<PAGE>
SMITH BARNEY
PRINCIPAL
1994
ANNUAL RETURN
REPORT
FUND
ZEROS AND APPRECIATION
SERIES 1996
................................
NOVEMBER 30, 1994
SMITH BARNEY MUTUAL FUNDS
[LOGO] INVESTING FOR YOUR FUTURE.
EVERYDAY.
<PAGE>
DEAR SHAREHOLDER:
PRINCIPAL RETURN FUND
ZEROS AND APPRECIATION SERIES 1996
The fiscal year for Smith Barney Principal Return Fund -- Zeros and
Appreciation Series 1996 ending November 30, 1994 was both challenging and
frustrating. At mid-year, we wrote to you about how difficult the bond
market
had been and what the implications were for stocks. Since then, bonds have
deteriorated further, while stocks have stabilized. Although this was not a
year of significant net gains for the Fund, it was far from a disaster. For
the
year, the Fund gained 0.10%, which was a slight improvement from mid-year
and
compares to 1.04% for the Standard & Poor's Daily Price Index of 500 Common
Stocks (S & P 500) and (1.66%) for the Lehman Brothers Intermediate Term
Government Bond Index. In a period marked by a series of negative events
for
the financial markets, the concept of combining zero-coupon treasuries with
good stocks has again proven its value by being a less volatile way to
invest
for long term growth.
In our last letter, we attributed the weakness in financial markets more to
the
process of reversing the prior speculative excesses in NASDAQ stocks,
emerging
foreign markets and the new issue market than to the upturn in interest
rates.
Since then, interest rates have continued to rise, partly because of a
strong
economy, but also due to an acceleration of de-leveraging by "derivatives
players." This has caused the overall market to stall and financial stocks
to
experience serious reactions.
While overall the market has not provided a good return this year, there
have
been some good winners in the Fund, including Johnson & Johnson, Amoco,
American International Group, Gillette, and Coca Cola. Part of the
difficulty
with the market has been the rapidity with which stocks decline on either
no
news, or even on news which is positive but does not exceed high
expectations.
Stocks such as Eastman Kodak, duPont, Fannie Mae and Xerox, which were big
winners earlier in the year, saw their gains erased in a matter of days. We
have also had our share of poor performers, most prominently in the auto
and
financial sectors which, despite good earnings results, have corrected with
the
rise in interest rates. We believe that the fundamental outlook for these
companies remains good, and that the stocks have over-reacted on the
downside.
The Fund has had a string of good years and the portfolio is well
positioned
for potential growth in a less hostile environment.
As far as the outlook for financial markets is concerned, the recent Orange
County fiasco proves once again that stretching for unreasonable returns
carries high risk. Investing in top quality companies with solid
managements,
excellent financials
1
<PAGE>
and attractive growth prospects is a time-proven method for long-term
growth of
capital. We have always been mindful of this and the Fund continues to be
managed not just for growth in good times, but also preservation of capital
and
lower volatility in challenging ones.
Thank you for your continued support of Principal Return Fund -- Zeros and
Appreciation Series 1996.
Sincerely,
/s/ Heath B. McLendon /s/ Harry D. Cohen
Heath B. McLendon Harry D. Cohen
Chairman of the Board Vice President and
Investment Officer
January 23, 1995
2
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
Zeros and Appreciation Series 1996
- ---------------------------------------------------------------------------
- -----
PORTFOLIO HIGHLIGHTS (UNAUDITED) NOVEMBER 30,
1994
- ---------------------------------------------------------------------------
- -----
PORTFOLIO ALLOCATION
[Pie chart depicting the allocation of the Principal Return Fund (Zeros and
Appreciaiton Series 1996) investment securities held at November 30, 1994
by
Portfolio Allocation classification. The pie is broken in pieces
representing
Portfolio Allocation in the following percentages:
<TABLE>
<CAPTION>
PORTFOLIO ALLOCATION PERCENTAGE
<S> <C>
U.S. Treasury Notes 62.2%
Convertible Bond, Commercial Paper,
and Net Otehr Assets and
Liabilites 2.7%
Common Stocks 35.1%
</TABLE>
<TABLE>
TOP TEN COMMON STOCK HOLDINGS
<CAPTION>
Percentage
of
Company Net Assets
- ---------------------------------------------------------------------------
- -
<S> <C>
EASTMAN KODAK COMPANY 1.2%
AT&T CORPORATION 1.2%
MINNESOTA MINING AND MANUFACTURING COMPANY 1.2%
DUPONT (E.I.) DENEMOURS & COMPANY 1.1%
JOHNSON & JOHNSON 1.1%
ROYAL DUTCH PETROLEUM COMPANY 1.1%
GENERAL ELECTRIC COMPANY 1.0%
WAL-MART STORES, INC. 1.0%
MOBIL CORPORATION 0.9%
PROCTER & GAMBLE COMPANY 0.9%
</TABLE>
3
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
Zeros and Appreciation Series 1996
<TABLE>
- ---------------------------------------------------------------------------
- ------------------
HISTORICAL PERFORMANCE
- ---------------------------------------------------------------------------
- ------------------
<CAPTION>
Year Ended Net Asset Value Capital
Dividends Total
November 30, Beginning Ending Gains Distributed
Paid Return**
<S> <C> <C> <C>
<C> <C>
- ---------------------------------------------------------------------------
- ------------------
1/16/89* -
11/30/89 $ 9.50 $11.38 --
- -- 19.79%
- ---------------------------------------------------------------------------
- ------------------
1990 11.38 10.77 $0.23
$0.63 2.29
- ---------------------------------------------------------------------------
- ------------------
1991 10.77 11.42 0.12
0.69 14.56
- ---------------------------------------------------------------------------
- ------------------
1992 11.42 11.75 0.51
0.65 13.64
- ---------------------------------------------------------------------------
- ------------------
1993 11.75 11.45 0.42
0.72 7.85
- ---------------------------------------------------------------------------
- ------------------
1994 11.45 9.40 1.58
0.50 0.10
- ---------------------------------------------------------------------------
- ------------------
Total $2.86
$3.19
- ---------------------------------------------------------------------------
- ------------------
Cumulative Total Return -- (1/16/89 through 11/30/94)
72.22%
- ---------------------------------------------------------------------------
- ------------------
<FN>
* The Fund commenced operations on January 16, 1989.
** Figures assume reinvestment of all dividends and capital gains
distributions at net asset
value and do not reflect deduction of the applicable front-end sales
charge.
</TABLE>
THE FUND'S POLICY IS TO DISTRIBUTE DIVIDENDS
AND CAPITAL GAINS, IF ANY, ANNUALLY.
<TABLE>
- ---------------------------------------------------------------------------
- --------------
AVERAGE ANNUAL TOTAL RETURN***
- ---------------------------------------------------------------------------
- --------------
<CAPTION>
Without
With
Sales Charge
Sales Charge
<S> <C>
<C>
- ---------------------------------------------------------------------------
- --------------
Year Ended 11/30/94 0.10%
(4.91)%
- ---------------------------------------------------------------------------
- --------------
Five Years Ended 11/30/94 7.53%
6.43%
- ---------------------------------------------------------------------------
- --------------
Inception 1/16/89 through 11/30/94 9.70%
8.74%
- ---------------------------------------------------------------------------
- --------------
<FN>
*** All average annual total return figures shown reflect the reinvestment
of dividends
and capital gains at net asset value.
</TABLE>
4
<PAGE>
GROWTH OF $10,000 INVESTED IN SMITH BARNEY PRINCIPAL RETURN FUND
ZEROS AND APPRECIATION SERIES 1996 VS. S&P 500
VS. LEHMAN BROTHERS INTERMEDIATE TERM GOVERNMENT BOND INDEX+
- ---------------------------------------------------------------------------
- -----
January 16, 1989 - November 30, 1994
<TABLE>
<CAPTION>
A line graph depicting the total growth (including reinvestment of
dividends
and capital gains) of a hypothetical investment of $10,000 in Principal
Return
Fund (Zeros and Appreciation Series 1996) shares on January 16, 1989
through
November 30, 1994 as compared iwth the growth of a $10,000 investment in
the
Standard & Poor's 500 Index and the Lehman Brothers Intermediate Term
Government
Bond Index. The plot points used to draw the line graph were as follows:
GROWTH
OF $10,000
INVESTMENT IN THE
GROWTH OF $10,000 LEHMAN
BROTHERS
GROWTH OF $10,000 INVESTMENT IN THE
INTERMEDIATE TERM
INVESTED IN SHARES STANDARD & POOR'S
GOVERNMENT BOND
MONTH ENDED OF THE FUND 500 INDEX
INDEX
<C> <C> <C> <C>
1/16/89 $9,500 -
- -
01/89 $9,690 $10,000
$10,000
02/89 $9,470 $9,751
$9,957
03/89 $9,630 $9,978
$10,004
06/89 $10,550 $10,858
$10,668
09/89 $11,140 $12,019
$10,789
12/89 $11,457 $12,266
$11,157
03/90 $11,198 $11,897
$11,142
06/91 $11,879 $12,645
$11,491
09/91 $11,176 $10,909
$11,713
12/90 $11,830 $11,885
$12,221
03/91 $12,600 $13,608
$12,491
06/91 $12,612 $13,575
$12,700
09/91 $13,231 $14,300
$13,304
12/91 $14,277 $15,498
$13,944
03/92 $13,941 $15,107
$13,800
06/92 $14,419 $15,393
$14,332
09/92 $15,013 $15,879
$14,960
12/92 $15,360 $16,678
$14,911
03/93 $15,860 $17,406
$15,469
06/93 $15,974 $17,489
$15,773
09/93 $16,245 $17,940
$16,106
12/93 $9,590 $18,357
$16,130
3/94 $16,187 $17,663
$15,832
6/94 $16,204 $17,736
$15,743
9/94 $16,465 $18,601
$15.863
11/94 $16,361 $18,326
$15,794
<FN>
+Illustration of $10,000 invested on January 16, 1989 assuming deduction of
the maximum 5% sales
charge at the time of investment and reinvestment of dividends and capital
gains at net asset value
through November 30, 1994.
The Lehman Brothers Intermediate Term Government Bond Index is comprised
of all publicly issued,
non-convertible debt of the U.S. Government or any agency thereof, quasi-
federal corporations, and
corporate debt guaranteed by the U.S. Government with a maturity of
between one and ten years.
The Standard & Poor's Composite Index ("S&P 500") is an index composed of
500 widely held
common stocks listed on the New York Stock Exchange, American Stock
Exchange and over-the-
counter market.
Index information is available at month-end only; therefore, the closest
month-end to inception dare of
the Fund has been used.
NOTE: All figures cited here represent past performance and do not
guarantee future results.
</TABLE>
5
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
Zeros and Appreciation Series 1996
- ---------------------------------------------------------------------------
- -----
PORTFOLIO OF INVESTMENTS NOVEMBER 30,
1994
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (NOTE
1)
- ---------------------------------------------------------------------------
- -----
COMMON STOCKS - 35.1%
CONSUMER SERVICES - 6.5%
<C> <C> <C>
1,000 Capital Cities ABC Inc. $
81,750
5,500 CBS, Inc.
305,250
9,000 Comcast Corporation, Class A
142,875
13,000 Disney (Walt) Company
567,125
10,000 Donnelly (RR) & Sons Company
286,250
3,500 Gannett, Inc.
165,812
2,000 Gaylord Entertainment Company, Class A
45,250
600 GC Companies, Inc.+
16,125
3,700 Grupo Televisa S.A.
167,425
4,000 Harcourt General, Inc.
143,500
10,000 Home Depot, Inc.
462,500
3,500 Penney (J.C.), Inc.
161,000
3,500 Scandinavian Broadcasting System S.A.+
69,125
12,000 TeleCommunications, Inc., Class A+
283,500
15,000 Time Warner, Inc.
506,250
12,000 Toys "R" Us, Inc.+
439,500
3,000 Tribune Company
150,375
30,000 Wal-Mart Stores, Inc.
693,750
------------------------------------------------------------------------
- -----
4,687,362
------------------------------------------------------------------------
- -----
CONSUMER NON-DURABLES - 3.6%
4,000 Avon Products, Inc.
247,500
2,000 Coca-Cola Company
102,250
3,400 CPC International Inc.
174,250
7,000 Crown Cork & Seal, Inc.+
264,250
8,000 Gillette Company
588,000
1,800 Hershey Foods Corporation
84,150
8,000 McDonald's Corporation
227,000
8,000 PepsiCo, Inc.
283,000
10,000 Procter & Gamble Company
625,000
------------------------------------------------------------------------
- -----
2,595,400
------------------------------------------------------------------------
- -----
ENERGY - 3.5%
7,000 Amerada Hess Corporation
318,500
9,000 Amoco Corporation
546,750
1,000 Atlantic Richfield Company
103,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
Zeros and Appreciation Series 1996
- ---------------------------------------------------------------------------
- -----
PORTFOLIO OF INVESTMENTS (CONTINUED) NOVEMBER 30,
1994
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (NOTE
1)
- ---------------------------------------------------------------------------
- -----
COMMON STOCKS (CONTINUED)
<C> <C> <C>
ENERGY (CONTINUED)
4,000 Burlington Resources, Inc. $
143,000
8,000 Mobil Corporation
682,000
7,000 Royal Dutch Petroleum Company
760,375
- ---------------------------------------------------------------------------
- -----
2,554,125
- ---------------------------------------------------------------------------
- -----
FINANCIAL SERVICES - 3.5%
3,000 Aetna Life & Casualty Company
134,250
5,000 American Express Company
148,125
5,000 American International Group, Inc.
458,125
8,000 Bank of New York, Inc.
223,000
5,000 Barnett Banks, Inc.
196,875
8,000 Chemical Banking Corporation
291,000
1,000 CIGNA Corporation
63,375
8,000 Federal National Mortgage Association
569,000
3,000 First Virginia Banks, Inc.
98,625
5,000 KeyCorp
121,875
2,000 NationsBank Corporation
89,750
3,000 UNUM Corporation
109,500
- ---------------------------------------------------------------------------
- -----
2,503,500
- ---------------------------------------------------------------------------
- -----
DIVERSIFIED CONGLOMERATES - 3.0%
5,000 Alco Standard Corporation
280,000
19,500 Eastman Kodak Company
889,688
17,000 Minnesota Mining and Manufacturing Company
871,250
3,000 Tenneco, Inc.
116,625
- ---------------------------------------------------------------------------
- -----
2,157,563
- ---------------------------------------------------------------------------
- -----
HEALTH CARE - 2.8%
6,000 American Home Products Corporation
390,750
6,000 Bristol-Meyers Squibb
346,500
15,000 Johnson & Johnson
800,625
10,000 Merck & Company, Inc.
372,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
Zeros and Appreciation Series 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
- -----
PORTFOLIO OF INVESTMENTS (CONTINUED) NOVEMBER 30,
1994
MARKET
VALUE
SHARES
(NOTE 1)
- ---------------------------------------------------------------------------
- -----
COMMON STOCKS (CONTINUED)
HEALTH CARE (CONTINUED)
<S> <C> <C>
2,000 Warner Lambert Company $
154,750
- ---------------------------------------------------------------------------
- -----
2,065,125
- ---------------------------------------------------------------------------
- -----
CAPITAL GOODS - 2.7%
3,000 AlliedSignal, Inc.
97,875
5,000 AMP Inc.
361,250
3,500 Caterpillar, Inc.
189,000
16,000 General Electric Company
736,000
6,000 Ingersoll-Rand Company
193,500
7,000 United Technologies Corporation
409,500
- ---------------------------------------------------------------------------
- -----
1,987,125
- ---------------------------------------------------------------------------
- -----
BASIC INDUSTRIES - 2.7%
15,000 duPont (E.I.) deNemours & Company
808,125
4,000 Fluor Corporation
171,500
2,500 Hercules, Inc.
285,937
8,000 International Paper Company
572,000
3,700 WMX Technologies, Inc.
95,275
- ---------------------------------------------------------------------------
- -----
1,932,837
- ---------------------------------------------------------------------------
- -----
TECHNOLOGY - 2.6%
4,000 Intel Corporation
252,500
4,500 International Business Machines Corporation
318,375
8,000 Microsoft Corporation+
503,000
5,500 Motorola, Inc.
310,063
5,400 Xerox Corporation
530,550
- ---------------------------------------------------------------------------
- -----
1,914,488
- ---------------------------------------------------------------------------
- -----
UTILITIES - 1.5%
18,000 AT&T Corporation
884,250
3,000 Bell Atlantic Corporation
150,375
2,000 Southwestern Bell Corporation
82,750
- ---------------------------------------------------------------------------
- -----
1,117,375
- ---------------------------------------------------------------------------
- -----
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
Zeros and Appreciation Series 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
- -----
PORTFOLIO OF INVESTMENTS (CONTINUED) NOVEMBER 30,
1994
MARKET
VALUE
SHARES (NOTE
1)
- ---------------------------------------------------------------------------
- -----
COMMON STOCKS (CONTINUED)
CONSUMER DURABLES - 1.5%
<S> <C> <C>
6,000 Chrysler Corporation $
290,250
10,000 Ford Motor Company
271,250
9,000 General Motors Corporation
343,125
5,000 Goodyear Tire & Rubber Company
169,375
- ---------------------------------------------------------------------------
- -----
1,074,000
- ---------------------------------------------------------------------------
- -----
TRANSPORTATION - 1.2%
2,000 Boeing Company
89,500
4,000 Burlington Northern, Inc.
195,000
6,000 CSX Corporation
417,000
4000 Union Pacific Corporation
186,000
- ---------------------------------------------------------------------------
- -----
887,500
- ---------------------------------------------------------------------------
- -----
TOTAL COMMON STOCKS (Cost $20,781,562)
25,476,400
- ---------------------------------------------------------------------------
- -----
FACE
VALUE
- ---------------------------------------------------------------------------
- -----
U.S. TREASURY NOTES - 62.2% (Cost $43,803,533)
$49,000,000 U.S. Treasury Notes-Strips, Zero Coupon due 2/15/96++
45,115,275
- ---------------------------------------------------------------------------
- -----
CONVERTIBLE BOND - 0.1% (Cost $180,750)
150,000 Savoy Pictures Entertainment, Inc.,
7.000% due 7/1/03
100,125
- ---------------------------------------------------------------------------
- -----
COMMERCIAL PAPER - 1.9% (Cost $1,354,000)
1,354,000 Ford Motor Credit Company,
5.750% due 12/1/94,
1,354,000
- ---------------------------------------------------------------------------
- -----
TOTAL INVESTMENTS (Cost $66,119,845*) 99.3%
72,045,800
OTHER ASSETS AND LIABILITIES (NET) 0.7
486,630
- ---------------------------------------------------------------------------
- -----
NET ASSETS 100.0%
$72,532,430
- ---------------------------------------------------------------------------
- -----
<FN>
* Aggregate cost for Federal tax purposes.
+ Non-income producing security.
++ Effective yield is 7.35% (unaudited).
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
Zeros and Appreciation Series 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
- -----
STATEMENT OF ASSETS AND LIABILITIES NOVEMBER 30,
1994
<S> <C> <C>
ASSETS:
Investments, at value (Cost $66,119,845) (Note 1)
See accompanying schedule
$72,045,800
Cash
268
Receivable for investment securities sold
579,308
Dividends and interest receivable
93,355
- ---------------------------------------------------------------------------
- -----
TOTAL ASSETS
72,718,731
- ---------------------------------------------------------------------------
- -----
LIABILITIES:
Payable for investment securities purchased $89,370
Accrued legal and audit fees 23,600
Investment advisory fee payable (Note 2) 18,103
Payable for Fund shares redeemed 13,483
Administration fee payable (Note 2) 12,069
Accrued shareholder reports expense 10,000
Transfer agent fees payable (Note 2 9,162
Custodian fees payable (Note 2) 6,000
Accrued expenses and other payables 4,514
- ---------------------------------------------------------------------------
- -----
TOTAL LIABILITIES
186,301
- ---------------------------------------------------------------------------
- -----
NET ASSETS
$72,532,430
- ---------------------------------------------------------------------------
- -----
NET ASSETS CONSIST OF:
Undistributed net investment income $
4,045,955
Accumulated net realized gain on investments sold
4,824,845
Unrealized appreciation of investments
5,925,955
Par value
7,719
Paid-in capital in excess of par value
57,727,956
- ---------------------------------------------------------------------------
- -----
TOTAL NET ASSETS
$72,532,430
- ---------------------------------------------------------------------------
- -----
NET ASSET VALUE and redemption price per share
($72,532,430 / 7,719,183 shares of beneficial interest
outstanding)
$9.40
- ---------------------------------------------------------------------------
- -----
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
Zeros and Appreciation Series 1996
- ---------------------------------------------------------------------------
- -----
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 30, 1994
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME:
Interest
$4,126,359
Dividends (net of foreign withholding taxes of $5,088)
728,883
- ---------------------------------------------------------------------------
- -----
TOTAL INVESTMENT INCOME
4,855,242
- ---------------------------------------------------------------------------
- -----
EXPENSES:
Investment advisory fee (Note 2) $240,712
Administration fee (Note 2) 160,475
Transfer agent fees (Note 2) 95,184
Legal and audit fees 35,739
Custodian fees (Note 2) 33,704
Trustees' fees and expenses (Note 2) 9,092
Amortization of organization costs (Note 5) 8,303
Other 22,683
- ---------------------------------------------------------------------------
- -----
TOTAL EXPENSES
605,892
- ---------------------------------------------------------------------------
- -----
NET INVESTMENT INCOM
4,249,350
- ---------------------------------------------------------------------------
- -----
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
(NOTES 1 AND 3):
Net realized gain on investments sold during the year.
4,824,846
Net unrealized depreciation of investments during the year
(8,924,081)
- ---------------------------------------------------------------------------
- -----
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
(4,099,235)
- ---------------------------------------------------------------------------
- -----
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $
150,115
- ---------------------------------------------------------------------------
- -----
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
Zeros and Appreciation Series 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
- ---------------------------
STATEMENT OF CHANGES IN NET ASSETS
YEAR YEAR
ENDED ENDED
11/30/94 11/30/93
<S> <C>
<C>
Net investment income $
4,249,350 $ 4,846,693
Net realized gain on investments sold during the year
4,824,846 12,532,076
Net unrealized depreciation of investments during the year
(8,924,081) (9,529,809)
- ---------------------------------------------------------------------------
- ---------------------------
Net increase in net assets resulting from operations
150,115 7,848,960
Distributions to shareholders from:
Net investment income
(3,942,821) (6,613,025)
Net realized gain on investments
(12,394,023) (3,896,983)
Net decrease in net assets from Fund share transactions (Note 4)
(2,433,613) (15,196,729)
- ---------------------------------------------------------------------------
- ---------------------------
Net decrease in net assets
(18,620,342) (17,857,777)
NET ASSETS:
Beginning of year
91,152,772 109,010,549
- ---------------------------------------------------------------------------
- ---------------------------
End of year (including undistributed net investment
income of $4,045,955 and $3,739,426, respectively) $
72,532,430 $ 91,152,772
- ---------------------------------------------------------------------------
- ---------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
Zeros and Appreciation Series 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
- ----------------------------
FINANCIAL HIGHLIGHTS
FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH YEAR.
YEAR YEAR YEAR
YEAR YEAR PERIOD
ENDED ENDED ENDED
ENDED ENDED ENDED
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>
Net asset value, beginning
of year $11.45 $11.75 $11.42
$10.77 $11.38 $ 9.50
- ---------------------------------------------------------------------------
- ------------------------------
Income from investment
operations:
Net investment income 0.56 0.53 0.54
0.62 0.55 0.63
Net realized and unrealized
gain/(loss) on investments (0.53) 0.31 0.95
0.84 (0.30) 1.25
- ---------------------------------------------------------------------------
- ------------------------------
Total from investment
operations 0.03 0.84 1.49
1.46 0.25 1.88
Less distributions:
Distributions from net
investment income (0.50) (0.72) (0.65)
(0.69) (0.63) --
Distributions from net
realized capital gains (1.58) (0.42) (0.51)
(0.12) (0.23) --
- ---------------------------------------------------------------------------
- ------------------------------
Total distributions (2.08) (1.14) (1.16)
(0.81) (0.86) 0.00
- ---------------------------------------------------------------------------
- ------------------------------
Net asset value, end of year $ 9.40 $11.45 $11.75
$11.42 $10.77 $ 11.38
- ---------------------------------------------------------------------------
- ------------------------------
Total return+++ 0.10% 7.85% 13.64%
14.56% 2.29% 19.79%
- ---------------------------------------------------------------------------
- ------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
000's) $72,532 $91,153 $109,011
$115,356 $121,493 $162,867
Ratio of operating expenses to
average net assets 0.75% 0.77%+ 0.77%
0.81% 0.85% 0.84%**
Ratio of net investment income
to average net assets 5.27% 4.76% 4.85%
5.26% 5.21% 5.79%**
Portfolio turnover rate 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 the
use of undistributed method did not accord with results of operations.
+++ Total return represents aggregate total return for the periods
indicated.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
Zeros and Appreciation Series 1996
- ---------------------------------------------------------------------------
- -----
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Principal Return Fund (formerly Smith Barney Shearson
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 Zeros Plus European Equities Series 1999 which has not yet commenced
operations. 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
14
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
Zeros and Appreciation Series 1996
- ---------------------------------------------------------------------------
- -----
NOTES TO FINANCIAL STATEMENTS (continued)
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, 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%
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 Fund has entered into an investment advisory agreement (the "Advisory
Agreement") with a division of Mutual Management Corp., which has been
15
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
Zeros and Appreciation Series 1996
- ---------------------------------------------------------------------------
- -----
NOTES TO FINANCIAL STATEMENTS (continued)
transferred effective November 7, 1994 to Smith Barney Mutual Funds
Management
Inc. ("SBMFM"). Mutual Management Corp. and SBMFM are both wholly owned
subsidiaries of Smith Barney Holdings Inc. ("Holdings"). Holdings is a
wholly
owned subsidiary of The Travelers Inc. Under the Advisory Agreement, the
Fund
pays a monthly fee at the annual rate of .30% of the value of its average
daily
net assets.
Prior to April 21, 1994, the Trust was party to an administration agreement
(the
"Administration Agreement") with The Boston Company Advisors, Inc. ("Boston
Advisors"), an indirect wholly owned subsidiary of Mellon Bank Corporation
("Mellon"). Under the Administration Agreement, the Fund paid a monthly fee
at
the annual rate of .20% of the value of its average daily net assets.
As of the close of business on April 21, 1994, SBMFM (formerly known as
Smith,
Barney Advisers, Inc.) succeeded Boston Advisors as the Fund's
administrator.
The new administration agreement contains substantially the same terms and
conditions, including the level of fees, as the predecessor agreement.
As of the close of business on April 21, 1994, the Fund and SBMFM entered
into a
sub-administration agreement (the "Sub-Administration Agreement") with
Boston
Advisors. 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.
For the year ended November 30, 1994, the Fund incurred total brokerage
commissions of $31,553 of which $2,370 was paid to Smith Barney Inc.
("Smith
Barney").
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.
16
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
Zeros and Appreciation Series 1996
- ---------------------------------------------------------------------------
- -----
NOTES TO FINANCIAL STATEMENTS (continued)
3. PURCHASES AND SALES OF SECURITIES
Purchases and proceeds from sales of securities, excluding U.S. government
securities and short-term investments, aggregated $8,338,480 and
$20,503,392,
respectively, for the year ended November 30, 1994. There were no purchases
of
long-term U.S. government securities for the year ended November 30, 1994.
Proceeds from sales of long-term U.S. government securities aggregated
$7,280,280 for the year ended November 30, 1994.
At November 30, 1994, aggregate gross unrealized appreciation for all
securities
in which there was an excess of value over tax cost was $6,589,406, and
aggregate gross unrealized depreciation for all securities in which there
was an
excess of tax cost over value was $663,451.
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 European Equities Series 1999 and the Zeros
Plus
Emerging Growth Series 2000 each constitute a sub-trust under the Master
Trust
Agreement. Changes in shares of beneficial interest of the Fund were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
YEAR ENDED
11/30/94
11/30/93
Shares Amount
Shares Amount
<S> <C> <C> <C>
<C>
- ---------------------------------------------------------------------------
- ----------------------
Issued as reinvestment of dividends 1,680,331 $ 16,113,342
960,816 $ 10,396,024
Redeemed (1,921,427) (18,546,955)
(2,281,849) (25,592,753)
- ---------------------------------------------------------------------------
- ----------------------
Net decrease (241,096) $ (2,433,613)
(1,321,033) $(15,196,729)
- ---------------------------------------------------------------------------
- ----------------------
</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
17
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
Zeros and Appreciation Series 1996
- ---------------------------------------------------------------------------
- -----
NOTES TO FINANCIAL STATEMENTS (continued)
and state securities regulations. All such costs have been fully amortized
at
November 30, 1994.
6. LINE OF CREDIT
The Fund and several affiliated entities participate in a $50 million line
of
credit provided by Bank of America (formerly Continental Bank N.A.) 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 20% of its net assets.
Interest is
payable either at the bank's Money Market Rate or the London Interbank
Offered
Rate (LIBOR) plus .375% on an annualized basis. 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 year ended November 30,
1994, the Fund had an average outstanding daily balance of $35,342 with
interest
rates ranging from 3.3125% to 3.9375%. Interest expense totalled $1,231 for
the
year ended November 30, 1994. At November 30, 1994, the Fund had no
outstanding
borrowings under this Agreement.
18
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
Zeros and Appreciation Series 1996
- ---------------------------------------------------------------------------
- -----
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
SMITH BARNEY PRINCIPAL RETURN FUND:
We have audited the accompanying statement of assets and liabilities of the
Zeros and Appreciation Series 1996 of Smith Barney Principal Return Fund
(formerly Smith Barney Shearson Principal Return Fund), including the
schedule
of portfolio investments, as of November 30, 1994, and the related
statement of
operations for the year then ended, the statement of changes in net assets
for
each of the two years in the period then ended, and the financial
highlights for
each of the five years in the period then ended and for the period from
January
16, 1989 (commencement of operations) to November 30, 1989. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the
financial
statements. Our procedures included confirmation of securities owned as of
November 30, 1994 by correspondence with the custodian and brokers. An
audit
also includes assessing the accounting principles used and significant
estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to
above present fairly, in all material respects, the financial position of
the
Zeros and Appreciation Series 1996 of Smith Barney Principal Return Fund as
of
November 30, 1994, the results of its operations for the year then ended,
the
changes in its net assets for each of the two years in the period then
ended,
and the financial highlights for each of the five years in the period then
ended
and for the period from January 16, 1989 (commencement of operations) to
November 30, 1989, in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
January 12, 1995
19
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
Zeros and Appreciation Series 1996
- ---------------------------------------------------------------------------
- -----
TAX INFORMATION (UNAUDITED) FISCAL YEAR ENDED NOVEMBER 30, 1994
Of the distributions made by the Fund during the fiscal year ended November
30,
1994, 15.51% qualify for the dividends-received deduction available to
corporate
shareholders.
The amount of long term capital gain paid for the fiscal year ended
November 30,
1994 was $12,279,537 for the Fund.
20
<PAGE>
PRINCIPAL SMITH BARNEY
RETURN FUND ------------
Zeros and Appreciation A Member of
TravelersGroup
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
OFFICERS
Heath B. McLendon
Chairman of the Board
Stephen J. Treadway
President
Harry D. Cohen
Vice President and This report is submitted for the
Investment Officer general information of the
shareholders of Smith Barney
Susan C. Fulenwider Principal Return Fund - Zeros
Vice President and and Appreciation Series 1996.
It is
Investment Officer not a prospectus, circular or
representation intended for use
Lewis E. Daidone in the purchase or sale of
shares
Senior Vice President of the Fund or of any securities
and Treasurer mentioned in this report.
Christina T. Sydor
Secretary
SMITH BARNEY
MUTUAL FUNDS
388 Greenwich Street
New York, New York 10013
Fund 123
FD 0304 A5
[LOGO] Recycled
Recyclable
<PAGE>
SMITH BARNEY
PRINCIPAL
1994
ANNUAL RETURN
REPORT
FUND
ZEROS AND APPRECIATION
SERIES 1998
......................
NOVEMBER 30, 1994
[LOGO] SMITH BARNEY MUTUAL
FUNDS
INVESTING FOR YOUR
FUTURE.
EVERY DAY.
<PAGE>
Principal Return Fund
Zeros and Appreciation Series 1998
DEAR SHAREHOLDER:
The fiscal year for Smith Barney Principal Return Fund -- Zeros and
Appreciation Series 1998 ending November 30, 1994 was both challenging
and frustrating. Although this was not a year of net gains for the Fund,
it was far from a disaster. At mid-year, we wrote to you about how
difficult the bond market had been and what the implications were for
stocks. Since then, bonds have deteriorated further, while stocks have
stabilized. For the year, the Fund declined 3.69%, which was a slight
improvement from mid-year and compares to 1.04% for the Standard & Poor's
Daily Price Index of 500 Common Stocks (S&P 500) and (1.66)% for the
Lehman
Brothers Intermediate Term Government Bond Index. In a period marked by a
series of negative events for the financial markets, the concept of
combining
zero-coupon treasuries with good stocks has again proven its value by
being a
less volatile way to invest for long term growth.
In our last letter, we attributed the weakness in financial markets more
to
the process of reversing the prior speculative excesses in NASDAQ stocks,
emerging foreign markets and the new issue market than to the upturn in
interest rates. Since then, interest rates have continued to rise, partly
because of a strong economy, but also due to an acceleration of de-
leveraging
by "derivatives players." This has caused the overall market to stall and
financial stocks to experience serious reactions.
While overall the market has not provided a good return this year, there
have
been some good winners in the Fund, including Johnson & Johnson, Amoco,
American International Group, Gillette, and Coca Cola. Part of the
difficulty
with the market has been the rapidity with which stocks decline on either
no
news, or even on news which is positive but does not exceed high
expectations.
Stocks such as Eastman Kodak, duPont, Fannie Mae and Xerox, which were big
winners earlier in the year, saw their gains erased in a matter of days.
We
have also had our share of poor performers, most prominently in the auto
and
financial sectors which, despite good earnings results, have corrected
with
the rise in interest rates. We believe that the fundamental outlook for
these
companies remains good, and that the stocks have over-reacted on the
downside.
The Fund has had a string of good years and the portfolio is well
positioned
for potential growth in a less hostile environment.
As far as the outlook for financial markets is concerned, the recent
Orange
County fiasco proves once again that stretching for unreasonable returns
carries high risk. Investing in top quality companies with solid
managements,
excellent financials
1
<PAGE>
and attractive growth prospects is a time-proven method for long term
growth of
capital. We have always been mindful of this and the Fund continues to be
managed not just for growth in good times, but also preservation of capital
and
lower volatility in challenging ones.
Thank you for your continued support of Principal Return Fund -- Zeros and
Appreciation Series 1998.
Sincerely,
<TABLE>
<S> <C>
Heath B. McLendon Harry D. Cohen
Chairman of the Board Vice President and
Investment Officer
January 23, 1995
</TABLE>
2
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
ZEROS AND APPRECIATION SERIES 1998
- ---------------------------------------------------------------------------
- -----
PORTFOLIO HIGHLIGHTS (UNAUDITED) NOVEMBER 30,
1994
- ---------------------------------------------------------------------------
- -----
<TABLE>
PORTFOLIO ALLOCATION BREAKDOWN
Pie chart depicting the allocation of the Principal Return Fund (Zeros and
Appreciation Series 1998) investment securities held at November 30, 1994
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 61.9%
Convertible Bond, Commercial Paper,
and Net Other Assets and Liabilities 4.0%
Common Stocks 34.1%
</TABLE>
<TABLE>
TOP TEN COMMON STOCK HOLDINGS
<CAPTION>
Percentage
of
Company Net Assets
<S> <C>
- ---------------------------------------------------------------------------
- -
MINNESOTA MINING AND MANUFACTURING COMPANY 1.2%
EASTMAN KODAK COMPANY 1.2%
AT&T CORPORATION 1.2%
DUPONT (E.I.) DENEMOURS & COMPANY 1.1%
DISNEY (WALT) COMPANY 1.0%
ROYAL DUTCH PETROLEUM COMPANY 0.9%
MOBIL CORPORATION 0.8%
JOHNSON & JOHNSON 0.8%
XEROX CORPORATION 0.8%
FEDERAL NATIONAL MORTGAGE ASSOCIATION 0.8%
</TABLE>
3
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
ZEROS AND APPRECIATION SERIES 1998
<TABLE>
- ---------------------------------------------------------------------------
- -----------
HISTORICAL PERFORMANCE
- ---------------------------------------------------------------------------
- -----------
<CAPTION>
Year Ended Net Asset Value Capital Gains Dividends
Total
November 30, Beginning Ending Distributed Paid
Return**
<S> <C> <C> <C> <C>
<C>
- ---------------------------------------------------------------------------
- -----------
1/25/91* -
11/30/91 $7.60 $8.40 -- --
10.53%
- ---------------------------------------------------------------------------
- -----------
1992 8.40 9.02 -- $0.43
12.86
- ---------------------------------------------------------------------------
- -----------
1993 9.02 9.38 $ 0.10 0.40
9.99
- ---------------------------------------------------------------------------
- -----------
1994 9.38 7.75 0.89 0.45
(3.69)
- ---------------------------------------------------------------------------
- -----------
Total $ 0.99 $1.28
- ---------------------------------------------------------------------------
- -----------
Cumulative Total Return (1/25/91 through 11/30/94)
32.14%
- ---------------------------------------------------------------------------
- -----------
<FN>
* The Fund commenced operations on January 25, 1991.
** Figures assume reinvestment of all dividends and capital gain
distributions at net asset value and do not reflect deduction of the
applicable front-end sales charge.
</TABLE>
THE FUND'S POLICY IS TO DISTRIBUTE DIVIDENDS AND CAPITAL GAINS, IF ANY,
ANNUALLY.
<TABLE>
- ---------------------------------------------------------------------------
- ---------------
AVERAGE ANNUAL TOTAL RETURN***
- ---------------------------------------------------------------------------
- ---------------
<CAPTION>
Without Sales Charge With
Sales Charge
<S> <C>
<C>
- ---------------------------------------------------------------------------
- ---------------
Year Ended 11/30/94 (3.69)%
(8.50)%
- ---------------------------------------------------------------------------
- ---------------
Inception 1/25/91 through 11/30/94 7.51%
6.08%
- ---------------------------------------------------------------------------
- ---------------
<FN>
*** All average annual total return figures shown reflect reinvestment of
dividends and capital gains at net asset value.
</TABLE>
4
<PAGE>
GROWTH OF $10,000 INVESTED IN SMITH BARNEY
PRINCIPAL RETURN FUND
ZEROS AND APPRECIATION SERIES 1998 VS. S&P 500 VS.
LEHMAN BROTHERS INTERMEDIATE TERM GOVERNMENT BOND INDEX+
- ---------------------------------------------------------------------------
- -----
January 25, 1991 -- November 30, 1994
<TABLE>
DESCRIPTION OF MOUNTAIN CHART IN SMITH BARNEY COVERS
A line graph depicting the total growth (including reinvestment of
dividends and
capital gains) of a hypothetical investment of $10,000 in Principal Return
Fund
(Zeros and Appreciation Series 1998) shares on January 25, 1991 through
November 30, 1994
as compared with the growth of a $10,000 investment in the Standard &
Poor's 500 Index
and the Lehman Brothers Intermediate Term Government Bond Index. The plot
points used
to draw the line graph were as follows:
<CAPTION>
GROWTH
OF $10,000
INVESTMENT IN THE
GROWTH OF $10,000 LEHMAN
BROTHERS
GROWTH OF $10,000 INVESTMENT IN THE
INTERMEDIATE TERM
INVESTED IN SHARES STANDARD & POOR'S
GOVERNMENT BOND
MONTH ENDED OF THE FUND 500 INDEX
INDEX
<S> <C> <C> <C>
1/25/91 $9,500 -
- -
01/91 $9,550 $10,000
$10,000
02/91 $9,738 $10,714
$10,061
03/91 $9,763 $10,973
$10,116
06/91 $9,825 $10,947
$10,286
09/91 $10,463 $11,532
$10,775
12/91 $11,233 $12,497
$11,293
03/92 $10,799 $12,182
$11,174
06/92 $11,167 $12,413
$11,608
09/92 $11,850 $12,805
$12,116
12/92 $11,991 $13,449
$12,077
03/93 $12,533 $14,036
$12,528
06/93 $12,700 $14,103
$12,775
09/93 $13,033 $14,467
$13,044
12/93 $13,142 $14,803
$13,063
03/94 $12,690 $14,244
$12,822
06/94 $12,609 $14,302
$12,750
09/94 $12,731 $15,000
$12,847
11/94 $12,553 $14,778
$12,792
<FN>
+ Illustration of $10,000 invested on January 25, 1991 assuming deduction
of the maximum 5% sales charge at the time of investment and
reinvestment
of dividends and capital gains at net asset value through November 30,
1994.
</TABLE>
The Lehman Brothers Intermediate Term Government Bond Index is comprised
of all publicly issued, non-convertible debt of the U.S. government or
any agency thereof, quasi-federal corporations, and corporate debt
guaranteed by the U.S. government with a maturity of between one and ten
years.
The Standard & Poor's Composite Index ("S&P 500") is an index composed
of
500 widely held common stocks listed on the New York Stock Exchange,
American Stock Exchange and over-the-counter market.
Index information is available at month-end only; therefore, the closest
month-end to inception of the Fund has been used.
NOTE: All figures cited here represent past performance and do not
guarantee future results.
5
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
ZEROS AND APPRECIATION SERIES 1998
<TABLE>
- ---------------------------------------------------------------------------
- ------------
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1994
- ---------------------------------------------------------------------------
- ------------
<CAPTION>
MARKET
VALUE
SHARES
(NOTE 1)
- ---------------------------------------------------------------------------
- ------------
<S>
<C>
COMMON STOCKS - 34.1%
CONSUMER SERVICES - 6.6%
2,000 Capital Cities ABC, Inc.
$ 163,500
7,500 CBS, Inc.
416,250
13,000 Comcast Corporation, Class A
206,375
24,000 Disney (Walt) Company
1,047,000
15,000 Donnelley (RR) & Sons Company
429,375
5,500 Gannett, Inc.
260,562
2,000 Gaylord Entertainment Company, Class A
45,250
800 GC Companies, Inc.+
21,500
5,800 Grupo Televisa S.A.
262,450
6,000 Harcourt General, Inc.
215,250
15,000 Home Depot, Inc.
693,750
5,000 Penney (J.C.), Inc.
230,000
3,500 Scandinavian Broadcasting System S.A.+
69,125
18,000 Tele-Communications, Inc., Class A+
425,250
20,000 Time Warner, Inc.
675,000
15,000 Toys "R" Us, Inc.+
549,375
4,500 Tribune Company
225,563
30,000 Wal-Mart Stores, Inc.
693,750
-------------------------------------------------------------------------
- ------------
6,629,325
-------------------------------------------------------------------------
- ------------
FINANCIAL SERVICES - 3.7%
4,500 Aetna Life & Casualty Company
201,375
6,200 American Express Company
183,675
4,500 American International Group, Inc.
412,313
11,000 Bank of New York, Inc.
306,625
7,000 Barnett Banks, Inc.
275,625
10,000 Chemical Banking Corporation
363,750
2,800 CIGNA Corporation
177,450
11,000 Federal National Mortgage Association
782,375
4,000 First Virginia Banks, Inc.
131,500
7,000 KeyCorp
170,625
6,000 Republic New York Corporation
256,500
2,000 UNUM Corporation
73,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
ZEROS AND APPRECIATION SERIES 1998
<TABLE>
- ---------------------------------------------------------------------------
- -----------
PORTFOLIO OF INVESTMENTS (continued)
NOVEMBER 30, 1994
- ---------------------------------------------------------------------------
- -----------
<CAPTION>
MARKET
VALUE
SHARES
(NOTE 1)
- ---------------------------------------------------------------------------
- -----------
<C> <S>
<C>
COMMON STOCKS (CONTINUED)
FINANCIAL SERVICES (CONTINUED)
3,000 Wells Fargo & Company
$ 433,500
-------------------------------------------------------------------------
- ------------
3,768,313
-------------------------------------------------------------------------
- ------------
CONSUMER NON-DURABLES -- 3.3%
5,000 Avon Products, Inc.
309,375
8,000 Coca-Cola Company
409,000
11,000 Crown Cork & Seal, Inc.
415,250
5,000 CPC International, Inc.
256,250
9,000 Gillette Company
661,500
2,200 Hershey Foods Corporation
102,850
9,000 International Flavors & Fragrances, Inc.
396,000
12,000 McDonald's Corporation
340,500
8,000 Newell Company
172,000
5,000 Procter & Gamble Company
312,500
-------------------------------------------------------------------------
- ------------
3,375,225
-------------------------------------------------------------------------
- ------------
ENERGY - 3.1%.
9,000 Amerada Hess Corporation
409,500
9,000 Amoco Corporation
546,750
2,500 Atlantic Richfield Company
258,750
7,000 Burlington Resources, Inc.
250,250
10,000 Mobil Corporation
852,500
8,000 Royal Dutch Petroleum Company
869,000
-------------------------------------------------------------------------
- ------------
3,186,750
-------------------------------------------------------------------------
- ------------
DIVERSIFIED CONGLOMERATES - 2.9%
6,000 Alco Standard Corporation
336,000
26,500 Eastman Kodak Company
1,209,063
24,000 Minnesota Mining and Manufacturing Company
1,230,000
3,000 Tenneco, Inc.
116,625
-------------------------------------------------------------------------
- ------------
2,891,688
-------------------------------------------------------------------------
- ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
ZEROS AND APPRECIATION SERIES 1998
<TABLE>
- ---------------------------------------------------------------------------
- ------------
PORTFOLIO OF INVESTMENTS (continued)
NOVEMBER 30, 1994
- ---------------------------------------------------------------------------
- ------------
<CAPTION>
MARKET
VALUE
SHARES
(NOTE 1)
- ---------------------------------------------------------------------------
- ------------
<C> <S>
<C>
COMMON STOCKS (CONTINUED)
CAPITAL GOODS - 2.7%
5,000 Allied-Signal, Inc.
$ 163,125
7,000 AMP Inc.
505,750
4,500 Caterpillar Inc.
243,000
6,000 Emerson Electric Company
354,000
16,000 General Electric Company
736,000
8,000 Ingersoll-Rand Company
258,000
9,000 United Technologies Corporation
526,500
-------------------------------------------------------------------------
- ------------
2,786,375
-------------------------------------------------------------------------
- ------------
TECHNOLOGY - 2.7%
2,400 Eaton Corporation
114,300
6,500 Intel Corporation
410,312
7,000 International Business Machines Corporation
495,250
10,000 Microsoft Corporation+
628,750
6,000 Motorola, Inc.
338,250
8,000 Xerox Corporation
786,000
-------------------------------------------------------------------------
- ------------
2,772,862
-------------------------------------------------------------------------
- ------------
HEALTH CARE - 2.7%
8,000 American Home Products Corporation
521,000
7,000 Bristol-Meyers Squibb
404,250
15,000 Johnson & Johnson
800,625
12,000 Merck & Company, Inc.
447,000
3,000 Schering-Plough Corporation
224,625
4,000 Warner Lambert Company
309,500
-------------------------------------------------------------------------
- ------------
2,707,000
-------------------------------------------------------------------------
- ------------
BASIC INDUSTRIES - 2.5%
20,000 duPont (E.I.) deNemours & Company
1,077,500
5,500 Fluor Corporation
235,812
3,500 Hercules, Inc.
400,312
10,000 International Paper Company
715,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
ZEROS AND APPRECIATION SERIES 1998
<TABLE>
- ---------------------------------------------------------------------------
- ------------
PORTFOLIO OF INVESTMENTS (continued)
NOVEMBER 30, 1994
- ---------------------------------------------------------------------------
- ------------
<CAPTION>
MARKET
VALUE
SHARES
(NOTE 1)
-------------------------------------------------------------------------
- ------------
<C> <S>
<C>
COMMON STOCKS (CONTINUED)
BASIC INDUSTRIES (CONTINUED)
4,000 WMX Technologies Inc.
$ 103,000
-------------------------------------------------------------------------
- ------------
2,531,624
-------------------------------------------------------------------------
- ------------
CONSUMER DURABLES - 1.7%
12,000 Chrysler Corporation
580,500
14,000 Ford Motor Company
379,750
10,000 General Motors Corporation
381,250
6,000 Goodyear Tire & Rubber Company
203,250
3,000 Whirlpool Corporation
149,625
-------------------------------------------------------------------------
- ------------
1,694,375
-------------------------------------------------------------------------
- ------------
UTILITIES - 1.4%
24,000 AT&T Corporation
1,179,000
4,000 Bell Atlantic Corporation
200,500
2,000 Southwestern Bell Corporation
82,750
-------------------------------------------------------------------------
- ------------
1,462,250
-------------------------------------------------------------------------
- ------------
TRANSPORTATION - 0.8%
3,000 Boeing Company
134,250
7,000 Burlington Northern, Inc.
341,250
7,000 Union Pacific Corporation
325,500
-------------------------------------------------------------------------
- ------------
801,000
-------------------------------------------------------------------------
- ------------
TOTAL COMMON STOCKS (Cost $29,745,138)
34,606,787
-------------------------------------------------------------------------
- ------------
FACE VALUE
-------------------------------------------------------------------------
- ------------
U.S. TREASURY NOTES 61.9% (COST $61,718,782)
$83,000,000 U.S. Treasury Notes-Strips, Zero Coupon due 8/15/98++
62,708,982
-------------------------------------------------------------------------
- ------------
CONVERTIBLE BOND - 0.1% (COST $241,000)
200,000 Savoy Pictures Entertainment, Inc.,
7.000% due 7/1/03
133,500
-------------------------------------------------------------------------
- ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
ZEROS AND APPRECIATION SERIES 1998
<TABLE>
- ---------------------------------------------------------------------------
- -------------
PORTFOLIO OF INVESTMENTS (continued)
NOVEMBER 30, 1994
- ---------------------------------------------------------------------------
- -------------
<CAPTION>
MARKET
VALUE
FACE VALUE
(NOTE 1)
<C> <S>
<C>
-------------------------------------------------------------------------
- -------------
COMMERCIAL PAPER - 3.5% (COST $3,508,000)
$3,508,000 Ford Motor Credit Company,
5.750% due 12/1/94
$ 3,508,000
-------------------------------------------------------------------------
- -------------
TOTAL INVESTMENTS (COST $95,212,920*) 99.6%
100,957,269
OTHER ASSETS AND LIABILITIES (NET) 0.4
431,165
-------------------------------------------------------------------------
- -------------
NET ASSETS 100.0%
$101,388,434
-------------------------------------------------------------------------
- -------------
<FN>
* Aggregate cost for Federal tax purposes.
+ Non-income producing security.
++ Effective yield is 7.83% (unaudited).
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
ZEROS AND APPRECIATION SERIES 1998
<TABLE>
- ---------------------------------------------------------------------------
- -------------
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1994
- ---------------------------------------------------------------------------
- -------------
<S> <C>
<C>
ASSETS:
Investments, at value (Cost $95,212,920) (Note 1)
See accompanying schedule
$100,957,269
Cash
267
Receivable for investment securities sold
599,585
Dividends and interest receivable
123,242
Unamortized organization costs (Note 5)
27,569
- ---------------------------------------------------------------------------
- -------------
TOTAL ASSETS
101,707,932
- ---------------------------------------------------------------------------
- -------------
LIABILITIES:
Payable for investment securities purchased $ 134,055
Payable for Fund shares redeemed 68,250
Investment advisory fee payable (Note 2) 25,389
Accrued legal and audit fees 22,600
Shareholder servicing fee payable (Note 2) 21,157
Administration fee payable (Note 2) 16,926
Transfer agent fees payable (Note 2) 14,596
Custodian fees payable (Note 2) 6,400
Accrued expenses and other payables 10,125
- ---------------------------------------------------------------------------
- -------------
TOTAL LIABILITIES
319,498
- ---------------------------------------------------------------------------
- -------------
NET ASSETS
$101,388,434
- ---------------------------------------------------------------------------
- -------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
ZEROS AND APPRECIATION SERIES 1998
<TABLE>
- ---------------------------------------------------------------------------
- -------------
STATEMENT OF ASSETS AND LIABILITIES (continued)
NOVEMBER 30, 1994
- ---------------------------------------------------------------------------
- -------------
<S>
<C>
NET ASSETS CONSIST OF:
Undistributed net investment income
$ 5,221,540
Accumulated net realized gain on investments sold
5,561,099
Unrealized appreciation of investments
5,744,349
Par value
13,086
Paid-in capital in excess of par value
84,848,360
- ---------------------------------------------------------------------------
- -------------
TOTAL NET ASSETS
$101,388,434
- ---------------------------------------------------------------------------
- -------------
NET ASSET VALUE and redemption price per share
($101,388,434 / 13,085,790 shares of beneficial interest
outstanding)
$7.75
- ---------------------------------------------------------------------------
- -------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
ZEROS AND APPRECIATION SERIES 1998
<TABLE>
- ---------------------------------------------------------------------------
- -------------
STATEMENT OF OPERATIONS FOR THE YEAR ENDED
NOVEMBER 30, 1994
- ---------------------------------------------------------------------------
- -------------
<S> <C>
<C>
INVESTMENT INCOME:
Interest
$ 5,388,728
Dividends (net of foreign withholding taxes of $5,814)
1,020,002
- ---------------------------------------------------------------------------
- -------------
TOTAL INVESTMENT INCOME
6,408,730
- ---------------------------------------------------------------------------
- -------------
EXPENSES:
Investment advisory fee (Note 2) $350,773
Shareholder servicing fee (Note 2) 292,311
Administration fee (Note 2) 233,848
Transfer agent fees (Note 2) 168,926
Custodian fees (Note 2) 39,713
Legal and audit fees 35,239
Amortization of organization costs (Note 5) 23,959
Trustees' fees and expenses (Note 2) 9,092
Other 30,830
- ---------------------------------------------------------------------------
- -------------
TOTAL EXPENSES
1,184,691
- ---------------------------------------------------------------------------
- -------------
NET INVESTMENT INCOME
5,224,039
- ---------------------------------------------------------------------------
- -------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS (NOTES 1 AND 3):
Net realized gain on investments sold during the year
5,561,100
Net unrealized depreciation of investments during the year
(14,922,818)
- ---------------------------------------------------------------------------
- -------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
(9,361,718)
- ---------------------------------------------------------------------------
- -------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS
$(4,137,679)
- ---------------------------------------------------------------------------
- -------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
ZEROS AND APPRECIATION SERIES 1998
<TABLE>
- ---------------------------------------------------------------------------
- ------------
STATEMENT OF CHANGES IN NET ASSETS
- ---------------------------------------------------------------------------
- ------------
<CAPTION>
YEAR
YEAR
ENDED
ENDED
11/30/94
11/30/93
<S> <C>
<C>
Net investment income $ 5,224,039
$ 6,380,649
Net realized gain on investments sold during the year 5,561,100
12,854,126
Net unrealized depreciation of investments during the
year (14,922,818)
(4,191,417)
- ---------------------------------------------------------------------------
- ------------
Net increase/(decrease) in net assets resulting from
operations (4,137,679)
15,043,358
Distributions to shareholders from:
Net investment income (6,373,719)
(7,173,390)
Net realized gain on investments (12,854,127)
(1,915,783)
Net decrease in net assets from Fund share transactions
(Note 4) (11,821,804)
(35,454,961)
- ---------------------------------------------------------------------------
- ------------
Net decrease in net assets (35,187,329)
(29,500,776)
NET ASSETS:
Beginning of year 136,575,763
166,076,539
- ---------------------------------------------------------------------------
- ------------
End of year (including undistributed net investment
income of $5,221,540 and $6,371,220, respectively) $101,388,434
$136,575,763
- ---------------------------------------------------------------------------
- -------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
ZEROS AND APPRECIATION SERIES 1998
<TABLE>
- ---------------------------------------------------------------------------
- ------------
FINANCIAL HIGHLIGHTS
- ---------------------------------------------------------------------------
- ------------
FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<CAPTION>
YEAR YEAR YEAR
PERIOD
ENDED ENDED ENDED
ENDED
11/30/94 11/30/93+
11/30/92+ 11/30/91*
<S> <C> <C> <C>
<C>
Net asset value, beginning of year $9.38 $9.02 $8.40
$7.60
- ---------------------------------------------------------------------------
- ------------
Income From Investment Operations:
Net investment income 0.41 0.38 0.37
0.39
Net realized and unrealized gain/(loss) on
investments (0.70) 0.48 0.68
0.41
- ---------------------------------------------------------------------------
- ------------
Total from investment operations (0.29) 0.86 1.05
0.80
Less Distributions:
Distributions from net investment income (0.45) (0.40)
(0.43) --
Distributions from net realized capital
gains (0.89) (0.10) --
- --
- ---------------------------------------------------------------------------
- ------------
Total distributions (1.34) (0.50)
(0.43) 0.00
- ---------------------------------------------------------------------------
- ------------
Net asset value, end of year $7.75 $9.38 $9.02
$8.40
- ---------------------------------------------------------------------------
- ------------
Total return++ (3.69)% 9.99%
12.86% 10.53%
- ---------------------------------------------------------------------------
- ------------
Ratios/Supplemental Data:
Net assets, end of year (in 000's) $101,388 $136,576 $166,077
$195,956
Ratio of operating expenses to average net
assets 1.01% 0.97%
1.01% 1.05%**
Ratio of net investment income to average
net assets 4.47% 4.15%
4.39% 5.04%**
Portfolio turnover rate 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 method did not accord with results of
operations.
++ Total return represents aggregate total return for the periods
indicated.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
ZEROS AND APPRECIATION SERIES 1998
- ---------------------------------------------------------------------------
- -----
NOTES TO FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
- -----
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Principal Return Fund, (formerly Smith Barney Shearson
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 Zeros Plus European Equities Series 1999 which has not yet commenced
operations. 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
16
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
ZEROS AND APPRECIATION SERIES 1998
- ---------------------------------------------------------------------------
- -----
NOTES TO FINANCIAL STATEMENTS (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 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%
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 Fund has entered into an investment advisory agreement (the "Advisory
Agreement") with a division of Mutual Management Corp., which has been
transferred effective November 7, 1994 to Smith Barney Mutual Funds
Management
Inc. ("SBMFM"). Mutual Management Corp. and SBMFM are both wholly owned
17
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
ZEROS AND APPRECIATION SERIES 1998
- ---------------------------------------------------------------------------
- -----
NOTES TO FINANCIAL STATEMENTS (continued)
- ---------------------------------------------------------------------------
- -----
subsidiaries of Smith Barney Holdings Inc. ("Holdings"). Holdings is a
wholly
owned subsidiary of The Travelers Inc. Under the Advisory Agreement, the
Fund
pays a monthly fee at the annual rate of .30% of the value of its average
daily
net assets.
Prior to April 21, 1994, the Trust was party to an administration agreement
(the
"Administration Agreement") with The Boston Company Advisors, Inc. ("Boston
Advisors"), an indirect wholly owned subsidiary of Mellon Bank Corporation
("Mellon"). Under the Administration Agreement, the Fund paid a monthly fee
at
the annual rate of .20% of the value of its average daily net assets.
As of the close of business on April 21, 1994, SBMFM (formerly known as
Smith,
Barney Advisers, Inc.) succeeded Boston Advisors as the Fund's
administrator.
The new administration agreement contains substantially the same terms and
conditions, including the level of fees, as the predecessor agreement.
As of the close of business on April 21, 1994, the Fund and SBMFM entered
into a
sub-administration agreement (the "Sub-Administration Agreement") with
Boston
Advisors. 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 .25% of the value of the Fund's average
daily
net assets for certain activities not provided by the Fund's transfer
agent.
For the year ended November 30, 1994, the Fund incurred total brokerage
commissions of $45,657 of which $2,130 was paid to Smith Barney.
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.
18
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
ZEROS AND APPRECIATION SERIES 1998
- ---------------------------------------------------------------------------
- -----
NOTES TO FINANCIAL STATEMENTS (continued)
- ---------------------------------------------------------------------------
- -----
3. PURCHASES AND SALES OF SECURITIES
Purchases and proceeds from sales of securities, excluding U.S. government
securities and short-term investments, aggregated $11,826,467 and
$28,043,877,
respectively, for the year ended November 30, 1994. There were no purchases
of
U.S. government securities for the year ended November 30, 1994. Proceeds
from
sales of U.S. government securities aggregated $16,950,110 for the year
ended
November 30, 1994.
At November 30, 1994, aggregate gross unrealized appreciation for all
securities
in which there was an excess of value over tax cost was $6,332,650 and
aggregate
gross unrealized depreciation for all securities in which there was an
excess of
tax cost over value was $588,301.
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 European Equities Series 1999 and the Zeros
Plus
Emerging Growth Series 2000 each constitute a sub-trust under the Master
Trust
Agreement. Changes in shares of beneficial interest of the Fund were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
YEAR ENDED
11/30/94
11/30/93
Shares Amount Shares
Amount
<S> <C> <C> <C>
<C>
- ---------------------------------------------------------------------------
- --------------
Issued as reinvestment of
dividends 2,338,524 $ 19,030,329 1,039,356
$ 9,021,620
Redeemed (3,819,146) (30,852,133) (4,880,410)
(44,476,581)
- ---------------------------------------------------------------------------
- --------------
Net decrease (1,480,622) $(11,821,804) (3,841,054)
$(35,454,961)
- ---------------------------------------------------------------------------
- --------------
</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
19
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
ZEROS AND APPRECIATION SERIES 1998
- ---------------------------------------------------------------------------
- -----
NOTES TO FINANCIAL STATEMENTS (continued)
- ---------------------------------------------------------------------------
- -----
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 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 (formerly Continental Bank N.A.) 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 20% of its net assets.
Interest is
payable either at the bank's Money Market Rate or the London Interbank
Offered
Rate (LIBOR) plus .375% on an annualized basis. 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
year
ended November 30, 1994, the Fund had an average outstanding daily balance
of
$78,366 with interest rates ranging from 3.3125% to 3.875%. Interest
expense
totalled $2,699 for the year ended November 30, 1994. At November 30, 1994,
the
Fund had no outstanding borrowings under this Agreement.
20
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
ZEROS AND APPRECIATION SERIES 1998
- ---------------------------------------------------------------------------
- -----
REPORT OF INDEPENDENT ACCOUNTANTS
- ---------------------------------------------------------------------------
- -----
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
SMITH BARNEY PRINCIPAL RETURN FUND:
We have audited the accompanying statement of assets and liabilities of the
Zeros and Appreciation Series 1998 of Smith Barney Principal Return Fund
(formerly Smith Barney Shearson Principal Return Fund), including the
schedule
of portfolio investments, as of November 30, 1994, and the related
statement of
operations for the year then ended, the statement of changes in net assets
for
each of the two years in the period then ended, and the financial
highlights for
each of the three years then ended and for the period from January 25, 1991
(commencement of operations) to November 30, 1991. These financial
statements
and financial highlights are the responsibility of the Fund's management.
Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the
financial
statements. Our procedures included confirmation of securities owned as of
November 30, 1994 by correspondence with the custodian and brokers. An
audit
also includes assessing the accounting principles used and significant
estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to
above present fairly, in all material respects, the financial position of
the
Zeros and Appreciation Series 1998 of Smith Barney Principal Return Fund as
of
November 30, 1994, the results of its operations for the year then ended,
the
changes in its net assets for each of the two years in the period then
ended,
and the financial highlights for each of the three years in the period then
ended and for the period from January 25, 1991 (commencement of operations)
to
November 30, 1991, in conformity with generally accepted accounting
principles.
Coopers & Lybrand
L.L.P.
Boston, Massachusetts
January 12, 1995
21
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
ZEROS AND APPRECIATION SERIES 1998
- ---------------------------------------------------------------------------
- -----
TAX INFORMATION (UNAUDITED) FISCAL YEAR ENDED NOVEMBER 30,
1994
- ---------------------------------------------------------------------------
- -----
Of the distributions made by the Fund, during the fiscal year ended
November 30,
1994, 18.14% qualify for the dividends-received deduction available to
corporate
shareholders.
The amount of long term capital gain paid for the fiscal year ended
November 30,
1994 was $12,366,090 for the Fund.
22
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
ZEROS AND APPRECIATION SERIES 1998
- ---------------------------------------------------------------------------
- -----
PARTICIPANTS
- ---------------------------------------------------------------------------
- -----
DISTRIBUTOR COUNSEL
Smith Barney Inc. Willkie Farr & Gallagher
388 Greenwich Street 153 East 53rd Street
New York, New York 10013 New York, New York 10022
INVESTMENT ADVISER TRANSFER AGENT
Smith Barney Mutual Funds The Shareholder Services Group,
Inc.
Management Inc. Exchange Place
388 Greenwich Street Boston, Massachusetts 02109
New York, New York 10013
CUSTODIAN
ADMINISTRATOR
Boston Safe Deposit and
Smith Barney Mutual Funds Trust Company
Management Inc. One Boston Place
388 Greenwich Street Boston, Massachusetts 02108
New York, New York 10013
SUB-ADMINISTRATOR
The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
23
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
ZEROS AND APPRECIATION SERIES 1998
- ---------------------------------------------------------------------------
- -----
OUT APPROACH TO MUTUAL FUND INVESTING
- ---------------------------------------------------------------------------
- -----
1. PERSONAL SERVICE
The Smith Barney Financial Consultant ("FC") is highly trained and deeply
committed to client service. Your FC works with you to establish a
relationship
based on one-to-one communication and the highest standards of quality.
2. ANALYZING YOUR NEEDS
Defining your needs and establishing specific goals is the first step
toward any
successful investment program. The Smith Barney Strategic Asset Allocator -
- - a
sophisticated financial planning tool -- can help you and your FC evaluate
your
resources and objectives. This groundwork then becomes the basis for a
strategy
designed specifically for you. Your FC can use the Strategic Asset
Allocator on
a periodic basis to ensure that your investment strategy is keeping pace
with
your changing needs and goals.
3. A UNIQUE MUTUAL FUND INVESTMENT PROGRAM
Your Smith Barney FC offers a number of mutual fund assessment tools that
are
unmatched in the financial services industry. Smith Barney FCs have access
to a
proprietary mutual fund research database that provides information at
their
fingertips on more than 2,100 funds. In addition, working with another
proprietary system known as the Mutual Fund Evaluation Service, your FC can
help
guide you through the complex mutual fund maze. Specifically, the
Evaluation
Service can provide a clear picture of the past performance of mutual funds
you
currently own. Presented in both graphic and numerical form, this
illustration
provides a wealth of easily understood data on more than 2,100 funds. This
complimentary service allows you to judge whether your mutual fund has
helped
meet your investment needs.
4. LOOKING AHEAD
Selecting a mutual fund should not be a one-event process that ends with
the
purchase of shares. You can count on the expertise of your FC as he or she
continues to monitor and evaluate your funds, to suggest new strategies and
to
listen. That, in our opinion, is how to use mutual funds to help achieve
your
financial goals.
24
<PAGE>
<TABLE>
<S> <C>
PRINCIPAL
RETURN FUND SMITH
BARNEY
ZEROS AND APPRECIATION -----
- -------
SERIES 1998
A Member of TravelersGroup
[LOGO]
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
OFFICERS
Heath B. McLendon
Chairman of the Board
Harry D. Cohen
Vice President This report is submitted
for the
Investment Officer general information of the
shareholders of Smith
Barney
Susan C. Fulenwider Principal Return Fund --
Zeros
Vice President and and Appreciation Series
1998. It is
Investment Officer not a prospectus, circular
or repre-
sentation intended for use
in the
Lewis E. Daidone purchase or sale of shares
of the
Senior Vice President Fund or of any securities
men-
and Treasurer tioned in this report
Christina T. Sydor SMITH BARNEY
Secretary MUTUAL FUNDS
388 Greenwich Street,
New York, New York 10013
[logo] Recycled Fund 137
Recyclable FD 0306 A5
</TABLE>
<PAGE>
SMITH BARNEY
PRINCIPAL
1994
ANNUAL RETURN
REPORT
FUND
ZEROS PLUS EMERGING GROWTH
SERIES 2000
..........................
NOVEMBER 30, 1994
SMITH BARNEY MUTUAL FUNDS
[LOGO] INVESTING FOR YOUR FUTURE.
EVERYDAY.
<PAGE>
PRINCIPAL RETURN FUND
ZEROS PLUS EMERGING GROWTH
SERIES 2000
DEAR SHAREHOLDER:
We are pleased to report that the Smith Barney Principal Return Fund --
Zeros
Plus Emerging Growth Series 2000, virtually maintained its value in what
proved
to be a turbulent period for growth stocks as well as fixed income
investments. For the fiscal year ended November 30, 1994, the net asset
value
of the Fund declined 0.20%. This compared with an increase of 1.04% for the
Standard & Poor's Daily Price Index of 500 Common Stocks (S&P 500). The
Value
Line Index, which represents a better measure of performance for the kinds
of
securities held in the Fund, declined 4.22% in the same 12 month period.
The
price of our U.S. Treasury Note Zero Coupon Bond due 2/15/2000, declined
3.20%
in this period while our emerging growth equities actually contributed in
excess of a 7.00% positive return towards the net asset value of the Fund.
For the second half of our fiscal year ended November 30, 1994, the net
asset
value of the Fund advanced 4.98%. This compared with an increase of 0.80%
for the S&P 500 and a decline of 3.09% for the Value Line Index. Once again
the
managed portion of the Fund, our emerging growth stocks, performed well
displaying an increase of 12.86% compared with a decline of 0.64% for our
zero
coupon bond. It should be remembered that at maturity, our bond will be
priced
at $100 compared with a recent quote of $67. Approximately 58% of the net
assets of the Fund are invested in Zero Coupon U.S. Treasury Notes maturing
in
the year 2000. The balance of the assets are invested in emerging growth
stocks.
In our May 31, 1994 semi-annual report, we discussed the change in monetary
policy instituted by the Federal Reserve Board (the Fed) which took place
earlier in February. From a policy of accommodation in which reserves were
created quite freely and interest rates kept at historically low levels,
the Fed
switched to one of neutrality. In the last six months, the Fed has
increased
interest rates at a faster rate leading some economists to label current
policy
as moderately restrictive. The yield curve has recently begun to flatten,
which
means interest rates on Treasury securities with maturities between two and
30
years have a relatively narrow spread. Historically, such a yield curve has
been
the precursor to a slowdown in the economy. The Fed's stated goal is to
promote
price stability, an objective they feel cannot be achieved if the economy
continues to experience rates of growth similar to those in the past
several
quarters. While inflation has remained quite tame when measured by the
Consumer
Price Index, the Fed remains concerned that if the economy were to continue
operating at very high levels of capacity utilization and near full
employment
it would inevitably lead to an increase in inflation. After failing to
appreciate the inflation fighting resolve of the Fed earlier in the fall
when
long-term interest rates reached 8.15%, the yield on the 30 year Treasury
Bond
has
1
<PAGE>
declined to a recent level of 7.85% and the U.S. dollar has strengthened
versus
other currencies. We have been surprised by the magnitude of the backup in
long-term interest rates during the past twelve months, but continue to
believe
that higher short-term interest rates combined with the depressing effects
of
the Clinton Administration's tax hike will lead to a slowdown in the U.S.
economy and eventually to a return to a more neutral monetary policy by the
Federal Reserve.
In prior reports to you we discussed our optimistic views towards top tier
biotechnology companies and telecommunications suppliers. This optimism was
vindicated when Chiron, our largest biotechnology holding, entered into a
strategic partnership with Swiss drug giant Ciba Geigy in which Chiron
shareholders received $117 a share for about 37% of their stock from Ciba.
Chiron also will exchange 6.6 million shares of new stock for some of
Ciba's
valuable assets, leaving the Swiss drug giant with a 49.9% ownership of
Chiron.
This will still allow Chiron, the California based company, to remain
independent following the partial tender offer.
While there has been much ongoing conjecture about the eventual winners and
losers from the construction of the information superhighway, we have
always
viewed the equipment suppliers as having the lowest risk, yet highest
potential
reward from the expected capital outlays such a system would entail. C-COR
Electronics (the Fund's largest shareholding), a supplier of high quality,
reliable capital equipment to cable television operators and phone
companies
intent on expanding into broadband services, has witnessed dramatic growth
in
its backlog and earnings during the past few years and its outlook remains
quite
bright.
While we have no control over the short-term price action of the Zero
Coupon
Bonds in the Fund, we are sure of one thing. At maturity, we are guaranteed
to
get $100 up from the recent price of $67. That guarantee, and our ability
to
find successful companies able to grow their earnings faster than the
overall
economy, should afford investors an attractive rate of return. We will
accomplish this by investing in companies such as C-COR Electronics,
California
Microwave, Tyco International and Wellman.
We value your trust and support and will continue to strive to provide you
with
the highest level of investment management.
Sincerely,
<TABLE>
<S> <C>
/S/ HEATH B. MCLENDON /S/ RICHARD A. FREEMAN
Heath B. McLendon Richard A. Freeman
Chairman of the Board Vice President and
Investment Officer
January 23, 1995
</TABLE>
2
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
Zeros Plus Emerging Growth Series 2000
- ---------------------------------------------------------------------------
- -----
PORTFOLIO HIGHLIGHTS (UNAUDITED) NOVEMBER 30,
1994
PORTFOLIO ALLOCATION
<TABLE>
<CAPTION>
DESCRIPTION OF PIE CHARTS IN SHAREHOLDER REPORT
Portfolio Allocation Breakdown
Pie chart depicting the allocation of the Principal Return Fund (Zeros Plus
Emerging Growth Series 2000) investment securities held at November 30,
1994
by Portfolio Allocation classification. The pie is broken in pieces
representing Portfolio Allocation the following percentages:
PORTFOLIO ALLOCATION PERCENTAGE
<S> <C>
U.S. Treasury Notes, Net Other Assets
and Liabilities 57.2%
Common Stocks 42.8%
</TABLE>
TOP TEN COMMON STOCK HOLDINGS
<TABLE>
<CAPTION>
Percentage
of
Company Net Assets
<S> <C>
- ---------------------------------------------------------------------------
- -----
C-COR ELECTRONICS, INC. 6.4%
CALIFORNIA MICROWAVE, INC. 5.7
CHIRON CORPORATION 5.2
GENENTECH, INC. 3.8
TECH-SYM CORPORATION 3.5
LOTUS DEVELOPMENT CORPORATION 2.8
VERTEX PHARMACEUTICALS, INC. 2.7
GENZYME CORPORATION 2.5
QUANTUM CORPORATION 2.1
TYCO INTERNATIONAL LTD. 2.0
</TABLE>
3
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
Zeros Plus Emerging Growth Series 2000
- ---------------------------------------------------------------------------
- ----
HISTORICAL PERFORMANCE
- ---------------------------------------------------------------------------
- ----
<TABLE>
<CAPTION>
Year Ended Net Asset Value Capital Gains Dividends Total
November 30, Beginning Ending Distributed Paid Return**
- ---------------------------------------------------------------------------
- ----
<S> <C> <C> <C> <C> <C>
8/30/91* -
11/30/91 $7.60 $7.57 -- -- (0.39)%
- ---------------------------------------------------------------------------
- ----
1992 7.57 8.16 -- $0.10 9.15
- ---------------------------------------------------------------------------
- ----
1993 8.16 9.00 $0.09 0.29 15.72
- ---------------------------------------------------------------------------
- ----
1994 9.00 8.15 0.50 0.34 (0.20)
- ---------------------------------------------------------------------------
- ----
Total $0.59 $0.73
- ---------------------------------------------------------------------------
- ----
Cumulative Total Return (8/30/91 through 11/30/94) 25.56%
- ---------------------------------------------------------------------------
- ----
<F/N>
* The Fund commenced operations on August 30, 1991.
** Figures assume reinvestment of all dividends and capital gain
distributions at net asset value and do not reflect deduction of the
applicable front-end sales charge.
</TABLE>
THE FUND'S POLICY IS TO DISTRIBUTE DIVIDENDS
AND CAPITAL GAINS, IF ANY, ANNUALLY.
- ---------------------------------------------------------------------------
- ----
AVERAGE ANNUAL TOTAL RETURN***
- ---------------------------------------------------------------------------
- ----
<TABLE>
<CAPTION>
Without With
Sales Charge Sales
Charge
<S> <C> <C>
- ---------------------------------------------------------------------------
- ----
Year Ended 11/30/94 (0.20)% (5.19)%
- ---------------------------------------------------------------------------
- ----
Inception 8/30/91 through 11/30/94 7.25% 5.57%
- ---------------------------------------------------------------------------
- ----
<F/N>
*** All average annual total return figures shown reflect reinvestment of
dividends and capital gains at net asset value.
</TABLE>
4
<PAGE>
GROWTH OF $10,000 INVESTED IN SMITH BARNEY PRINCIPAL RETURN FUND
ZEROS PLUS EMERGING GROWTH SERIES 2000 VS. VALUE LINE INDEX+
- ---------------------------------------------------------------------------
- -----
August 30, 1991 -- November 30, 1994
<TABLE>
<CAPTION>
DESCRIPTION OF MOUNTAIN CHART IN SMITH BARNEY COVERS
A line graph depicting the total growth (including reinvestment of
dividends
and capital gains) of a hypothetical investment of $10,000 in Principal
Return Fund (Zeros Plus Emerging Growth Series 2000) shares on August 30,
1991
through November 30, 1994 as compared with the growth of a $10,000
investment
in the Value Line Index. The plot points used to draw the line graph were
as
follows:
GROWTH OF $10,000 GROWTH OF $10,000
INVESTMENT IN SHARES INVESTMENT IN THE
MONTH ENDED OF THE FUND VALUE LINE INDEX
<S> <C> <C>
08/91 $9,500 $10,000
09/91 $9,763 $9,863
12/91 $10,265 $10,155
03/92 $9,809 $10,478
06/92 $9,632 $10,033
09/92 $10,214 $10,054
12/92 $10,464 $10,861
03/93 $10,424 $10,404
06/93 $11,115 $11,333
09/93 $11,912 $11,721
12/93 $12,121 $12,027
3/94 $11,479 $11,601
6/94 $11,129 $11,196
9/94 $11,753 $11,726
11/94 $11,928 $11,182
<F/N>
+ Illustration of $10,000 invested on August 30, 1991 assuming deduction of
the
maximum 5% sales charge at the time of investment and reinvestment of
dividends and capital gains at net asset value through November 30, 1994.
The Value Line Composite Index (geometric), composed of approximately
1,700
stocks, is a geometric average of the daily price percentage change in
each
stock covering both large and small capitalized companies.
Index information is available at month-end only; therefore, the closest
month-end to inception date of the Fund has been used.
NOTE: All figures cited here represent past performance and do not
guarantee
future results.
5
</TABLE>
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
Zeros Plus Emerging Growth Series 2000
<TABLE>
- ---------------------------------------------------------------------------
- ------------
PORTFOLIO OF INVESTMENTS NOVEMBER 30,
1994
- ---------------------------------------------------------------------------
- ------------
<CAPTION>
MARKET VALUE
SHARES
(NOTE 1)
- ---------------------------------------------------------------------------
- ------------
<C> <S>
<C>
COMMON STOCKS - 42.8%
HEALTH CARE - 15.6%
50,000 Chiron Corporation+
$ 3,862,500
50,000 Cor Therapeutics, Inc.+
668,750
55,000 Fischer Imaging Corporation+
336,875
60,000 Genentech, Inc.+
2,820,000
63,000 Genzyme Corporation+
1,874,250
25,000 IDEC Pharmaceuticals Corporation+
62,500
145,000 Vertex Pharmaceuticals, Inc.+
1,993,750
- ---------------------------------------------------------------------------
- ------------
11,618,625
- ---------------------------------------------------------------------------
- ------------
TELECOMMUNICATIONS - 12.1%
134,500 California Microwave, Inc.+
4,253,562
93,525 C-COR Electronics, Inc.+
4,769,775
- ---------------------------------------------------------------------------
- ------------
9,023,337
- ---------------------------------------------------------------------------
- ------------
TECHNOLOGY - 11.3%
46,000 Lotus Development Corporation+
2,058,500
100,000 Quantum Corporation+
1,575,000
50,000 Tandem Computers, Inc.+
850,000
119,000 Tech-Sym Corporation+
2,603,125
120,000 VLSI Technology, Inc.+
1,410,000
- ---------------------------------------------------------------------------
- ------------
8,496,625
- ---------------------------------------------------------------------------
- ------------
CAPITAL GOODS - 2.0%
33,000 Tyco International Ltd.
1,518,000
- ---------------------------------------------------------------------------
- ------------
BASIC INDUSTRIES - 1.8%
53,000 Wellman, Inc.
1,344,875
- ---------------------------------------------------------------------------
- ------------
TOTAL COMMON STOCKS (Cost $22,522,137)
32,001,462
- ---------------------------------------------------------------------------
- ------------
</TABLE>
<TABLE>
<CAPTION>
FACE
VALUE
<S> <C>
<C>
- ---------------------------------------------------------------------------
- ------------
U.S. TREASURY NOTES - 57.6% (Cost $42,457,848)
$64,000,000 U.S. Treasury Notes-Strips, Zero Coupon due 02/15/00++
43,015,674
- ---------------------------------------------------------------------------
- ------------
TOTAL INVESTMENTS (Cost $64,979,985*) 100.4%
75,017,136
OTHER ASSETS AND LIABILITIES (NET) (0.4)
(266,023)
- ---------------------------------------------------------------------------
- ------------
NET ASSETS 100.0%
$74,751,113
- ---------------------------------------------------------------------------
- ------------
<FN>
* Aggregate cost for Federal tax purposes.
+ Non-income producing security.
++ Effective yield is 7.83% (unaudited).
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
Zeros Plus Emerging Growth Series 2000
<TABLE>
- ---------------------------------------------------------------------------
- --------------
STATEMENT OF ASSETS AND LIABILITIES NOVEMBER 30,
1994
- ---------------------------------------------------------------------------
- --------------
<S> <C>
<C>
ASSETS:
Investments, at value (Cost $64,979,985) (Note 1)
See accompanying schedule
$75,017,136
Cash
20,836
Unamortized organization costs (Note 5)
45,228
Dividends receivable
3,180
- ---------------------------------------------------------------------------
- --------------
TOTAL ASSETS
75,086,380
- ---------------------------------------------------------------------------
- --------------
LIABILITIES:
Notes payable (Note 6) $200,056
Payable for Fund shares redeemed 33,590
Investment advisory fee payable (Note 2) 24,728
Accrued legal and audit fees 23,600
Shareholder servicing fee payable (Note 2) 15,455
Administration fee payable (Note 2) 12,364
Transfer agent fees payable (Note 2) 10,749
Custodian fees payable (Note 2) 4,600
Accrued expenses and other payables 10,125
- ---------------------------------------------------------------------------
- --------------
TOTAL LIABILITIES
335,267
- ---------------------------------------------------------------------------
- --------------
NET ASSETS
$74,751,113
- ---------------------------------------------------------------------------
- --------------
NET ASSETS CONSIST OF:
Undistributed net investment income
$ 2,248,449
Accumulated net realized loss on investments sold
(1,458,915)
Unrealized appreciation of investments
10,037,151
Par value
9,169
Paid-in capital in excess of par value
63,915,259
- ---------------------------------------------------------------------------
- --------------
TOTAL NET ASSETS
$74,751,113
- ---------------------------------------------------------------------------
- --------------
NET ASSET VALUE and redemption price per share
($74,751,113 / 9,169,036 shares of beneficial interest
outstanding)
$8.15
- ---------------------------------------------------------------------------
- --------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
Zeros Plus Emerging Growth Series 2000
<TABLE>
- ---------------------------------------------------------------------------
- ------------
STATEMENT OF OPERATIONS
- ---------------------------------------------------------------------------
- ------------
FOR THE YEAR ENDED NOVEMBER 30, 1994
<S> <C>
<C>
INVESTMENT INCOME:
Interest
$ 3,647,653
Dividends
35,610
- ---------------------------------------------------------------------------
- ------------
TOTAL INVESTMENT INCOME
3,683,263
- ---------------------------------------------------------------------------
- ------------
EXPENSES:
Investment advisory fee (Note 2) $333,220
Shareholder servicing fee (Note 2) 208,263
Administration fee (Note 2) 166,610
Transfer agent fees (Note 2) 123,805
Legal and audit fees 35,739
Custodian fees (Note 2) 27,530
Amortization of organization costs (Note 5) 25,844
Trustees' fees and expenses (Note 2) 9,092
Other 26,612
- ---------------------------------------------------------------------------
- ------------
TOTAL EXPENSES
956,715
- ---------------------------------------------------------------------------
- ------------
NET INVESTMENT INCOME
2,726,548
- ---------------------------------------------------------------------------
- ------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS (NOTES 1 AND 3):
Net realized loss on investments sold during the year
(952,291)
Net unrealized depreciation of investments during the year
(2,235,398)
- ---------------------------------------------------------------------------
- ------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
(3,187,689)
- ---------------------------------------------------------------------------
- ------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS
$ (461,141)
- ---------------------------------------------------------------------------
- ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
Zeros Plus Emerging Growth Series 2000
<TABLE>
- ---------------------------------------------------------------------------
- -------------------
STATEMENT OF CHANGES IN NET ASSETS
- ---------------------------------------------------------------------------
- -------------------
<CAPTION>
YEAR
YEAR
ENDED
ENDED
11/30/94
11/30/93
<S> <C>
<C>
Net investment income $
2,726,548 $ 3,406,399
Net realized gain/(loss) on investments sold during the year
(952,291) 4,834,559
Net unrealized appreciation/(depreciation) of investments
during the year
(2,235,398) 7,293,854
- ---------------------------------------------------------------------------
- -------------------
Net increase/(decrease) in net assets resulting from operations
(461,141) 15,534,812
Distributions to shareholders from:
Net investment income
(3,638,777) (4,426,224)
Net realized gain on investments
(5,302,121) (1,385,927)
Net decrease in net assets from Fund share transactions (Note 4)
(12,712,032) (38,184,100)
- ---------------------------------------------------------------------------
- -------------------
Net decrease in net assets
(22,114,071) (28,461,439)
NET ASSETS:
Beginning of year
96,865,184 125,326,623
- ---------------------------------------------------------------------------
- -------------------
End of year (including undistributed net investment
income of $2,248,449 and $3,401,931, respectively) $
74,751,113 $ 96,865,184
- ---------------------------------------------------------------------------
- -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
Zeros Plus Emerging Growth Series 2000
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
- --------
FINANCIAL HIGHLIGHTS
- ---------------------------------------------------------------------------
- --------
FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH YEAR.
YEAR YEAR
YEAR PERIOD
ENDED ENDED
ENDED ENDED
11/30/94 11/30/93++
11/30/92++ 11/30/91*
<S> <C> <C>
<C> <C>
Net asset value, beginning of year $9.00 $8.16
$7.57 $7.60
- ---------------------------------------------------------------------------
- -------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.27 0.26
0.26 0.07
Net realized and unrealized gain/(loss) on
investments (0.28) 0.96
0.43 (0.10)
- ---------------------------------------------------------------------------
- -------------------
Total from investment operations (0.01) 1.22
0.69 (0.03)
LESS DISTRIBUTIONS:
Distributions from net investment income (0.34) (0.29)
(0.10) --
Distributions from net realized capital gains (0.50) (0.09)
- -- --
- ---------------------------------------------------------------------------
- -------------------
Total distributions (0.84) (0.38)
(0.10) 0.00
- ---------------------------------------------------------------------------
- -------------------
Net asset value, end of year $8.15 $9.00
$8.16 $7.57
- ---------------------------------------------------------------------------
- -------------------
Total return+++ (0.20)% 15.72%
9.15% (0.39)%
===========================================================================
=======
============
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000's) $74,751 $ 96,865
$125,327 $157,425
Ratio of operating expenses to average net
assets 1.15% 1.10%
1.15%+ 1.18%**
Ratio of net investment income to average net
assets 3.27% 3.12%
3.31% 3.56%**
Portfolio turnover rate 1% 0%
0% 2%
- ---------------------------------------------------------------------------
- ------------------
<F/N>
* The Fund commenced operations on August 30, 1991.
** Annualized.
+ The operating expense ratio excludes interest expense. The operating
expense
ratio including interest expense was 1.16%.
++ 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 method did not accord with results of
operations.
+++ Total return represents aggregate total return for the periods
indicated.
SEE NOTES TO FINANCIAL STATEMENTS.
10
</TABLE>
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
Zeros Plus Emerging Growth Series 2000
- ---------------------------------------------------------------------------
- -----
NOTES TO FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
- -----
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Principal Return Fund (formerly Smith Barney Shearson
Principle 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 Zeros Plus European Equities Series 1999, which has not yet
commenced operations. The Zeros Plus Emerging Growth Series 2000 (the
"Fund")
expects to terminate operations on February 28, 2000. 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,
11
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
Zeros Plus Emerging Growth Series 2000
- ---------------------------------------------------------------------------
- -----
NOTES TO FINANCIAL STATEMENTS (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 Trust's
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%
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 a division of Mutual Management Corp., which has been
transferred effective November 7, 1994, to Smith Barney Mutual Funds
Management
Inc. ("SBMFM"). Mutual Management Corp. and SBMFM are both wholly owned
subsidiaries of Smith Barney Holdings Inc. ("Holdings"). Holdings is a
wholly
owned subsidiary of The Travelers Inc. Under the Advisory Agreement, the
Fund
12
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
Zeros Plus Emerging Growth Series 2000
- ---------------------------------------------------------------------------
- -----
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- ---------------------------------------------------------------------------
- -----
pays a monthly fee at the annual rate of .40% of the value of its average
daily
net assets.
Prior to April 21, 1994, the Trust was party to an administration
agreement
(the "Administration Agreement") with The Boston Company Advisors, Inc.
("Boston
Advisors"), an indirect wholly owned subsidiary of Mellon Bank Corporation
("Mellon"). Under the Administration Agreement, the Fund paid a monthly fee
at
the annual rate of .20% of the value of its average daily net assets.
As of the close of business of April 21, 1994, SBMFM (formerly known
as
Smith, Barney Advisers, Inc.) succeeded Boston Advisors as the Fund's
administrator. The new administration agreement contains substantially the
same
terms and conditions, including the level of fees, as the predecessor
agreement.
As of the close of business on April 21, 1994, the Fund and SBMFM
entered
into a sub-administration agreement (the "Sub-Administration Agreement")
with
Boston Advisors. 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 .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 Trust's transfer
agent.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
U.S.
government securities and short-term investments, aggregated $765,075 and
$10,333,319, respectively, for the year ended November 30, 1994. There were
no
purchases of U.S. government securities for the year ended November 30,
1994.
Proceeds from sales of long-term U.S. government securities aggregated
$12,444,880 for the year ended November 30, 1994.
13
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
Zeros Plus Emerging Growth Series 2000
- ---------------------------------------------------------------------------
- -----
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- ---------------------------------------------------------------------------
- -----
At November 30, 1994, aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$11,437,006,
and aggregate gross unrealized depreciation for all securities in which
there
was an excess of tax cost over value was $1,399,855.
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 and Appreciation Series 1998 and the
Zeros
Plus European Equities Series 1999 each constitute a sub-trust under the
Master
Trust Agreement. Changes in shares of beneficial interest of the Fund were
as
follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR
ENDED
11/30/94
11/30/93
Shares Amount Shares
Amount
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------
- -----
Issued as reinvestment
of dividends 1,066,066 $ 8,852,528 734,363 $
5,757,650
Redeemed (2,662,785) (21,564,560) (5,324,977)
(43,941,750)
- ---------------------------------------------------------------------------
- -----
Net decrease (1,596,719) $(12,712,032) (4,590,614)
$(38,184,100)
- ---------------------------------------------------------------------------
- -----
</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 Trust's 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 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. NOTES PAYABLE
The Fund and several affiliated entities participate in a $50 million
line
of credit provided by Bank of America (formerly Continental Bank N.A.)
under an
Amended
14
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
Zeros Plus Emerging Growth Series 2000
- ---------------------------------------------------------------------------
- -----
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- ---------------------------------------------------------------------------
- -----
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 20% of its net assets. Interest is payable
either at the bank's Money Market Rate or the London Interbank Offered Rate
(LIBOR) plus .375% on an annualized basis. 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
year
ended November 30, 1994, the Fund had an average outstanding daily balance
of
$146,575 with interest rates ranging from 3.3125% to 6.625%. Interest
expense
totalled $6,960 for the year ended November 30, 1994. At November 30, 1994,
the
Fund had outstanding borrowings of $200,056 under this Agreement.
15
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
Zeros Plus Emerging Growth Series 2000
- ---------------------------------------------------------------------------
- -----
REPORT OF INDEPENDENT ACCOUNTANTS
- ---------------------------------------------------------------------------
- -----
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
SMITH BARNEY PRINCIPAL RETURN FUND:
We have audited the accompanying statement of assets and liabilities of the
Zeros Plus Emerging Growth Series 2000 of Smith Barney Principal Return
Fund
(formerly Smith Barney Shearson Principal Return Fund), including the
schedule
of portfolio investments, as of November 30, 1994, and the related
statement of
operations for the year then ended, the statement of changes in net assets
for
each of the two years in the period then ended, and the financial
highlights for
each of the three years in the period then ended and for the period from
August
30, 1991 (commencement of operations) to November 30, 1991. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the
financial
statements. Our procedures included confirmation of securities owned as of
November 30, 1994 by correspondence with the custodian and brokers. An
audit
also includes assessing the accounting principles used and significant
estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to
above present fairly, in all material respects, the financial position of
the
Zeros Plus Emerging Growth Series 2000 of Smith Barney Principal Return
Fund as
of November 30, 1994, the results of its operations for the year then
ended, the
changes in its net assets for each of the two years in the period then
ended,
and the financial highlights for each of the three years in the period then
ended and for the period from August 30, 1991 (commencement of operations)
to
November 30, 1991, in conformity with generally accepted accounting
principles.
Coopers and Lybrand
L.L.P.
Boston, Massachusetts
January 12, 1995
16
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
Zeros Plus Emerging Growth Series 2000
- ---------------------------------------------------------------------------
- -----
TAX INFORMATION (UNAUDITED) FISCAL YEAR ENDED NOVEMBER 30,
1994
- ---------------------------------------------------------------------------
- -----
Of the distributions made by the Fund, during the fiscal year ended
November 30,
1994, 1.31% qualify for the dividends-received deduction available to
corporate
shareholders.
The amount of long term capital gain paid for the fiscal year ended
November 30,
1994 was $5,302,121 for the Fund.
17
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
Zeros Plus Emerging Growth Series 2000
- ---------------------------------------------------------------------------
- -----
PARTICIPANTS
- ---------------------------------------------------------------------------
- -----
DISTRIBUTOR COUNSEL
Smith Barney Inc. Wilkie Farr & Gallagher
388 Greenwich Street 153 East 53rd Street
New York, New York 10013 New York, New York 10022
INVESTMENT ADVISER TRANSFER AGENT
Smith Barney Mutual Funds The Shareholder Services Group,
Inc.
Management Inc. Exchange Place
388 Greenwich Street Boston, Massachusetts 02109
New York, New York 10013
CUSTODIAN
ADMINISTRATOR
Boston Safe Deposit and
Smith Barney Mutual Funds Trust Company
Management Inc. One Boston Place
388 Greenwich Street Boston, Massachusetts 02108
New York, New York 10013
SUB-ADMINISTRATOR
The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
18
<PAGE>
Smith Barney
PRINCIPAL RETURN FUND
Zeros Plus Emerging Growth Series 2000
- ---------------------------------------------------------------------------
- ----
OUR APPROACH TO MUTUAL FUND INVESTING
- ---------------------------------------------------------------------------
- ----
1. PERSONAL SERVICE
The Smith Barney Financial Consultant ("FC") is highly trained and deeply
committed to client service. Your FC works with you to establish a
relationship
based on one-to-one communication and the highest standards of quality.
2. ANALYZING YOUR NEEDS
Defining your needs and establishing specific goals is the first step
toward any
successful investment program. The Smith Barney Strategic Asset Allocator -
- - a
sophisticated financial planning tool -- can help you and your FC evaluate
your
resources and objectives. This groundwork then becomes the basis for a
strategy
designed specifically for you. Your FC can use the Strategic Asset
Allocator on
a periodic basis to ensure that your investment strategy is keeping pace
with
your changing needs and goals.
3. A UNIQUE MUTUAL FUND INVESTMENT PROGRAM
Your Smith Barney FC offers a number of mutual fund assessment tools that
are
unmatched in the financial services industry. Smith Barney FCs have access
to a
proprietary mutual fund research database that provides information at
their
fingertips on more than 2,100 funds. In addition, working with another
proprietary system known as the Mutual Fund Evaluation Service, your FC can
help
guide you through the complex mutual fund maze. Specifically, the
Evaluation
Service can provide a clear picture of the past performance of mutual funds
you
currently own. Presented in both graphic and numerical form, this
illustration
provides a wealth of easily understood data on more than 2,100 funds. This
complimentary service allows you to judge whether your mutual fund has
helped
meet your investment needs.
4. LOOKING AHEAD
Selecting a mutual fund should not be a one-event process that ends with
the
purchase of shares. You can count on the expertise of your FC as he or she
continues to monitor and evaluate your funds, to suggest new strategies and
to
listen. That, in our opinion, is how to use mutual funds to help achieve
your
financial goals.
19
<PAGE>
PRINCIPAL SMITH BARNEY
RETURN FUND ------------
Zeros Plus Emerging Growth A Member of
TravelersGroup
Series 2000 [LOGO]
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
OFFICERS
Heath B. McLendon
Chairman of the Board
Stephen J. Treadway
President
Richard A. Freeman
Vice President and This report is submitted for the
Investment Officer general information of the
shareholders of Smith Barney
Susan C. Fulenwider Principal Return Fund - Zeros
Vice President and Plus Emerging Growth Series
2000.
Investment Officer It is not a prospectus, circular
or
representation intended for use
Lewis E. Daidone in the purchase or sale of
shares
Senior Vice President of the Fund or of any securities
and Treasurer mentioned in this report.
Christina T. Sydor
Secretary
SMITH BARNEY
MUTUAL FUNDS
388 Greenwich Street
New York, New York 10013
Fund 141
FD 0305 A5
[LOGO] Recycled
Recyclable
