SEMI-ANNUAL REPORT
================================================================================
Smith Barney
Principal Return Fund
Security and Growth Fund
------------------------
May 31, 1996
[Logo] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
- ------------------------
Security and Growth Fund
- ------------------------
Dear Shareholder:
We are pleased to provide you with the semi-annual report for the Smith Barney
Security and Growth Fund for the period ended May 31, 1996. A detailed summary
of the historical performance as well as the current holdings of the Security
and Growth Fund can be found in the appropriate sections that follow. In this
report we will comment on how your Fund performed and what changes have been
made in the portfolio. We also describe our expectations for the financial
markets in the coming months.
Fund Performance and Market Overview
For the six-month period ended May 31, 1996, the Smith Barney Security and
Growth Fund had a total return of 11.20%. Over the same period, the Standard &
Poor's 500 Stock Price Index ("S&P 500"), a capitalization-weighted measure of
500 widely held common stocks and a common market benchmark, had a total return
of 10.53%. The Lehman Brothers Intermediate Term Government Bond Index, an
unmanaged index generally representative of the intermediate-term bond market,
had a negative total return of 0.26% during the same period. A 50/50 blend of
the S&P 500 and the Lehman Brothers Intermediate Term Government Bond Index,
which approximates the stock and bond composition of the Fund, would have had a
total return of 5.14%.
The second half of 1995 and the first half of 1996 were a study in contrasts.
Last year witnessed an impressive rally in the bond market as yields on the
30-Year U.S. Treasury bond fell from 7.92% to 5.94%. The stock market responded
favorably as the S&P 500 rose an equally impressive 37.5%. The stock market
leadership was centered in large capitalization growth companies, while smaller
capitalization companies for the most part underperformed the broad market
averages.
Thus far, 1996 has been a difficult period for the bond market. Interest rates
have risen just over 100 basis points to 6.99%. Despite this bond market
volatility, the stock market has performed well. Interestingly, the market
leadership has shifted from large capitalization growth companies to small
capitalization companies. This dynamic can be seen in the performance of the S&P
500, which has appreciated 9.78% year-to-date, while the NASDAQ index has gained
17.46%.
Since the beginning of January, the Security and Growth Fund produced a total
return of 8.70%. Although this is roughly in line with the 9.78% gain in the S&P
500, it is important to note that the zero coupon bond portion of the Fund
actually had a negative total return of 8.65% while the equity component
appreciated 26.05%. The zero coupon bond component represents 47% of the
1
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total portfolio and is sufficient to return investors' original capital without
regard to the values from the equity segment of the portfolio. Fluctuations in
the bond's value can affect the overall portfolio value, as occurred in the
first half of 1996. Originally the bonds had a 10.3 year life and is now about 9
years. As the time to maturity declines, so will the bond portfolio's
sensitivity to interest rates.
Investment Strategy
At the end of 1995, we decided to re-focus the Fund and further emphasize
smaller companies that might show solid earnings progress even if overall
corporate earnings advanced only modestly. Many of these companies have market
capitalizations of less than $250 million. A number of these smaller company
stocks are not widely followed by major Wall Street research departments. One of
the goals of the Fund is to identify promising small companies before Wall
Street's coverage of them expands, a development which usually stimulates
greater investor interest.
Along with our decision to further emphasize small-cap stocks, we have reduced
the number of positions in the equity portion of the Fund from 35 to 25 and
thereby increased the importance of each position. We believe this more targeted
investment approach will continue to provide adequate diversification while
renewing our commitment to stock selection. The Fund's objective is to identify
stocks which can appreciate approximately twice as fast as the S&P 500 over a
period of three years or which have a one-year appreciation potential of at
least 40%.
One area of the stock market that we believe will generate outstanding returns
over the next three to five years is the natural resources industry. Over the
last fifteen years, natural resource companies have underperformed the market by
a wide margin. Many natural resource company stocks likely will be beneficiaries
of the moderate acceleration in inflation we expect may occur between now and
the year 2000. The Fund has taken profits in several companies that have become
fully valued and is redeploying these assets into this sector of the market. We
believe that the next five years will be good ones for selected natural resource
companies as worldwide growth in developing countries increases demand for the
metals, energy, and forest products these types of companies produce.
Technology companies will continue to be an important sector for the Smith
Barney Security and Growth Fund. Technological advances are changing the way we
live, the things we buy and the services we use. The Fund currently has
investments in technology companies that are established leaders in their
markets, possess solid balance sheets and are well managed, but, for reasons we
believe are temporary, are currently out of favor.
2
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Another sector of the market the Fund currently emphasizes is health care. The
Fund holds positions in a number of biotechnology companies that have potential
products that address large and expanding markets. We seek early and late stage
biotechnology companies whose corporate partnerships both validate their
technology as well as provide financial assistance.
Market Outlook
The level of speculation in many stocks recently reached "mania" proportions and
there has been a continuing frenzy to buy many new issues, or initial public
offerings (IPO's). Stock selection is always important, but in this type of
environment it must be combined with a sober view of what constitutes a
reasonable price to pay for a company and its future prospects. We are concerned
that many investors apparently have lost sight of this fact. Although we remain
cautious with regards to the overall stock market, we continue to believe
smaller capitalization stocks will outperform larger companies by a substantial
margin between now and the year 2000.
For the bond market, the first part of 1996 has been one of the most difficult
periods in 70 years. In the coming months, we believe interest rates at the long
end will fluctuate in a trading range between 6.50% - 7.50%. On balance, we feel
the bond component of the portfolio may provide modest gains going forward.
In closing, we thank you for your investment in the Smith Barney Security &
Growth Fund. We believe our investment approach, which focuses on no more than
25 high potential stocks, is one that may prove to be successful in the coming
years.
Sincerely,
/s/Heath B. McLendon /s/John G. Goode
Heath B. McLendon John G. Goode
Chairman and Vice President and
Chief Executive Officer Investment Officer
June 10, 1996
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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
Period Ended of Period Period Dividends Distributions Returns(1)
================================================================================
5/31/96 $10.68 $11.50 $0.35 $0.00 11.20%+
- --------------------------------------------------------------------------------
3/30/95*-11/30/95 9.60 10.68 0.00 0.14 12.70+
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Total $0.35 $0.14
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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)
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Six Months Ended 5/31/96+ 11.20% 6.70%
- --------------------------------------------------------------------------------
Year Ended 5/31/96 18.29 13.60
- --------------------------------------------------------------------------------
3/30/95* through 5/31/96 20.90 16.82
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Cumulative Total Return
- --------------------------------------------------------------------------------
Without
Sales Charge(1)
================================================================================
3/30/95* through 5/31/96 25.32%
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(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the 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. See Notes to Financial Statements.
4
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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. Standard & Poor's 500 Index and
Lehman Brothers Intermediate Term Government Bond Index+
- --------------------------------------------------------------------------------
March 1995 -- May 1996
[The table below was represented as a line graph in the printed material.]
Lehman
Brothers
Security Intermediate
and Term
Growth S&P 500 Gov't Bond
Portfolio Index Index
--------- ----- -----
3/30/95 9,600 10,000 10,000
5/95 10,170 10,653 10,401
11/95 10,819 12,090 10,877
5/31/96 12,030 13,363 10,873
+ 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 May 31, 1996. The Standard & Poor's 500 Index 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 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 (unaudited) May 31, 1996
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SHARES SECURITY VALUE
================================================================================
COMMON STOCKS -- 44.5%
Basic Materials -- 5.6%
10,800 American Exploration Corp. $ 141,750
417,500 Crown Resources Corp. 2,713,750
400,000 Golden Star Resources Ltd. 7,000,000
310,000 RMI Titanium Co. 6,238,750
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16,094,250
- --------------------------------------------------------------------------------
Consumer Cyclicals -- 9.0%
250,000 Home Shopping Network Inc. 3,593,750
250,000 Nextel Communications Inc. 5,187,500
1,100,000 Taco Cabana Inc., Class A Shares 9,487,500
400,000 Tele Communications Inc. 7,550,000
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25,818,750
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Consumer Staples -- 4.3%
895,000 Calgene Inc. 5,370,000
400,000 Optical Coating Laboratory Inc.+ 7,000,000
- --------------------------------------------------------------------------------
12,370,000
- --------------------------------------------------------------------------------
Healthcare -- 13.5%
100,000 Alteon Inc. 1,500,000
100,000 Alza Corp. 2,850,000
490,000 Aphton Corp. 11,760,000
525,000 Metra Bio Systems 6,562,500
450,000 Neurex Corp. 9,450,000
250,000 Onyx Pharmaceuticals Inc. 3,500,000
200,000 Sciclone Pharmaceuticals 2,450,000
25,000 Synaptic Pharmaceuticals Inc. 418,750
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38,491,250
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Interest Sensitive -- 1.9%
175,000 First American Financial Corp.+ 5,359,375
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Technology -- 10.2%
100,000 Adflex Solutions Inc. 1,575,000
200,000 Adobe Systems Inc.+ 7,425,000
325,000 General Datacomm Industries Inc. 5,159,375
200,000 Informix Corp. 4,550,000
155,000 Lasermaster Technologies Inc. 775,000
2,727,272 Power Spectra Inc. 3,238,636
See Notes to Financial Statements.
6
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Smith Barney Principal Return Fund
Security and Growth Fund
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Schedule of Investments (unaudited) (continued) May 31, 1996
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Technology -- 10.2% (continued)
250,000 Quantum Corp. $ 5,968,750
375,000 Sanctuary Woods Multimedia Corp. 328,125
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29,019,886
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TOTAL COMMON STOCKS
(Cost -- $94,991,276) 127,153,511
================================================================================
FOREIGN STOCKS -- 6.2%
288,300 Asia Pacific Resource Inc. 1,982,062
500,000 Comcast UK Cable Partner 6,812,500
250,000 Grupo Iusacell SA ADR 2,843,750
200,000 Morgan Stanley Nikkei 22, Call Warrants,
Expire 8/15/97+ 2,000,000
259,500 Nelson Gold Corp. Ltd. 198,727
778,800 Pan African Resource Corp. 1,136,022
190,000 United International Holdings Inc. 2,707,500
- --------------------------------------------------------------------------------
TOTAL FOREIGN STOCKS
(Cost -- $15,431,105) 17,680,561
================================================================================
FACE
AMOUNT SECURITY VALUE
================================================================================
U.S. GOVERNMENT OBLIGATIONS -- 44.6%
$240,000,000 U.S. Treasury Strips TINT, zero coupon due 8/15/05
(Cost -- $123,369,259) 127,663,200
================================================================================
REPURCHASE AGREEMENT -- 4.7%
13,490,000 Chase Manhattan Bank, 5.218% due 6/3/96; Proceeds
at maturity -- $13,495,866; (Fully collateralized by
U.S. Treasury Notes, 6.125% due 5/31/97;
Market value -- $13,765,446) (Cost -- $13,490,000) 13,490,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $247,281,640*) $285,987,272
================================================================================
+ Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
7
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Smith Barney Principal Return Fund
Security and Growth Fund
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Statement of Assets and Liabilities (unaudited) May 31, 1996
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $247,281,640) $ 285,987,272
Cash 280
Receivable for securities sold 386,876
Dividends and interest receivable 29,866
Other assets 61,246
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Total Assets 286,465,540
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LIABILITIES:
Payable for securities purchased 1,930,568
Investment advisory fees payable 127,952
Distribution fees payable 260,424
Accrued expenses 266,001
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Total Liabilities 2,584,945
- --------------------------------------------------------------------------------
Total Net Assets $283,880,595
================================================================================
NET ASSETS:
Par value of shares $ 24,676
Capital paid in excess of par value 228,172,396
Undistributed net investment income 2,946,014
Accumulated net realized gain from security transactions 14,031,877
Net unrealized appreciation of investments 38,705,632
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Total Net Assets $283,880,595
================================================================================
Shares Outstanding 24,676,160
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Net Asset Value (and redemption price) $11.50
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See Notes to Financial Statements.
8
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Smith Barney Principal Return Fund
Security and Growth Fund
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Statement of Operations (unaudited)
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For the Six Months Ended May 31, 1996
INVESTMENT INCOME:
Interest $ 5,972,346
Dividends 91,000
- --------------------------------------------------------------------------------
Total Investment Income 6,063,346
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EXPENSES:
Investment advisory fees (Note 2) 729,888
Distribution fees (Note 2) 364,944
Shareholder and system servicing fees 175,000
Registration fees 82,500
Shareholder communications 50,000
Audit and legal 11,500
Custody 9,000
Directors' fees 6,000
Other 181,118
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Total Expenses 1,609,950
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Net Investment Income 4,453,396
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
AND OPTIONS (NOTES 3 AND 5):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) 14,380,196
Options purchased (253,000)
- --------------------------------------------------------------------------------
Net Realized Gain 14,127,196
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of period 26,066,656
End of period 38,705,632
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Increase in Net Unrealized Appreciation 12,638,976
- --------------------------------------------------------------------------------
Net Gain on Investments and Options 26,766,172
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Increase in Net Assets From Operations $31,219,568
================================================================================
See Notes to Financial Statements.
9
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Smith Barney Principal Return Fund
Security and Growth Fund
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Six Months Ended May 31, 1996 (unaudited)
and the Period Ended November 30, 1995
1996 1995(a)
================================================================================
OPERATIONS:
Net investment income $ 4,453,396 $ 8,785,204
Net realized gain 14,127,196 3,357,336
Increase in net unrealized appreciation 12,638,976 26,066,656
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations 31,219,568 38,209,196
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (9,799,435) --
Net realized gains -- (3,945,806)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (9,799,435) (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 9,609,074 3,873,501
Cost of shares reacquired (56,970,728) (41,018,083)
- --------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From
Fund Share Transactions (47,361,654) 275,558,726
- --------------------------------------------------------------------------------
Increase (Decrease) in Net Assets (25,941,521) 309,822,116
NET ASSETS:
Beginning of period 309,822,116 --
- --------------------------------------------------------------------------------
End of period* $283,880,595 $309,822,116
================================================================================
* Includes undistributed net investment income of: $ 2,946,014 $ 8,292,053
================================================================================
(a) For the period from March 30, 1995 (commencement of operations) to November
30, 1995.
See Notes to Financial Statements.
10
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Smith Barney Principal Return Fund
Security and Growth Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)
- --------------------------------------------------------------------------------
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 two other funds: 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
semi-annual reports.
The significant accounting policies consistently followed by the Fund
are:(a) security 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; over-the-counter securities and listed securities are valued at the bid
price at the close of business on each day; U.S. Government Securities (other
than short-term securities) are valued at the quoted bid price in the
over-the-counter market; investment in securities for which market quotations
are not available are valued at fair value as determined by the Board of
Trustees; (c) securities maturing within 60 days are valued at cost plus
accreted discount, or minus amortized premium, which approximates value; (d)
interest income is recorded on the accrual basis and dividend income is recorded
on the ex-dividend date except for dividends from foreign securities which are
recorded as soon as the Fund is informed of the ex-dividend date; (e) 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;
(f) gains or losses on the sale of securities are calculated by using the
specific identification method; (g) dividends and distributions to shareholders
are recorded by the Fund on the ex-dividend date; (h) 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; (i) the Fund intends to comply with the applicable provisions of the
Internal Revenue Code of 1986, as amended, pertaining
11
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Smith Barney Principal Return Fund
Security and Growth Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
to regulated investment companies and to make distributions of taxable income
sufficient to relieve it from substantially all Federal income and excise taxes;
and (j) estimates and assumptions are required to be made regarding assets,
liabilities and changes in net assets resulting from operations when financial
statements are prepared. Changes in the economic environment, financial markets
and any other parameters used in determining these estimates could cause actual
results to differ.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), through its Davis Skaggs Investment Management
division, acts as investment adviser to the Fund. The Fund pays SBMFM an
investment advisory fee calculated at an annual rate of 0.50% of the average
daily net assets. This fee is calculated daily and paid monthly.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of
Trust 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 six months ended May 31, 1996, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were:
================================================================================
Purchases $ 76,175,005
- --------------------------------------------------------------------------------
Sales 111,739,431
================================================================================
At May 31, 1996, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were approximately
as follows:
================================================================================
Gross unrealized appreciation $ 42,192,836
Gross unrealized depreciation (3,487,204)
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 38,705,632
================================================================================
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.
12
<PAGE>
Smith Barney Principal Return Fund
Security and Growth Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
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 six months ended May 31, 1996, the Fund did not write any call
or put options.
6. SHARES OF BENEFICIAL INTEREST
At May 31, 1996, 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 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:
Six Months Ended Period Ended
May 31, 1996 November 30, 1995(a)
================================================================================
Shares sold -- 32,573,641
Shares issued on reinvestment 908,228 368,907
Shares redeemed (5,249,656) (3,924,960)
- --------------------------------------------------------------------------------
Net Increase (Decrease) (4,341,428) 29,017,588
================================================================================
(a) For the period from March 30, 1995 (commencement of operations) to November
30, 1995.
13
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Smith Barney Principal Return Fund
Security and Growth Fund
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of beneficial interest outstanding throughout each period:
1996(1) 1995(2)
================================================================================
Net Asset Value, Beginning of Period $ 10.68 $ 9.60
- --------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.53 0.28
Net realized and unrealized gain 0.64 0.94
- --------------------------------------------------------------------------------
Total Income From Operations 1.17 1.22
- --------------------------------------------------------------------------------
Less Distribution From:
Net investment income (0.35) --
Net realized gains -- (0.14)
- --------------------------------------------------------------------------------
Total Distributions (0.35) (0.14)
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $11.50 $10.68
- --------------------------------------------------------------------------------
Total Return++ 11.20% 12.70%
- --------------------------------------------------------------------------------
Net Assets, End of Period (000s) $283,881 $309,822
- --------------------------------------------------------------------------------
Ratios to Average Net Assets+:
Expenses 1.09% 1.02%
Net investment income 3.02 4.07
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 24.81% 25.50%
================================================================================
Average commissions per share
paid on equity transactions $ 0.06 $ 0.06
================================================================================
(1) For the six months ended May 31, 1996 (unaudited).
(2) For the period from March 30, 1995 (commencement of operations) to November
30, 1995.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
14
<PAGE>
Smith Barney SMITH BARNEY
Principal Return Fund ------------
A Member of TravelersGroup[LOGO]
Trustees
Paul R. Ades
Herbert Barg
Alger B. Chapman
Dwight B. Crane
Frank Hubbard
Allan R. Johnson
Heath B. McLendon, 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 Adviser
Smith Barney Mutual Funds
Management Inc.
Distributor
Smith Barney Inc.
Custodian
PNCBank, N.A.
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
FD 0951 7/96
SEMI-ANNUAL REPORT
================================================================================
Smith Barney
Principal Return Fund
Zeros Plus Emerging Growth
Series 2000
- --------------------------
May 31, 1996
[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 you with the semi-annual report for Smith Barney
Principal Return Fund - Zeros Plus Emerging Growth Series 2000 for the period
ended May 31, 1996. For your convenience, we have provided a summary of economic
and market conditions, as well as our portfolio strategy at this time. A
detailed summary of performance and current holdings can be found in the
appropriate sections that follow in the semi-annual report.
Fund Performance Update
For the six months ended May 31, 1996, the net asset value (NAV) of the Zeros
Plus Emerging Growth Series 2000 appreciated by 3.85% and paid dividends
totaling $0.2789 per share. Stronger-than-expected U.S. economic growth reported
over the past three months led to a rise in interest rates and a decline in bond
prices. This affected the bond portion of the Fund. During the past six months,
the price of the Fund's zero-coupon U.S. Treasury notes due February 15, 2000,
declined by 0.50%. This significantly affected the Fund's performance, as 53.5%
of its net assets are invested in zero-coupon Treasury notes maturing in the
year 2000. The balance of the Fund's assets is invested in stocks, which
generated a total return of more than 9.0% during this time period and
contributed to the NAV appreciation of the Fund.
Market and Economic Overview
In the last six months, the pace of U.S. economic growth was affected by several
factors. In our opinion, the main factors were the lack of a balanced budget
agreement in Washington, that led to several shutdowns of the federal
government, additional downsizing by major American corporations, and an
extremely harsh winter in the eastern regions of the U.S. All of these factors
held back economic growth in the early part of the six-month period under
review. Long-term interest rates continued to ease into January reflecting signs
of economic weakness in the U.S., strength in the U.S. dollar and low
inflationary expectations.
More recently, several economic reports released by the federal government in
late February and early March appeared to indicate that the U.S. economy was
growing at a much stronger rate than previously expected. At the same time, many
commodity prices rose, particularly grain prices, which were affected by a poor
growing season and higher energy prices caused by the uncertainty of Iraqi
1
<PAGE>
oil production. The combination of stronger U.S. economic growth and higher
price levels for many commodities led to a rapid increase in long-term interest
rates. We believe this rise in interest rates may act to restrain U.S. economic
growth in the second half of 1996.
However, there are also encouraging signs that commodity price increases have
leveled off as several key commodity averages have declined significantly. In
addition, we believe the credit markets have already factored in two potential
interest rate hikes by the Federal Reserve Board which would occur if economic
growth continues at an inflationary pace, or if organized labor wage settlements
come in higher than historical precedents.
Fund's Investment Strategy
The Smith Barney Principal Return Fund - Zeros Plus Emerging Growth Series 2000
has maintained a consistent investment strategy since its inception and is
managed much like a traditional "buy and hold" growth fund. As disciplined,
"bottom-up" investors, we try to identify the stocks of companies with
outstanding growth potential that can grow their earnings rapidly. The Fund is
well diversified across different industries and market sectors, with major
holdings in the biotechnology and health care sectors. As many investors have
adjusted their portfolio allocations to include more cyclical companies that
would benefit from strength in the U.S. economy in recent months, the prices of
many health care securities have weakened. Although companies such as Chiron and
Genzyme, two of the Fund's holdings in the biotechnology sector, reported strong
earnings and made significant strides in developing new product lines, their
share prices declined during the period covered by this report. The decline in
their share prices also took place despite stock splits declared by the
managements of Chiron and Genzyme, which usually are an indication of a
management's confidence in the future.
If our expectations for moderate economic growth during the second half of 1996
come true, long-term interest rates could ease from their current levels. In
this scenario, the price-earnings multiples on growth stocks will widen and
encourage investors to focus on companies able to expand their business
regardless of the condition of the economy or the direction of interest rates.
(The P/E multiple or ratio is the price of a stock divided by its earnings per
share.) This figure generally gives investors an idea of how much they are
paying for a particular company's earnings power. Under this scenario, we
believe the following areas look attractive: biotechnology, which has benefited
from robust product development accompanied by a more lenient attitude at the
Food and Drug Administration; telecommunications, which has been helped by the
passing of the landmark telecommunications bill; and selected technology
companies which could benefit from the corporate upgrade cycle for computers by
many corporations.
2
<PAGE>
In closing, we would like to thank you for investing in the Smith Barney
Principal Return Fund - Zeros Plus Emerging Growth Series 2000. We look forward
to continuing to help you achieve your investment goals.
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
June 28, 1996
3
<PAGE>
Smith Barney Principal Return Fund
Zeros Plus Emerging Growth Series 2000
- --------------------------------------------------------------------------------
Historical Performance
- --------------------------------------------------------------------------------
Net Asset Value
------------------
Beginning End of Income Capital Gain Total
Period Ended of Period Period Dividends Distributions Returns(1)
================================================================================
5/31/96 $9.28 $9.35 $0.28 $0.00 3.85%+
- --------------------------------------------------------------------------------
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 $1.28 $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)
================================================================================
Six Months Ended 5/31/96+ 3.85% (1.36)%
- --------------------------------------------------------------------------------
Year Ended 5/31/96 14.88 9.11
- --------------------------------------------------------------------------------
8/30/91* through 5/31/96 10.29 9.10
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without
Sales Charge(1)
================================================================================
8/30/91* through 5/31/96 59.31%
================================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the 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%.
+ 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
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 -- May 1996
[The table below was represented as a line graph in the printed material.]
P.R. V.L.
---- ----
8/30/91 9500 10000
11/91 9463 9463
11/92 10328 10600
11/93 11952 11673
11/94 11928 11180
11/95 14573 13386
5/31/96 15134 14732
+ 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 May 31, 1996. 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.
5
<PAGE>
Smith Barney Principal Return Fund
Zeros Plus Emerging Growth Series 2000
- --------------------------------------------------------------------------------
Portfolio Highlights May 31, 1996
- --------------------------------------------------------------------------------
Common Stock Industry Breakdown
(as a percentage of total common stocks)
[The table below was represented as a pie chart in the printed material.]
Biotechnology 23.3%
Telecommunications 17.9%
Capital Goods 6.9%
Drug Delivery 3.0%
Technology 24.9%
Pharmaceuticals 24.0%
Top Ten Holdings
Percentage of
Total Investments
================================================================================
U.S. Treasury Strips 53.5%
Vertex Pharmaceuticals, Inc. 6.3
Chiron Corp. 5.7
C-Cor Electronics, Inc. 5.6
Genzyme Corp. - General Division 4.3
Tech-Sym Corp. 4.2
Tyco International Ltd. 3.2
Quantum Corp. 3.2
California Microwave, Inc. 2.7
IDEC Pharmaceuticals Corp. 2.6
================================================================================
6
<PAGE>
Smith Barney Principal Return Fund
Zeros Plus Emerging Growth Series 2000
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) May 31, 1996
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
COMMON STOCKS -- 46.5%
Biotechnology -- 10.9%
40,000 Chiron Corp.+ $ 4,200,000
100,000 Gensia Pharmaceuticals Inc.+ 512,500
55,000 Genzyme Corp. - General Division+ 3,203,750
8,505 Genzyme Corp. - Tissue Repair+ 107,375
- --------------------------------------------------------------------------------
8,023,625
- --------------------------------------------------------------------------------
Capital Goods -- 3.2%
60,000 Tyco International Ltd. 2,370,000
- --------------------------------------------------------------------------------
Drug Delivery -- 1.4%
100,000 Advanced Polymer Systems+ 1,012,500
- --------------------------------------------------------------------------------
Pharmaceuticals -- 11.1%
40,000 Forest Laboratories Inc., Class A Shares+ 1,650,000
75,000 IDEC Pharmaceuticals Corp.+ 1,931,250
125,000 Vertex Pharmaceuticals Inc.+ 4,656,250
- --------------------------------------------------------------------------------
8,237,500
- --------------------------------------------------------------------------------
Technology -- 11.6%
100,000 Excel Technology Inc.+ 1,137,500
25,000 Fischer Imaging Corp.+ 325,000
99,000 Quantum Corp.+ 2,363,625
90,000 Tech-Sym Corp.+ 3,071,250
97,000 VLSI Technology, Inc.+ 1,661,125
- --------------------------------------------------------------------------------
8,558,500
- --------------------------------------------------------------------------------
Telecommunications -- 8.3%
104,500 California Microwave, Inc.+ 1,998,563
177,050 C-COR Electronics, Inc.+ 4,138,544
- --------------------------------------------------------------------------------
6,137,107
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost -- $16,989,875) 34,339,232
================================================================================
FACE
AMOUNT SECURITY VALUE
================================================================================
U.S. TREASURY STRIPS -- 53.5%
$50,000,000 U.S. Treasury Strips, zero coupon due 2/15/00
(Cost -- $37,315,179) 39,434,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $54,305,054*) $73,773,232
================================================================================
+ 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 (unaudited) May 31, 1996
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $54,305,054) $73,773,232
Deferred organization costs 6,373
- --------------------------------------------------------------------------------
Total Assets 73,779,605
- --------------------------------------------------------------------------------
LIABILITIES:
Payable to bank 397,079
Investment advisory fees payable 24,766
Administration fees payable 12,383
Accrued expenses 73,084
- --------------------------------------------------------------------------------
Total Liabilities 507,312
- --------------------------------------------------------------------------------
Total Net Assets $73,272,293
================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 7,833
Capital paid in excess of par value 52,091,264
Undistributed net investment income 928,421
Accumulated net realized gain on security transactions 776,597
Net unrealized appreciation of investments 19,468,178
- --------------------------------------------------------------------------------
Total Net Assets $73,272,293
================================================================================
Shares Outstanding 7,832,985
- --------------------------------------------------------------------------------
Net Asset Value (and redemption price) $ 9.35
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
8
<PAGE>
Smith Barney Principal Return Fund
Zeros Plus Emerging Growth Series 2000
- --------------------------------------------------------------------------------
Statement of Operations (unaudited)
- --------------------------------------------------------------------------------
For the Six Months Ended May 31, 1996
INVESTMENT INCOME:
Interest $ 1,508,930
Dividends 6,000
- --------------------------------------------------------------------------------
Total Investment Income 1,514,930
- --------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2) 148,200
Distribution fees (Note 2) 92,625
Administration fees (Note 2) 74,099
Transfer agent fees 47,999
Amortization of deferred organization costs 12,958
Audit and legal 11,700
Shareholder communications 8,000
Registration fees 5,000
Trustees' fees 4,500
Custody 3,000
Other 24,178
- --------------------------------------------------------------------------------
Total Expenses 432,259
- --------------------------------------------------------------------------------
Net Investment Income 1,082,671
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS (NOTE3):
Realized Gain from Security Transactions
(excluding short-term securities):
Proceeds from sales 6,685,109
Cost of securities sold 6,584,440
- --------------------------------------------------------------------------------
Net Realized Gain 100,669
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of period 17,841,129
End of period 19,468,178
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 1,627,049
- --------------------------------------------------------------------------------
Net Gain on Investments 1,727,718
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 2,810,389
================================================================================
See Notes to Financial Statements.
9
<PAGE>
Smith Barney Principal Return Fund
Zeros Plus Emerging Growth Series 2000
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Six Months Ended May 31, 1996 (unaudited)
and the Year Ended November 30, 1995
1996 1995
================================================================================
OPERATIONS:
Net investment income $ 1,082,671 $ 2,341,528
Net realized gain 100,669 4,894,552
Increase in net unrealized appreciation 1,627,049 7,803,978
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations 2,810,389 15,040,058
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (2,280,172) (2,464,055)
Net realized gains -- (2,759,709)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (2,280,172) (5,223,764)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net asset value of shares issued for
reinvestment of dividends 2,230,305 5,123,737
Cost of shares reacquired (6,051,408) (13,127,965)
- --------------------------------------------------------------------------------
Decrease in Net Assets From Fund
Share Transactions (3,821,103) (8,004,228)
- --------------------------------------------------------------------------------
Increase (Decrease) in Net Assets (3,290,886) 1,812,066
NET ASSETS:
Beginning of period 76,563,179 74,751,113
- --------------------------------------------------------------------------------
End of period* $ 73,272,293 $ 76,563,179
================================================================================
* Includes undistributed net investment income of: $ 928,421 $ 2,125,922
================================================================================
See Notes to Financial Statements.
10
<PAGE>
Smith Barney Principal Return Fund
Zeros Plus Emerging Growth Series 2000
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)
- --------------------------------------------------------------------------------
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 two other funds: 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 semi-annual
reports.
The significant accounting policies consistently followed by the Fund
are:(a) security 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; over-the-counter securities and listed securities are valued at the bid
price at the close of business on each day; U.S. Government Securities (other
than short-term securities) are valued at the quoted bid price in the
over-the-counter market; investment in securities for which market quotations
are not available are valued at fair value as determined by the Board of
Trustees; (c) securities maturing within 60 days are valued at cost plus
accreted discount, or minus amortized premium, which approximates market value;
(d) interest income is recorded on an accrual basis and dividend income is
recorded on the ex-dividend date; (e) 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; (f) gains or losses on the
sale of securities are calculated by using the specific identification method;
(g) dividends and distributions to shareholders are recorded on the ex-dividend
date; (h) 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; and (i) estimates and
assumptions are required to be made regarding assets, liabilities and changes in
net assets resulting from operations when financial statements are prepared.
Changes in the economic environment, financial markets and any other parameters
used in determining these estimates could cause actual results to differ.
11
<PAGE>
Smith Barney Principal Return Fund
Zeros Plus Emerging Growth Series 2000
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
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.
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.
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 six months ended May 31, 1996, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases --
- --------------------------------------------------------------------------------
Sales $ 6,685,109
================================================================================
At May 31, 1996, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were approximately
as follows:
================================================================================
Gross unrealized appreciation $19,564,653
Gross unrealized depreciation (96,475)
- --------------------------------------------------------------------------------
Net unrealized appreciation $19,468,178
================================================================================
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.
12
<PAGE>
Smith Barney Principal Return Fund
Zeros Plus Emerging Growth Series 2000
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
5. SHARES OF BENEFICIAL INTEREST
At May 31, 1996, 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 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:
Six Months Ended Year Ended
May 31, 1996 November 30, 1995
================================================================================
Shares issued on reinvestment 245,628 596,734
Shares redeemed (665,975) (1,512,438)
- --------------------------------------------------------------------------------
Net Decrease (420,347) (915,704)
================================================================================
13
<PAGE>
Smith Barney Principal Return Fund
Zeros Plus Emerging Growth Series 2000
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of beneficial interest outstanding throughout each period:
<TABLE>
<CAPTION>
1996(1) 1995 1994 1993 1992 1991(2)
=========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 9.28 $ 8.15 $ 9.00 $ 8.16 $ 7.57 $ 7.60
- -------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.14 0.27 0.27 0.26 0.26 0.07
Net realized and unrealized gain (loss) 0.21 1.48 (0.28) 0.96 0.43 (0.10)
- -------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.35 1.75 (0.01) 1.22 0.69 (0.03)
- -------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.28) (0.27) (0.34) (0.29) (0.10) --
Net realized gains -- (0.35) (0.50) (0.09) -- --
- -------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.28) (0.62) (0.84) (0.38) (0.10) --
- -------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 9.35 $ 9.28 $ 8.15 $ 9.00 $ 8.16 $ 7.57
- -------------------------------------------------------------------------------------------------------------------------
Total Return 3.85%++ 22.17% (0.20)% 15.72% 9.15% (0.39)%++
- -------------------------------------------------------------------------------------------------------------------------
Net Assets,
End of Period (000s) $73,272 $76,563 $74,751 $96,865 $125,327 $157,425
- -------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(3) 1.17%+ 1.17% 1.15% 1.10% 1.15% 1.18%+
Net investment income 2.92+ 3.12 3.27 3.12 3.31 3.56+
- -------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 0% 6% 1% 0% 0% 2%
=========================================================================================================================
Average commissions
per share paid on
equity transactions(4) $ 0.06 $ 0.06 -- -- -- --
=========================================================================================================================
</TABLE>
(1) For the six months ended May 31, 1996 (unaudited).
(2) For the period from August 30, 1991 (commencement of operations) through
November 30, 1991.
(3) For the year ended November 30, 1992, the expense ratio excludes interest
expense. The expense ratio including interest expense was 1.16%. (4) As of
October 1995, the SEC instituted new guidelines requiring the disclosure of
average commissions per share.
++ 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
- --------------------------------------------------------------------------------
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. For the
year ended November 30, 1994, Coopers & Lybrand's audit report contained no
adverse opinion or disclaimer of opinion; nor was the report 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.
15
<PAGE>
(This page intentionally left blank.)
<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
PNCBank, N.A.
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
FD2403 7/96
SEMI-ANNUAL REPORT
================================================================================
Smith Barney
Principal Return Fund
Zeros and Appreciation
Series 1998
- ----------------------
May 31, 1996
[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 the semi-annual report for the Smith Barney
Principal Return Fund - Zeros and Appreciation Series 1998 for the period ended
May 31, 1996. For your convenience, we have summarized the Fund's investment
strategy over this time and discussed some of the Fund's holdings in greater
detail. A more comprehensive summary of performance and current holdings can be
found in the appropriate sections of this semi-annual report.
Fund Performance Update
The first six months of this fiscal year beginning December 1, 1995 were mixed
for financial assets. The stock market continued to advance with higher
volatility while the bond market fell primarily because of
stronger-than-expected economic growth in the U.S. The modest total return of
3.74% posted by the Smith Barney Principal Return Fund - Zeros and Appreciation
Series 1998 was almost entirely due to the appreciation of its stock portion,
which comprises roughly 40% of total assets. In addition, over the past six
months, the Fund paid dividends of $0.3944 per share.
Market Overview
While rising interest rates negatively impacted the bond market, the stock
market continued to perform well through the end of May. However, since the
beginning of July, stock market volatility has increased and it appears as if a
correction has taken place.
During the period covered by this report, the bond market has seen a dramatic
shift in investor expectations. Six months ago, the consensus forecast was for a
weak U.S. economy with a possible Federal Reserve Board easing of monetary
policy. Interest rates, which bottomed during the July rally, have reversed
direction amidst reports of stronger-than-expected economic growth. At the end
of May, many bond investors expected stronger economic growth with the
possibility that the Federal Reserve might raise interest rates. However,
against a backdrop of higher stock market volatility, many bond investors have
become less certain about whether or not the Federal Reserve Board will increase
interest rates or leave them unchanged.
Fund's Investment Strategy
The core of the equity portion of the Fund's portfolio consists of high-quality
growth stocks of companies we believe should provide stable and predictable
earnings growth over the long term. However, in the continuing absence of clear
economic signals, the Fund has employed a more diversified portfolio investment
strategy that includes undervalued cyclical companies such as
1
<PAGE>
automobile manufacturers. The Fund also continues to hold a large number of the
stocks of restructuring companies with management's dedicated to enhancing
shareholder values.
Since our last letter, the Fund's top-ten holdings have changed slightly.
Because the Fund owned both Chase Manhattan Bank and Chemical Bank prior to
their merger, the new Chase Manhattan Bank is now one of the Fund's top-ten
positions. We anticipate this merger should create considerable cost savings,
synergies, and leadership positions in core businesses. Moreover, we expect the
return of excess capital to investors through share repurchase plans and
dividend increases. Another new addition to the Fund's top ten is Allstate, a
leading provider of auto and home insurance. The company is moving aggressively
to reduce its exposure to property and casualty "single event" catastrophes and
plans to sell non-core assets and return excess capital to shareholders. Lastly,
during the period covered by this report, pharmaceutical giants Merck and
Johnson & Johnson have become two of the Fund's top-ten holdings either through
appreciation or through minor additions to existing positions. Other solid
performers for the Fund over the last six months include Eastman Kodak and
Xerox, as well as American Home Products.
Market Outlook
In our view, the risks of investing in the stock market have increased during
the last six months. The generous gains enjoyed by many investors over the last
eighteen months has caused speculation to rise. Particularly among small
capitalization stocks, speculation is becoming pervasive yet may still last for
some time. Based on all traditional market measurements, the valuations of many
stocks are at historical highs. Interest rates, which provided a floor under
equities throughout 1995 as they were falling in value, have risen and recently
stabilized. In our opinion, interest rates now threaten to keep a ceiling on the
appreciation potential of many stocks.
We expect bond yields will stay in a narrow trading range through the end of
1996, discounting a mild pick-up in inflationary expectations and a more hostile
political environment. Fortunately, the U.S. economy continues to have positive
momentum and should stay strong enough to fulfill corporate profitability
expectations. One of the biggest driving factors behind the stock market
continues to be strong liquidity.
The current state of the stock market is frustrating to many veteran market
observers. Many experienced money managers believe that stocks are overpriced,
but are hesitant to make any "timing" bets with respect to a possible
correction. In large part because of their hesitation, selling pressure remains
weak and many money managers continue to invest new money in equities. In this
climate of uncertainty, the Fund's holdings in zero coupon U.S. Treasury
2
<PAGE>
securities should help to reduce both its risk and volatility if market
conditions become more turbulent. Furthermore, the Fund's emphasis on
high-quality growth stocks should also help its performance before it matures in
1998.
In closing, thank you for investing in the Smith Barney Principal Return Fund -
Zeros and Appreciation Series 1998. We look forward to continuing to help you
achieve your financial goals.
Sincerely,
/s/ Heath B. McLendon /s/ Harry D. Cohen
Heath B. McLendon Harry D. Cohen
Chairman and Vice President and
Chief Executive Officer Investment Officer
July 18, 1996
3
<PAGE>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1998
- --------------------------------------------------------------------------------
Historical Performance
- --------------------------------------------------------------------------------
Net Asset Value
--------------------
Beginning End of Income Capital Gain Total
Period Ended of Period Period Dividends Distributions Returns(1)
================================================================================
5/31/96 $7.91 $7.80 $0.39 $0.00 3.74%+
- --------------------------------------------------------------------------------
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 $2.07 $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)
================================================================================
Six Months Ended 5/31/96+ 3.74% (1.49)%
- --------------------------------------------------------------------------------
Year Ended 5/31/96 10.55 5.04
- --------------------------------------------------------------------------------
Five Years Ended 5/31/96 9.22 8.11
- --------------------------------------------------------------------------------
1/25/91* through 5/31/96 9.74 8.69
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without
Sales Charge(1)
================================================================================
1/25/91* through 5/31/96 64.40%
================================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the 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.
4
<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 -- May 1996
[The table below was represented by a line graph in the printed material.]
P. R. S&P Lehman
----- ----- -----
1/25/91 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
5/31/96 15618 22991 14538
+ 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 May 31, 1996. 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
<PAGE>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1998
- --------------------------------------------------------------------------------
Portfolio Highlights (unaudited) May 31, 1996
- --------------------------------------------------------------------------------
Common Stock Industry Breakdown
(as a percentage of total common stocks)
[The following table was represented as a pie chart in the printed material.]
Basic Industries 5.5
Capital Goods 8.9
Consumer Durables 5.1
Consumer Non-Durables 12.9
Consumer Services 12.2
Diversified Conglomerates 2.9
Energy 10.7
Financial Services 14.9
Health Care 9.5
Miscellaneous 0.8
Technology 10.4
Transportation 1.8
Telecommunications 4.4
Top Ten Holdings
Percentage of
Total Investments
================================================================================
U.S. Treasury Strips 62.8%
Eastman Kodak Co. 1.4
American Telephone & Telegraph Corp. 1.1
Xerox Corp. 1.1
Mobil Corp. 1.0
Amoco Corp. 0.8
Chase Manhattan Corp. 0.8
Minnesota Mining and Manufacturing Co. 0.7
Johnson & Johnson 0.7
Merck & Co., Inc. 0.7
================================================================================
6
<PAGE>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1998
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) May 31, 1996
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
COMMON STOCKS -- 36.0%
Basic Materials -- 2.0%
2,500 Aluminum Co. of America $ 154,063
7,000 E.I. du Pont Demours & Co. 558,250
6,000 Hercules, Inc. 340,500
5,000 Olin Corp. 462,500
2,000 Santa Fe Pacific Gold Co. 30,500
4,000 St. Joe Paper Co. 257,000
5,000 Wellman Inc. 113,125
- --------------------------------------------------------------------------------
1,915,938
- --------------------------------------------------------------------------------
Biotechnology -- 0.2%
1,500 Amgen Inc. 89,250
1,000 Chiron Corp. 105,000
- --------------------------------------------------------------------------------
194,250
- --------------------------------------------------------------------------------
Capital Goods -- 3.2%
7,500 Allied Signal, Inc. 410,625
12,000 AMP Inc. 505,500
4,000 Browning Ferris Industries, Inc. 122,000
3,000 Emerson Electric Co. 256,875
7,000 General Electric Co. 579,250
6,000 Honeywell Inc. 304,500
6,000 Kennametal Inc. 222,750
8,000 Tyco International Ltd. 316,000
9,000 WMX Technologies Inc. 317,250
- --------------------------------------------------------------------------------
3,034,750
- --------------------------------------------------------------------------------
Consumer Durables -- 1.8%
6,000 Chrysler Corp. 399,750
6,000 Echlin Inc. 206,250
11,000 Ford Motor Co. 401,500
5,000 General Motors Corp. 275,625
3,000 Goodyear Tire & Rubber Co. 151,500
5,000 Stanley Works 303,125
- --------------------------------------------------------------------------------
1,737,750
- --------------------------------------------------------------------------------
Consumer Non-Durables -- 4.7%
7,000 Coca-Cola Inc. 322,000
4,300 CPC International Inc. 297,238
17,200 Eastman Kodak Co. 1,279,250
6,000 Gillette Co. 354,750
3,000 International Flavors & Fragrances Inc. 145,875
4,000 Mattel Inc. 109,000
9,000 McDonald's Corp. 433,125
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
7
<PAGE>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1998
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) May 31, 1996
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Consumer Non-Durables -- 4.7% (continued)
4,500 Nabisco Holdings Corp. $ 152,437
8,000 Newell Corp. 240,000
6,000 Proctor & Gamble Co. 527,250
5,500 Scotts Co. 101,063
2,000 Unilever NV 269,750
3,000 Wm. Wrigley Jr. Co. 157,125
- --------------------------------------------------------------------------------
4,388,863
- --------------------------------------------------------------------------------
Consumer Services -- 4.4%
10,000 Comcast Corp., Class A Shares 173,750
5,500 Gannett, Inc. 383,625
6,000 J.C. Penney, Co. 311,250
5,000 Meredith Corp. 229,375
11,000 New York Times Co., Class A Shares 361,625
11,000 R.R. Donnelley & Sons Co. 404,250
20,000 Savoy Pictures Entertainment Inc.+ 120,000
3,500 Scandanavian Broadcasting Systems 87,500
18,000 Tele-Communications, Inc., Series A+ 339,750
6,000 Time Warner, Inc. 242,250
4,000 Tribune Co. 296,500
20,000 Wal-Mart Stores, Inc. 517,500
7,000 Walt Disney Co. 425,250
6,000 Viacom Inc., Non-Voting Class B Shares+ 254,250
- --------------------------------------------------------------------------------
4,146,875
- --------------------------------------------------------------------------------
Diversified Conglomerates -- 1.1%
8,000 Corning Inc. 306,000
10,200 Minnesota Mining and Manufacturing Co. 696,150
- --------------------------------------------------------------------------------
1,002,150
- --------------------------------------------------------------------------------
Energy -- 3.9%
2,500 Amerada Hess Corp. 142,500
10,000 Amoco Corp. 725,000
2,000 Atlantic Richfield Co. 239,250
5,000 Chevron Corp. 298,750
4,500 Enron Inc. 180,000
5,500 Horsham Corp. 81,813
8,000 Mobil Corp. 903,000
3,000 Royal Dutch Petroleum Co. 450,000
4,700 Tenneco Inc. 252,625
6,000 Union Pacific Resources Corp. 154,500
7,000 Unocal Corp. 227,500
- --------------------------------------------------------------------------------
3,654,938
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
8
<PAGE>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1998
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) May 31, 1996
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Financial Services -- 5.4%
15,000 Allstate Insurance Corp. $ 633,750
14,000 American Express Co. 640,500
4,000 American International Group, Inc. 377,000
1,500 C.N.A. Financial Corp. 150,000
10,200 Chase Manhattan Corp. 714,000
7,500 Chubb Corp. 349,687
8,000 Federal National Mortgage Association 247,000
4,000 First of America Bank Corp. 183,000
4,000 First Virginia Banks, Inc. 160,000
5,000 Great Western Financial Corp. 115,000
8,000 Household International Inc. 554,000
10,000 Leucadia National Corp. 246,250
7,000 Mercury Finance Co. 87,500
5,000 Union Planters Corp. 153,125
2,000 Wells Fargo & Co. 482,000
- --------------------------------------------------------------------------------
5,092,812
- --------------------------------------------------------------------------------
Healthcare -- 3.4%
8,000 Abbott Laboratories Inc. 345,000
10,000 American Home Products Corp. 535,000
6,800 Bristol-Myers Squibb Co. 580,550
2,000 Eli Lilly & Co. 128,500
7,000 Johnson & Johnson 681,625
10,000 Merck & Co., Inc. 646,250
6,000 Warner Lambert Co. 336,000
- --------------------------------------------------------------------------------
3,252,925
- --------------------------------------------------------------------------------
Technology -- 3.7%
4,000 Boeing Co. 341,000
5,000 California Microwave Inc.+ 95,625
4,000 Hewlett Packard Co. 427,000
4,000 Intel Corp. 302,000
4,000 International Business Machines Corp. 427,000
4,600 Lockheed Martin Co. 385,825
2,000 Microsoft Corp.+ 237,500
3,500 Silicon Graphics Inc. 96,250
10,000 Teradyne Inc. 201,250
6,500 Xerox Corp. 1,022,937
- --------------------------------------------------------------------------------
3,536,387
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
9
<PAGE>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1998
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) May 31,1996
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Telecommunications -- 1.6%
17,000 AT&T Corp. $ 1,060,375
2,500 GTE Corp. 106,875
7,500 NYNEX Corp. 345,938
- --------------------------------------------------------------------------------
1,513,188
- --------------------------------------------------------------------------------
Transportation -- 0.6%
5,000 AMR Corp. 471,874
1,500 Burlington Northern Santa Fe 127,125
- --------------------------------------------------------------------------------
598,999
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost -- $24,666,184) 34,069,825
================================================================================
FACE
AMOUNT SECURITY VALUE
================================================================================
U.S. TREASURY STRIPS -- 62.8%
$68,000,000 U.S. Treasury Strips, zero coupon due 8/15/98
(Cost -- $56,973,886) 59,363,320
================================================================================
REPURCHASE AGREEMENT -- 1.2%
1,137,000 Chase Manhattan Corp., 5.220% due 6/1/96; Proceeds
at maturity -- $1,137,494; (Fully collateralized by
U.S. Treasury Notes, 6.125% due 5/31/97;
Market value -- $1,160,216) (Cost -- $1,137,000) 1,137,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $82,777,070*) $94,570,145
================================================================================
+ Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
10
<PAGE>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1998
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) May 31, 1996
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $82,777,070) $94,570,145
Cash 266
Receivable for securities sold 292,155
Dividends and interest receivable 102,617
- --------------------------------------------------------------------------------
Total Assets 94,965,183
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 118,244
Investment advisory fees payable 24,375
Distribution fees payable 19,470
Administration fees payable 16,000
Accrued expenses 105,818
- --------------------------------------------------------------------------------
Total Liabilities 283,907
- --------------------------------------------------------------------------------
Total Net Assets $94,681,276
================================================================================
NET ASSETS:
Par value of shares of beneficial interest 12,140
Capital paid in excess of par value 76,778,125
Undistributed net investment income 1,859,022
Accumulated net realized gain on security transactions 4,238,914
Net unrealized appreciation of investments 11,793,075
- --------------------------------------------------------------------------------
Total Net Assets $94,681,276
================================================================================
Shares Outstanding 12,139,536
- --------------------------------------------------------------------------------
Net Asset Value (and redemption price) $ 7.80
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
11
<PAGE>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1998
- --------------------------------------------------------------------------------
Statement of Operations (unaudited)
- --------------------------------------------------------------------------------
For the Six Months Ended May 31, 1996
INVESTMENT INCOME:
Interest $ 2,306,265
Dividends 356,534
- -------------------------------------------------------------------------------
Total Investment Income 2,662,799
- -------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2) 145,372
Administration fees (Note 2) 96,915
Distribution fees (Note 2) 121,144
Shareholder and system servicing fees 60,000
Audit and legal 14,000
Shareholder communications 11,000
Trustees' fees 6,500
Registration fees 6,000
Custody 5,000
Amortization of deferred organization costs 3,610
Other 37,088
- -------------------------------------------------------------------------------
Total Expenses 506,629
- -------------------------------------------------------------------------------
Net Investment Income 2,156,170
- -------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (NOTE 3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 13,717,233
Cost of securities sold 10,603,178
- -------------------------------------------------------------------------------
Net Realized Gain 3,114,055
- -------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of period 13,538,500
End of period 11,793,075
- -------------------------------------------------------------------------------
Decrease in Net Unrealized Appreciation (1,745,425)
- -------------------------------------------------------------------------------
Net Gain on Investments 1,368,630
- -------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 3,524,800
================================================================================
See Notes to Financial Statements.
12
<PAGE>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1998
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Six Months Ended May 31, 1996 (unaudited)
and the Year Ended November 30, 1995
1996 1995
- --------------------------------------------------------------------------------
OPERATIONS:
Net investment income $ 2,156,170 $ 4,572,313
Net realized gain 3,114,055 5,828,985
Increase (decrease) in net unrealized
appreciation (1,745,425) 7,794,151
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations 3,524,800 18,195,449
- --------------------------------------------------------------------------------
DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income (4,869,461) (5,217,995)
Net realized gains -- (10,268,770)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (4,869,461) (15,486,765)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net asset value of shares issued for
reinvestment of dividends 4,761,674 15,181,620
Cost of shares reacquired (7,248,348) (20,766,127)
- --------------------------------------------------------------------------------
Decrease in Net Assets From Fund
Share Transactions (2,486,674) (5,584,507)
- --------------------------------------------------------------------------------
Decrease in Net Assets (3,831,335) (2,875,823)
NET ASSETS:
Beginning of period 98,512,611 101,388,434
- --------------------------------------------------------------------------------
End of period* $ 94,681,276 $ 98,512,611
================================================================================
* Includes undistributed net
investment income of: $ 1,859,022 $ 4,572,313
================================================================================
See Notes to Financial Statements.
13
<PAGE>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1998
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)
- --------------------------------------------------------------------------------
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 two other funds: 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 semi-annual
reports.
The significant accounting policies consistently followed by the Fund
are:(a) security 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; over-the-counter securities and listed securities are valued at the bid
price at the close of business on each day; U.S. Government Securities (other
than short-term securities) are valued at the quoted bid price in the
over-the-counter market; investment in securities for which market quotations
are not available are valued at fair value as determined by the Board of
Trustees; (c) securities maturing within 60 days are valued at cost plus
accreted discount, or minus amortized premium, which approximates market value;
(d) interest income is recorded on the accrual basis and dividend income is
recorded on the ex-dividend date; (e) 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; (f) gains or losses on the
sale of securities are calculated by using the specific identification method;
(g) dividends and distributions to shareholders are recorded on the ex-dividend
date; (h) 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; (i) the Fund intends to comply with the applicable
provisions of the Internal Revenue Code of 1986, as amended, pertaining to
regulated investment
14
<PAGE>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1998
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
companies and to make distributions of taxable income sufficient to relieve it
from substantially all Federal income and excise taxes; and (j) estimates and
assumptions are required to be made regarding assets, liabilities and changes in
net assets resulting from operations when financial statements are prepared.
Changes in the economic environment, financial markets and any other parameters
used in determining these estimates could cause actual results to differ.
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.
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. All officers and one Trustee of the Trust are
employees of SB.
3. INVESTMENTS
During the six months ended May 31, 1996, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $ 7,718,351
- --------------------------------------------------------------------------------
Sales 13,717,233
================================================================================
At May 31, 1996, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were approximately
as follows:
================================================================================
Gross unrealized appreciation $12,110,451
Gross unrealized depreciation (317,376)
- --------------------------------------------------------------------------------
Net unrealized appreciation $11,793,075
================================================================================
15
<PAGE>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1998
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
4. REPURCHASE AGREEMENTS
The Fund purchases (and its custodian takes possession of) U.S. Govern ment
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 May 31, 1996, 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
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:
Six Months Ended Year Ended
May 31, 1996 November 30, 1995
================================================================================
Shares issued on reinvestment 628,189 2,087,741
Shares redeemed (938,348) (2,723,836)
- --------------------------------------------------------------------------------
Net Decrease (310,159) (636,095)
================================================================================
16
<PAGE>
Smith Barney Principal Return Fund
Zeros and Appreciation Series 1998
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of beneficial interest outstanding throughout each period:
<TABLE>
<CAPTION>
1996(1) 1995 1994 1993 1992 1991(2)
==========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 7.91 $ 7.75 $ 9.38 $ 9.02 $ 8.40 $ 7.60
- --------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.17 0.36 0.41 0.38 0.37 0.39
Net realized and unrealized gain (loss) 0.11 1.03 (0.70) 0.48 0.68 0.41
- --------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.28 1.39 (0.29) 0.86 1.05 0.80
- --------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.39) (0.40) (0.45) (0.40) (0.43) --
Net realized gains -- (0.83) (0.89) (0.10) -- --
- --------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.39) (1.23) (1.34) (0.50) (0.43) --
- --------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 7.80 $ 7.91 $ 7.75 $ 9.38 $ 9.02 $ 8.40
- --------------------------------------------------------------------------------------------------------------------------
Total Return 3.74%++ 19.93% (3.69)% 9.99% 12.86% 10.53%++
- --------------------------------------------------------------------------------------------------------------------------
Net Assets,
End of Period (000s) $ 94,681 $ 98,513 $101,388 $136,576 $166,077 $195,956
- --------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.06%+ 1.05% 1.01% 0.97% 1.01% 1.05%+
Net investment income 4.50+ 4.59 4.47 4.15 4.39 5.04+
- --------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 8% 13% 10% 17% 4% 20%
==========================================================================================================================
Average commissions per share
paid on equity transactions(3) $ 0.06 $ 0.06 -- -- -- --
==========================================================================================================================
</TABLE>
(1) For the six months ended May 31, 1996 (unaudited).
(2) For the period from January 25, 1991 (commencement of operations) through
November 30, 1991.
(3) As of October 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
17
<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. For the
year ended November 30, 1994, Coopers & Lybrand's audit report contained no
adverse opinion or disclaimer of opinion; nor was the report 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.
18
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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 Travelers Group [Logo]
Investment Manager
Smith Barney Mutual Funds
Management Inc.
Distributor
Smith Barney Inc.
Custodian
PNCBank, N.A.
This report is submitted for the general
informa tion 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 perti nent information.
Smith Barney
Principal Return Fund
388 Greenwich Street
New York, New York 10013
FD2402 7/96
