SEMI-ANNUAL REPORT
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Smith Barney
Principal
Return Fund
Security and
Growth Fund
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May 31, 1997
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
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Security and Growth Fund
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Dear Shareholder:
We are pleased to provide the semi-annual report for the Smith Barney Principal
Return Fund - Security and Growth Fund ("Fund") for the period ended May 31,
1997. In this report, we comment on how your Fund has performed as well as our
near-term expectations for the financial markets. For your convenience, a
detailed summary of the historical performance as well as its current holdings
can be found in the appropriate sections that follow.
Fund Performance Update
For the six months ended May 31, 1997, the Fund had a total return of 0.88%. In
comparison, the Fund's peer group average returned 3.02% for the same period
according to Lipper Analytical Services, Inc., a major fund tracking
organization. The zero coupon bonds held in the Fund fell by 1.57%. The zero
coupon bonds represent about 50% of the total portfolio and at maturity will be
sufficient to return investors' original capital, without regard to the value of
the equity segment of the Fund. The equity and cash component of the Fund
appreciated 3.4%. The closest benchmark to the portfolio of stocks held in the
Fund is the Russell 2000 Index (a common benchmark of small-capitalization
stocks). The Russell 2000 Index appreciated 7.5% during the last six months.
The first six months of the Fund's fiscal year has seen an increase in
volatility in the equity market. From its peak in the middle of February to its
trough in the middle of April, the Standard & Poor's Composite Stock Index ("S&P
500") suffered a 9.6% correction. (The S&P 500 is a recognized
capitalization-weighted equity index that is weighted in favor of large-company
issues.) In our view, the principal cause of this increased market volatility
was rising interest rates. Additionally, some mutual funds (mostly those in the
aggressive growth and technology style categories) experienced a reduction in
asset inflows resulting in a lack of liquidity, especially for
smaller-capitalization issues. For many smaller companies, their share prices
declined much more than larger issues.
However, once it became clear that bond yields had peaked in the middle of April
at about 7.2%, the equity market snapped back with impressive gains. The S&P 500
has appreciated 14.1% from its trough, and the Russell 2000 Index has gained
13.3% from its lows. Although it is encouraging that small-cap stocks have risen
in conjunction with large-cap stocks, the "narrowness" theme we identified in
our 1996 annual report continued into the new year with large-capitalization
stocks generally outperforming small-capitalization stocks. More than 60% of all
stocks have underperformed the S&P 500 by 15% or more in the last six to twelve
months. The S&P 500 appreciated 12.1% over the last six months, while the
Russell 2000 Index gained 7.5% during the same period. The top 25 names in the
capitalization-weighted S&P 500 outperformed the other 475 by a 2-to-1 margin,
another indication of the "two-tiered" nature of the market.
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Many companies in the S&P 500 are growing at 10%-15% annual rates and command
price/earnings ("P/E") multiples of 25-40 times this year's earnings estimates.
The large difference between growth rates and P/E ratios suggests to us that
many large capitalization companies are fully priced. In contrast, many small-
and medium-cap stocks are growing 25%-30% and selling at less than 20 times
earnings. Although some of these companies are not well known, we believe this
is where outstanding value exists. And ultimately we expect that this
outstanding value will translate into superior performance.
The primary factors affecting the Fund's performance during the reporting period
included a difficult bond market and a narrow stock market. The Fund invests in
undervalued companies that have market capitalizations of $1 billion or less
(i.e., generally considered to be small-cap issues). Because of this investment
focus and the fact that 25-50 large, multinational companies have had a strong
influence on the S&P 500 index, our performance has lagged. Moreover, the Fund's
performance was also negatively affected because certain sectors of the market
that are important to the Fund, such as biotechnology and natural resources,
underperformed over the last six months. However, the technology sector was an
area of strength within the Fund.
Fund's Investment Strategy
The Fund generally holds 25 core stocks. Over the course of the last six months,
we have reduced our exposure to biotechnology and health care in general. In a
volatile market environment, we have elected to increase our exposure to
companies that possess nearer term earnings and cash flows and decrease our
exposure to "development" stage companies. As a result, the Fund's technology
weighting rose to just over 20%.
The largest position in the Fund continues to be Quantum Corp., a market leader
in the production of disk drives for personal computers. This company has been
an outstanding performer in the last six months and yet, if anything, its
fundamental earnings picture is even better today. Assuming continued strong
execution, Quantum's operating margins could exceed 10% over the near term and
earnings this fiscal year could exceed current Wall Street estimates of $2.65
per share.
We continue to believe that the long-term prospects for biotechnology are
outstanding but recently this has not been reflected in the group's performance.
Although Calgene, one of the Fund's positions, agreed to be acquired by Monsanto
for a 45% premium, the remaining biotechnology investments in the portfolio have
underperformed the market recently. We believe the fundamentals for the
biotechnology issues held in the Fund are outstanding and that this sector of
the market represents unusually good relative value. An environment in which
interest rates are falling could help generate renewed interest in the group.
Biotechnology shares really are a call on future revenues and earnings
discounted to a present value. All things being equal, lower interest rates
produce higher discounted values.
The other area of disappointment for the Fund was the natural resource sector.
Over the last six months, commodity prices have generally trended lower. The
Fund has exposure to companies in the oil, natural gas, gold and titanium
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sectors whose underlying commodity prices all fell in the last six months. In
most cases, our philosophy is to identify and invest with companies that add
value for shareholders through success in finding and growing reserves. During
this period of weakness, we have added to some of our investments in this
sector. Recent strength in the economy and stock market suggest that demand for
natural resources companies should improve this year and in 1998.
Small-Cap Stock Outlook
We believe that small-cap stocks, as a group, continue to represent the best
risk/reward characteristics in the market today. Not only are the valuations
compelling, but also the interest rate environment appears positive. In previous
periods, small-cap stocks typically generate their best performance when rates
are flat or moving lower, as long as profits are growing. With long-maturity
U.S. Treasury yields at about 7%, we believe rates at the long end will either
be stable or down in the next six months even if the Federal Reserve Board
chooses to increase short-term rates.
Included below are the sector weightings in the Security and Growth Fund. These
weightings should give you a better idea of the positioning of the Fund. In
addition, we list the Fund's ten largest holdings as of May 31, 1997.
% of Total % of Total
S&P Sector Investments Top Ten Holdings Investments
- ---------- ----------- ---------------- -----------
Fixed Income 50.5% U.S. Treasury Strips 50.5%
Technology 17.3 Quantum Corp. 5.6
Healthcare 11.4 Adobe Systems, Inc. 4.3
Base Materials 7.2 RMI Titanium Co. 3.4
Consumer Staples 3.7 Neurex Corp. 3.2
Consumer Cyclicals 3.3 Adflex Solutions Inc. 2.7
Energy 3.0 Metra Biosystems Inc. 2.1
Communication 2.3 Optical Coating Laboratory Inc. 2.1
Home Shopping Network Inc. 2.0
Taco Cabana Inc. 1.7
In closing, thank you for your investment in the Smith Barney Principal Return
Fund - Security and Growth Fund. We believe the Fund is well positioned to take
advantage of the inefficiencies we have identified in today's market. In our
opinion, we are nearing the time when small-cap issues such as those held by the
Fund will once again outperform large-cap issues.
Sincerely,
/s/ Heath B. McLendon /s/ John G. Goode
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Heath B. McLendon John G. Goode
Chairman Vice President and
Investment Officer
June 20, 1997
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Historical Performance
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Net Asset Value
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Beginning End Income Capital Gain Total
Period of Period of Period Dividends Distributions Returns(1)
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5/31/97 $ 10.22 $ 10.31 $ 0.00 $ 0.00 0.88%+
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11/30/96 10.68 10.22 0.62 0.99 11.15
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3/30/95*-11/30/95 9.60 10.68 0.00 0.14 12.70+
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Total $ 0.62 $ 1.13
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It is the Fund's policy to distribute dividends and capital gains, if any,
annually.
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Average Annual Total Return
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Without With
Sales Charge(1) Sales Charge(2)
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Six Months Ended 5/31/97+ 0.88% (3.19)%
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Year Ended 5/31/97 0.84 (3.20)
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3/30/95* through 5/31/97 11.28 9.23
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Cumulative Total Return
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Without
Sales Charge(1)
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3/30/95* through 5/31/97 26.37%
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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.
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Historical Performance
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Growth of $10,000 Invested in Shares of the
Security and Growth Fund vs. Standard & Poor's 500 Index,
Lehman Brothers Intermediate Term Government Bond Index and
Russell 2000 Index+
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March 1995 -- May 1997
[The following table was represented as a line graph in the printed material.]
[PLOT POINTS TO COME]
+ 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, 1997. 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 Russell 2000 Index is a
capitalization weighted total return index which is comprised of 2000 of
the smallest capitalized U.S. domiciled companies with less than average
growth orientation whose common stock is traded in the United States on
the New York Stock Exchange, American Stock Exchange and NASDAQ. 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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Schedule of Investments (unaudited) May 31, 1997
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SHARES SECURITY VALUE
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COMMON STOCK -- 47.6%
Broadcast Media -- 2.0%
135,000 Home Shopping Network Inc.+ $ 4,134,375
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Computer Peripheral -- 9.3%
350,000 Adflex Solutions Inc.+ 5,643,750
75,000 Applied Magnetics Corp.+ 1,865,625
300,000 Quantum Corp.+ 11,662,500
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19,171,875
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Computer Software -- 7.4%
200,000 Adobe Systems, Inc. 8,925,000
318,400 Infinium Software Inc.+ 2,746,200
175,000 Informix Corp.+ 1,575,000
200,000 Macromedia Inc.+ 2,012,500
18,750 Sanctuary Woods Multimedia Corp.+ 58,594
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15,317,294
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Electronics Semiconductor -- 0.6%
60,000 California Micro Devices+ 495,000
300,000 Seeq Technology Inc.+ 721,875
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1,216,875
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Forest Products & Paper -- 0.8%
419,700 Asia Pacific Resource Inc.+ 1,678,800
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Manufacturing-Special -- 3.3%
400,000 Optical Coating Laboratory Inc. 4,250,000
2,727,272 Power Spectra Inc.+++ 1,960,227
2,000,000 Power Spectra Inc.+ # 718,760
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6,928,987
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Medical Biotechnology -- 6.4%
340,000 Alteon Inc.+ 1,360,000
181,500 Aphton Corp.+ 2,631,750
450,000 Neurex Corp.+ 6,581,250
255,000 Onyx Pharmaceuticals Inc.+ 2,741,250
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13,314,250
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Medical Supplies -- 3.6%
150,000 Closure Medical Corp.+ 3,150,000
900,000 Metra Biosystems Inc.+ 4,275,000
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7,425,000
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Metals-Diversified -- 4.4%
200,000 Alyn Corp.+ 2,150,000
300,000 RMI Titanium Co.+ 6,975,000
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9,125,000
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Mining -- 1.4%
417,500 Crown Resources Corp.+ 2,818,125
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See Notes to Financial Statements.
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Schedule of Investments (unaudited) (continued) May 31, 1997
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SHARES SECURITY VALUE
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Oil & Gas -- 3.0%
400,000 Abacan Resource Corp.+ $ 2,900,000
250,000 American Exploration Corp.+ 3,218,750
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6,118,750
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Pharmaceuticals -- 1.4%
100,000 Alza Corp.+ 2,950,000
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Restaurants -- 1.7%
700,000 Taco Cabana Inc., Class A Shares+ 3,500,000
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Telecommunications -- 2.3%
200,000 Nextel Communications Inc.+ 2,950,000
300,000 Novatel Inc.+ 1,912,500
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4,862,500
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TOTAL COMMON STOCK
(Cost -- $89,389,696) 98,561,831
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FOREIGN STOCK -- 0.6%
225,000 Philex Gold Inc.+ (Cost -- $1,826,838) 1,223,357
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WARRANTS -- 0.1%
125,000 Aphton Corp., Expire 9/14/02+ (Cost -- $0) 250,000
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FACE
AMOUNT SECURITY VALUE
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U.S. TREASURY STRIPS -- 50.5%
$180,000,000 U.S. Treasury Strips TINT, zero coupon due 8/15/05
(Cost -- $99,437,100) 104,581,800
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REPURCHASE AGREEMENT -- 1.2%
2,414,000 Chase Manhattan Bank, 5.47% due 6/2/97; Proceeds
at maturity -- $2,415,100; (Fully collateralized by
U.S. Treasury Bill due 5/15/00; Market value
-- $2,462,283) (Cost -- $2,414,000) 2,414,000
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TOTAL INVESTMENTS -- 100%
(Cost -- $193,067,634*) $207,030,988
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+ Non-income producing security.
++ This security is issued with attached warrants.
# Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be sold in transactions that are exempt from
registration, normally to qualified institutional buyers.
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
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Statement of Assets and Liabilities (unaudited) May 31, 1997
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ASSETS:
Investments, at value (Cost-- $193,067,634) $207,030,988
Cash 478
Receivable for securities sold 494,484
Dividends and interest receivable 25,100
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Total Assets 207,551,050
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LIABILITIES:
Distribution fees payable 204,692
Management fees payable 91,007
Payable for Fund shares purchased 20,773
Payable for securities purchased 7,365
Accrued expenses 102,393
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Total Liabilities 426,230
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Total Net Assets $207,124,820
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NET ASSETS:
Par value of shares of beneficial interest $ 20,082
Capital paid in excess of par value 179,847,547
Undistributed net investment income 2,679,075
Accumulated net realized gain from security
transactions and options 10,614,762
Net unrealized appreciation of investments 13,963,354
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Total Net Assets $207,124,820
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Shares Outstanding 20,082,148
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Net Asset Value (and redemption price) $10.31
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See Notes to Financial Statements.
8
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Statement of Operations (unaudited)
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For the Six Months Ended May 31, 1997
INVESTMENT INCOME:
Interest $ 3,808,803
Dividends 86,000
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Total Investment Income 3,894,803
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EXPENSES:
Management fees (Note 2) 556,674
Distribution fees (Note 2) 278,337
Shareholder and system servicing fees 127,254
Shareholder communications 25,796
Audit and legal 13,044
Trustees' fees 11,874
Custody 7,311
Other 3,067
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Total Expenses 1,023,357
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Net Investment Income 2,871,446
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REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND OPTIONS (NOTES 3 AND 5):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) 8,802,277
Options written (38,316)
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Net Realized Gain 8,763,961
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Change in Net Unrealized Appreciation of Investments:
Beginning of period 23,964,662
End of period 13,963,354
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Decrease in Net Unrealized Appreciation (10,001,308)
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Net Loss on Investments and Options (1,237,347)
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Increase in Net Assets From Operations $ 1,634,099
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See Notes to Financial Statements.
9
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Statements of Changes in Net Assets
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For the Six Months Ended May 31, 1997 (unaudited)
and the Year Ended November 30, 1996
1997 1996
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OPERATIONS:
Net investment income $ 2,871,446 $ 7,787,828
Net realized gain 8,763,961 23,428,478
Decrease in net unrealized appreciation (10,001,308) (2,101,994)
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Increase in Net Assets From Operations 1,634,099 29,114,312
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DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- (16,260,991)
Net realized gains -- (21,493,619)
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Decrease in Net Assets From
Distributions to Shareholders -- (37,754,610)
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FUND SHARE TRANSACTIONS (NOTE 6):
Net asset value of shares issued
for reinvestment of dividends -- 36,941,093
Cost of shares reacquired (38,515,882) (94,116,308)
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Decrease in Net Assets From
Fund Share Transactions (38,515,882) (57,175,215)
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Decrease in Net Assets (36,881,783) (65,815,513)
NET ASSETS:
Beginning of period 244,006,603 309,822,116
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End of period* $ 207,124,820 $ 244,006,603
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* Includes undistributed (overdistributed)
net investment income of: $2,679,075 $(192,371)
================================================================================
See Notes to Financial Statements.
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Notes to Financial Statements (unaudited)
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1. SIGNIFICANT ACCOUNTING POLICIES
The Security and Growth Fund ("Fund") is a separate investment fund of the
Smith Barney Principal Return Fund ("Trust"). The Trust, a Massachusetts
business trust, is registered under the Investment Company Act of 1940, as
amended, as a diversified, open-end management investment company. Shares of the
Fund are not currently being offered for sale to new investors. 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 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; foreign dividends are
recorded on the ex-dividend date or as soon as practical after the Fund
determines the existence of a dividend declaration after exercising reasonable
due diligence; (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) the character of income and gains to be distributed are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. At November 30, 1996,
reclassifications were made to the Fund's capital accounts to reflect permanent
book/tax differences and income and gains available for distributions under
income tax regulations. 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 companies and to make
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Notes to Financial Statements (unaudited)(continued)
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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. MANAGEMENT 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 manager of the Fund. The Fund pays SBMFM a
management 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, 1997, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $16,589,337
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Sales 57,571,588
================================================================================
At May 31, 1997, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
================================================================================
Gross unrealized appreciation $ 29,094,479
Gross unrealized depreciation (15,131,125)
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Net unrealized appreciation $ 13,963,354
================================================================================
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Notes to Financial Statements (unaudited)(continued)
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4. REPURCHASE AGREEMENTS
The Fund purchases (and its custodian takes possession of) U.S. Government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day) at
an agreed-upon higher repurchase price. The Fund requires continual maintenance
of the market value of the collateral in amounts at least equal to the
repurchase price.
5. OPTION CONTRACTS
Premiums paid when put or call options are purchased by the Fund,
represent investments, which are marked-to-market daily. When a purchased option
expires, the Fund will realize a loss in the amount of the premium paid. When
the Fund enters into a closing sales transaction, the Fund will realize a gain
or loss depending on whether the proceeds from the closing sales transaction are
greater or less than the premium paid for the option. When the Fund exercises a
put option, they will realize a gain or loss from the sale of the underlying
security and the proceeds from such sale will be decreased by the premium
originally paid. When the Fund exercises a call option, the cost of the security
which the Fund purchases upon exercise will be increased by the premium
originally paid.
As of May 31, 1997, the Fund held no purchased put or call options.
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 written call
option is exercised the cost of the security sold will be decreased by the
premium originally received. When a written put option is exercised, the amount
of the premium originally received will reduce the cost of the security which
the Fund purchased upon exercise. When written index options are exercised,
settlement is made in cash.
The risk associated with purchasing options is limited to the premium
originally paid. The Fund enters into options for hedging purposes. The risk in
writing a call option is that the Fund gives up the opportunity to participate
in any increase in the price of the underlying security beyond the exercise
price. The risk in writing a put option is that the Fund is exposed to the risk
of loss if the market price of the underlying security declines.
13
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Notes to Financial Statements (unaudited)(continued)
- --------------------------------------------------------------------------------
The following covered call option transactions occurred during the period
ended May 31, 1997:
Number of
Premium Contracts
================================================================================
Options written, outstanding at November 30, 1996 $ 188,681 1,500
Options written during the six months ended May 31, 1997 73,498 500
Options cancelled in closing purchase transactions (262,179) (2,000)
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Options written, outstanding at May 31, 1997 $ 0 0
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6. SHARES OF BENEFICIAL INTEREST
At May 31, 1997, 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 Year Ended
May 31, 1997 November 30, 1996
================================================================================
Shares issued on reinvestment -- 3,534,156
Shares redeemed (3,786,242) (8,683,354)
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Net Decrease (3,786,242) (5,149,198)
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14
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Financial Highlights
- --------------------------------------------------------------------------------
For a share of beneficial interest outstanding throughout each period:
1997(1) 1996 1995(2)
================================================================================
Net Asset Value, Beginning of Period $ 10.22 $ 10.68 $ 9.60
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Income From Operations:
Net investment income 0.14 0.33 0.28
Net realized and unrealized gain (0.05) 0.82 0.94
- -------------------------------------------------------------------------------
Total Income From Operations 0.09 1.15 1.22
- -------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- (0.62) --
Net realized gains -- (0.99) (0.14)
- -------------------------------------------------------------------------------
Total Distributions -- (1.61) (0.14)
- -------------------------------------------------------------------------------
Net Asset Value, End of Period $ 10.31 $ 10.22 $ 10.68
- -------------------------------------------------------------------------------
Total Return 0.88%++ 11.15% 12.70%++
- -------------------------------------------------------------------------------
Net Assets, End of Period (000s) $ 207,125 $ 244,007 $ 309,822
- -------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.92%+ 0.99% 1.02%+
Net investment income 2.57+ 2.88 4.07+
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Portfolio Turnover Rate 7% 43% 26%
- -------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions $ 0.05 $ 0.05 $ 0.06
================================================================================
(1) For the six months ended May 31, 1997 (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.
15
<PAGE>
(This page intentionally left blank)
<PAGE>
Smith Barney
Principal Return Fund
Trustees
Paul R. Ades
Herbert Barg
Dwight B. Crane
Frank Hubbard
Heath B. McLendon, Chairman
Jerome Miller
Ken Miller
John F. White
Allan R. Johnson, Emeritus
Officers
Heath B. McLendon
Chief Executive Officer
Lewis E. Daidone
Senior Vice President
and Treasurer
John G. Goode
Vice President and
Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
SMITH BARNEY
-------------
A Member of TraverlersGroup [LOGO]
Investment Manager
Smith Barney Mutual Funds
Management Inc.
Distributor
Smith Barney Inc.
Custodian
PNC Bank, 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
FD0951 7/97
SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
Smith Barney
Principal Return
Fund
Zeros Plus
Emerging Growth
Series 2000
- --------------------------------------------------------------------------------
May 31,1997
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
- --------------------------------------
Zeros Plus Emerging Growth Series 2000
- --------------------------------------
Dear Shareholder:
We are pleased to provide the semi-annual report for the Smith Barney Principal
Return Fund - Zeros Plus Emerging Growth Series 2000 ("Fund") for the period
ended May 31, 1997. For your convenience, we have summarized the Fund's
investment strategy over this time. A comprehensive summary of performance and
current holdings can be found in the appropriate sections that follow.
Fund Performance Update
The Fund seeks to return the principal amount of each shareholder's original
investment (including any sales charges paid) on or about February 28, 2000 by
investing a portion of its assets in zero coupon U.S. Treasury bonds. In
addition, the Fund, to the extent consistent with its objective, seeks to
provide long-term appreciation of capital by investing the balance of its assets
primarily in the equity securities issued by emerging growth companies. These
emerging growth companies are usually small-to medium-sized firms that we
believe to have significant profit potential over the long term.
For the six month period ended May 31, 1997, the Fund had a total return of
2.90%. During the same six-month period, the Russell 2000 Index* and the Value
Line Composite Index (Geometric)** advanced 8.44% and 7.68%, respectively.
Emerging growth stocks currently comprise approximately 42.3% of the net assets
of the Fund with the remaining balance accounted for by zero coupon U.S.
Treasury bonds.
Market Overview
Following the lows reached during July 1996, the leadership that eventually
developed in the stock market was concentrated mostly in large, multinational
companies. The decided preference of many investors for the shares of
large-capitalization companies rather than smaller- and middle-capitalization
companies continued until May 1997. Similar to the stock market decline
witnessed last summer, the S&P 500 sustained a nearly 10% decline this spring
with the over-the-counter market, as represented by the Nasdaq Composite Index,
experiencing an approximate 20% decline. As was the case last summer, the rise
in long-term interest rates was the catalyst for the correction in the stock
market.
- ----------
* The Russell 2000 Index is made up of 2,000 smaller-capitalized U.S.-based
companies whose common stocks trade on either the New York, American, or
Nasdaq stock exchanges.
** The Value Line Composite Index-Geometric is composed of 1,700 stocks tracked
by the Value Line Investment Survey.
1
<PAGE>
During the period from November to May, many investors grew increasingly
concerned about the Federal Reserve Board's ("Fed") monetary policy that had
remained neutral for nearly two years. Although most U.S. government-sponsored
indicators of inflation remained benign, the pace of economic growth remained
strong, a factor which raised fears at the Fed about a future pickup in
inflation. Moreover, Fed Chairman Alan Greenspan added another element of
uncertainty to financial markets when he cited the high level of stock prices as
a factor that should be considered when setting monetary policy. In late March,
the Fed raised short-term interest rates by 0.25%. In March and April, the
breadth of the stock market was quite poor, and investors withdrew money from
aggressive growth and emerging growth equity mutual funds for several weeks.
Many market forecasters incorrectly forecasted the end to the bull market which
had been underway since 1990. As investors became more confident that the Fed
would refrain from raising interest rates at their May meeting, market breadth
improved, monetary flows into mutual funds increased and for the first time in
quite a long while small-capitalization stocks outperformed
larger-capitalization ones.
Investment Strategy and Market Outlook
We believe that the extreme period of underperformance for smaller stocks has
ended. In our view, the nearly 10% advance of the Russell Index in May signaled
a broadening out of the stock market, which included more of the types of stocks
held in the Fund. Provided that long-term interest rates remain below the high
levels reached in the spring, we are reasonably confident that the advance in
stock prices will at least match the underlying earnings growth of the economy.
We think the proposed reduction of capital gains rates in the new tax bill
increases the long-term attraction of investing in growth stocks. In fact,
several of the Fund's holdings performed quite well as their earnings continued
to grow strongly and/or they reported excellent progress with their new product
pipelines.
Vertex continues to make good progress with their flagship product to treat HIV.
Initial test results for this new protease inhibitor have indicated that the
drug is effective in suppressing HIV without the highly unfavorable side effects
exhibited by similar products. These initial results have made us optimistic
that this drug could become a front-line treatment for AIDS.
2
<PAGE>
Quantum Corporation, a leading supplier of computer storage devices, continues
to gain market share in the computer storage industry. The combination of rising
profit margins and growing revenues led to strong profitability growth for the
company. Our confidence in the future of Quantum was recently confirmed when the
company declared a 2:1 stock split. Tyco International announced a series of
acquisitions that should immediately add to the company's earnings. This
diversified manufacturer of flow control, fire protection and disposable medical
products has actually seen its internal growth rate increase during the past few
years.
In closing, thank you for your investment in the Smith Barney Principal Return
Fund - Zeros Plus Emerging Growth Series 2000 and your continued confidence in
our investment approach. We look forward to communicating with you at the end of
the Fund's fiscal year.
Sincerely,
/s/ Heath B. McLendon /s/ Richard A. Freeman
Heath B. McLendon Richard A. Freeman
Chairman Vice President and
Investment Officer
June 23, 1997
3
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance
- --------------------------------------------------------------------------------
Net Asset Value
--------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
================================================================================
5/31/97 $8.63 $8.88 $0.00 $0.00 2.90%+
- --------------------------------------------------------------------------------
11/30/96 9.28 8.63 0.57 0.22 1.55
- --------------------------------------------------------------------------------
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 $1.57 $1.16
================================================================================
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 5/31/97+ 2.90% (2.20)%
- --------------------------------------------------------------------------------
Year Ended 5/31/97 0.62 (4.39)
- --------------------------------------------------------------------------------
Five Years Ended 5/31/97 9.42 8.31
- --------------------------------------------------------------------------------
8/30/91* through 5/31/97 8.54 7.58
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without
Sales Charge(1)
================================================================================
8/30/91* through 5/31/97 60.30%
================================================================================
(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>
- --------------------------------------------------------------------------------
Historical Performance (unaudited)
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Shares of the
Zeros Plus Emerging Growth Series 2000
vs. Value Line Composite Index and
Lehman Brothers Intermediate Term Government Bond Index+
- --------------------------------------------------------------------------------
August 1991 -- May 1997
[The following table was represented as a line graph in the printed material.]
[PLOT POINTS TO COME]
+ 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, 1997. The Value Line Composite Index -
Geometric, composed of approximately 1,700 stocks, is a geometric average of
the daily price percentage change in each stock covering both large and
small capitalized companies. The Lehman Brothers Intermediate Term
Government Bond Index is comprised of approximately 1,000 issues of U.S.
Government Treasury and Agency Securities. These 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>
- --------------------------------------------------------------------------------
Portfolio Highlights (unaudited) May 31, 1997
- --------------------------------------------------------------------------------
Common Stock Industry Breakdown
(as a percentage of total common stocks)
[The following table was represented as a pie chart in the printed material.]
Common Stock Industry Breakdown
(as a percentage of total common stocks)
----------------------------------------
Biotechnology 20.1%
Capital Goods 11.2%
Drug Delivery 2.9%
Pharmaceuticals 22.4%
Technology 32.6%
Telecommunications 10.8%
Top Ten Holdings
Percentage of
Total Investments
================================================================================
U.S. Treasury Strips 57.7%
Vertex Pharmaceuticals, Inc. 5.1
Tyco International Ltd. 4.8
Quantum Corp. 4.5
Tech-Sym Corp. 4.2
Genzyme Corp. - General Division 4.0
Chiron Corp. 3.8
VLSI Technology, Inc. 3.6
IDEC Pharmaceuticals Corp. 2.8
C-COR Electronics, Inc. 2.4
================================================================================
6
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) May 31, 1997
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
COMMON STOCKS -- 42.3%
Biotechnology -- 8.5%
120,000 Chiron Corp.+ $ 2,265,000
100,000 Gensia Sicor Inc.+ 462,500
100,000 Genzyme Corp. - General Division+ 2,387,500
- --------------------------------------------------------------------------------
5,115,000
- --------------------------------------------------------------------------------
Capital Goods -- 4.7%
45,000 Tyco International Ltd. 2,857,500
- --------------------------------------------------------------------------------
Drug Delivery -- 1.2%
100,000 Advanced Polymer Systems, Inc.+ 725,000
- --------------------------------------------------------------------------------
Pharmaceuticals -- 9.5%
23,000 Forest Laboratories Inc., Class A Shares+ 971,750
75,000 IDEC Pharmaceuticals Corp.+ 1,687,500
75,000 Vertex Pharmaceuticals, Inc.+ 3,037,500
- --------------------------------------------------------------------------------
5,696,750
- --------------------------------------------------------------------------------
Technology -- 13.8%
100,000 Excel Technology Inc.+ 831,250
70,000 Quantum Corp.+ 2,721,250
80,000 Tech-Sym Corp.+ 2,550,000
90,000 VLSI Technology, Inc.+ 2,188,125
- --------------------------------------------------------------------------------
8,290,625
- --------------------------------------------------------------------------------
Telecommunications -- 4.6%
104,500 California Microwave, Inc.+ 1,280,125
150,050 C-COR Electronics, Inc.+ 1,462,988
- --------------------------------------------------------------------------------
2,743,113
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost-- $13,577,939) 25,427,988
================================================================================
FACE
AMOUNT SECURITY VALUE
================================================================================
U.S. GOVERNMENT OBLIGATIONS -- 57.7%
$41,000,000 U.S. Treasury Strips, zero coupon due 2/15/00
(Cost -- $33,107,439) 34,652,790
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost-- $46,685,378*) $60,080,778
================================================================================
+ Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
7
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) May 31, 1997
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost-- $46,685,378) $ 60,080,778
Receivable for securities sold 204,368
- --------------------------------------------------------------------------------
Total Assets 60,285,146
- --------------------------------------------------------------------------------
LIABILITIES:
Investment advisory fees payable 20,231
Administration fees payable 10,115
Payable to bank 9,758
Distribution fees payable 3,393
Accrued expenses 28,058
- --------------------------------------------------------------------------------
Total Liabilities 71,555
- --------------------------------------------------------------------------------
Total Net Assets $ 60,213,591
================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 6,779
Capital paid in excess of par value 42,824,859
Undistributed net investment income 991,223
Accumulated net realized gain on security transactions 2,995,330
Net unrealized appreciation of investments 13,395,400
- --------------------------------------------------------------------------------
Total Net Assets $ 60,213,591
================================================================================
Shares Outstanding 6,778,713
- --------------------------------------------------------------------------------
Net Asset Value (and redemption price) $8.88
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
8
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations (unaudited)
- --------------------------------------------------------------------------------
For the Six Months Ended May 31, 1997
INVESTMENT INCOME:
Interest $ 1,366,290
Dividends 5,000
- --------------------------------------------------------------------------------
Total Investment Income 1,371,290
- --------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2) 125,268
Distribution fees (Note 2) 78,293
Administration fees (Note 2) 62,634
Shareholder and system servicing fees 35,231
Audit and legal 10,989
Shareholder communications 7,957
Registration fees 4,863
Trustees' fees 4,544
Custody 2,077
Other 1,803
- --------------------------------------------------------------------------------
Total Expenses 333,659
- --------------------------------------------------------------------------------
Net Investment Income 1,037,631
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (NOTE3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 8,008,299
Cost of securities sold 5,420,717
- --------------------------------------------------------------------------------
Net Realized Gain 2,587,582
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of period 15,177,124
End of period 13,395,400
- --------------------------------------------------------------------------------
Decrease in Net Unrealized Appreciation (1,781,724)
- --------------------------------------------------------------------------------
Net Gain on Investments 805,858
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 1,843,489
================================================================================
See Notes to Financial Statements.
9
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Six Months Ended May 31, 1997 (unaudited)
and the Year Ended November 30, 1996
1997 1996
================================================================================
OPERATIONS:
Net investment income $ 1,037,631 $ 2,191,296
Net realized gain 2,587,582 1,363,972
Decrease in net unrealized appreciation (1,781,724) (2,664,005)
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations 1,843,489 891,263
- --------------------------------------------------------------------------------
DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income -- (4,363,626)
Net realized gains -- (1,632,152)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders -- (5,995,778)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net asset value of shares issued for
reinvestment of dividends -- 5,862,983
Cost of shares reacquired (7,061,975) (11,889,570)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Fund Share Transactions (7,061,975) (6,026,587)
- --------------------------------------------------------------------------------
Decrease in Net Assets (5,218,486) (11,131,102)
NET ASSETS:
Beginning of period 65,432,077 76,563,179
- --------------------------------------------------------------------------------
End of period* $60,213,591 $65,432,077
================================================================================
* Includes undistributed (overdistributed)
net investment income of: $991,223 $(46,408)
================================================================================
See Notes to Financial Statements.
10
<PAGE>
- --------------------------------------------------------------------------------
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.
Shares of the Fund are not currently being offered for sale to new investors.
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 value; (d)
interest income, adjusted for amortization of premium and accretion of discount,
is recorded on an accrual basis; (e) dividend income is recorded on the
ex-dividend date; foreign income dividends are recorded on the ex-dividend date
or as soon as practical after the Fund determines the existence of a dividend
declaration after exercising reasonable due diligence; (f) 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;
(g) gains or losses on the sale of securities are calculated by using the
specific identification method; (h) dividends and distributions to shareholders
are recorded on the ex-dividend date; (i) 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 (j) estimates and assumptions are required to be made
regarding assets, liabilities and changes in
11
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
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, 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.
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, 1997, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $ 0
- --------------------------------------------------------------------------------
Sales 8,008,299
================================================================================
At May 31, 1997, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
================================================================================
Gross unrealized appreciation $14,090,360
Gross unrealized depreciation (694,960)
- --------------------------------------------------------------------------------
Net unrealized appreciation $13,395,400
================================================================================
12
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
4. REPURCHASE AGREEMENTS
The Fund purchases (and its custodian takes possession of) U.S. Government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day) at
an agreed-upon higher repurchase price. The Fund requires continual maintenance
of the market value of the collateral in amounts at least equal to the
repurchase price.
5. SHARES OF BENEFICIAL INTEREST
At May 31, 1997, 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, 1997 November 30, 1996
================================================================================
Shares issued on reinvestment -- 662,288
Shares redeemed (800,937) (1,335,970)
- --------------------------------------------------------------------------------
Net Decrease (800,937) (673,682)
================================================================================
13
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of beneficial interest outstanding throughout each period:
<TABLE>
<CAPTION>
1997(1) 1996 1995 1994 1993 1992
==========================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $8.63 $9.28 $8.15 $9.00 $8.16 $7.57
- ------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.15 0.30 0.27 0.27 0.26 0.26
Net realized and unrealized
gain (loss) 0.10 (0.16) 1.48 (0.28) 0.96 0.43
- ------------------------------------------------------------------------------------------
Total Income (Loss)
From Operations 0.25 0.14 1.75 (0.01) 1.22 0.69
- ------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- (0.57) (0.27) (0.34) (0.29) (0.10)
Net realized gains -- (0.22) (0.35) (0.50) (0.09) --
- ------------------------------------------------------------------------------------------
Total Distributions -- (0.79) (0.62) (0.84) (0.38) (0.10)
- ------------------------------------------------------------------------------------------
Net Asset Value, End of Period $8.88 $8.63 $9.28 $8.15 $9.00 $8.16
- ------------------------------------------------------------------------------------------
Total Return 2.90%+ + 1.55% 22.17% (0.20)% 15.72% 9.15%
- ------------------------------------------------------------------------------------------
Net Assets,
End of Period (millions) $60 $65 $77 $75 $97 $125
- ------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(2) 1.06%+ 1.11% 1.17% 1.15% 1.10% 1.15%
Net investment income 3.30+ 3.15 3.12 3.27 3.12 3.31
- ------------------------------------------------------------------------------------------
Portfolio Turnover Rate 0% 0% 6% 1% 0% 0%
- ------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(3) $0.06 $0.06 $0.06 -- -- --
==========================================================================================
</TABLE>
(1) For the six months ended May 31, 1997 (unaudited).
(2) For the year ended November 30, 1992, the expense ratio excludes interest
expense. The expense ratio including interest expense was 1.16%.
(3) As of September 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>
(This page intentionally left blank.)
<PAGE>
(This page intentionally left blank.)
<PAGE>
Smith Barney
Principal Return Fund
Trustees
Paul R. Ades
Herbert Barg
Dwight B. Crane
Frank Hubbard
Heath B. McLendon, Chairman
Jerome Miller
Ken Miller
John F. White
Allan R. Johnson, Emeritus
Officers
Heath B. McLendon
Chief Executive Officer
Lewis E. Daidone
Senior Vice President
and Treasurer
Richard Freeman
Vice President and
Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
SMITHBARNEY
-----------
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 7/97
SEMI-ANNUAL REPORT
Smith Barney
Principal Return
Fund
Zeros and
Appreciation
Series 1998
- --------------------------------------------------------------------------------
May 31, 1997
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Everyday.
<PAGE>
- --------------------------------------------------------------------------------
Zeros and Appreciation Series 1998
- --------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to provide the semi-annual report for the Smith Barney Principal
Return Fund - Zeros and Appreciation Series 1998 ("Fund") for the period ended
May 31, 1997. For your convenience, we have summarized the Fund's investment
strategy over this period and discussed some of the Fund's holdings in greater
detail. A comprehensive summary of performance and current holdings can be found
in the appropriate sections that follow.
Fund Performance Update
The Fund seeks to return the principal amount of each shareholder's original
investment (including any sales charge paid) on August 31, 1998 by investing a
portion of its assets in zero coupon securities. In addition, the Fund, to the
extent consistent with its objective, seeks to provide long-term appreciation of
capital by investing the balance of its assets primarily in equity securities.
The first six months of the year beginning December 1, 1996 were mixed for
financial assets. The stock market continued to advance strongly while the bond
market fluctuated within a narrow range due to stronger-than-expected growth in
the U.S. economy.
The total return of 5.32% posted by the Fund resulted almost entirely from the
appreciation of the stock portion of the Fund, which comprises roughly 40% of
total assets. In comparison, the Fund outperformed its Lipper Analytical
Services, Inc. peer group average of 3.02% for the same period. (Lipper
Analytical Services, Inc. is an independent fund tracking organization.) In
addition, the Fund's position in zero coupon bonds performed as intended by
reducing the volatility of overall financial returns.
Market Overview
Despite a correction approaching 10% in late March, the stock market advanced
significantly during the last six months. In our view, the source of the
market's volatility was a small increase in short-term interest rates by the
Federal Reserve augmented by fears of future rate increases. After a torrid
first quarter of 1997, economic growth slowed and inflation fears subsided. As a
result, both the bond and stock markets rebounded as investors regained
confidence in the so-called "goldilocks" economy (i.e., neither too hot nor too
cold).
1
<PAGE>
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 and dividend growth over the long term. However, due to a paucity of
sectors or groups of stocks that offer both attractive valuations and solid
fundamentals, we have employed a more diversified portfolio strategy. This
emphasis on increasing diversification involves cyclical stocks such as
automobile manufacturers as well as restructuring companies with managements
dedicated to enhancing shareholder value.
Since our last shareholder letter, the Fund's top-ten holdings have changed
slightly. Allstate, a leading provider of auto and home insurance, is now the
Fund's top holding. The company continues to reduce "single event" catastrophe
exposure, while profitably growing its auto business and returning excess
capital to shareholders. Xerox, a long time top-ten holding of the Fund, has
provided exceptional returns over the last six months as new digital products
and an intensified focus on cost control, have restored the company's status as
a growth vehicle. Traditionally, the Fund has held a sizable position in
pharmaceuticals such as Merck, Johnson & Johnson and American Home Products and
they remain important contributors to performance. Another industry we have been
bullish on for some time is energy, where greater-than-expected global demand
for oil and gas, as well as continued restructurings have boosted returns. Mobil
and Amoco also remain top-ten holdings. Finally, General Electric, Minnesota
Mining and Manufacturing and Chase Manhattan Bank have all been solid performers
during the last six months.
Market Outlook
The stock market's momentum continues to confound many veteran market observers.
Based on traditional measurements, valuations are high and leave little room for
error. However, it is almost impossible to forecast when valuations will peak.
We do believe that the risk of investing increases as valuations climb and that
many investors, after roughly two years of outsized returns, are not thinking a
lot about risk. In our opinion, liquidity remains the driving force of the
equity market.
Fortunately, corporate profits continue to meet, and in many cases, exceed
expectations. The restructuring of corporate America over the last decade has
created enormous benefits for U.S. corporations and their shareholders and the
momentum remains strong. Inflation, by most accounts, is nonexistent thanks to
enormous productivity gains from technology investments. Unemployment is at a
24-year low. While we realize that the current favorable environment will not
last, change will most likely occur gradually.
2
<PAGE>
With respect to the bond market, we anticipate that yields will stay in a narrow
range through the end of 1997, caught between those investors who fear an
accelerating economy and those who fear a slowing U.S. economy. We think
inflation should continue to be modest.
The market's recent surge has once again awakened the speculative fevers of many
investors. We continue to monitor the rise in speculation realizing that
extremes are often the cause of short-term market volatility. In this climate,
the Fund's holding in zero coupon U.S. Treasury bonds should help to reduce both
its risk and volatility. Furthermore, we believe the Fund's emphasis on
high-quality growth stocks should also continue to help performance before the
Fund 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 Vice President and
Investment Officer
June 18, 1997
3
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance
- --------------------------------------------------------------------------------
Net Asset Value
------------------
Beginning End of Income Capital Gain Total
Period Ended of Period Period Dividends Distributions Returns(1)
================================================================================
5/31/97 $7.52 $7.92 $0.00 $0.00 5.32%+
- --------------------------------------------------------------------------------
11/30/96 7.91 7.52 0.78 0.44 11.03
- --------------------------------------------------------------------------------
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 $2.46 $2.26
================================================================================
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 5/31/97+ 5.32% 0.00%
- --------------------------------------------------------------------------------
Year Ended 5/31/97 12.72 7.09
- --------------------------------------------------------------------------------
Five Years Ended 5/31/97 9.58 8.46
- --------------------------------------------------------------------------------
1/25/91* through 5/31/97 10.20 9.31
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without
Sales Charge(1)
================================================================================
1/25/91* through 5/31/97 85.31%
================================================================================
(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>
- --------------------------------------------------------------------------------
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 1997
[The following table was represented as a line graph in the printed material.]
[PLOT POINTS TO COME]
+ 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, 1997. The S&P 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 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>
- --------------------------------------------------------------------------------
Portfolio Highlights (unaudited) May 31, 1997
- --------------------------------------------------------------------------------
Common Stock Industry Breakdown
(as a percentage of total common stocks)
[The following table was represented as a pie graph in the printed material.]
Basic Industries 6.9%
Capital Goods 9.1%
Consumer
Durables 2.6%
Consumer
Non-Durables 8.7%
Consumer Services 11.0%
Diversified
Conglomerates 1.9%
Energy 11.7%
Financial Services 19.9%
Health Care 11.9%
Technology 11.8%
Telecommunications 4.5%
Top Ten Holdings
Percentage of
Total Investments
================================================================================
U.S. Treasury Strips 63.0%
Allstate Corp. 1.5
Mobil Corp. 1.0
Eastman Kodak Co. 0.9
Johnson & Johnson 0.9
Xerox Corp. 0.9
Amoco Corp. 0.8
General Electric Co. 0.8
Merck & Co., Inc. 0.8
Chase Manhattan Bank Corp. 0.7
================================================================================
6
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) May 31, 1997
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
COMMON STOCKS -- 34.9%
================================================================================
Basic Industries -- 2.4%
4,500 E.I. du Pont de Nemours & Co. $ 489,938
6,000 Hercules, Inc. 281,250
6,000 IMC Global Inc. 234,750
4,000 Mead Corp. 255,000
10,000 Olin Corp. 410,000
2,000 Raychem Corp. 148,250
4,000 St. Joe Co. 329,000
- --------------------------------------------------------------------------------
2,148,188
- --------------------------------------------------------------------------------
Capital Goods -- 3.2%
6,500 Allied Signal, Inc. 498,875
4,000 Emerson Electric Co. 216,000
12,000 General Electric Co. 724,500
4,000 Honeywell Inc. 291,000
3,000 Johnson Controls Inc. 127,125
5,000 Rockwell International Corp. 322,500
5,000 Tyco International Ltd. 317,500
10,000 Waste Management Inc. 317,500
- --------------------------------------------------------------------------------
2,815,000
- --------------------------------------------------------------------------------
Consumer Durables -- 0.9%
5,000 Chrysler Corp. 158,750
8,000 General Motors Corp. 458,000
3,000 Goodyear Tire & Rubber Co. 175,500
- --------------------------------------------------------------------------------
792,250
- --------------------------------------------------------------------------------
Consumer Non-Durables -- 3.0%
3,300 CPC International, Inc. 283,800
2,000 Conagra Inc. 120,250
10,000 Eastman Kodak Co. 828,750
2,000 Gillette Co. 177,750
8,000 Kimberly-Clark Corp. 401,000
2,000 Proctor & Gamble Co. 275,750
3,000 Stanley Works 123,000
2,500 Unilever NV 484,375
- --------------------------------------------------------------------------------
2,694,675
- --------------------------------------------------------------------------------
Consumer Services -- 3.8%
5,000 Dow Jones & Co., Inc. 194,375
6,000 Gannett, Inc. 555,000
4,000 Gap Inc. 137,000
6,000 J.C. Penney Co. 309,000
5,000 McDonald's Corp. 251,250
10,000 Meredith Corp. 258,750
3,000 New York Times Co., Class A Shares 138,188
8,000 Newell Co. 306,000
3,500 Scandinavian Broadcasting Systems, S.A. 71,750
See Notes to Financial Statements.
7
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) May 31, 1997
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Consumer Services -- 3.5% (continued)
5,000 Time Warner, Inc. $ 232,500
15,000 Wal-Mart Stores, Inc. 446,250
6,000 Walt Disney Co. 491,250
- --------------------------------------------------------------------------------
3,391,313
- --------------------------------------------------------------------------------
Diversified Conglomerates -- 0.7%
6,500 Minnesota Mining and Manufacturing Co. 596,375
- --------------------------------------------------------------------------------
Energy -- 4.1%
6,500 Amerada Hess Corp. 347,750
8,000 Amoco Corp. 715,000
5,000 Ashland Inc. 239,375
2,000 Barret Resources Corp.+ 67,000
2,000 Cabot Corp. 51,250
2,500 Enron Inc. 101,875
4,000 Exxon Corp. 237,000
2,000 Halliburton Co. 154,750
6,000 Mobil Corp. 839,250
3,000 Noble Affiliates Inc. 126,375
2,000 Royal Dutch Petroleum Co. 390,500
2,000 Sonat, Inc. 115,000
6,000 Union Pacific Resources Corp. 173,250
1,500 Williams Cos. 66,188
- --------------------------------------------------------------------------------
3,624,563
- --------------------------------------------------------------------------------
Financial Services -- 6.9%
18,000 Allstate Corp. 1,325,250
8,000 American Express Co. 556,000
3,000 American International Group, Inc. 406,125
5,000 Associates First Capital Corp. 236,250
7,000 Chase Manhattan Bank Corp. 661,500
6,500 Chubb Corp. 396,500
1,500 C.N.A. Financial Corp.+ 153,562
10,000 Fannie Mae 436,250
3,000 First Virginia Banks, Inc. 168,000
1,000 General Re Corp. 175,250
5,000 Household International Inc. 491,250
3,000 Leucadia National Corp. 89,625
4,000 National City Corp. 206,000
1,000 Provident Cos. 53,750
4,000 St. Paul Cos. 286,500
2,000 Wells Fargo & Co. 527,000
- --------------------------------------------------------------------------------
6,168,812
- --------------------------------------------------------------------------------
Health Care -- 4.2%
8,000 Abbott Laboratories 504,000
8,000 American Home Products Corp. 610,000
7,500 Bristol-Myers Squibb & Co. 550,313
See Notes to Financial Statements.
8
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) May 31, 1997
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Health Care -- 4.2% (continued)
14,000 Johnson & Johnson $ 838,250
8,000 Merck & Co., Inc. 719,000
3,000 Novartis AG 205,405
3,000 SmithKline Beecham PLC 262,500
- --------------------------------------------------------------------------------
3,689,468
- --------------------------------------------------------------------------------
Technology -- 4.2%
2,126 Boeing Co. 223,762
1,000 Cisco Systems Inc.+ 67,750
2,000 First Data Corp. 80,000
8,000 Hewlett Packard Co. 412,000
3,000 Imation Corp.+ 72,000
3,000 Intel Corp. 454,500
5,000 International Business Machines Corp. 432,500
2,000 Lockheed Martin Corp. 187,250
2,000 Microsoft Corp.+ 248,000
5,000 Texas Instruments, Inc. 449,374
6,000 Thermo Electron Corp.+ 207,000
12,000 Xerox Corp. 813,000
- --------------------------------------------------------------------------------
3,647,136
- --------------------------------------------------------------------------------
Telecommunications -- 1.6%
6,000 Ameritech Corp. 393,000
8,000 Bell Atlantic Corp. 560,000
10,000 GTE Corp. 441,250
- --------------------------------------------------------------------------------
1,394,250
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost-- $18,767,631) 30,962,030
================================================================================
FACE
AMOUNT SECURITY VALUE
================================================================================
U.S. GOVERNMENT OBLIGATIONS -- 63.0%
$60,000,000 U.S. Treasury Strips, zero coupon due 8/15/98
(Cost -- $54,452,372) 55,920,000
================================================================================
REPURCHASE AGREEMENT -- 2.1%
1,885,000 Chase Manhattan Bank Corp., 5.470% due 6/2/97;
Proceeds at maturity -- $1,885,859; (Fully
collateralized by U.S. Treasury Notes, 6.375%
due 5/15/00; Market value -- $1,922,702)
(Cost -- $1,885,000) 1,885,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost-- $75,105,003*) $88,767,030
================================================================================
+ Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
9
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) May 31, 1997
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost-- $75,105,003) $88,767,030
Cash 199
Dividends and interest receivable 78,878
- --------------------------------------------------------------------------------
Total Assets 88,846,107
- --------------------------------------------------------------------------------
LIABILITIES:
Investment advisory fees payable 22,807
Distribution fees payable 15,072
Administration fees payable 14,954
Accrued expenses 31,610
- --------------------------------------------------------------------------------
Total Liabilities 84,443
- --------------------------------------------------------------------------------
Total Net Assets $88,761,664
================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 11,207
Capital paid in excess of par value 69,463,199
Undistributed net investment income 2,049,254
Accumulated net realized gain from security transactions 3,575,977
Net unrealized appreciation of investments 13,662,027
- --------------------------------------------------------------------------------
Total Net Assets $88,761,664
================================================================================
Shares Outstanding 11,206,685
- --------------------------------------------------------------------------------
Net Asset Value (and redemption price) $ 7.92
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
10
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations (unaudited)
- --------------------------------------------------------------------------------
For the Six Months Ended May 31, 1997
INVESTMENT INCOME:
Interest $ 2,262,546
Dividends 330,538
- --------------------------------------------------------------------------------
Total Investment Income 2,593,084
- --------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2) 135,142
Distribution fees (Note 2) 112,619
Administration fees (Note 2) 90,095
Transfer agent fees 54,629
Audit and legal 11,635
Shareholder communications 8,951
Trustees' fees 6,465
Registration fees 3,978
Shareholder and system servicing fees 3,482
Custody 3,281
Other 1,004
- --------------------------------------------------------------------------------
Total Expenses 431,281
- --------------------------------------------------------------------------------
Net Investment Income 2,161,803
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (NOTE3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 14,351,016
Cost of securities sold 10,809,915
- --------------------------------------------------------------------------------
Net Realized Gain 3,541,101
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of period 14,743,051
End of period 13,662,027
- --------------------------------------------------------------------------------
Decrease in Net Unrealized Appreciation (1,081,024)
- --------------------------------------------------------------------------------
Net Gain on Investments 2,460,077
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 4,621,880
================================================================================
See Notes to Financial Statements.
11
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Six Months Ended May 31, 1997 (unaudited)
and the Year Ended November 30, 1996
1997 1996
================================================================================
OPERATIONS:
Net investment income $ 2,161,803 $ 4,422,626
Net realized gain 3,541,101 4,226,911
Increase (decrease) in net unrealized appreciation (1,081,024) 1,204,551
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations 4,621,880 9,854,088
- --------------------------------------------------------------------------------
DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income -- (9,107,488)
Net realized gains -- (5,316,894)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders -- (14,424,382)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net asset value of shares issued for
reinvestment of dividends -- 14,078,633
Cost of shares reacquired (9,652,950) (14,228,216)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Fund Share Transactions (9,652,950) (149,583)
- --------------------------------------------------------------------------------
Decrease in Net Assets (5,031,070) (4,719,877)
NET ASSETS:
Beginning of period 93,792,734 98,512,611
- --------------------------------------------------------------------------------
End of period* $88,761,664 $ 93,792,734
================================================================================
* Includes undistributed (overdistributed)
net investment income of: $ 2,049,254 $ (112,549)
================================================================================
See Notes to Financial Statements.
12
<PAGE>
- --------------------------------------------------------------------------------
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.
Shares of the Fund are not currently being offered for sale to new investors.
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, adjusted for amortization of premium and accretion of
discount, is recorded on the accrual basis; (e) dividend income is recorded on
the ex-dividend date; foreign dividend income is recorded on the ex-dividend
date or as soon as practical after the Fund determines the existence of a
dividend declaration after exercising reasonable due diligence; (f) 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;
(g) gains or losses on the sale of securities are calculated by using the
specific identification method; (h) dividends and distributions to shareholders
are recorded on the ex-dividend date; (i) the character of income and gains to
be distributed are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. At November 30, 1996,
reclassifications were made to the Fund's capital accounts to reflect permanent
book/tax differences and income and gains available for distributions under
income tax regulations. Net investment income,
13
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
net realized gains and net assets were not affected by this change; (j) 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 (k) 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, 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, 1997, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $ 6,445,320
- --------------------------------------------------------------------------------
Sales 14,351,016
================================================================================
At May 31, 1997, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
================================================================================
Gross unrealized appreciation $ 13,700,001
Gross unrealized depreciation (37,974)
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 13,662,027
================================================================================
14
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
4. REPURCHASE AGREEMENTS
The Fund purchases (and its custodian takes possession of) U.S. Government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day) at
an agreed-upon higher repurchase price. The Fund requires continual maintenance
of the market value of the collateral in amounts at least equal to the
repurchase price.
5. SHARES OF BENEFICIAL INTEREST
At May 31, 1997, 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, 1997 November 30, 1996
================================================================================
Shares issued on reinvestment -- 1,838,422
Shares redeemed (1,260,065) (1,821,367)
- --------------------------------------------------------------------------------
Net Increase (Decrease) (1,260,065) 17,055
================================================================================
15
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of beneficial interest outstanding throughout each period:
<TABLE>
<CAPTION>
1997(1) 1996 1995 1994 1993 1992
=====================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $7.52 $7.91 $7.75 $9.38 $9.02 $8.40
- -----------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.19 0.38 0.36 0.41 0.38 0.37
Net realized and unrealized
gain (loss) 0.21 0.45 1.03 (0.70) 0.48 0.68
- -----------------------------------------------------------------------------------------------------
Total Income (Loss) From
Operations 0.40 0.83 1.39 (0.29) 0.86 1.05
- -----------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- (0.78) (0.40) (0.45) (0.40) (0.43)
Net realized gains -- (0.44) (0.83) (0.89) (0.10) --
- -----------------------------------------------------------------------------------------------------
Total Distributions -- (1.22) (1.23) (1.34) (0.50) (0.43)
- -----------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $7.92 $7.52 $7.91 $7.75 $9.38 $9.02
- -----------------------------------------------------------------------------------------------------
Total Return 5.32%++ 11.03% 19.93% (3.69)% 9.99% 12.86%
- -----------------------------------------------------------------------------------------------------
Net Assets,
End of Period (millions) $ 89 $ 94 $ 99 $ 101 $ 137 $ 166
- -----------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.96%+ 0.95% 1.05% 1.01% 0.97% 1.01%
Net investment income 4.80+ 4.67 4.59 4.47 4.15 4.39
- -----------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 7% 12% 13% 10% 17% 4%
=====================================================================================================
Average commissions per share
paid on equity transactions(2) $0.06 $0.06 $0.06 -- -- --
=====================================================================================================
</TABLE>
(1) For the six months ended May 31, 1997 (unaudited).
(2) As of September 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.
16
<PAGE>
Smith Barney
Principal Return Fund
Trustees
Paul R. Ades
Herbert Barg
Dwight B. Crane
Frank Hubbard
Heath B. McLendon, Chairman
Jerome Miller
Ken Miller
John F. White
Allan R. Johnson, Emeritus
Officers
Heath B. McLendon
Chief Executive Officer
Lewis E. Daidone
Senior Vice President
and Treasurer
Harry D. Cohen
Vice President and
Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
Smith Barney
------------
A Member of TravelersGroup[LOGO]
Investment Adviser
Smith Barney Mutual Funds
Management Inc.
Distributor
Smith Barney Inc.
Custodian
PNCBank, N.A.
This report is submitted for the general information of the shareholders of
Smith Barney Principal Return Fund -- Zeros and Appreciation Series 1998. It is
not authorized for distribution to prospective investors unless accompanied or
preceded by a current Prospectus for the Fund, which contains information
concerning the Fund's investment policies and expenses as well as other
pertinent information.
Smith Barney
Principal Return Fund
388 Greenwich Street
New York, New York 10013
FD2402 7/97
