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ANNUAL REPORT
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1995
1995
1995
1995
1995
Smith Barney
Principal Return Fund
Security and Growth Fund
---------------------------------------------
November 30, 1995
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
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Security and Growth Fund
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Dear Shareholder:
We are pleased to provide the annual report for the Smith Barney Principal
Return Fund -- Security and Growth Fund for the period ended November 30, 1995.
For your convenience, we have outlined our portfolio strategy during this time.
A more detailed summary of performance and current holdings can be found in the
appropriate sections that follow in the annual report.
For the period ended November 30, 1995, the Smith Barney Security and Growth
Fund posted a total return of 12.70%. The Standard & Poor's 500-Stock index, an
unmanaged index generally representative of the U.S. stock market, had a total
return of 37.53%. The Lehman Brothers Intermediate Term Government Bond Index,
an unmanaged index that is generally considered to be a gauge of the
intermediate term government bond market, had a total return of 18.48%.
Smith Barney Security and Growth Fund began its operations on April 1, 1995 with
an initial net asset value (NAV) of $9.60. At year-end, the Fund's net asset
value (NAV) was $10.58 after a capital gains distribution of $.1366 per share
and a dividend distribution of $.3457 for each share. The Fund's NAV gained
15.23% over the last months of 1995. Smith Barney Security and Growth Fund
emphasizes smaller capitalization value stocks. The medium market capitalization
of the Fund is about $350 million dollars and there are a number of companies
that have market capitalizations of less than $100 million. We believe small
capitalization value stocks will be a major opportunity over the next three to
five years.
The Fund's investment management team expects to maintain a position in zero
coupon bonds that mature in August 2005, which will ensure the preservation of
the original capital invested in the Fund. The ten-year zero-coupon bonds were
the Fund's first purchases and they were bought with a yield-to-maturity of
7.36%. Yields have fallen substantially since those purchases and we are pleased
to report these bonds have appreciated significantly.
The remainder of the assets in Smith Barney Security and Growth Fund are
invested in companies that we believe have the ability to appreciate
substantially faster than the market. Most of the companies we target are
small-to-mid-cap in size. Rather than try to select stocks that may perform well
over a period of a few months, our stock selections are generally based on a
three-year investment horizon. What follows is a discussion of four stocks we
currently like that may outperform the market over the next few years. Of
course, there can be no guarantees made that these stocks will perform according
to our expectations. Please note that these portfolio holdings should not be
considered recommendations for action by individual investors.
1
<PAGE>
Taco Cabana (TACO)
One of the largest positions of the Fund is in a restaurant chain specializing
in Mexican food. Originally the stock went public at $12 and eventually reached
a price of $22. Our cost is about $5.50 per share, and based on current
estimates, the shares sell for roughly 4.5 times cash flow. The company's
balance sheet is strong and improving. In addition, a new and seasoned
management team is now in place. Our one-year objective for the stock price is
in the range of $7 to $10. If this regional enterprise can expand into new
markets, earnings and cash flow, in our view, may justify double-digit prices.
Cray Research (CYR)
Cray Research is a leading supercomputer company that has seen its shares
decline 70% in the last five years. Yet, the company's balance sheet is strong,
and they have recently introduced a new product line that appears to have been
well received. We expect a much-improved fourth quarter and strong sales and
earnings momentum in 1996. Turning around the fortunes of a computer company is
difficult, yet the successes of IBM and Digital Equipment show that the rewards
of a turnaround can be substantial. Our one-year goal for this stock is an
appreciation rate of at least 30%.
Optical Coating Laboratory Inc. (OCLI)
Optical Coating is a leading producer of thin film coatings used to impart
unique optical properties to components and systems. In addition, Optical
Coating's Flex Products division has developed patented pigments that may open
up large new markets. In fact, a major automobile manufacturer will be using an
Optical Coating pigment on several thousand 1996 automobiles, which will result
in revenues of several hundred dollars per automobile. Currently, the company
has capacity limitations for this product, however 1997 should see an increase
in cars utilizing this novel product. A unique feature of this "paint" is that
it does not fade. In addition to the potential of the automobile market, Optical
Coating's technology is being used to coat $100 dollar bills to make
counterfeiting more difficult. This product is already in use on foreign
currencies in partnership with a leading Swiss printing ink company. We believe
Optical Coating shares have the potential to double in price over the next 24
months.
First American Financial (FAF)
First American Financial is a leader in title insurance and related services.
The company is transforming its revenue and income stream by adding new services
to its traditional title insurance. These new areas could contribute 30%-40% of
the company's earnings in 1996. Currently, the shares sell for less than 8 times
our 1996 estimate. We believe this company could be an attractive acquisition
target as the financial services industry continues to consolidate.
2
<PAGE>
Conclusion
During 1995, larger capitalization stocks were among the strongest performers
with smaller, value stocks relative underperformers. Given the conditions we
expect in the domestic economy in the years 1996-1997, we believe smaller
companies, especially those held by the Fund, should outperform the market as a
whole. We believe smaller companies may be able to show better earnings progress
in a period of slowing economic activity whereas larger companies would have
greater difficulty. In our view, our projection for a stronger U.S. dollar could
also have an adverse impact on the earnings of multinational organizations.
At the present time, we have about 35 positions in the Security and Growth Fund
and we may reduce that figure to the 25-30 range. Our largest concentration is
in technology issues, followed by consumer cyclicals and health
care/biotechnology. At this time, we would like to thank you for your investment
in Smith Barney Principal Return Fund Security and Growth Fund.
Sincerely,
/s/ Heath B. McLendon /s/ John G. Goode
Heath B. McLendon John G. Goode
Chairman and Portfolio Manager
Chief Executive Officer
December 18, 1995
3
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Smith Barney Principal Return Fund
Security and Growth Fund
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Historical Performance
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Net Asset Value
------------------
Beginning End of Income Capital Gain Total
Year Ended of Year Year Dividends Distributions Returns(1)
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3/30/95*-11/30/95 $9.60 $10.68 $0.00 $0.14 12.70%+
================================================================================
It is the Funds' policy to distribute dividends and capital gains, if any,
annually.
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Total Return
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Without With
Sales Charge(1) Sales Charge(2)
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3/30/95* through 11/30/95 12.70% 8.19%
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(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect deduction of the applicable
sales charge.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, shares reflect the deduction of the
maximum initial sales charge of 4.00%.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
* Commencement of operations.
4
<PAGE>
Smith Barney Principal Return Fund
Security and Growth Fund
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Historical Performance (unaudited)
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Growth of $10,000 Invested in Shares of the
Security and Growth Fund vs. S&P 500 Index and
Lehman Brothers Intermediate Term Government Bond Index+
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March 1995 -- November 1995
[The following table was presented as a line graph in the printed document]
Lehman Bros.
SGF S&P 500 INDEX Intermediate Tem Gov't Index
--- ------------- ----------------------------
3/30/95 9600 10000 10000
3/95 9570 10294 10116
4/95 9720 10597 10233
5/95 10170 11019 10522
11/95 10819 12506 11004
+ Hypothetical illustration of $10,000 invested in shares of the Security and
Growth Fund from March 30, 1995 (commencement of operations), assuming
deduction of the maximum 4.00% sales charge at the time of investment and
reinvestment of dividends and capital gains, if any, at net asset value
through November 30, 1995. The S&P 500 is an index of widely held common
stocks listed on the New York and American Stock Exchanges and the
over-the-counter markets. Figures for the S&P 500 Index include
reinvestment of dividends. The Lehman Brothers Intermediate Term Government
Bond Index is comprised of approximately 1,000 issues of U.S. Government
Treasury and Agency Securities. The indexes are unmanaged and are not
subject to the same management and trading expenses of a mutual fund.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost. No adjustment
has been made for shareholder tax liability on dividends or capital gains.
5
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Smith Barney Principal Return Fund
Security and Growth Fund
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Schedule of Investments November 30, 1995
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SHARES SECURITY VALUE
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COMMON STOCKS -- 29.7%
Broadcast Media -- 3.6%
125,000 Groupo Televisa SA GDR $ 2,703,125
250,000 Home Shopping Network Inc.* 2,343,750
300,000 Tele-Communications, Inc.* 5,550,000
25,000 United International Holdings Inc.,
Class A Shares* 350,000
25,000 Valuevision International Inc.,
Class A Shares* 140,625
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11,087,500
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Computer Systems -- 4.9%
300,000 Cray Research Inc.* 7,200,000
350,000 Lasermaster Technologies Inc.* 2,100,000
180,000 Quantum Corp.* 3,375,000
613,000 Sanctuary Woods Multimedia Corp.* 2,528,625
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15,203,625
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Department Stores -- 1.5%
200,000 Meyer Fred Inc.* 4,625,000
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Electronics -- 0.5%
2,727,272 Power Spectra Inc.* 1,704,545
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Entertainment -- 1.8%
275,000 Cinergi Pictures Entertainment Inc.* 1,048,438
322,000 Savoy Pictures Entertainment Inc.* 1,937,055
165,500 Station Casino Inc.* 2,482,500
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5,467,993
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Financial Services -- 0.4%
400,000 Peregrine Investments Holdings Ltd. ADR* 1,118,750
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Insurance - Property & Casualty -- 0.9%
125,000 First American Financial Corp. 2,859,375
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Manufacturing -- 1.3%
200,500 Paragon Trades Brands Inc.* 4,185,438
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Mining -- 2.4%
100,000 Cambior Inc. 1,100,000
417,500 Crown Resources Corp.* 1,826,562
500,000 Golden Star Resources Ltd.* 2,593,750
300,000 Nelson Gold Corp. Ltd.* 486,045
400,000 Royal Oak Mines Facility* 1,575,000
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7,581,357
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See Notes to Financial Statements.
6
<PAGE>
Smith Barney Principal Return Fund
Security and Growth Fund
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Schedule of Investments (continued) November 30, 1995
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SHARES SECURITY VALUE
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Medical Biotechnology -- 2.3%
355,200 Calgene Inc.* $ 1,820,400
200,000 Centocor Inc.* 2,800,000
425,000 Neurex Corp.* 2,550,000
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7,170,400
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Medical Supplies -- 0.1%
30,000 Optical Coating Laboratory Inc. 401,250
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Oil & Gas-Domestic -- 0.8%
19,800 Enron Oil & Gas Co. 415,800
765,000 Forest Oil Corp.* 2,008,125
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2,423,925
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Packaging & Container -- 0.9%
220,000 U.S. Can Corp.* 2,832,500
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Pharmaceuticals -- 2.8%
100,000 Alteon Inc.* 925,000
100,000 Alza Corp.* 2,300,000
500,000 Aphton Corp.* 5,312,500
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8,537,500
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Restaurants -- 2.1%
1,187,000 Taco Cabana Inc., Class A Shares* 6,380,125
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Telecommunications -- 3.4%
200,000 CAI Wireless Systems Inc.* 1,725,000
100,000 Comsat Corp. 1,937,500
300,000 General Datacomm Industries Inc.* 5,925,000
72,700 Grupo Iusacell SA ADR* 826,963
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10,414,463
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TOTAL COMMON STOCKS (Cost -- $88,937,483) 91,993,746
================================================================================
MISCELLANEOUS -- 2.3%
100,000 Cray Research Put @ $20,
Options expire 12/20/95 31,250
300,000 Morgan Stanley Group Inc. Nikkei 22,
Call Warrants expire 8/15/972, 100,000
200,000 Nelson Gold at $3.30 CAD,
Warrants expire 4/30/96 2,945
500,000 ROC Taiwan Fund SBI 4,875,000
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TOTAL MISCELLANEOUS (Cost -- $7,232,917) 7,009,195
================================================================================
See Notes to Financial Statements.
7
<PAGE>
Smith Barney Principal Return Fund
Security and Growth Fund
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Schedule of Investments (continued) November 30, 1995
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FACE
AMOUNT SECURITY VALUE
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U.S. TREASURY STRIPS -- 58.6%
$320,000,000 U.S. Treasury Strips TINT,
zero coupon due 8/15/05
(Cost -- $158,583,485) $181,817,600
================================================================================
REPURCHASE AGREEMENT -- 9.4%
29,177,000 Chemical Securities Inc., 5.789%
due 12/1/95; Proceeds at
maturity -- $29,181,692;
(Fully collateralized by U.S. Treasury
Notes, zero coupon due 11/14/96;
Market value -- $29,813,088)
(Cost -- $29,177,000) 29,177,000
================================================================================
TOTAL INVESTMENTS -- 100% (Cost -- $283,930,885)++ $309,997,541
================================================================================
* Non-income producing security.
++ Aggregate cost for federal income tax purposes is $284,328,535.
See Notes to Financial Statements.
8
<PAGE>
Smith Barney Principal Return Fund
Security and Growth Fund
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Statement of Assets and Liabilities November 30, 1995
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ASSETS:
Investments, at value (Cost-- $283,930,885) $309,997,541
Cash 698
Receivable for securities sold 1,138,756
Dividends and interest receivable 32,992
Other assets 61,246
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Total Assets 311,231,233
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LIABILITIES:
Payable for securities purchased 343,750
Distribution fees payable 318,006
Payable for Fund shares purchased 298,517
Management fees payable 100,800
Accrued expenses 348,044
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Total Liabilities 1,409,117
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Total Net Assets $309,822,116
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NET ASSETS:
Par value of shares of beneficial interest $ 29,018
Capital paid in excess of par value 275,529,708
Undistributed net investment income 8,292,053
Overdistribution of net realized gains (95,319)
Net unrealized appreciation of investments 26,066,656
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Total Net Assets $309,822,116
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Shares Outstanding 29,017,588
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Net Asset Value (and redemption price) $10.68
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See Notes to Financial Statements.
9
<PAGE>
Smith Barney Principal Return Fund
Security and Growth Fund
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Statement of Operations For the Period Ended November 30, 1995(a)
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INVESTMENT INCOME:
Interest $10,731,545
Dividends 259,972
Less: Foreign withholding tax (3,512)
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Total Investment Income 10,988,005
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EXPENSES:
Management fees (Note 2) 1,074,991
Distribution fees (Note 2) 537,495
Shareholder and system servicing fees 275,000
Registration fees 155,000
Shareholder communications 72,000
Audit and legal 22,100
Custody 20,000
Trustees' fees 6,375
Other 39,840
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Total Expenses 2,202,801
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Net Investment Income 8,785,204
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REALIZED AND UNREALIZED GAIN ON INVESTMENTS
AND OPTIONS (NOTES 3 AND 5):
Realized Gain From:
Security transactions (excluding short-term securities) 2,687,238
Options purchased 670,098
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Net Realized Gain 3,357,336
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Change in Net Unrealized Appreciation of Investments:
Beginning of period --
End of period 26,066,656
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Increase in Net Unrealized Appreciation 26,066,656
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Net Gain on Investments and Options 29,423,992
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Increase in Net Assets From Operations $38,209,196
================================================================================
(a) For the period from March 30, 1995 (commencement of operations) to November
30, 1995.
See Notes to Financial Statements.
10
<PAGE>
Smith Barney Principal Return Fund
Security and Growth Fund
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Statement of Changes in Net Assets
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For the Period Ended November 30, 1995(a)
OPERATIONS:
Net investment income $ 8,785,204
Net realized gain 3,357,336
Increase in net unrealized appreciation 26,066,656
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Increase in Net Assets From Operations 38,209,196
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DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income --
Net realized gains (3,945,806)
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Decrease in Net Assets From
Distributions to Shareholders (3,945,806)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 6):
Net proceeds from sale of shares 312,703,308
Net asset value of shares issued
for reinvestment of dividends 3,873,501
Cost of shares reacquired (41,018,083)
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Increase in Net Assets From
Fund Share Transactions 275,558,726
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Increase in Net Assets 309,822,116
NET ASSETS:
Beginning of period --
- --------------------------------------------------------------------------------
End of period* $309,822,116
================================================================================
* Includes undistributed net investment income of: $8,292,053
================================================================================
(a) For the period from March 30, 1995 (commencement of operations) to November
30, 1995.
See Notes to Financial Statements.
11
<PAGE>
Smith Barney Principal Return Fund
Security and Growth Fund
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Notes to Financial Statements
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1. SIGNIFICANT ACCOUNTING POLICIES
The Security and Growth Fund ("Fund") is a separate investment fund of the
Smith Barney Principal Return Fund ("Trust"). The Trust, a Massachusetts
business trust, is registered under the Investment Company Act of 1940, as
amended, as a diversified, open-end management investment company. The Trust
consists of this Fund and three other funds: the Zeros and Appreciation Series
1996, the Zeros and Appreciation Series 1998 and the Zeros Plus Emerging Growth
Series 2000. The financial statements and financial highlights for the other
funds are presented in separate annual reports.
The significant accounting policies consistently followed by the Fund
are:(a) securities transactions are accounted for on the trade date; (b)
securities traded on a national securities exchange are valued at the last sale
price on that exchange or, if there were no sales, at the current quoted bid
price; (c) over-the-counter securities and listed securities are valued at the
bid price at the close of business on each day; (d) U.S. Government Securities
(other than short-term securities) are valued at the quoted bid price in the
over-the-counter market; (e) short-term securities that mature in 60 days or
less are valued at cost plus accreted discount, or minus amortized premium,
which approximates value; (f) investment in securities for which market
quotations are not available are valued at fair value as determined by the Board
of Trustees; (g) interest income is recorded on the accrual basis; (h) the
accounting records of the Fund are maintained in U.S. dollars. All assets and
liabilities denominated in foreign currencies are translated into U.S. dollars
based on the rate of exchange of such currencies against U.S. dollars on the
date of valuation. Purchases and sales of securities, and income and expenses
are translated at the rate of exchange quoted on the respective date that such
transactions are recorded. Differences between income and expense amounts
recorded and collected or paid are adjusted when reported by the custodian bank;
(i) gains or losses on the sale of securities are calculated by using the
specific identification method; (j) dividends and distributions to shareholders
are recorded by the Fund on the ex-dividend date; (k) in accordance with
Statement of Position 93-2, Determination, Disclosure, and Financial Statement
Presentation of Income, Capital Gain, and Return of Capital Distribution by
Investment Companies, book and tax differences relating to shareholder
distributions and other permanent book and tax differences have been
reclassified to undistributed net investment income. As of November 30, 1995,
the cumulative effect of such differences totaling $493,151 was reclassified to
undistributed net income from overdistribution of net realized gains. Net
investment income, net realized gains and net assets were not affected by this
change; and (l) the Fund intends to comply with the applicable provisions of the
Internal Revenue Code of 1986, as amended, pertaining to regulated investment
12
<PAGE>
Smith Barney Principal Return Fund
Security and Growth Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
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companies and to make distributions of taxable income sufficient to relieve it
from substantially all Federal income and excise taxes.
2. INVESTMENT ADVISORY AGREEMENT AND ADMINISTRATION AGREEMENT
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), through its Davis Skaggs Investments Management
division, acts as investment adviser of the Fund. The Fund pays SBMFM an
investment advisory fee calculated at an annual rate of 0.30% of the average
daily net assets. SBMFM also acts as the Fund's administrator for which the Fund
pays a fee calculated at an annual rate of 0.20% of the average daily net
assets. These fees are calculated daily and paid monthly.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of
Fund shares. For the period ended November 30, 1995, SB received sales charges
of approximately $12.6 million on purchases of the Fund's shares.
Pursuant to a Distribution Plan, the Fund pays SB a service fee calculated
at an annual rate of 0.25% of the average daily net assets.
All officers and one Trustee of the Trust are employees of SB.
3. INVESTMENTS
During the period ended November 30, 1995, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were:
================================================================================
Purchases $305,587,048
- --------------------------------------------------------------------------------
Sales 58,649,351
================================================================================
At November 30, 1995, net unrealized appreciation of investments for
Federal income tax purposes consisted of the following:
================================================================================
Gross unrealized appreciation $ 32,196,055
Gross unrealized depreciation (6,527,049)
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 25,669,006
================================================================================
13
<PAGE>
Smith Barney Principal Return Fund
Security and Growth Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
4. REPURCHASE AGREEMENTS
The Fund purchases (and its custodian takes possession of) U.S. Government
Securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day) at
an agreed-upon higher repurchase price. The Fund requires continual maintenance
of the market value of the collateral in amounts at least equal to the
repurchase price.
5. OPTION CONTRACTS
Premiums paid when put or call options are purchased by the Fund, represent
investments, which are marked-to-market daily. When a purchased option expires,
the Fund will realize a loss in the amount of the premium paid. When the Fund
enters into a closing sales transaction, the Fund will realize a gain or loss
depending on whether the proceeds from the closing sales transaction are greater
or less than the premium paid for the option. When the Fund exercises a put
option, they will realize a gain or loss from the sale of the underlying
security and the proceeds from such sale will be decreased by the premium
originally paid. When the Fund exercises a call option, the cost of the security
which the Fund purchases upon exercise will be increased by the premium
originally paid.
When the Fund writes a call or put option, an amount equal to the premium
received by the Fund is recorded as a liability, the value of which is
marked-to-market daily. When a written option expires, the Fund realizes a gain
equal to the amount of the premium received. When the Fund enters into a closing
purchase transaction, the Fund realizes a gain (or loss if the cost of the
closing purchase transaction exceeds the premium received when the option was
sold) without regard to any unrealized gain or loss on the underlying security,
and the liability related to such option is eliminated. When a call option is
exercised the cost of the security sold will be increased by the premium
originally received. When a put option is exercised, the amount of the premium
originally received will reduce the cost of the security which the Fund
purchased upon exercise.
During the period ended November 30, 1995, the Fund did not write any call
or put options.
14
<PAGE>
Smith Barney Principal Return Fund
Security and Growth Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
6. SHARES OF BENEFICIAL INTEREST
At November 30, 1995, the Fund had an unlimited number of shares of
beneficial interest authorized with a par value of $0.001 per share. The Fund,
the Zeros and Appreciation Series 1996, the Zeros and Appreciation Series 1998
and the Zeros Plus Emerging Growth Series 2000 each constitute a sub-trust under
the Master Trust Agreement. Transactions in shares of the Fund were as follows:
Period Ended
November 30, 1995(a)
================================================================================
Shares sold 32,573,641
Shares issued on reinvestment 368,907
Shares redeemed (3,924,960)
- --------------------------------------------------------------------------------
Net Increase 29,017,588
================================================================================
(a) For the period from March 30, 1995 (commencement of operations) to November
30, 1995.
15
<PAGE>
Smith Barney Principal Return Fund
Security and Growth Fund
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of beneficial interest outstanding throughout the period:
1995(1)
================================================================================
Net Asset Value, Beginning of Period $ 9.60
- --------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.28
Net realized and unrealized gain 0.94
- --------------------------------------------------------------------------------
Total Income From Operations 1.22
- --------------------------------------------------------------------------------
Less Distribution From:
Net investment income --
Net realized gains (0.14)
- --------------------------------------------------------------------------------
Total Distributions (0.14)
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $10.68
- --------------------------------------------------------------------------------
Total Return 12.70%++
- --------------------------------------------------------------------------------
Net Assets, End of Period (000s) $309,822
- --------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.02%+
Net investment income 4.07+
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 25.50%
- --------------------------------------------------------------------------------
Average commissions paid on
equity security transactions(2) $0.06
================================================================================
(1) For the period from March 30, 1995 (commencement of operations) to November
30, 1995.
(2) New SEC disclosure guidelines require that average commissions be
calculated for the current year only.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
16
<PAGE>
Smith Barney Principal Return Fund
Security and Growth Fund
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees of
Smith Barney Principal Return Fund:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the Security and Growth Fund of Smith
Barney Principal Return Fund as of November 30, 1995, the related statements of
operations, changes in net assets and financial highlights for the period from
March 30, 1995 (commencement of operations) to November 30, 1995. 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 audit.
We conducted our audit 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, 1995, by correspondence with the custodian. As to securities
purchased and sold but not received or delivered, we performed other appropriate
auditing procedures. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Security and Growth Fund
of Smith Barney Principal Return Fund as of November 30, 1995, and the results
of its operations, changes in its net assets and financial highlights for the
period from March 30, 1995 to November 30, 1995, in conformity with generally
accepted accounting principles.
/s/ KMPG Peat Marwick LLP
New York, New York
January 17, 1996
17
<PAGE>
Smith Barney Principal Return Fund
Security and Growth Fund
- --------------------------------------------------------------------------------
Additional Shareholder Information (unaudited)
- --------------------------------------------------------------------------------
On March 13, 1995 the annual meeting of the shareholders of the Fund was
held for the purpose of voting on the following matter:
1. To elect nine (9) trustees of the Trust:
The results of the Proposal were as follows:
Trustees % Voting in Favor % Voting Against
================================================================================
Paul B. Ades 96.031% 3.969%
Herbert Barg 95.908 4.092
Alger B. Chapman 96.106 3.894
Dwight B. Crane 96.113 3.887
Frank G. Hubbard 96.118 3.882
Allan R. Johnson 96.762 4.238
Heath B. McLendon 96.087 3.913
Ken Miller 96.041 3.959
John F. White 95.757 4.243
================================================================================
18
<PAGE>
SMITH BARNEY
------------
A Member of Travelers Group [LOGO]
Smith Barney
Principal Return Fund
Trustees
Paul R. Ades
Herbert Barg
Alger B. Chapman
Dwight B. Crane
Frank Hubbard
Allan R. Johnson
Heath B. McLendon, Chairman
Jerome Miller
Ken Miller
John F. White
Officers
Heath B. McLendon
Chief Executive Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President and Treasurer
John G. Goode
Vice President and Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
Investment Manager
Smith Barney Mutual Funds
Management Inc.
Distributor
Smith Barney Inc.
Custodian
PNC Bank
This report is submitted for the general information of the shareholders of
Smith Barney Principal Return Fund -- Security and Growth Fund. It is not
authorized for distribution to prospective investors unless accompanied or
preceded by a current Prospectus for the Fund, which contains information
concerning the Fund's investment policies and expenses as well as other
pertinent information.
Smith Barney
Principal Return Fund
388 Greenwich Street
New York, New York 10013
FD01052 1/96
- --------------------------------------------------------------------------------
ANNUAL REPORT
- --------------------------------------------------------------------------------
1995
1995
1995
1995
1995
Smith Barney
Principal Return Fund
Zeros Plus Emerging Growth
Series 2000
-----------------------------------
November 30, 1995
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
- --------------------------------------------------------------------------------
Zeros Plus Emerging Growth Series 2000
- --------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to provide the annual report for Smith Barney Principal Return
Fund - Zeros Plus Emerging Growth Series 2000 for the year ended November 30,
1995. For your convenience, we have provided a summary of economic and market
conditions, as well as our portfolio strategy during this time. A more detailed
summary of performance and current holdings can be found in the appropriate
sections that follow in the annual report.
We are happy to report that Smith Barney Principal Return Fund - Zeros Plus
Emerging Growth Series 2000 outperformed the market averages in the second half
of the fiscal year. For the six months ended November 30, 1995, the net asset
value (NAV) of the Zeros Plus Emerging Growth Series 2000 advanced 15.91%. This
compared with an increase of 14.89% for S&P 500 Index. Approximately 57% 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 Fund's assets are invested in emerging
growth stocks.
As many of you know, the U.S. securities markets -- both equity and fixed income
- -- operated under a nearly ideal environment for the past six months. The
Federal Reserve (the "Fed"), often criticized for taking monetary policy to
extremes, successfully engineered a much-hoped-for "soft landing." Following a
moderately restrictive monetary policy in 1994 (i.e., short-term interest rates
were raised a number of times to slow the economy and prevent a pickup in
inflation), the Fed effected policy which lowered short-term interest rates this
summer with expectations for further cuts in the months ahead. Although
short-term rates were cut only once, long-term interest rates (which are set by
the markets and not by a governmental body in Washington, D.C.), declined
sharply, falling over 200 basis points in little over a year. When combined with
moderate inflation and relatively favorable corporate profits, the equity market
responded in a very positive manner, scaling two 1000-point barriers within
eleven months for the first time in history.
The Zeros Plus Emerging Growth Series 2000's strong performance in the past six
months was the result of a sizable weighting in biotechnology stocks, strength
in several diversified companies such as Tech-Sym and Tyco International as well
as several technology stock holdings.
In June, one of the Fund's holdings, Lotus Development, accepted a $64 dollar a
share acquisition offer from IBM. This was a nearly 100% premium to the price
that Lotus was trading for prior to IBM's offer. The Fund recognized significant
profits, selling our position in this software company after the announcement.
Following the January tender offer by Ciba Geigy for 38.25% of our shares in
1
<PAGE>
Chiron, we redeployed some of the proceeds back into Chiron at prices roughly
half of the price paid by the Swiss drug giant.
Our biotechnology stocks -- including Chiron, Genzyme (which advanced on
favorable clinical trial results from its anti-adhesion products) and Idec
Pharmaceuticals (added in the most recent six-month period) -- assumed stock
market leadership as investors moved their money into companies providing more
predictable growth in a slow economic environment. In addition to Idec
Pharmaceutical, the Fund bought an initial position in Forest Laboratories, a
well-managed, middle-sized drug company undergoing a significant sales force
expansion in preparation for the launch of two new major products. We also
established a position in Advanced Polymer Systems, a drug delivery company that
has two important products awaiting approval from the Food and Drug
Administration. In addition, we purchased a position in Excel Technology, a
commercial laser company that serves the scientific, industrial and medical
markets.
While it is unlikely that the stock market will duplicate the magnitude of
1995's record-setting performance, a Presidential election year is usually a
positive one for the equity market. We would be surprised if long-term interest
rates decline meaningfully from the 6% level, even though we expect the Fed to
continue to nudge down short-term rates at a pace that would not cause the
economy to overheat and result in a pickup in inflation. We expect corporate
profits in general to be up much less than they were in 1995. This is a major
reason why we have increased the health care exposure of Zeros Plus Emerging
Growth Series 2000. These stocks tend to do especially well in a lackluster
economic climate.
We expect an improvement in the performance of telecommunications stocks in
1996. The burden of uncertain legislation should be behind these companies and
they are likely to see a global expansion in their business.
At this time, we would like to thank you for your investment in Zeros Plus
Emerging Growth Series 2000.
Sincerely,
/s/ Heath B. McLendon /s/ Richard A. Freeman
Heath B. McLendon Richard A. Freeman
Chairman and Vice President and
Chief Executive Officer Investment Officer
December 19, 1995
2
<PAGE>
Smith Barney Principal Return Fund
Zeros Plus Emerging Growth Series 2000
- --------------------------------------------------------------------------------
Historical Performance
- --------------------------------------------------------------------------------
Net Asset Value
---------------------
Beginning End of Income Capital Gain Total
Year Ended of Year Year Dividends Distributions Returns(1)
================================================================================
11/30/95 $8.15 $9.28 $0.27 $0.35 22.17%
- --------------------------------------------------------------------------------
11/30/94 9.00 8.15 0.34 0.50 (0.20)
- --------------------------------------------------------------------------------
11/30/93 8.16 9.00 0.29 0.09 15.72
- --------------------------------------------------------------------------------
11/30/92 7.57 8.16 0.10 0.00 9.15
- --------------------------------------------------------------------------------
8/30/91*-11/30/91 7.60 7.57 0.00 0.00 (0.39)+
================================================================================
Total $1.00 $0.94
================================================================================
It is the Funds' policy to distribute dividends and capital gains, if any,
annually.
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Without With
Sales Charge(1) Sales Charge(2)
================================================================================
Year Ended 11/30/95 22.17% 16.06%
- --------------------------------------------------------------------------------
8/30/91* through 11/30/95 10.58 9.25
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without
Sales Charge(1)
================================================================================
8/30/91* through 11/30/95 53.40%
================================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect deduction of the applicable
sales charge.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, shares reflect the deduction of the
maximum initial sales charge of 5.00%.
* Commencement of operations.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
3
<PAGE>
Smith Barney Principal Return Fund
Zeros Plus Emerging Growth Series 2000
- --------------------------------------------------------------------------------
Historical Performance (unaudited)
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Shares of the
Zeros Plus Emerging Growth Series 2000
vs. Value Line Composite Index+
- --------------------------------------------------------------------------------
August 1991 -- November 1995
[The following table was represented by a line graph in the printed material.]
P. R. V.L.
----- ----
8/31/91 9500 10000
11/91 9463 9463
11/92 10328 10600
11/93 11952 11673
11/94 11928 11180
11/95 14573 13386
+ Hypothetical illustration of $10,000 invested in shares of the Zeros Plus
Emerging Growth Series 2000 from August 30, 1991 (commencement of
operations), assuming deduction of the maximum 5.00% sales charge at the
time of investment and reinvestment of dividends and capital gains, if any,
at net asset value through November 30, 1995. The Value Line Composite
Index, 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. The index is unmanaged and is not subject to
the same management and trading expenses of a mutual fund.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost. No adjustment
has been made for shareholder tax liability on dividends or capital gains.
4
<PAGE>
Smith Barney Principal Return Fund
Zeros Plus Emerging Growth Series 2000
- --------------------------------------------------------------------------------
Portfolio Highlights November 30, 1995
- --------------------------------------------------------------------------------
Common Stock Industry Breakdown
[The following table was represented by a pie chart in the printed material.]
Basic Industries 4.0%
Capital Goods 5.9%
Healthcare 48.2%
Technology 22.0%
Telecommunications 19.9%
Percentage of
Top Ten Holdings Total Investments
================================================================================
U.S. Treasury Strips 55.7%
C-COR Electronics, Inc. 5.9
Chiron Corp. 5.6
Genzyme Corp. - General Division 4.6
Vertex Pharmaceuticals, Inc. 3.9
Tech-Sym Corp. 3.9
California Microwave, Inc. 2.9
VLSI Technology, Inc. 2.7
Tyco International Ltd. 2.6
Quantum Corp. 2.4
================================================================================
5
<PAGE>
Smith Barney Principal Return Fund
Zeros Plus Emerging Growth Series 2000
- --------------------------------------------------------------------------------
Schedule of Investments November 30, 1995
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
COMMON STOCKS -- 44.3%
Basic Industries -- 1.8%
53,000 Wellman Inc. $ 1,358,125
- --------------------------------------------------------------------------------
Capital Goods -- 2.6%
64,000 Tyco International Ltd. 2,008,000
- --------------------------------------------------------------------------------
Healthcare -- 21.3%
100,000 Advanced Polymer Systems, Inc.* 562,500
42,874 Chiron Corp.* 4,319,556
50,000 COR Therapeutics, Inc.* 550,000
100,000 Excel Technology, Inc.* 650,000
40,000 Forest Laboratories, Inc., Class A Shares* 1,700,000
45,000 Fischer Imaging Corp.* 483,750
100,000 Gensia Inc.* 450,000
55,000 Genzyme Corporation - General Division* 3,588,750
8,505 Genzyme Corporation - Tissue Repair* 149,900
75,000 IDEC Pharmaceuticals Corp.* 1,031,250
145,000 Vertex Pharmaceuticals, Inc.* 2,990,625
- --------------------------------------------------------------------------------
16,476,331
- --------------------------------------------------------------------------------
Technology -- 9.8%
99,000 Quantum Corp.* 1,856,250
50,000 Tandem Computers, Inc.* 625,000
100,000 Tech-Sym Corp.* 2,987,500
97,000 VLSI Technology, Inc.* 2,061,250
- --------------------------------------------------------------------------------
7,530,000
- --------------------------------------------------------------------------------
Telecommunications -- 8.8%
104,500 California Microwave, Inc.* 2,272,875
177,050 C-COR Electronics, Inc.* 4,559,038
- --------------------------------------------------------------------------------
6,831,913
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost -- $20,627,205) 34,204,369
================================================================================
See Notes to Financial Statements.
6
<PAGE>
Smith Barney Principal Return Fund
Zeros Plus Emerging Growth Series 2000
- --------------------------------------------------------------------------------
Schedule of Investments (continued) November 30, 1995
- --------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
================================================================================
U.S. TREASURY STRIPS -- 55.7%
$54,000,000 U.S. Treasury Strips, zero coupon due 2/15/00
(Cost -- $38,753,515) $43,017,480
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $59,380,720)++ $77,221,849
================================================================================
* Non-income producing security.
++ Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
7
<PAGE>
Smith Barney Principal Return Fund
Zeros Plus Emerging Growth Series 2000
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities November 30, 1995
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $59,380,720) $77,221,849
Receivable for securities sold 342,006
Dividends receivable 3,710
Deferred organization costs 19,331
- --------------------------------------------------------------------------------
Total Assets 77,586,896
- --------------------------------------------------------------------------------
LIABILITIES:
Payable to bank 786,941
Distribution fees payable 104,826
Investment advisory fees payable 24,517
Payable for Fund shares purchased 23,374
Administration fees payable 12,258
Accrued expenses 71,801
- --------------------------------------------------------------------------------
Total Liabilities 1,023,717
- --------------------------------------------------------------------------------
Total Net Assets $76,563,179
================================================================================
NET ASSETS:
Par value of shares of benefical interest $ 8,253
Capital paid in excess of par value 55,911,947
Undistributed net investment income 2,125,922
Accumulated net realized gain on security transactions 675,928
Net unrealized appreciation of investments 17,841,129
- --------------------------------------------------------------------------------
Total Net Assets $76,563,179
================================================================================
Shares Outstanding 8,253,332
- --------------------------------------------------------------------------------
Net Asset Value (and redemption price) $9.28
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
8
<PAGE>
Smith Barney Principal Return Fund
Zeros Plus Emerging Growth Series 2000
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended November 30, 1995
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 3,188,030
Dividends 27,510
- --------------------------------------------------------------------------------
Total Investment Income 3,215,540
- --------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2) 300,015
Distribution fees (Note 2) 187,509
Administration fees (Note 2) 150,007
Shareholder and system serving fees 102,000
Audit and legal 26,400
Amortization of deferred organization costs 25,897
Custody 17,000
Shareholder communications 17,000
Trustees' fees 9,000
Registration fees 5,000
Other 34,184
- --------------------------------------------------------------------------------
Total Expenses 874,012
- --------------------------------------------------------------------------------
Net Investment Income 2,341,528
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS (NOTE3):
Realized Gain from Security Transactions
(excluding short-term securities):
Proceeds from sales 18,423,130
Cost of securities sold 13,528,578
- --------------------------------------------------------------------------------
Net Realized Gain 4,894,552
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year 10,037,151
End of year 17,841,129
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 7,803,978
- --------------------------------------------------------------------------------
Net Gain on Investments 12,698,530
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $15,040,058
================================================================================
See Notes to Financial Statements.
9
<PAGE>
<TABLE>
<CAPTION>
Smith Barney Principal Return Fund
Zeros Plus Emerging Growth Series 2000
- ------------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended November 30
- ------------------------------------------------------------------------------------
1995 1994
====================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 2,341,528 $ 2,726,548
Net realized gain (loss) 4,894,552 (952,291)
Increase (decrease) in net unrealized appreciation 7,803,978 (2,235,398)
- -----------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Operations 15,040,058 (461,141)
- -----------------------------------------------------------------------------------
DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income (2,464,055) (3,638,777)
Net realized gains (2,759,709) (5,302,121)
- -----------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (5,223,764) (8,940,898)
- -----------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net asset value of shares issued for
reinvestment of dividends 5,123,737 8,852,528
Cost of shares reacquired (13,127,965) (21,564,560)
- -----------------------------------------------------------------------------------
Decrease in Net Assets From Fund
Share Transactions (8,004,228) (12,712,032)
- -----------------------------------------------------------------------------------
Increase (Decrease) in Net Assets 1,812,066 (22,114,071)
NET ASSETS:
Beginning of year* 74,751,113 96,865,184
- -----------------------------------------------------------------------------------
End of year* $ 76,563,179 $ 74,751,113
====================================================================================
* Includes undistributed net investment income of: $ 2,125,922 $ 2,248,449
====================================================================================
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
Smith Barney Principal Return Fund
Zeros Plus Emerging Growth Series 2000
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Zeros Plus Emerging Growth Series 2000 ("Fund") is a separate
investment fund of the Smith Barney Principal Return Fund ( "Trust"). The Trust,
a Massachusetts business trust, is registered under the Investment Company Act
of 1940, as amended, as a diversified, open-end management investment company.
The Trust consists of this Fund and three other funds: the Zeros and
Appreciation Series 1996, the Zeros and Appreciation Series 1998 and the
Security and Growth Fund. The financial statements and financial highlights for
the other funds are presented in separate annual reports.
The significant accounting policies consistently followed by the Fund
are:(a) securities transactions are accounted for on the trade date; (b)
securities traded on a national securities exchange are valued at the last sale
price on that exchange or, if there were no sales, at the current quoted bid
price; (c) over-the-counter securities and listed securities are valued at the
bid price at the close of business on each day; (d) U.S. Government securities
(other than short-term securities) are valued at the quoted bid price in the
over-the-counter market; (e) short-term securities that have a maturity of 60
days or less are valued at cost plus accreted discount, or minus amortized
premium, which approximates market value; (f) investment in securities for which
market quotations are not available are valued at fair value as determined by
the Board of Trustees; (g) interest income is recorded on an accrual basis; (h)
the accounting records of the Fund are maintained in U.S. dollars. All assets
and liabilities denominated in foreign currencies are translated into U.S.
dollars based on the rate of exchange of such currencies against U.S. dollars on
the date of valuation. Purchases and sales of securities, and income and
expenses are translated at the rate of exchange quoted on the respective date
that such transactions are recorded. Differences between income and expense
amounts recorded and collected or paid are adjusted when reported by the
custodian bank; (i) gains or losses on the sale of securities are calculated by
using the specific identification method; (j) dividends and distributions to
shareholders are recorded by the Trust on the ex-dividend date; and (k) the Fund
intends to comply with the applicable provisions of the Internal Revenue Code of
1986, as amended, pertaining to regulated investment companies and to make
distributions of taxable income sufficient to relieve it from substantially all
Federal income and excise taxes.
In addition, organization costs have been deferred and are being amortized
on a straight line basis over a five year period, beginning with the
commencement of the Fund's operations in August 1991.
11
<PAGE>
Smith Barney Principal Return Fund
Zeros Plus Emerging Growth Series 2000
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
2. INVESTMENT ADVISORY AGREEMENT, ADMINISTRATION
AGREEMENT AND OTHER TRANSACTIONS
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as investment adviser of the Fund. The Fund
pays SBMFM an investment advisory fee calculated at an annual rate of 0.40% of
the average daily net assets. SBMFM also acts as the Fund's administrator for
which the Fund pays a fee calculated at an annual rate of 0.20% of the average
daily net assets. These fees are calculated daily and paid monthly.
In addition, The Boston Company Advisors, Inc. ("Boston Advisors"), an
indirect wholly owned subsidiary of Mellon Bank Corporation, acted as
sub-administrator to the Fund. SBMFM paid Boston Advisors a portion of its
administration fee at a rate agreed upon from time to time between SBMFM and
Boston Advisors. As of July 31, 1995 this relationship was terminated.
Pursant to a Distribution Plan, the Fund pays Smith Barney Inc. ("SB"),
another subsidiary of SBH, a service fee calculated at an annual rate of 0.25%
of the average daily net assets.
All officers and one Trustee of the Trust are employees of SB.
3. INVESTMENTS
During the year ended November 30, 1995, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were:
================================================================================
Purchases $ 4,745,156
- --------------------------------------------------------------------------------
Sales 18,423,130
================================================================================
At November 30, 1995, net unrealized appreciation of investments for
Federal income tax purposes consisted of the following:
================================================================================
Gross unrealized appreciation $18,254,679
Gross unrealized depreciation (413,550)
- --------------------------------------------------------------------------------
Net unrealized appreciation $17,841,129
================================================================================
12
<PAGE>
Smith Barney Principal Return Fund
Zeros Plus Emerging Growth Series 2000
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
4. REPURCHASE AGREEMENTS
The Fund purchases (and its custodian takes possession of) U.S. Government
Securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day) at
an agreed-upon higher repurchase price. The Fund requires continual maintenance
of the market value of the collateral in amounts at least equal to the
repurchase price.
5. SHARES OF BENEFICIAL INTEREST
At November 30, 1995, the Fund had an unlimited number of shares of
beneficial interest authorized with a par value of $0.001 per share. The Fund,
the Zeros and Appreciation Series 1996, the Zeros and Appreciation Series 1998
and the Security and Growth Fund each constitutes a sub-trust under the Master
Trust Agreement. Transactions in shares of the Fund were as follows:
Year Ended Year Ended
November 30, 1995 November 30, 1994
================================================================================
Shares issued on reinvestment 596,734 1,066,066
Shares redeemed (1,512,438) (2,662,785)
- --------------------------------------------------------------------------------
Net Decrease (915,704) (1,596,719)
================================================================================
- --------------------------------------------------------------------------------
Additional Shareholder Information (unaudited)
- --------------------------------------------------------------------------------
On March 13, 1995 the annual meeting of the shareholders of the Fund was
held for the purpose of voting on the following matter:
1. To elect nine (9) trustees of the Trust:
The results of the Proposal were as follows:
Trustees % Voting in Favor % Voting Against
================================================================================
Paul B. Ades 96.031% 3.969%
Herbert Barg 95.908 4.092
Alger B. Chapman 96.106 3.894
Dwight B. Crane 96.113 3.887
Frank G. Hubbard 96.118 3.882
Allan R. Johnson 96.762 4.238
Heath B. McLendon 96.087 3.913
Ken Miller 96.041 3.959
John F. White 95.757 4.243
================================================================================
13
<PAGE>
Smith Barney Principal Return Fund
Zeros Plus Emerging Growth Series 2000
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $8.15 $9.00 $8.16 $7.57 $7.60
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.27 0.27 0.26 0.26 0.07
Net realized and unrealized gain (loss) 1.48 (0.28) 0.96 0.43 (0.10)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.75 (0.01) 1.22 0.69 (0.03)
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.27) (0.34) (0.29) (0.10) --
Net realized gains (0.35) (0.50) (0.09) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.62) (0.84) (0.38) (0.10) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $9.28 $8.15 $9.00 $8.16 $7.57
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return 22.17% (0.20)% 15.72% 9.15% (0.39)%++
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $76,563 $74,751 $96,865 $125,327 $157,425
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(2) 1.17% 1.15% 1.10% 1.15% 1.18%+
Net investment income 3.12 3.27 3.12 3.31 3.56+
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 6% 1% 0% 0% 2%
====================================================================================================================================
Average commissions paid on
equity security transactions(3) $0.06 -- -- -- --
====================================================================================================================================
</TABLE>
(1) For the period from August 30, 1991 (commencement of operations) through
November 30, 1991.
(2) For the year ended November 30, 1992, the expense ratio excludes interest
expense. The expense ratio including interest expense was 1.16%.
(3) New SEC disclosure guidelines require that average commissions per share be
calculated for current year only.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
14
<PAGE>
Smith Barney Principal Return Fund
Zeros Plus Emerging Growth Series 2000
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees of
Smith Barney Principal Return Fund:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the Zeros Plus Emerging Growth Series
2000 of Smith Barney Principal Return Fund as of November 30, 1995, and the
related statement of operations, statement of changes in net assets, and
financial highlights for the year then ended. 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 audit. The statement of changes in net assets
for the year ended November 30, 1994 and the financial highlights for each of
the years in the four-year period then ended, were audited by other auditors
whose report thereon, dated January 12, 1995 expressed an unqualified opinion on
that statement of changes in net assets and those financial highlights.
We conducted our audit 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, 1995, by correspondence with the custodian. As to securities
purchased and sold but not received or delivered, we performed other appropriate
auditing procedures. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements 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,
1995, and the results of its operations, changes in its net assets and financial
highlights for the year then ended, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
January 17, 1996
15
<PAGE>
Smith Barney Principal Return Fund
Zeros Plus Emerging Growth Series 2000
- --------------------------------------------------------------------------------
Additional Information
- --------------------------------------------------------------------------------
Change in Independent Auditor: On October 20, 1994, based upon the
recommendation of the Audit Committee of the Fund, the Board of Trustees
determined not to retain Coopers & Lybrand L.L.P. ("Coopers & Lybrand") as the
Fund's independent auditor and voted to appoint KPMG Peat Marwick LLP. During
the Fund's two most recent fiscal years, Coopers & Lybrand's audit reports
contained no adverse opinion or disclaimer of opinion; nor were the reports
qualified or modified as to uncertainty, audit scope, or accounting principles.
Further, during this same period there were no disagreements with Coopers &
Lybrand on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if not resolved
to the satisfaction of Coopers & Lybrand, would have caused it to make reference
to the subject matter of such disagreements in connection with its audit
reports. The Fund has requested Coopers & Lybrand to provide a letter to the
Securities and Exchange Commission stating whether Coopers & Lybrand agrees with
the foregoing statements, and to provide the Fund with a copy of such letter. A
copy of this letter is available upon request by calling the Fund at (212)
723-9218.
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended November 30, 1995, 100% of the capital gains
distributions were designated as long-term capital gains.
16
<PAGE>
Smith Barney
Principal Return Fund
Trustees
Paul R. Ades
Herbert Barg
Alger B. Chapman
Dwight B. Crane
Frank Hubbard
Allan R. Johnson
Heath B. McLendon, Chairman
Jerome Miller
Ken Miller
John F. White
Officers
Heath B. McLendon
Chief Executive Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President and Treasurer
Richard Freeman
Vice President and Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
SMITH BARNEY
------------
A Member of Travelers Group[LOGO}
Investment Manager
Smith Barney Mutual Funds
Management Inc.
Distributor
Smith Barney Inc.
Custodian
PNC Bank
This report is submitted for the general information of the shareholders of
Smith Barney Principal Return Fund -- Zeros Plus Emerging Growth Series 2000. It
is not authorized for distribution to prospective investors unless accompanied
or preceded by a current Prospectus for the Fund, which contains information
concerning the Fund's investment policies and expenses as well as other
pertinent information.
Smith Barney
Principal Return Fund
388 Greenwich Street
New York, New York 10013
FD0306 1/96
- --------------------------------------------------------------------------------
ANNUAL REPORT
- --------------------------------------------------------------------------------
1995
1995
1995
1995
1995
Smith Barney
Principal Return Fund
Zeros and Appreciation
Series 1998
-----------------------------------
November 30, 1995
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
- --------------------------------------------------------------------------------
Zeros and Appreciation Series 1998
- --------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to provide you with this annual report for Smith Barney Principal
Return Fund - Zeros and Appreciation Series 1998 for the year ended November 30,
1995. For your convenience, we have provided a summary of economic and market
conditions, as well as our portfolio strategy during this time. A more detailed
summary of performance and current holdings can be found in the appropriate
sections that follow in the annual report.
For the year covered by this report, Smith Barney Principal Return Fund - Zeros
and Appreciation Series 1998 posted a total return of 19.93%. The gain was
fueled by an extremely strong stock market and a more modest move in zero coupon
Treasury notes maturing in 1998. As you know, the Smith Barney Principal Return
Fund - Zeros and Appreciation Series 1998 is a combination of those two
categories of assets, and the net effect is to provide shareholders with more
consistent, though less spectacular, results.
The Fund's Investment Strategy
In recent months, many of the Fund's largest holdings have performed
extraordinarily well, fueled by both internal corporate developments and
declining interest rates. For example, companies like Eastman Kodak, AT&T, Xerox
and Minnesota Mining and Manufacturing have been beneficiaries of significant
restructurings. Other stocks such as Mobil, Johnson and Johnson, Merck and
Procter and Gamble have led the overall market higher.
The stock market has clearly become the investment vehicle of choice for many
investors, both seasoned and new. Such new-found popularity tends to make
veteran market observers a bit wary. But, as we stated in our last letter,
confidence has not given way to a more dangerous euphoria. While low interest
rates are a major driving force for higher stock prices, the flip side of that
(i.e., softer business conditions), should not be ignored. The risk to the
market would be in earnings not matching expectations in a slow-growth economy.
We still maintain our philosophy that high grade growth stocks, surrounded by
timely themes, are a solid way for investors to participate in the equity
market.
In October and November, we did some minor profit taking in positions of several
top holdings. In our view, the big run-up in some stocks took them to levels
that generously discount earnings improvement. New purchases in the
1
<PAGE>
Fund were few, but included Allstate and Olin Corp. The first stock fits into
our theme of dominant companies in solid businesses, while the latter stock
joins our restructuring theme.
We believe this Fund continues to represent a lower-risk way for investors to
own a cross-section of U.S. equities, although there can be no guarantees that
our investment objectives will be achieved. At this time, we would like to thank
you for your investment in Smith Barney Principal Return Fund - Zeros and
Appreciation Series 1998.
Sincerely,
/s/ Heath B. McLendon /s/ Harry Cohen
Heath B. McLendon Harry D. Cohen
Chairman and Vice President and
Chief Executive Officer Investment Officer
December 8, 1995
2
<PAGE>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1998
- --------------------------------------------------------------------------------
Historical Performance
- --------------------------------------------------------------------------------
Net Asset Value
- --------------------------------------------------------------------------------
Beginning End of Income Capital Gain Total
Year Ended of Year Year Dividends Distributions Returns(1)
================================================================================
11/30/95 $7.75 $7.91 $0.40 $0.83 19.93%
- --------------------------------------------------------------------------------
11/30/94 9.38 7.75 0.45 0.89 (3.69)
- --------------------------------------------------------------------------------
11/30/93 9.02 9.38 0.40 0.10 9.99
- --------------------------------------------------------------------------------
11/30/92 8.40 9.02 0.43 0.00 12.86
- --------------------------------------------------------------------------------
1/25/91*-11/30/91 7.60 8.40 0.00 0.00 10.53+
================================================================================
Total $1.68 $1.82
================================================================================
It is the Fund's policy to distribute dividends and capital gains, if any,
annually.
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Without With
Sales Charge(1) Sales Charge(2)
================================================================================
Year Ended 11/30/95 19.93% 13.90%
- --------------------------------------------------------------------------------
1/25/91* through 11/30/95 9.96 8.80
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without
Sales Charge(1)
================================================================================
1/25/91* through 11/30/95 58.47%
================================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect deduction of the applicable
sales charge.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, shares reflect the deduction of the
maximum initial sales charge of 5.00%.
* Commencement of operations.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
3
<PAGE>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1998
- --------------------------------------------------------------------------------
Historical Performance (unaudited)
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Shares of the
Zeros and Appreciation Series 1998 vs. S&P 500 Index and
Lehman Brothers Intermediate Term Government Bond Index+
- --------------------------------------------------------------------------------
January 1991 -- November 1995
[The following table was represented by a line graph in the printed material.]
P. R. S&P Lehman
----- --- ------
Jan 25, 91 9500 10000 10000
11/91 10500 11219 11026
11/92 11850 13292 11921
11/93 13034 14633 13011
11/94 12553 14787 12795
11/95 15055 20258 14544
+ Hypothetical illustration of $10,000 invested in shares of the Zeros and
Appreciation Series 1998 from January 25, 1991 (commencement of
operations), assuming deduction of the maximum 5.00% sales charge at the
time of investment and reinvestment of dividends and capital gains, if any,
at net asset value through November 30, 1995. The S&P 500 is an index of
widely held common stocks listed on the New York and American Stock
Exchanges and the over-the-counter markets. Figures for the S&P 500 Index
include reinvestment of dividends. The Lehman Brothers Intermediate Term
Government Bond Index is comprised of approximately 1,000 issues of U.S.
Government Treasury and Agency Securities. The indexes are unmanaged and
are not subject to the same management and trading expenses of a mutual
fund.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost. No adjustment
has been made for shareholder tax liability on dividends or capital gains.
4
<PAGE>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1998
- --------------------------------------------------------------------------------
Portfolio Highlights (unaudited) November 30, 1995
- --------------------------------------------------------------------------------
Common Stock Industry Breakdown
[The following was represented by a pie chart in the printed material.]
Utilities 4.4%
Basic Industries 7.0%
Transportation 1.9%
Technology 8.6%
Capital Goods 6.3%
Consumer Durables 4.8%
Healthcare 11.2%
Consumer Non-Durables 7.3%
Financial Services 13.1%
Consumer Services 14.8%
Energy 8.6%
Diversified Conglomerates 12.0%
Top Ten Holdings
Percentage of
Company Total Investments
================================================================================
U.S. Treasury Strips 60.9%
Eastman Kodak Co. 1.5
Xerox Corp. 1.4
American Telephone & Telegraph Corp. 1.3
Minnesota Mining and Manufacturing Co. 1.3
Mobil Corp. 0.8
Amoco Corp. 0.8
R.R. Donnelley & Sons Co. 0.8
Time Warner, Inc. 0.8
E.I. du Pont De Nemours & Co. 0.7
================================================================================
5
<PAGE>
<TABLE>
<CAPTION>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1998
- -------------------------------------------------------------------------------------------
Schedule of Investments November 30, 1995
- -------------------------------------------------------------------------------------------
SHARES SECURITY VALUE
===========================================================================================
<S> <C> <C>
COMMON STOCKS -- 35.5%
Basic Industries -- 2.5 %
6,000 ACX Technologies, Inc.* $ 99,000
4,500 Aluminum Co. of America 263,250
4,000 Cyprus Amax Minerals Co. 110,000
11,000 E.I. du Pont De Nemours & Co. 731,500
7,500 Hercules, Inc. 411,563
3,000 International Paper Inc. 114,375
4,000 Mead Corp. 228,500
3,500 Olin Corp. 266,000
2,000 Santa Fe Pacific Gold Co. 24,000
4,000 St. Joe Paper Co. 229,500
- -------------------------------------------------------------------------------------------
2,477,688
- -------------------------------------------------------------------------------------------
Capital Goods -- 2.2 %
7,500 Allied Signal, Inc. 354,375
17,000 AMP Inc. 682,125
5,000 Boeing Co. 364,375
3,000 Caterpillar, Inc. 184,125
8,000 Ingersoll-Rand Co. 307,000
4,600 Lockheed Martin Corp. 337,525
- -------------------------------------------------------------------------------------------
2,229,525
- -------------------------------------------------------------------------------------------
Consumer Durables -- 1.7 %
4,500 Chrysler Corp. 233,438
19,000 Ford Motor Co. 536,750
7,000 General Motors Corp. 339,500
9,000 Goodyear Tire & Rubber Co. 381,375
8,000 Newell Co. 211,000
- -------------------------------------------------------------------------------------------
1,702,063
- -------------------------------------------------------------------------------------------
Consumer Non-Durables -- 2.6%
4,000 Coca-Cola Inc. 303,000
5,000 CPC International Inc. 343,750
6,000 Gillette Co. 311,250
9,000 International Flavors & Fragrances Inc. 460,125
10,200 McDonald's Corp. 455,175
8,000 Proctor & Gamble Co. 691,000
- -------------------------------------------------------------------------------------------
2,564,300
- -------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
<TABLE>
<CAPTION>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1998
- -------------------------------------------------------------------------------------------
Schedule of Investments (continued) November 30, 1995
- -------------------------------------------------------------------------------------------
SHARES SECURITY VALUE
===========================================================================================
<S> <C> <C>
Consumer Services -- 5.3 %
13,000 Comcast Corp., Class A Shares $ 256,750
5,500 Gannett, Inc. 335,500
8,000 Home Depot, Inc. 355,000
6,000 J.C. Penney Co. 281,250
5,000 Meredith Corp. 196,875
8,000 New York Times Co., Class A Shares 236,000
21,000 R.R. Donnelley & Sons Co. 805,875
20,000 Savoy Pictures Entertainment Inc.* 120,314
3,500 Scandanavian Broadcasting Systems* 82,687
3,000 Tele-Communications, Inc. New Liberty Media Group Series A* 84,000
18,000 Tele-Communications, Inc., Series A, TCI Group* 333,000
20,000 Time Warner, Inc. 800,000
7,500 Tribune Co. 483,750
7,000 Walt Disney Co. 420,875
10,000 Wal-Mart Stores, Inc. 240,000
3,800 Viacom Inc., Class B Non Voting Shares* 183,350
- -------------------------------------------------------------------------------------------
5,215,226
- -------------------------------------------------------------------------------------------
Diversified Conglomerates -- 4.3%
22,000 Eastman Kodak Co. 1,496,000
6,000 Emerson Electric Co. 468,000
8,000 General Electric Co. 538,000
6,000 Honeywell Inc. 285,750
9,000 Minnesota Mining and Manufacturing Co. 1,244,500
6,000 Tyco International Ltd. 188,250
- -------------------------------------------------------------------------------------------
4,220,500
- -------------------------------------------------------------------------------------------
Energy -- 3.1%
12,000 Amoco Corp. 813,000
3,300 Atlantic Richfield Co. 357,637
7,000 Burlington Resources, Inc. 269,500
5,000 Chevron Corp. 246,875
8,000 Mobil Corp. 835,000
3,000 Royal Dutch Petroleum Co. 385,125
6,000 Union Pacific Resources Group Inc.* 139,500
- -------------------------------------------------------------------------------------------
3,046,637
- -------------------------------------------------------------------------------------------
Financial Services -- 4.6%
17,000 American Express Co. 722,500
6,000 American International Group, Inc. 538,500
8,500 Allstate Insurance Corp. 348,500
5,000 Chase Manhattan Corp. 304,375
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
<TABLE>
<CAPTION>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1998
- -------------------------------------------------------------------------------------------
Schedule of Investments (continued) November 30, 1995
- -------------------------------------------------------------------------------------------
SHARES SECURITY VALUE
===========================================================================================
<S> <C> <C>
Financial Services -- 4.6% (continued)
7,000 Chemical Banking Corp. $ 420,000
3,000 Federal National Mortgage Association 328,500
4,000 First Virginia Banks, Inc. 170,500
4,000 Fiserv Inc.* 106,000
7,000 Household International Inc. 437,500
10,000 Leucadia National Corp. 275,000
6,000 Republic New York Corp. 378,000
5,000 Union Planters Corp. 157,500
2,000 Wells Fargo & Co. 420,500
- -------------------------------------------------------------------------------------------
4,607,375
- -------------------------------------------------------------------------------------------
Healthcare -- 4.0 %
8,000 Abbott Laboratories Inc. 325,000
8,000 American Home Products Corp. 730,000
8,500 Bristol-Myers Squibb Co. 682,125
4,000 Forest Laboratories, Inc.* 170,000
8,000 Johnson & Johnson 693,000
10,000 Merck & Co., Inc. 618,750
3,000 Perrigo Co.* 39,375
4,000 Pharmacia & Upjohn, Inc.* 143,500
1,500 SmithKline Beecham Units ADR 79,875
2,500 United HealthCare Corp. 157,188
3,500 Warner Lambert Co. 312,375
- -------------------------------------------------------------------------------------------
3,951,188
- -------------------------------------------------------------------------------------------
Technology -- 3.1 %
5,000 California Microwave Inc.* 108,750
2,000 General Instruments Corp.* 51,250
2,000 Hewlett Packard Co. 165,750
8,000 Intel Corp. 487,000
3,000 International Business Machines Corp. 289,875
3,000 Microsoft Corp.* 261,375
5,000 Motorola, Inc. 306,250
10,000 Xerox Corp. 1,371,250
- -------------------------------------------------------------------------------------------
3,041,500
- -------------------------------------------------------------------------------------------
Transportation -- 0.6 %
2,500 AMR Corp.* 191,562
1,000 Conrail Inc. 69,875
6,000 Union Pacific Corp. 406,500
- -------------------------------------------------------------------------------------------
667,937
- -------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
<TABLE>
<CAPTION>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1998
- -------------------------------------------------------------------------------------------
Schedule of Investments (continued) November 30, 1995
- -------------------------------------------------------------------------------------------
SHARES SECURITY VALUE
===========================================================================================
<S> <C> <C>
Utilities -- 1.5 %
19,000 American Telephone & Telegraph Corp. $ 1,254,000
5,000 Nynex Corp. 248,125
- -------------------------------------------------------------------------------------------
1,502,125
- -------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost -- $25,909,088) 35,226,064
==========================================================================================
FACE
AMOUNT SECURITY VALUE
==========================================================================================
U.S. TREASURY STRIPS -- 60.9%
$70,000,000 U.S. Treasury Strips, zero coupon due 8/15/98
(Cost -- $56,348,076) 60,569,600
==========================================================================================
REPURCHASE AGREEMENT -- 3.6 %
3,531,000 Chemical Securities Inc., 5.800% due 12/1/95;
Proceeds at maturity -- $3,531,568;
(Fully collateralized by U.S. Treasury Notes, 5.870%
due 11/14/96; Market value -- $3,607,979)
(Cost -- $3,531,000) 3,531,000
==========================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $85,788,164)++ $99,326,664
==========================================================================================
</TABLE>
* Non-income producing security.
++ Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
9
<PAGE>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1998
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities November 30, 1995
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost-- $85,788,164) $99,326,664
Cash 525
Receivable for securities sold 104,757
Dividends and interest receivable 119,045
Deferred organization cost 3,610
- --------------------------------------------------------------------------------
Total Assets 99,554,601
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 714,190
Payable for Fund shares purchased 134,955
Distribution fees payable 40,128
Investment advisory fees payable 23,967
Administration fees payable 15,978
Accrued expenses 112,772
- --------------------------------------------------------------------------------
Total Liabilities 1,041,990
- --------------------------------------------------------------------------------
Total Net Assets $98,512,611
================================================================================
NET ASSETS:
Par value of shares of beneficial interest 12,450
Capital paid in excess of par value 79,264,489
Undistributed net investment income 4,572,313
Accumulated net realized gain on security transactions 1,124,859
Net unrealized appreciation of investments 13,538,500
- --------------------------------------------------------------------------------
Total Net Assets $98,512,611
================================================================================
Shares Outstanding 12,449,695
- --------------------------------------------------------------------------------
Net Asset Value (and redemption price) $7.91
================================================================================
See Notes to Financial Statements.
10
<PAGE>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1998
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended November 30, 1995
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 4,798,903
Dividends 819,710
Less: Foreign withholding tax (4,689)
- --------------------------------------------------------------------------------
Total Investment Income 5,613,924
- --------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2) 298,009
Distribution fees (Note 2) 248,341
Administration fees (Note 2) 198,673
Shareholder and system servicing fees 132,000
Custody 31,200
Audit and legal 26,400
Amortization of deferred organization costs 23,959
Shareholder communications 17,000
Trustees' fees 9,000
Registration fees 6,000
Other 51,029
- --------------------------------------------------------------------------------
Total Expenses 1,041,611
- --------------------------------------------------------------------------------
Net Investment Income 4,572,313
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS (NOTE3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 32,586,838
Cost of securities sold 26,757,853
- --------------------------------------------------------------------------------
Net Realized Gain 5,828,985
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year 5,744,349
End of year 13,538,500
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 7,794,151
- --------------------------------------------------------------------------------
Net Gain on Investments 13,623,136
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $18,195,449
================================================================================
See Notes to Financial Statements.
11
<PAGE>
<TABLE>
<CAPTION>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1998
- --------------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended November 30
- --------------------------------------------------------------------------------------
1995 1994
======================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 4,572,313 $ 5,224,039
Net realized gain 5,828,985 5,561,100
Increase (decrease) in net unrealized appreciation 7,794,151 (14,922,818)
- --------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Operations 18,195,449 (4,137,679)
- --------------------------------------------------------------------------------------
DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income (5,217,995) (6,373,719)
Net realized gains (10,268,770) (12,854,127)
- --------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (15,486,765) (19,227,846)
- --------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net asset value of shares issued for
reinvestment of dividends 15,181,620 19,030,329
Cost of shares reacquired (20,766,127) (30,852,133)
- --------------------------------------------------------------------------------------
Decrease in Net Assets From Fund
Share Transactions (5,584,507) (11,821,804)
- --------------------------------------------------------------------------------------
Decrease in Net Assets (2,875,823) (35,187,329)
NET ASSETS:
Beginning of year 101,388,434 136,575,763
- --------------------------------------------------------------------------------------
End of year* $ 98,512,611 $ 101,388,434
======================================================================================
* Includes undistributed net investment income of: $4,572,313 $5,221,540
======================================================================================
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1998
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Zeros and Appreciation Series 1998 ("Fund") is a separate investment
fund of the Smith Barney Principal Return Fund ("Trust"). The Trust, a
Massachusetts business trust, is registered under the Investment Company Act of
1940, as amended, as a diversified, open-end management investment company. The
Trust consists of this Fund and three other funds: the Zeros and Appreciation
Series 1996, the Zeros Plus Emerging Growth Series 2000 and the Security and
Growth Fund. The financial statements and financial highlights for the other
funds are presented in separate annual reports.
The significant accounting policies consistently followed by the Fund
are:(a) securities transactions are accounted for on the trade date; (b)
securities traded on a national securities exchange are valued at the last sale
price on that exchange or, if there were no sales, at the current quoted bid
price; (c) over-the-counter securities and listed securities are valued at the
bid price at the close of business on each day; (d) U.S. Government Securities
(other than short-term securities) are valued at the quoted bid price in the
over-the-counter market; (e) short-term securities that have a maturity of 60
days or less are valued at cost plus accreted discount, or minus amortized
premiums, which approximates market value; (f) investment in securities for
which market quotations are not available are valued at fair value as determined
by the Board of Trustees; (g) interest income is recorded on the accrual basis;
(h) the accounting records of the Fund are maintained in U.S. dollars. All
assets and liabilities denominated in foreign currencies are translated into
U.S. dollars based on the rate of exchange of such currencies against U.S.
dollars on the date of valuation. Purchases and sales of securities, and income
and expenses are translated at the rate of exchange quoted on the respective
date that such transactions are recorded. Differences between income and expense
amounts recorded and collected or paid are adjusted when reported by the
custodian bank; (i) gains or losses on the sale of securities are calculated by
using the specific identification method; (j) dividends and distributions to
shareholders are recorded by the Fund on the ex-dividend date; (k) in accordance
with Statement of Position 93-2 Determination, Disclosure, and Financial
Statement Presentation of Income, Capital Gain, and Return of Capital
Distributions by Investment Companies, book and tax basis differences relating
to shareholder distributions and other permanent book and tax differences are
reclassified from accumulated net realized gains. As of November 30, 1995, the
cumulative effect of such differences, totaling $3,545 were reclassified to
undistributed net investment income from accumulated net realized gains. Net
investment income, net realized gains, and net assets were not affected by this
change; and (l) the Fund intends to comply with the applicable provisions of
13
<PAGE>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1998
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
the Internal Revenue Code of 1986, as amended, pertaining to regulated
investment companies and to make distributions of taxable income sufficient to
relieve it from substantially all Federal income and excise taxes.
In addition, organization costs have been deferred and are being amortized
on a straight line basis over a five-year period, beginning with the
commencement of the Fund's operations in January 1991.
2. INVESTMENT ADVISORY AGREEMENT, ADMINISTRATION
AGREEMENT AND OTHER TRANSACTIONS
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as investment adviser of the Fund. The Fund
pays SBMFM an investment advisory fee calculated at an annual rate of 0.30% of
the average daily net assets. SBMFM also acts as the Fund's administrator for
which the Fund pays a fee calculated at an annual rate of 0.20% of the average
daily net assets. These fees are calculated daily and paid monthly.
In addition, The Boston Company Advisors, Inc. ("Boston Advisors"), a
indirect wholly owned subsidiary of Mellon Bank Corporation, acted as
sub-administrator of the Fund. SBMFM paid Boston Advisors a portion of its
administration fee at a rate agreed upon from time to time between SBMFM and
Boston Advisors. As of July 31, 1995, this relationship was terminated.
Pursuant to a Distribution Plan, the Fund pays Smith Barney Inc. ("SB"),
another subsidiary of SBH, a service fee calculated at an annual rate of 0.25%
of the average daily net assets.
For the year ended November 30, 1995, SB received brokerage commissions of
$420.
All officers and one Trustee of the Trust are employees of SB.
3. INVESTMENTS
During the year ended November 30, 1995, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were:
================================================================================
Purchases $12,675,739
- --------------------------------------------------------------------------------
Sales 32,586,838
================================================================================
14
<PAGE>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1998
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
At November 30, 1995, net unrealized appreciation of investments for
Federal income tax purposes consisted of the following:
================================================================================
Gross unrealized appreciation $13,807,386
Gross unrealized depreciation (268,886)
- --------------------------------------------------------------------------------
Net unrealized appreciation $13,538,500
================================================================================
4. REPURCHASE AGREEMENTS
The Fund purchases (and its custodian takes possession of) U.S. Government
Securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day) at
an agreed-upon higher repurchase price. The Fund requires continual maintenance
of the market value of the collateral in amounts at least equal to the
repurchase price.
5. SHARES OF BENEFICIAL INTEREST
At November 30, 1995, the Fund had an unlimited number of shares of
beneficial interest authorized with a par value of $0.001 per share. The Fund,
the Zeros and Appreciation Series 1996, the Zeros Plus Emerging Growth Series
2000 and the Security and Growth Fund each constitute a sub-trust under the
Master Trust Agreement. Transactions in shares of the Fund were as follows:
Year Ended Year Ended
November 30, 1995 November 30, 1994
================================================================================
Shares issued on reinvestment 2,087,741 2,338,524
Shares redeemed (2,723,836) (3,819,146)
- --------------------------------------------------------------------------------
Net Decrease (636,095) (1,480,622)
================================================================================
15
<PAGE>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1998
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $7.75 $9.38 $9.02 $8.40 $7.60
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.36 0.41 0.38 0.37 0.39
Net realized and unrealized gain (loss) 1.03 (0.70) 0.48 0.68 0.41
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.39 (0.29) 0.86 1.05 0.80
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.40) (0.45) (0.40) (0.43) --
Net realized gains (0.83) (0.89) (0.10) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.23) (1.34) (0.50) (0.43) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $7.91 $7.75 $9.38 $9.02 $8.40
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return 19.93% (3.69)% 9.99% 12.86% 10.53%++
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $98,513 $101,388 $136,576 $166,077 $195,956
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.05% 1.01% 0.97% 1.01% 1.05%+
Net investment income 4.59 4.47 4.15 4.39 5.04+
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 13% 10% 17% 4% 20%
====================================================================================================================================
Average commissions paid on
early security transactions(2) $0.06 -- -- -- --
====================================================================================================================================
</TABLE>
(1) For the period from January 25, 1991 (commencement of operations) to
November 30, 1991.
(2) New SEC disclosure guidelines require that average commissions per share be
calculated for the current year only.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
16
<PAGE>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1998
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees of
Smith Barney Principal Return Fund:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the Zeros and Appreciation Series 1998
of Smith Barney Principal Return Fund as of November 30, 1995, and the related
statement of operations, statement of changes in net assets, and financial
highlights for the year then ended. 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 audit. The statement of changes in net assets for the year ended
November 30, 1994 and the financial highlights for each of the years in the
three-year period then ended and for the period from January 25, 1991
(commencement of operations) to November 30, 1991, were audited by other
auditors whose report thereon, dated January 12, 1995, expressed an unqualified
opinion on that statement of changes in net assets and those financial
highlights.
We conducted our audit 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, 1995, by correspondence with the custodian. As to securities
purchased and sold but not received or delivered, we performed other appropriate
auditing procedures. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements 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, 1995, and
the results of its operations, changes in its net assets and financial
highlights for the year then ended, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
January 17, 1996
17
<PAGE>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1998
- --------------------------------------------------------------------------------
Additional Shareholder Information (unaudited)
- --------------------------------------------------------------------------------
On March 13, 1995 the annual meeting of the shareholders of the Fund was
held for the purpose of voting on the following matters:
1. To elect nine (9) trustees of the Trust:
The results of the Proposal were as follows:
Trustees % Voting in Favor % Voting Against
================================================================================
Paul B. Ades 96.031% 3.969%
Herbert Barg 95.908 4.092
Alger B. Chapman 96.106 3.894
Dwight B. Crane 96.113 3.887
Frank G. Hubbard 96.118 3.882
Allan R. Johnson 96.762 4.238
Heath B. McLendon 96.087 3.913
Ken Miller 96.041 3.959
John F. White 95.757 4.243
================================================================================
18
<PAGE>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1998
- --------------------------------------------------------------------------------
Additional Information
- --------------------------------------------------------------------------------
Change in Independent Auditor: On October 20, 1994, based upon the
recommendation of the Audit Committee of the Fund, the Board of Trustees
determined not to retain Coopers & Lybrand L.L.P. ("Coopers & Lybrand") as the
Fund's independent auditor and voted to appoint KPMG Peat Marwick LLP. During
the Fund's two most recent fiscal years, Coopers & Lybrand's audit reports
contained no adverse opinion or disclaimer of opinion; nor were the reports
qualified or modified as to uncertainty, audit scope, or accounting principles.
Further, during this same period there were no disagreements with Coopers &
Lybrand on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if not resolved
to the satisfaction of Coopers & Lybrand, would have caused it to make reference
to the subject matter of such disagreements in connection with its audit
reports. The Fund has requested Coopers & Lybrand to provide a letter to the
Securities and Exchange Commission stating whether Coopers & Lybrand agrees with
the foregoing statements, and to provide the Fund with a copy of such letter. A
copy of this letter is available upon request by calling the Fund at (212)
723-9218.
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended November 30, 1995, 95.62% of capital gain
distributions were designated as long-term capital gains.
19
<PAGE>
Smith Barney
Principal Return Fund
Trustees
Paul R. Ades
Herbert Barg
Alger B. Chapman
Dwight B. Crane
Frank Hubbard
Allan R. Johnson
Heath B. McLendon, Chairman
Jerome Miller
Ken Miller
John F. White
Officers
Heath B. McLendon
Chief Executive Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President and Treasurer
Harry D. Cohen
Vice President and Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
SMITH BARNEY
------------
A Member of TravelersGroup[LOGO]
Investment Adviser
Smith Barney Mutual Funds
Management Inc.
Distributor
Smith Barney Inc.
Custodia
n
PNCBank
This report is submitted for the general information of the shareholders of
Smith Barney Principal Return Fund -- Zeros and Appreciation Series 1998. It is
not authorized for distribution to prospective investors unless accompanied or
preceded by a current Prospectus for the Fund, which contains information
concerning the Fund's investment policies and expenses as well as other
pertinent information.
Smith Barney
Principal Return Fund
388 Greenwich Street
New York, New York 10013
FD0305 1/96
- --------------------------------------------------------------------------------
ANNUAL REPORT
- --------------------------------------------------------------------------------
1995
1995
1995
1995
1995
Smith Barney
Principal Return Fund
Zeros and Appreciation
Series 1996
--------------------------
November 30, 1995
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
- --------------------------------------------------------------------------------
Zeros and Appreciation Series 1996
- --------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to provide you with this annual report for Smith Barney Principal
Return Fund -- Zeros and Appreciation Series 1996 for the twelve-month period
ended November 30, 1995. As you know, this is an especially timely letter
because the Smith Barney Principal Return Fund -- Zeros and Appreciation Series
1996 will end on March 1, 1996. In our view, the Fund's combination of zero
coupon Treasury securities and quality stocks have proven their worth as an
investment medium and in combination have achieved the original objectives of
the Fund.
Since its inception on January 16, 1989 through November 30, 1995, the Smith
Barney Principal Return Fund - Zero and Appreciation Series 1996 had a total
return of 97.58%. We believe this has been a consistently rewarding eight years
for shareholders of the Fund.
For your convenience, we summarize the period's prevailing economic and market
conditions below and outline our portfolio strategy. A more detailed summary of
performance and current holdings can be found in the appropriate sections that
follow in the annual report.
The Fund's Investment Philosophy
Our investment philosophy has always been to own a core of outstanding growth
companies with dominant industry positions, superior or rapidly improving
balance sheets, and managements committed to improving shareholder value.
Companies that fit that description include: Johnson & Johnson, Proctor and
Gamble, Merck, McDonalds and Coca-Cola. All of these companies are well
represented in the Fund.
In addition to the Fund's list of classic growth stocks, another investment
strategy that has worked well for the Fund over the last few years has been to
find formerly great growth companies that have fallen on hard times but where
there was a catalyst to restructure and bring underlying values to the surface.
This includes some of the Fund's best performers such as Eastman Kodak, Xerox,
Minnesota Mining & Manufacturing, American Telephone & Telegraph, Dupont and
American Home Products. In each case, new management, mergers, divestitures or
spin-offs unlocked long latent potential. Lastly, we surround our core of growth
companies with themes we believe make sense in the prevailing economic
environment. For example, throughout the year, the Fund has been well
represented in the financial sector. We had large positions
1
<PAGE>
in American Express, American International Group, Fannie Mae, Household
International as well as both Chase Manhattan and Chemical Bank.
The stock market has become increasingly the investment vehicle of choice for
both seasoned and new investors. However, such new-found popularity tends to
make veteran market observers a bit wary. Yet, as we stated in our last letter
to you, confidence has not yet given way to a potentially more dangerous
euphoria. While low interest rates are a major driving force behind higher stock
prices, the flip side -- softer business conditions -- should not be ignored. In
our view, the risk to the stock market are earnings not matching expectations in
a slow-growth economy. We still hold true to our belief that high grade growth
stocks, surrounded by timely themes, are a solid way for investors to
participate in the stock market.
At this time, we would like to thank you for your investment in Smith Barney
Principal Return Fund - Zeros and Appreciation Series 1996. We appreciate your
loyal ownership of the Fund and your past support for our investment management
approach.
- --------------------------------------------------------------------------------
Special Shareholder Notice
All good things do not always have to come to an end. Even though the Smith
Barney Principal Return Fund -- Zeros and Appreciation Series 1996 matures on
March 1, 1996, we invite you to consider staying with the Smith Barney Family
of Funds. Before Wednesday, February 28, 1996, you can exchange all or a
portion of your assets for shares of other funds within the Smith Barney Family
of Funds (within a single class of shares).
If you liked the investment approach followed in the equity portion of the
Smith Barney Principal Return Fund -- Zeros and Appreciation Series 1996,
consider the Smith Barney Appreciation Fund. This Fund has been in existence
for 25 years and is managed by Harry D. Cohen who currently manages more than
$3 billion in Smith Barney equity assets. We suggest you call your Smith Barney
Financial Consultant right away to discuss your options.
- --------------------------------------------------------------------------------
Sincerely,
/s/ Heath B. McLendon /s/ Harry Cohen
Heath B. McLendon Harry D. Cohen
Chairman and Vice President and
Chief Executive Officer Investment Officer
December 8, 1995
2
<PAGE>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1996
- --------------------------------------------------------------------------------
Historical Performance
- --------------------------------------------------------------------------------
Net Asset Value
------------------
Beginning End of Income Capital Gain Total
Year Ended of Year Year Dividends Distributions Returns(1)
================================================================================
11/30/95 $ 9.40 $ 8.70 $0.57 $1.35 14.73%
- --------------------------------------------------------------------------------
11/30/94 11.45 9.40 0.50 1.58 0.10
- --------------------------------------------------------------------------------
11/30/93 11.75 11.45 0.72 0.42 7.85
- --------------------------------------------------------------------------------
11/30/92 11.42 11.75 0.65 0.51 13.64
- --------------------------------------------------------------------------------
11/30/91 10.77 11.42 0.69 0.12 14.56
- --------------------------------------------------------------------------------
11/30/90 11.38 10.77 0.63 0.23 2.29
- --------------------------------------------------------------------------------
1/16/89*-11/30/89 9.50 11.38 0.00 0.00 19.79+
================================================================================
Total $3.76 $4.21
================================================================================
It is the Fund's policy to distribute dividends and capital gains, if any,
annually.
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Without With
Sales Charge(1) Sales Charge(2)
================================================================================
Year Ended 11/30/95 14.73% 9.04%
- --------------------------------------------------------------------------------
Five Years Ended 11/30/95 10.03 8.90
- --------------------------------------------------------------------------------
1/16/89* through 11/30/95 10.41 9.59
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without
Sales Charge(1)
================================================================================
1/16/89* through 11/30/95 97.58%
================================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect deduction of the applicable
sales charge.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, shares reflect the deduction of the
maximum initial sales charge of 5.00%.
* Commencement of operations.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
3
<PAGE>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1996
- --------------------------------------------------------------------------------
Historical Performance (unaudited)
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Shares of the
Zeros and Appreciation Series 1996 vs. S&P 500 Index and
Lehman Brothers Intermediate Term Government Bond Index+
- --------------------------------------------------------------------------------
January 1989 -- November 1995
[The following table was represented by a line chart in the printed material.]
P. R. S&P Lehman
----- --- ------
Jan 16, 89 9500 10000 10000
11/89 10360 11983 11125
11/90 11760 11567 12056
11/91 12916 13920 13617
11/92 14380 16492 14723
11/93 15917 18157 16068
11/94 16359 18348 15801
11/95 17841 25135 17961
+ Hypothetical illustration of $10,000 invested in shares of the Zeros and
Appreciation Series 1996 from January 16, 1989 (commencement of
operations), assuming deduction of the maximum 5.00% sales charge at the
time of investment and reinvestment of dividends and capital gains, if any,
at net asset value through November 30, 1995. The S&P 500 is an index of
widely held common stocks listed on the New York and American Stock
Exchanges and the over-the-counter markets. Figures for the S&P 500 Index
include reinvestment of dividends. The Lehman Brothers Intermediate Term
Government Bond Index is comprised of approximately 1,000 issues of U.S.
Government Treasury and Agency Securities. The indexes are unmanaged and
are not subject to the same management and trading expenses of a mutual
fund.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost. No adjustment
has been made for shareholder tax liability on dividends or capital gains.
4
<PAGE>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1996
- --------------------------------------------------------------------------------
Portfolio Highlights (unaudited) November 30, 1995
- --------------------------------------------------------------------------------
Common Stock Industry Breakdown
[The following table was represented by a pie chart in the printed material.]
Utilities 5.1%
Basic Industries 7.9%
Transportation 1.7%
Capital Goods 8.1%
Technology 8.5%
Consumer Durables 5.0%
Healthcare 11.1%
Consumer Non-Durables 5.8%
Financial Services 10.1%
Consumer Services 15.9%
Energy 9.5%
Diversified Conglomerates 11.3%
Top Ten Holdings
Percentage of
Company Total Investments
================================================================================
U.S. Treasury Strips 62.3%
Eastman Kodak Co. 1.7
Minnesota Mining and Manufacturing Co. 1.2
Xerox Corp. 1.1
American Telephone & Telegraph Corp. 1.1
Mobil Corp. 1.0
American Home Products Corp. 0.8
Amoco Corp. 0.7
E.I. du Pont De Nemours & Co. 0.7
R.R. Donnelly & Sons Co. 0.7
================================================================================
5
<PAGE>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1996
- --------------------------------------------------------------------------------
Schedule of Investments November 30, 1995
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
COMMON STOCKS -- 30.8%
Basic Industries -- 2.4%
2,500 Aluminum Co. of America $ 146,250
2,000 Cyprus Amax Minerals Co. 55,000
7,000 E.I. du Pont De Nemours & Co. 465,500
4,500 Hercules, Inc. 246,938
1,000 Hewlett Packard Co. 82,875
2,700 Honeywell Inc. 128,588
3,000 Mead Corp. 171,375
1,500 St. Joe Paper Co. 86,063
4,000 Viacom Inc., Class B Shares* 193,000
- --------------------------------------------------------------------------------
1,575,589
- --------------------------------------------------------------------------------
Capital Goods -- 2.5%
- --------------------------------------------------------------------------------
4,000 Allied Signal, Inc. 189,000
11,000 AMP Inc. 441,375
3,000 Boeing Co. 218,625
2,000 Catepillar, Inc. 122,750
5,000 General Electric Co. 336,250
5,000 Ingersoll-Rand Co. 191,875
1,800 Lockheed Martin Corp. 132,075
- --------------------------------------------------------------------------------
1,631,950
- --------------------------------------------------------------------------------
Consumer Durables -- 1.5%
2,500 Chrysler Corp. 129,688
10,000 Ford Motor Co. 282,500
5,000 General Motors Corp. 242,500
5,000 Goodyear Tire & Rubber Co. 211,875
5,000 Newell Co. 131,875
- --------------------------------------------------------------------------------
998,438
- --------------------------------------------------------------------------------
Consumer Non-Durables -- 1.8%
1,000 Coca-Cola Co. 75,750
3,400 CPC International Inc. 233,750
4,000 Gillette Co. 207,500
5,000 McDonald's Corp. 223,125
5,000 Procter & Gamble Co. 431,875
- --------------------------------------------------------------------------------
1,172,000
- --------------------------------------------------------------------------------
Consumer Services -- 4.9%
4,000 California Microwave Inc.* 87,000
9,000 Comcast Corp., Class A Shares 177,750
3,500 Gannett, Inc. 213,500
See Notes to Financial Statements.
6
<PAGE>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1996
- --------------------------------------------------------------------------------
Schedule of Investments (continued) November 30, 1995
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Consumer Services -- 4.9% (continued)
12,000 R.R. Donnelley & Sons Co. $ 460,500
4,000 Home Depot, Inc. 177,500
3,000 International Flavors & Fragrances Inc. 153,375
4,000 J.C. Penney Co. 187,500
3,000 Meredith Corp. 118,125
5,000 New York Times Co., Class A Shares 147,500
15,000 Savoy Pictures Entertainment Inc.* 90,235
3,500 Scandinavian Broadcasting System* 82,688
12,000 Tele-Communications, Inc., Series A, TCIGroup* 222,000
11,000 Time Warner, Inc. 440,000
3,000 Tribune Co. 193,500
5,000 Walt Disney Co. 300,625
6,000 Wal-Mart Stores, Inc. 144,000
- --------------------------------------------------------------------------------
3,195,798
- --------------------------------------------------------------------------------
Diversified Conglomerates -- 3.5%
16,000 Eastman Kodak Co. 1,088,000
3,000 Emerson Electric Co. 234,000
12,000 Minnesota Mining and Manufacturing Co. 786,000
2,000 Scotts Co.* 40,250
4,000 Tyco International Ltd. 125,500
- --------------------------------------------------------------------------------
2,273,750
- --------------------------------------------------------------------------------
Energy -- 2.9%
7,000 Amoco Corp. 474,250
1,500 Atlantic Richfield Co. 162,563
3,000 Baker Hughes Inc. 61,125
5,000 Burlington Resources, Inc. 192,500
2,500 Chevron Corp. 123,437
6,000 Mobil Corp. 626,250
2,000 Royal Dutch Petroleum Co. 256,750
- --------------------------------------------------------------------------------
1,896,875
- --------------------------------------------------------------------------------
Financial Services -- 3.1%
9,500 American Express Co. 403,750
3,000 American International Group, Inc. 269,250
3,500 Allstate Insurance Corp. 143,500
3,000 Chase Manhattan Corp. 182,625
3,000 Chemical Banking Corp. 180,000
1,500 Federal National Mortgage Association 164,250
3,000 First Virginia Banks, Inc. 127,875
2,500 Fiserve Inc.* 66,250
See Notes to Financial Statements.
7
<PAGE>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1996
- --------------------------------------------------------------------------------
Schedule of Investments (continued) November 30, 1995
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Financial Services -- 3.1% (continued)
3,000 Household International Inc. $ 187,500
6,000 Lecudia National Corp. 165,000
2,000 Republic New York Corp. 126,000
- --------------------------------------------------------------------------------
2,016,000
- --------------------------------------------------------------------------------
Healthcare -- 3.4%
5,500 American Home Products Corp. 501,875
5,000 Abbott Laboratories Inc. 203,125
5,000 Bristol-Myers Squibb Co. 401,250
5,000 Forest Laboratories, Inc* 212,500
5,000 Johnson & Johnson 433,125
5,000 Merck & Co., Inc. 309,375
2,000 Pharmacia & Upjohn, Inc.* 71,750
1,000 Warner Lambert Co. 89,250
- --------------------------------------------------------------------------------
2,222,250
- --------------------------------------------------------------------------------
Technology -- 2.7%
3,500 Apple Computer Inc. 133,437
4,500 Intel Corp. 273,937
1,500 International Business Machines Corp. 144,937
2,000 Microsoft Corp.* 174,250
4,000 Motorola, Inc. 245,000
5,400 Xerox Corp. 740,475
- --------------------------------------------------------------------------------
1,712,036
- --------------------------------------------------------------------------------
Transportation -- 0.5%
1,500 AMR Corp.* 114,937
3,200 Union Pacific Corp. 216,800
- --------------------------------------------------------------------------------
331,737
- --------------------------------------------------------------------------------
Utilities -- 1.6 %
11,000 American Telephone & Telegraph Corp. 726,000
4,000 Nynex Corp. 198,500
4,000 Union Pacific Resources Group Inc.* 93,000
- --------------------------------------------------------------------------------
1,017,500
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost -- $14,426,255) 20,043,923
================================================================================
See Notes to Financial Statements.
8
<PAGE>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1996
- --------------------------------------------------------------------------------
Schedule of Investments (continued) November 30, 1995
- --------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
================================================================================
U.S. TREASURY STRIPS -- 62.3%
$41,000,000 U.S. Treasury Strips, zero coupon due 2/15/96
(Cost -- $40,154,467) $40,547,360
================================================================================
REPURCHASE AGREEMENT -- 6.9%
4,473,000 Chemical Securities Inc., 5.800% due 12/1/95;
Proceeds at maturity -- $4,473,719; (Fully
collateralized by U.S. Treasury Notes, 5.870%
due 11/14/96; Market value -- $4,570,516)
(Cost -- $4,473,000) 4,473,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $59,053,722)++ $65,064,283
================================================================================
* Non-income producing security.
++ Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
9
<PAGE>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1996
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities November 30, 1995
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $59,053,722) $ 65,064,283
Cash 995
Receivable for securities sold 65,473
Dividends and interest receivable 65,398
- --------------------------------------------------------------------------------
Total Assets 65,196,149
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 84,935
Payable for Fund shares purchased 49,416
Investment advisory fees payable 15,760
Administration fees payable 10,507
Accrued expenses 71,037
- --------------------------------------------------------------------------------
Total Liabilities 231,655
- --------------------------------------------------------------------------------
Total Net Assets $64,964,494
================================================================================
NET ASSETS:
Par value of shares of beneficial interest 7,464
Capital paid in excess of par value 54,816,902
Undistributed net investment income 3,730,150
Accumulated net realized gain on security transactions 399,417
Net unrealized appreciation of investments 6,010,561
Total Net Assets $64,964,494
================================================================================
Shares Outstanding 7,464,369
- --------------------------------------------------------------------------------
Net Asset Value (and redemption price) $8.70
- --------------------------------------------------------------------------------
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, 1995
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 4,048,947
Dividends 524,114
Less: Foreign withholding tax (3,634)
- --------------------------------------------------------------------------------
Total Investment Income 4,569,427
- --------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2) 203,597
Administration fees (Note 2) 135,732
Shareholder and system servicing fees 94,000
Audit and legal 26,400
Custody 23,000
Shareholder communications 15,000
Trustees' fees 9,000
Registration fees 5,200
Other 17,285
- --------------------------------------------------------------------------------
Total Expenses 529,214
- --------------------------------------------------------------------------------
Net Investment Income 4,040,213
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS (NOTE3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 26,704,716
Cost of securities sold 21,359,860
- --------------------------------------------------------------------------------
Net Realized Gain 5,344,856
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year 5,925,955
End of year 6,010,561
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 84,606
- --------------------------------------------------------------------------------
Net Gain on Investments 5,429,462
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $9,469,675
================================================================================
See Notes to Financial Statements.
11
<PAGE>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1996
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended November 30
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
===================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 4,040,213 $ 4,249,350
Net realized gain 5,344,856 4,824,846
Increase (decrease) in net unrealized appreciation 84,606 (8,924,081)
- -----------------------------------------------------------------------------------
Increase in Net Assets From Operations 9,469,675 150,115
- -----------------------------------------------------------------------------------
DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income (4,356,018) (3,942,821)
Net realized gains (9,770,284) (12,394,023)
- -----------------------------------------------------------------------------------
Decrease in Net Assets From Distributions to
Shareholders (14,126,302) (16,336,844)
- -----------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net asset value of shares issued for
reinvestment of dividends 13,813,673 16,113,342
Cost of shares reacquired (16,724,982) (18,546,955)
- -----------------------------------------------------------------------------------
Decrease in Net Assets From Fund
Share Transactions (2,911,309) (2,433,613)
- -----------------------------------------------------------------------------------
Decrease in Net Assets (7,567,936) (18,620,342)
NET ASSETS:
Beginning of year 72,532,430 91,152,772
- -----------------------------------------------------------------------------------
End of year* $64,964,494 $72,532,430
===================================================================================
* Includes undistributed net investment income of: $3,730,150 $4,045,955
===================================================================================
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1996
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Zeros and Appreciation Series 1996 ("Fund") is a separate investment
fund of the Smith Barney Principal Return Fund ("Trust"). The Trust, a
Massachusetts business trust, is registered under the Investment Company Act of
1940, as amended, as a diversified, open-end management investment company. The
Trust consists of this Fund and three other funds: the Zeros and Appreciation
Series 1998, the Zeros Plus Emerging Growth Series 2000 and the Security and
Growth Fund. The financial statements and financial highlights for the other
funds are presented in separate annual reports.
The significant accounting policies consistently followed by the Fund
are:(a) securities transactions are accounted for on the trade date; (b)
securities traded on a national securities exchange are valued at the last sale
price on that exchange or, if there were no sales, at the current quoted bid
price; (c) over-the-counter securities and listed securities are valued at the
bid price at the close of business on each day; (d) U.S. Government Securities
(other than short-term securities) are valued at the quoted bid price in the
over-the-counter market; (e) short-term securities that have a maturity of 60
days or less are valued at cost plus accreted discount, or minus amortized
premium, which approximates market value; (f) investment in securities for which
market quotations are not available are valued at fair value as determined by
the Board of Trustees; (g) interest income is recorded on an accrual basis; (h)
the accounting records of the Fund are maintained in U.S. dollars. All assets
and liabilities denominated in foreign currencies are translated into U.S.
dollars based on the rate of exchange of such currencies against U.S. dollars on
the date of valuation. Purchases and sales of securities, and income and
expenses are translated at the rate of exchange quoted on the respective date
that such transactions are recorded. Differences between income and expense
amounts recorded and collected or paid are adjusted when reported by the
custodian bank; (i) gains or losses on the sale of securities are calculated by
using the specific identification method; (j) dividends and distributions to
shareholders are recorded by the Fund on the ex-dividend date; and (k) the Fund
intends to comply with the applicable provisions of the Internal Revenue Code of
1986, as amended, pertaining to regulated investment companies and to make
distributions of taxable income sufficient to relieve it from substantially all
Federal income and excise taxes.
13
<PAGE>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1996
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
2. INVESTMENT ADVISORY AGREEMENT, ADMINISTRATION AGREEMENT
AND OTHER TRANSACTIONS
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as investment adviser of the Fund. The Fund
pays SBMFM an investment advisory fee calculated at an annual rate of 0.30% of
the average daily net assets. SBMFM also acts as the Fund's administrator for
which the Fund pays a fee calculated at an annual rate of 0.20% of the average
daily net assets. These fees are calculated daily and paid monthly.
In addition, The Boston Company Advisors, Inc. ("Boston Advisors"), an
indirect wholly owned subsidiary of Mellon Bank Corporation, acted as
sub-administrator of the Fund. SBMFM paid Boston Advisors a portion of its
administration fee at a rate agreed upon from time to time between SBMFM and
Boston Advisors. As of July 31, 1995 this relationship was terminated.
For the year ended November 30, 1995, Smith Barney Inc. ("SB") received
brokerage commissions of $570. All officers and one Trustee of the Trust are
employees of SB.
3. INVESTMENTS
During the year ended November 30, 1995, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were:
================================================================================
Purchases $ 7,254,385
- --------------------------------------------------------------------------------
Sales 26,704,716
================================================================================
At November 30, 1995, net unrealized appreciation of investments for
Federal income tax purposes consisted of the following:
================================================================================
Gross unrealized appreciation $6,201,828
Gross unrealized depreciation (191,267)
- --------------------------------------------------------------------------------
Net unrealized appreciation $6,010,561
================================================================================
14
<PAGE>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1996
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
4. REPURCHASE AGREEMENTS
The Fund purchases (and its custodian takes possession of) U.S. Government
Securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day) at
an agreed-upon higher repurchase price. The Fund requires continual maintenance
of the market value of the collateral in amounts at least equal to the
repurchase price.
5. SHARES OF BENEFICIAL INTEREST
At November 30, 1995, the Fund had an unlimited number of shares of
beneficial interest authorized with a par value of $0.001 per share. The Fund,
the Zeros and Appreciation Series 1998, the Zeros Plus Emerging Growth Series
2000 and the Security and Growth Fund each constitute a sub-trust under the
Master Trust Agreement.
Transactions in shares of the Fund were as follows:
Year Ended Year Ended
November 30, 1995 November 30, 1994
================================================================================
Shares issued on reinvestment 1,635,173 1,680,331
Shares redeemed (1,889,987) (1,921,427)
- --------------------------------------------------------------------------------
Net Decrease (254,814) (241,096)
================================================================================
6. SUBSEQUENT EVENT
On March 1, 1996, the Fund will mature. Prior to this date shareholders can
exchange all or a portion of their shares for other shares within the Smith
Barney Mutual Fund complex. If a shareholder remains in the Fund until maturity
then they will receive the liquidation value of their shares.
15
<PAGE>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1996
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
===================================================================================================
Net Asset Value, Beginning of Year $9.40 $11.45 $11.75 $11.42 $10.77
- ---------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.53 0.56 0.53 0.54 0.62
Net realized and unrealized gain (loss) 0.69 (0.53) 0.31 0.95 0.84
- ---------------------------------------------------------------------------------------------------
Total Income From Operations 1.22 0.03 0.84 1.49 1.46
- ---------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.57) (0.50) (0.72) (0.65) (0.69)
Net realized gains (1.35) (1.58) (0.42) (0.51) (0.12)
- ---------------------------------------------------------------------------------------------------
Total Distributions (1.92) (2.08) (1.14) (1.16) (0.81)
- ---------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $8.70 $9.40 $11.45 $11.75 $11.42
- ---------------------------------------------------------------------------------------------------
Total Return 14.73% 0.10% 7.85% 13.64% 14.56%
- ---------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $64,964 $72,532 $91,153 $109,011 $115,356
- ---------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(1) 0.78% 0.75% 0.77% 0.77% 0.81%
Net investment income 5.92 5.27 4.76 4.85 5.26
- ---------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 11% 10% 20% 11% 17%
===================================================================================================
Average commissions paid on
equity security transactions(2) $0.06 -- -- -- --
===================================================================================================
</TABLE>
(1) For the year ended November 30, 1993, the expense ratio excludes interest
expense. The expense ratio including interest expense was 0.78%.
(2) New SEC disclosure guidelines require that average commissions per share be
calculated for current year only.
16
<PAGE>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1996
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees of
Smith Barney Principal Return Fund:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the Zeros and Appreciation Series 1996
of Smith Barney Principal Return Fund as of November 30, 1995, and the related
statement of operations, statement of changes in net assets, and financial
highlights for the year then ended. 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 audit. The statement of changes in net assets for the year ended
November 30, 1994 and the financial highlights for each of the years in the
four-year period then ended, were audited by other auditors whose report
thereon, dated January 12, 1995, expressed an unqualified opinion on that
statement of changes in net assets and those financial highlights.
We conducted our audit 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, 1995, by correspondence with the custodian. As to securities
purchased and sold but not received or delivered, we performed other appropriate
auditing procedures. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements 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, 1995, and
the results of its operations, changes in its net assets and financial
highlights for the year then ended, in conformity with generally accepted
accounting principles.
/s/ KPMG PEAT MARWICK LLP
New York, New York
January 17, 1996
17
<PAGE>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1996
- --------------------------------------------------------------------------------
Additional Shareholder Information (unaudited)
- --------------------------------------------------------------------------------
On March 13, 1995 the annual meeting of the shareholders of the Fund was
held for the purpose of voting on the following matters:
1. To elect nine (9) trustees of the Trust:
The results of the Proposal were as follows:
Trustees % Voting in Favor % Voting Against
================================================================================
Paul B. Ades 96.031% 3.969%
Herbert Barg 95.908 4.092
Alger B. Chapman 96.106 3.894
Dwight B. Crane 96.113 3.887
Frank G. Hubbard 96.118 3.882
Allan R. Johnson 96.762 4.238
Heath B. McLendon 96.087 3.913
Ken Miller 96.041 3.959
John F. White 95.757 4.243
================================================================================
18
<PAGE>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1996
- --------------------------------------------------------------------------------
Additional Information
- --------------------------------------------------------------------------------
Change in Independent Auditor: On October 20, 1994, based upon the
recommendation of the Audit Committee of the Fund, the Board of Trustees
determined not to retain Coopers & Lybrand L.L.P. ("Coopers & Lybrand") as the
Fund's independent auditor and voted to appoint KPMG Peat Marwick LLP. During
the Fund's two most recent fiscal years, Coopers & Lybrand's audit reports
contained no adverse opinion or disclaimer of opinion; nor were the reports
qualified or modified as to uncertainty, audit scope, or accounting principles.
Further, during this same period there were no disagreements with Coopers &
Lybrand on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if not resolved
to the satisfaction of Coopers & Lybrand, would have caused it to make reference
to the subject matter of such disagreements in connection with its audit
reports. The Fund has requested Coopers & Lybrand to provide a letter to the
Securities and Exchange Commission stating whether Coopers & Lybrand agrees with
the foregoing statements, and to provide the Fund with a copy of such letter. A
copy of this letter is available upon request by calling the Fund at (212)
723-9218.
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended November 30, 1995, 97.32% of capital gain
distributions were designated as long-term capital gains.
19
<PAGE>
Smith Barney SMITH BARNEY
Principal Return Fund ------------
A Member of Travelers Group {LOGO]
Trustees
Paul R. Ades
Herbert Barg
Alger B. Chapman
Dwight B. Crane
Frank Hubbard
Allan R. Johnson
Heath B. McLendon, Chairman
Jerome Miller
Ken Miller
John F. White
Officers
Heath B. McLendon
Chief Executive Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President and Treasurer
Harry D. Cohen
Vice President and Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
Investment Adviser
Smith Barney Mutual Funds
Management Inc.
Distributor
Smith Barney Inc.
Custodian
PNC Bank
This report is submitted for the general information of the shareholders of
Smith Barney Principal Return Fund -- Zeros and Appreciation Series 1996. It is
not authorized for distribution to prospective investors unless accompanied or
preceded by a current Prospectus for the Fund, which contains information
concerning the Fund's investment policies and expenses as well as other
pertinent information.
Smith Barney
Principal Return Fund
388 Greenwich Street
New York, New York 10013
FD0304 1/96
