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Smith Barney Principal
Return Fund
Zeros and
Appreciation
Series 1998
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SEMI-ANNUAL REPORT
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May 31, 1998
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.(sm)
<PAGE>
Smith Barney
Principal Return
Fund
[PHOTO OMITTED] [PHOTO OMITTED]
HEATH B. MCLENDON HARRY D. COHEN
Chairman Vice President and
Investment Officer
Dear Shareholder:
We are pleased to provide you with the semi-annual report for the Smith Barney
Principal Return Fund -- Zeros and Appreciation Series 1998 ("Fund") for the
period ended May 31, 1998. For your convenience, we have summarized the Fund's
investment strategy over this time and discussed some of the Fund's holdings in
greater detail. A more comprehensive summary of performance and current holdings
can be found in the appropriate sections of this report.
Performance Update
The six-month total return of 6.90% posted by the Fund resulted primarily from
the appreciation of the stock portion of the Fund, which comprises roughly 30%
of total assets. For the six months ended May 31, 1998, the stock market, as
measured by the Standard & Poor's 500 Composite Index,* had a total return of
14.17%. Over the same time period, the bond market, as measured by the Lehman
Brothers Intermediate Term Government Bond Index,** generated a total return of
3.53%.
Market Overview
The stock market continued to post impressive returns over the last six months.
As a whole, corporate profits met revised expectations although profit growth
has continued to slow. Interest rates, which have declined recently due to the
Asian crises, were virtually unchanged during the reporting period. Finally,
strong inflows of money into mutual funds and an almost frenzied level of
mergers and acquisitions continued to push stock prices higher. Recent market
volatility stems from a heightened concern over the profit impact from the
events in Asia coupled with a "highly valued" market working off some of the
excesses built up since the start of the year. Please keep in mind that the
upcoming termination date of this Fund is having an impact on our buy and sell
decisions. Over the past several months, we have used unusual market strength to
reduce many positions.
- ----------
* The S&P 500 Index is a capitalization-weighted measure of 500 widely held
common stocks.
** The Lehman Brothers Intermediate Term Government Bond Index is comprised of
approximately 1,000 issues of U.S. Government Treasury and Agency Securities.
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Smith Barney Principal Return Fund 1
<PAGE>
Investment Strategy
As noted in the "Special Shareholder Notice" which follows this letter, the core
of the stock portion of the Fund's portfolio consists of high quality growth
stocks with dominant market positions, global franchises, seasoned and respected
management teams and excellent balance sheets. The Fund's top ten holdings have
changed slightly during the reporting period. Allstate Corp., a leading provider
of auto and home insurance, remains the Fund's single largest holding. The only
significant addition is Ralston Purina, a company with leadership positions in
pet foods and batteries. We believe that Ralston Purina is undervalued, that
core volumes are growing strongly and that significant value creating events are
possible over the long term. Pharmaceutical companies such as Bristol Myers,
Johnson & Johnson and Merck, which we highlighted in our last shareholder
letter, also remain top Fund holdings. Finally, we have started to re-emphasize
the energy sector with sizable positions in Exxon and Mobil.
Market Outlook
We believe that current market conditions warrant a conservative investment
approach. With valuation levels at or near record levels, the market remains
susceptible to any negative news, while already discounting the positives.
Profit growth is slowing due to significant global overcapacity, and fewer
benefits from corporate restructuring which have been one of the drivers of
earnings growth over the last several years. Fortunately, interest rates should
remain favorable as the economy slows over the next several months. Furthermore,
excess global capacity and worldwide competition should help keep inflationary
pressures dormant.
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
pursue your financial goals in the future.
Sincerely,
/s/ Heath B. McLendon /s/ Harry D. Cohen
Heath B. McLendon Harry D. Cohen
Chairman Vice President and
Investment Officer
June 24, 1998
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2 1998 Semi-Annual Report to Shareholders
<PAGE>
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Special Shareholder Notice
As you know, the Fund will mature on August 31, 1998. The Fund seeks to return
the principal amount of your original investment (including any sales charge
paid) by investing a portion of its assets in zero coupon bonds. In addition,
the Fund, to the extent consistent with its objective, seeks to provide
long-term capital appreciation by investing the balance of its assets primarily
in stocks.
The core of the stock portion of the Fund's portfolio consists of high-quality
growth stocks with dominant market positions, global franchises, seasoned and
respected management teams and excellent balance sheets. Around this core, the
Fund's manager looks for special situations such as restructuring candidates or
undervalued securities.
We hope you have been pleased with the consistent returns provided by the Smith
Barney Principal Return Fund -- Zeros and Appreciation Series 1998. If you were
satisfied by the investment approach followed by the stock portion of the Fund,
you may want to consider investing in the Smith Barney Appreciation Fund, which
is also managed by Harry D. "Hersh" Cohen, the manager of Zeros and Appreciation
Series 1998. Hersh has successfully managed the Appreciation Fund since January
1979, which has provided investors with consistent long-term capital growth
through all market cycles. A letter was sent to you in late June encouraging you
to consider investing in the Smith Barney Appreciation Fund.
You may exchange into the Smith Barney Appreciation Fund, or any other Smith
Barney Mutual Fund, until August 31, 1998 free of charge. For more information
about any of the more than 50 Smith Barney Mutual Funds, including sales charges
and expenses please call your Smith Barney Financial Consultant for a copy of a
prospectus for any fund you may wish to invest in. Please read it carefully
before you invest or send money.
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Smith Barney Principal Return Fund 3
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Hypothetical Analysis of a $10,000 Investment in Smith Barney
Principal Return Fund -- Zeros and Appreciation Series 1998
from January 25, 1991* through May 31, 1998
This table illustrates a hypothetical analysis of an initial investment in the
Smith Barney Principal Return Fund -- Zeros and Appreciation Series 1998. The
key factors behind this analysis are:
o Initial Investment on January 25, 1991 $10,000
o Maximum offering price per share including
5% sales charge at time of investment $8.00
o Initial Shares Purchased 1,250
Income/
Capital Gain Reinvest Additional Cumulative
Year Dividend NAV Shares Shares
- ---- -------- --- ------ ------
1991* 1,250.00
1992 $0.4300 $8.43 63.76 1,313.76
1993 0.5004 8.68 75.74 1,389.50
1994 1.3443 8.14 230.26 1,619.76
1995 1.2279 7.31 283.47 1,903.23
1996 1.2191 7.65 319.58 2,222.81
1997 0.5300 7.88 149.50 2,372.31
1998 0.3900 7.55 122.54 2,494.85
* Commencement of operations.
** NAV represents an average of several distributions made during the period.
Please note that this hypothetical analysis assumes reinvestment of all
distributions and a full redemption from the Fund as of May 31, 1998 at a net
asset value of $7.99 per share. A shareholder's initial investment of $10,000 at
a maximum offering price per share of $8.00 would result in an ending share
balance of 2,494.85 shares at a value of $19,933.85. The $9,933.85 increase over
the cost basis consists of $9,688.65 in dividends and capital gain distributions
received throughout the life of the investment, and a net capital gain at the
time of redemption of $245.20 (representing a long-term gain of $174.83 and a
short-term gain of $70.37.) The cumulative total return, including the deduction
of the 5% sales charge, on this investment is 99.34%, and the average annual
total return is 9.84%.
Past performance is not indicative of future results.
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4 1998 Semi-Annual Report to Shareholders
<PAGE>
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Historical Performance
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<TABLE>
<CAPTION>
Net Asset Value
-----------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
===========================================================================================
<S> <C> <C> <C> <C> <C>
5/31/98 $7.86 $7.99 $0.39 $0.00 6.90%+
- -------------------------------------------------------------------------------------------
11/30/97 7.52 7.86 0.01 0.52 11.60
- -------------------------------------------------------------------------------------------
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
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11/30/92 8.40 9.02 0.43 0.00 12.86
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1/25/91*-11/30/91 7.60 8.40 0.00 0.00 10.53+
===========================================================================================
Total $2.86 $2.78
===========================================================================================
</TABLE>
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)
================================================================================
Six Months Ended 5/31/98+ 6.90% 1.60%
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Year Ended 5/31/98 13.23 7.53
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Five Years Ended 5/31/98 9.60 8.48
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1/25/91* through 5/31/98 10.61 9.84
================================================================================
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Cumulative Total Return
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Without
Sales Charge(1)
================================================================================
1/25/91* through 5/31/98 109.83%
================================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charge.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, shares reflect the deduction of the
maximum initial sales charge of 5.00%.
* Commencement of operations.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
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Smith Barney Principal Return Fund 5
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Historical Performance (unaudited)
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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+
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January 1991 -- May 1998
[The following table was depicted as a line chart in the printed material.]
Principal Return
Zeros and Lehman Bros.
Appreciation S&P 500 Intermediate Term
Series 1998 Index Gov't. Bond Index
----------- ----- -----------------
1/25/91 9500 10000 10000
11/91 10500 13219 11026
11/92 11850 13292 11921
11/93 13034 14633 13011
11/94 12558 14787 12795
11/95 15055 20258 14544
11/96 16716 26294 15115
11/97 18646 33789 16064
5/31/98 19934 38881 16631
+ 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, 1998. The Standard & Poor's 500
Index ("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.
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6 1998 Semi-Annual Report to Shareholders
<PAGE>
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Portfolio Highlights (unaudited) May 31, 1998
- --------------------------------------------------------------------------------
Common Stock Industry Breakdown
(as a percentage of total common stocks)
[The following table was depicted as a pie chart in the printed material.]
Basic Industries 4.5%
Telecommunications 4.9%
Technology 13.2%
Health Care 11.1%
Financial Services 21.6%
Capital Goods 10.1%
Consumer Durables 3.4%
Consumer Non-Durables 8.8%
Consumer Services 11.5%
Diversified Conglomerates 1.6%
Energy 9.3%
Percentage of
Top Ten Holdings Total Investments
================================================================================
U.S. Treasury Strips 65.0%
Allstate Corp. 1.1
Bristol-Myers Squibb Co. 0.8
General Electric Co. 0.8
American International Group, Inc. 0.7
Johnson & Johnson 0.7
Mobil Corp. 0.7
Household International Inc. 0.6
Merck & Co., Inc. 0.6
Unilever NV 0.6
================================================================================
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Smith Barney Principal Return Fund 7
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Schedule of Investments (unaudited) May 31, 1998
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
COMMON STOCK -- 27.9%
Basic Industries -- 1.3%
5,500 E.I. du Pont de Nemours & Co. $ 423,500
4,000 Mead Corp. 124,500
6,000 Olin Corp. 259,500
8,000 The St. Joe Co. 239,500
- --------------------------------------------------------------------------------
1,047,000
- --------------------------------------------------------------------------------
Capital Goods -- 2.8%
8,000 Allied Signal, Inc. 342,000
2,500 Emerson Electric Co. 151,875
8,500 General Electric Co. 708,688
3,000 Honeywell Inc. 251,813
4,000 Johnson Controls Inc. 238,000
3,000 Lockheed Martin Corp. 336,750
6,000 Tyco International Ltd. 332,250
- --------------------------------------------------------------------------------
2,361,376
- --------------------------------------------------------------------------------
Consumer Durables -- 0.9%
3,000 Black & Decker Corp. 175,125
3,000 Chrysler Corp. 166,875
2,000 General Motors Corp. 143,875
2,000 Goodyear Tire & Rubber Co. 143,750
1,000 Schlumberger Ltd. 78,063
1,500 Stanley Works 71,250
- --------------------------------------------------------------------------------
778,938
- --------------------------------------------------------------------------------
Consumer Non-Durables -- 2.5%
200 Agribrands International, Inc. 6,850
5,000 ConAgra, Inc. 146,250
4,000 Dow Chemical Corp. 387,500
2,000 Eastman Kodak Co. 142,750
1,000 Gillette Co. 117,125
8,000 Kimberly-Clark Corp. 396,500
2,000 Procter & Gamble Co. 167,875
2,000 Ralston-Purina Group 222,625
6,000 Unilever NV 473,625
- --------------------------------------------------------------------------------
2,061,100
- --------------------------------------------------------------------------------
Consumer Services -- 3.2%
3,600 Bestfoods 203,175
6,000 Gannett, Inc. 395,625
3,000 Hilton Hotels Corp. 94,313
5,000 McDonald's Corp. 328,125
7,000 Meredith Corp. 278,250
5,000 Newell Co. 241,250
3,000 Pepsico Inc. 122,438
2,000 Scandinavian Broadcasting Systems SA 61,500
See Notes to Financial Statements.
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8 1998 Semi-Annual Report to Shareholders
<PAGE>
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Schedule of Investments (unaudited) (continued) May 31, 1998
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Consumer Services -- 3.2% (continued)
2,000 Time Warner, Inc. $ 155,625
6,500 Wal-Mart Stores, Inc. 358,719
4,000 The Walt Disney Co. 452,500
- --------------------------------------------------------------------------------
2,691,520
- --------------------------------------------------------------------------------
Diversified Conglomerates -- 0.4%
4,000 Minnesota Mining and Manufacturing Co. 370,500
- --------------------------------------------------------------------------------
Energy -- 2.6%
9,000 Amoco Corp. 376,313
5,000 Ashland Inc. 249,375
5,000 Exxon Corp. 352,500
3,000 Halliburton Co. 142,125
7,000 Mobil Corp. 546,000
2,500 Royal Dutch Petroleum Co. 140,156
3,000 Sonat, Inc. 117,563
2,000 Texaco Inc. 115,500
6,000 Union Pacific Resources Corp. 121,500
- --------------------------------------------------------------------------------
2,161,032
- --------------------------------------------------------------------------------
Financial Services -- 6.0%
9,500 Allstate Corp. 894,188
3,000 American Express Co. 307,875
4,500 American International Group, Inc. 557,156
2,500 Associates First Capital Corp. 187,031
2,500 Chase Manhattan Corp. 339,844
4,500 Chubb Corp. 358,031
1,000 C.N.A. Financial Corp.+ 151,250
7,000 Fannie Mae 419,125
1,000 First Virginia Banks, Inc. 52,250
1,500 General Re Corp. 329,813
4,000 Household International Inc. 541,250
4,000 Leucadia National Corp. 137,250
2,000 National City Corp. 135,500
6,000 St. Paul Cos. 266,250
1,000 Wells Fargo & Co. 361,500
- --------------------------------------------------------------------------------
5,038,313
- --------------------------------------------------------------------------------
Health Care -- 3.1%
5,000 Abbott Laboratories 370,938
6,000 American Home Products Corp. 289,875
6,000 Bristol-Myers Squibb Co. 645,000
8,000 Johnson & Johnson 552,500
4,500 Merck & Co., Inc. 526,781
2,000 Pfizer, Inc. 209,625
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2,594,719
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See Notes to Financial Statements.
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Smith Barney Principal Return Fund 9
<PAGE>
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Schedule of Investments (unaudited) (continued) May 31, 1998
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Technology -- 3.7%
4,000 Chiron Corp. $ 72,250
4,000 Cisco Systems Inc. 302,500
6,000 Compaq Computer Corp. 163,875
5,000 Hewlett Packard Co. 310,625
5,000 Intel Corp. 357,188
3,000 International Business Machines Corp. 352,125
4,000 Lucent Technologies, Inc. 283,750
2,000 Microsoft Corp.+ 169,625
2,000 PPG Industries Inc. 145,750
4,500 Texas Instruments, Inc. 231,182
8,000 Thermo Electron Corp+ 281,000
4,000 Xerox Corp. 411,000
- --------------------------------------------------------------------------------
3,080,870
- --------------------------------------------------------------------------------
Telecommunications -- 1.4%
8,000 Ameritech Corp. 339,500
3,000 Bell Atlantic Corp. 274,875
2,000 Bellsouth Corp. 129,000
7,000 GTE Corp. 408,188
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1,151,563
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TOTAL COMMON STOCK
(Cost-- $12,029,917) 23,336,931
================================================================================
FACE
AMOUNT SECURITY VALUE
================================================================================
U.S. GOVERNMENT OBLIGATIONS -- 65.0%
$55,000,000 U.S. Treasury Strips, zero coupon due 8/15/98
(Cost -- $54,057,122) 54,408,750
================================================================================
REPURCHASE AGREEMENT -- 7.1%
6,001,000 Chase Securities Inc., 5.500% due 6/1/98;
Proceeds at maturity -- $6,003,750;
(Fully collateralized by U.S. Treasury
Notes, 5.500% due 1/31/03; Market
value -- $6,121,029) (Cost -- $6,001,000) 6,001,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost-- $72,088,039*) $83,746,681
================================================================================
+ Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
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10 1998 Semi-Annual Report to Shareholders
<PAGE>
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Statement of Assets and Liabilities (unaudited) May 31, 1998
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost-- $72,088,039) $83,746,681
Cash 190
Dividends and interest receivable 46,873
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Total Assets 83,793,744
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LIABILITIES:
Investment advisory fees payable 20,344
Distribution fees payable 13,341
Administration fees payable 13,311
Accrued expenses 37,208
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Total Liabilities 84,204
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Total Net Assets $83,709,540
================================================================================
NET ASSETS:
Par value of capital shares $ 10,480
Capital paid in excess of par value 63,312,808
Undistributed net investment income 1,669,614
Accumulated net realized gain on security transactions 7,057,996
Net unrealized appreciation of investments 11,658,642
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Total Net Assets $83,709,540
================================================================================
Shares Outstanding 10,479,629
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Net Asset Value (and redemption price) $ 7.99
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See Notes to Financial Statements.
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Smith Barney Principal Return Fund 11
<PAGE>
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Statement of Operations (unaudited)
- --------------------------------------------------------------------------------
For the Six Months Ended May 31, 1998
INVESTMENT INCOME:
Interest $ 2,160,022
Dividends 227,406
Less: Foreign withholding tax (1,408)
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Total Investment Income 2,386,020
- --------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2) 127,650
Shareholder and system servicing fees 110,126
Administration fees (Note 2) 85,100
Transfer agent fees 46,379
Shareholder communications 12,008
Audit and legal 11,635
Trustees' fees 6,102
Custody 3,281
Registration fees 2,556
Other 831
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Total Expenses 405,668
- --------------------------------------------------------------------------------
Net Investment Income 1,980,352
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (NOTE 3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 16,929,205
Cost of securities sold 9,653,867
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Net Realized Gain 7,275,338
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of period 15,180,045
End of period 11,658,642
- --------------------------------------------------------------------------------
Decrease in Net Unrealized Appreciation (3,521,403)
- --------------------------------------------------------------------------------
Net Gain on Investments 3,753,935
- --------------------------------------------------------------------------------
Increase in Net Assets from Operations $ 5,734,287
================================================================================
See Notes to Financial Statements.
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12 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Six Months Ended May 31, 1998 (unaudited)
and the Year Ended November 30, 1997
1998 1997
================================================================================
OPERATIONS:
Net investment income $ 1,980,352 $ 4,161,669
Net realized gain 7,275,338 5,079,576
Increase (decrease) in net unrealized
appreciation (3,521,403) 436,994
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations 5,734,287 9,678,239
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (4,212,229) (132,527)
Net realized gains -- (5,346,896)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (4,212,229) (5,479,423)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net asset value of shares issued for
reinvestment of dividends 4,091,295 5,324,889
Cost of shares reacquired (8,000,527) (17,219,725)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Fund Share Transactions (3,909,232) (11,894,836)
- --------------------------------------------------------------------------------
Decrease in Net Assets (2,387,174) (7,696,020)
NET ASSETS:
Beginning of period 86,096,714 93,792,734
- --------------------------------------------------------------------------------
End of period* $ 83,709,540 $ 86,096,714
================================================================================
* Includes undistributed net investment
income of: $ 1,669,614 $ 3,901,491
================================================================================
See Notes to Financial Statements.
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Smith Barney Principal Return Fund 13
<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 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 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 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 or 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, 1997,
reclassifications were made to the Fund's capital accounts to reflect permanent
book/tax differences
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14 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
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; (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
Mutual Management Corp. ("MMC"), a subsidiary of Salomon Smith Barney Holdings
Inc. ("SSBH"), acts as investment adviser of the Fund. The Fund pays MMC an
investment advisory fee calculated at an annual rate of 0.30% of the average
daily net assets. MMC 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 SSBH, 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, 1998, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $ 2,644,651
- --------------------------------------------------------------------------------
Sales 16,929,205
================================================================================
- --------------------------------------------------------------------------------
Smith Barney Exchange Reserve Fund 15
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
At May 31, 1998, the aggregate gross unrealized appreciation and depreciation of
investments for Federal income tax purposes were substantially as follows:
================================================================================
Gross unrealized appreciation $ 11,745,094
Gross unrealized depreciation (86,452)
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 11,658,642
================================================================================
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, 1998, 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, 1998 November 30, 1997
================================================================================
Shares issued on reinvestment 541,893 675,747
Shares redeemed (1,020,255) (2,184,506)
- --------------------------------------------------------------------------------
Net Decrease (478,362) (1,508,759)
================================================================================
- --------------------------------------------------------------------------------
16 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of beneficial interest outstanding throughout each period:
<TABLE>
<CAPTION>
1998(1) 1997 1996 1995 1994 1993
=============================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $7.86 $7.52 $7.91 $7.75 $9.38 $9.02
- ---------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.20 0.38 0.38 0.36 0.41 0.38
Net realized and unrealized
gain (loss) 0.32 0.49 0.45 1.03 (0.70) 0.48
- ---------------------------------------------------------------------------------------------
Total Income (Loss)
From Operations 0.52 0.87 0.83 1.39 (0.29) 0.86
- ---------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.39) (0.01) (0.78) (0.40) (0.45) (0.40)
Net realized gains -- (0.52) (0.44) (0.83) (0.89) (0.10)
- ---------------------------------------------------------------------------------------------
Total Distributions (0.39) (0.53) (1.22) (1.23) (1.34) (0.50)
- ---------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $7.99 $7.86 $7.52 $7.91 $7.75 $9.38
- ---------------------------------------------------------------------------------------------
Total Return 6.90%++ 11.60% 11.03% 19.93% (3.69)% 9.99%
- ---------------------------------------------------------------------------------------------
Net Assets,
End of Period (millions) $ 84 $ 86 $ 94 $ 99 $ 101 $ 137
- ---------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.96%+ 0.95% 0.95% 1.05% 1.01% 0.97%
Net investment income 4.70+ 4.66 4.67 4.59 4.47 4.15
- ---------------------------------------------------------------------------------------------
Portfolio Turnover Rate 3% 11% 12% 13% 10% 17%
- ---------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(2) $0.06 $0.06 $0.06 $0.06 -- --
=============================================================================================
</TABLE>
(1) For the six months ended May 31, 1998 (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.
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 17
<PAGE>
- --------------------------------------------------------------------------------
Additional Shareholder Information (unaudited)
- --------------------------------------------------------------------------------
On February 6, 1998 a special meeting of shareholders of the Trust was held for
the purpose of voting on the following matters:
1. To elect Trustees of the Trust; and
2. To approve or disapprove the reclassification, modification and/or
elimination of certain fundamental investment policies.
The results of the vote on Proposal 1 were as follows:
Shares Voted Percentage Shares Voted Percentage
Name of Trustees For Shares Voted Against Shares Voted
================================================================================
Paul R. Ades 18,357,855.212 96.992% 569,401.879 3.008%
Herbert Barg 18,324,756.049 96.817 602,501.042 3.183
Dwight B. Crane 18,357,438.225 96.989 569,818.866 3.011
Frank Hubbard 18,355,307.898 96.978 571,949.193 3.022
Jerome Miller 18,357,924.291 96.992 569,332.800 3.008
Ken Miller 18,353,804.176 96.970 573,452.915 3.030
Heath B. McLendon 18,341,693.427 96.906 585,563.664 3.094
================================================================================
Proposal 2 requested that shareholders approve certain modifications to the
fundamental policies of the Fund in order to modernize them in view of certain
regulatory, business or industry developments that have occurred since original
adoption of these policies by the Fund. The following chart demonstrates that
all proposals were approved by shareholders.
================================================================================
Diversification Approved
- --------------------------------------------------------------------------------
Industry Concentration Approved
- --------------------------------------------------------------------------------
Borrowing Approved
- --------------------------------------------------------------------------------
Lending by the Fund Approved
- --------------------------------------------------------------------------------
Real Estate Approved
================================================================================
The information below reports the lowest percentage of shares voting for the
proposals and the highest percentage of shares voting against and abstaining by
shareholders of the Fund on all proposals.
Shares Percentage Shares Percentage Percentage
Voted of Shares Voted of Shares Shares of Shares
For Voted Against Voted Abstaining Abstained
================================================================================
5,052,805.837 89.810% 147,390.196 2.620% 425,913.077 7.570%
================================================================================
- --------------------------------------------------------------------------------
18 1998 Semi-Annual Report to Shareholders
<PAGE>
Smith Barney Smith Barney
Principal Return Fund A Member of TravelersGroup[LOGO]
Trustees
Paul R. Ades
Herbert Barg
Dwight B. Crane
Frank Hubbard
Heath B. McLendon, Chairman
Jerome Miller
Ken Miller
Allan R. Johnson, Emeritus
John F. White, 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
Investment Manager
Mutual Management Corp.
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 -- 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
www.smithbarney.com
FD2402 7/98
[LOGO]
Smith Barney Principal
Return Fund
Zeros Plus
Emerging Growth
Series 2000
----------------------------
SEMI-ANNUAL REPORT
----------------------------
May 31, 1998
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.(SM)
<PAGE>
Smith Barney
Principal Return
Fund
[PHOTO OMITTED] [PHOTO OMITTED]
HEATH B. MCLENDON RICHARD A. FREEMAN
Chairman Vice President and
Investment Officer
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, 1998. 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. (A zero
coupon bond is a bond where no periodic interest payments are made. Investors
buy the bond at a discounted price and receive one payment at maturity.) 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 stocks of emerging growth companies. These emerging growth
companies are small- to medium-sized firms that we believe have significant
profit potential during a two to three year period.
For the six months ended May 31, 1998, the Fund posted a total return of 2.03%.
For the same period the Russell 2000 Index* and the Value Line Composite
Geometric Index,** two measures of performance that are more representative of
the stock portion of the Fund's portfolio, reported gains of 4.45% and 6.61%,
respectively. The Lehman Brothers Intermediate Term Government Bond Index***
advanced 3.53% in the most recent six-month period. Emerging growth stocks
currently
- ----------
* 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 Geometric Index is composed of 1,700 stocks tracked
by the Value Line Investment Survey.
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 1
<PAGE>
comprise approximately 45% of the net assets of the Fund with the remaining
balance accounted for by zero coupon U.S. Treasury bonds.
Market Overview
The past six-month period under review was one where the U.S. economy continued
to enjoy favorable conditions. The rate of inflation remains under 2% and the
annual unemployment rate (roughly 4.5%) is at a level not seen in more than 25
years. For the first time in a generation, Washington D.C. is forecasting a
budget surplus. Years of uninterrupted economic growth leading to a low rate of
unemployment (which in turn contributes to smaller government transfer payments)
have helped the federal budget considerably.
Another factor behind the budget progress is the significant increase in capital
gains generated by the high levels of the stock market and cash merger activity.
The decline in the maximum rate on long-term capital gains from 28% to 20% last
summer has also made many investors less reluctant to sell their holdings given
the more favorable tax treatments. Moreover, we believe that stock buybacks and
merger activity are even more important factors behind the overall market's
climb during the past few years than the more publicized inflow of large sums of
money into mutual funds.
Renewed weakness in Asian currencies, notably the Japanese yen, have led to
further declines in many Far Eastern stock markets and in some cases to levels
below last October's lows. This has led to a dramatic contraction in business
throughout the entire Asian region. Asia's woes have had a negative impact on
certain segments of the U.S. economy, especially the demand for technology
goods. An inventory correction witnessed by several sizeable computer
manufacturers in the U.S. has also contributed to a slowing in growth of
technology spending. We believe that the computer inventory correction is now
ending and should lead to stronger business conditions in the technology
industry by the fall.
Despite a favorable relative earnings outlook, small- and mid-capitalization
stocks have now fallen back to valuation levels last seen in 1990, the bottom of
the last small-capitalization stock cycle. According to our research analysts,
over the past 20 years, only during the 1987 stock market collapse have emerging
growth stocks had such relatively low valuations compared with large-
capitalization stocks. As of June 2, 1998, the average NASDAQ stock has declined
30% from its 52-week high. About 60% of all NASDAQ stocks are down more than 20%
and fully 84% are down more than 10%.
- ----------
*** The Lehman Brothers Intermediate Term Government Bond Index is comprised of
approximately 1,000 issues of U.S. Government Treasury and Agency Securities.
- --------------------------------------------------------------------------------
2 1998 Semi-Annual Report to Shareholders
<PAGE>
Investment Strategy and Market Outlook
We continue to emphasize primarily young, innovative companies in dynamic
industries that we believe possess above-average earnings growth during the next
few years. Moreover, nearly 60% of the Fund is invested in U.S. Treasury
securities that can help cushion the downside during a difficult market for
emerging growth stocks such as we recently experienced.
In an environment characterized by low inflation and low interest rates and
where corporate profit growth is moderating, we think that emerging growth
stocks offer very attractive values. We believe that the Fund's health care
stocks in particular have very favorable risk/reward characteristics given their
attractive earnings outlooks and low relative price earnings ratios (P/E ratio)
compared to their forecasted growth rates. (A P/E ratio shows the relationship
between a stock's price and the company's earnings for the last four quarters.)
Genzyme, IDEC Pharmaceuticals and Chiron are all Fund holdings that fit in that
category. With valuations at such historically low levels, the beginning of
possible higher merger activity in emerging growth stocks could also benefit
their performance going forward.
In closing, thank you for your continued confidence in our investment-management
approach. We look forward to helping you pursue your financial goals in the
years ahead.
Sincerely,
/s/ Heath B. McLendon /s/ Richard A. Freeman
Heath B. McLendon Richard A. Freeman
Chairman Vice President and
Investment Officer
June 23, 1998
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 3
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance
- --------------------------------------------------------------------------------
Net Asset Value
--------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
================================================================================
5/31/98 $8.46 $8.29 $0.31 $0.03 2.03%+
- --------------------------------------------------------------------------------
11/30/97 8.63 8.46 0.00 1.23 12.28
- --------------------------------------------------------------------------------
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 $1.88 $2.42
================================================================================
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 5/31/98+ 2.03% (3.12)%
- --------------------------------------------------------------------------------
Year Ended 5/31/98 11.34 5.74
- --------------------------------------------------------------------------------
Five Years Ended 5/31/98 9.34 8.22
- --------------------------------------------------------------------------------
8/30/91* through 5/31/98 8.95 8.13
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without
Sales Charge(1)
================================================================================
8/30/91* through 5/31/98 78.48%
================================================================================
(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 1998 Semi-Annual Report to Shareholders
<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 1998
[The following table was depicted as a line chart in the printed material.]
Zeros Plus Value Line Lehman Bros.
Emerging Growth Composite Intermediate Term
Series 2000 Index Gov't. Bond Index
----------- ----- -----------------
8/31/91 9500 10000 10000
11/91 9463 9463 10406
11/92 10328 10600 11251
11/93 11952 11673 12279
11/94 11928 11180 12075
11/95 14573 13386 13726
11/96 14800 15316 14502
11/97 16617 18327 15412
5/31/98 16955 19538 15956
+ 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, 1998. 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.
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 5
<PAGE>
- --------------------------------------------------------------------------------
Portfolio Highlights (unaudited) May 31, 1998
- --------------------------------------------------------------------------------
Common Stock Industry Breakdown
(as a percentage of total common stocks)
[The following table was depicted as a pie chart in the printed material.]
Biotechnology 18.3%
Capital Goods 11.8%
Drugs 3.3%
Pharmaceuticals 21.6%
Telecommunications 19.6%
Technology 25.4%
Percentage of
Top Ten Holdings Total Investments
================================================================================
U.S. Treasury Strips 56.1%
Tyco International Ltd. 5.2
C-COR Electronics, Inc. 4.4
California Microwave, Inc. 4.2
Genzyme Corp. - General Division 3.8
Quantum Corp. 3.7
IDEC Pharmaceuticals Corp. 3.5
Vertex Pharmaceuticals, Inc. 3.5
Chiron Corp. 3.4
Tech-Sym Corp. 3.3
================================================================================
- --------------------------------------------------------------------------------
6 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) May 31, 1998
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
COMMON STOCK -- 43.9%
Biotechnology -- 8.0%
100,000 Chiron Corp.* $ 1,806,250
100,000 Gensia Sicor Inc.* 425,000
75,000 Genzyme Corp.--General Division* 2,053,125
3,000 Genzyme Corp.-- Tissue Repair* 19,500
- --------------------------------------------------------------------------------
4,303,875
- --------------------------------------------------------------------------------
Capital Goods -- 5.2%
50,000 Tyco International Ltd. 2,768,750
- --------------------------------------------------------------------------------
Drugs -- 1.5%
100,000 Advanced Polymer Systems, Inc.* 787,500
- --------------------------------------------------------------------------------
Pharmaceutical -- 9.5%
40,000 Forest Laboratories Inc., Class A Shares* 1,320,000
60,000 IDEC Pharmaceuticals Corp.* 1,890,000
65,000 Vertex Pharmaceuticals, Inc.* 1,868,750
- --------------------------------------------------------------------------------
5,078,750
- --------------------------------------------------------------------------------
Technology -- 11.1%
100,000 Excel Technology Inc.* 1,012,500
90,000 Quantum Corp.* 1,968,750
60,500 Tech-Sym Corp.* 1,750,719
80,000 VLSI Technology, Inc.* 1,240,000
- --------------------------------------------------------------------------------
5,971,969
- --------------------------------------------------------------------------------
Telecommunications -- 8.6%
150,050 C-COR Electronics, Inc.* 2,382,044
104,500 California Microwave, Inc.* 2,240,218
- --------------------------------------------------------------------------------
4,622,262
- --------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost-- $12,810,523) 23,533,106
================================================================================
FACE
AMOUNT SECURITY VALUE
================================================================================
U.S. GOVERNMENT OBLIGATION -- 56.1%
$33,000,000 U.S. Treasury Strips, zero coupon due 2/15/00
(Cost-- $28,822,530) 30,083,130
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $41,633,053**) $53,616,236
================================================================================
* Non-income producing security.
** Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 7
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) May 31, 1998
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $41,633,053) $53,616,236
Cash 106,691
- --------------------------------------------------------------------------------
Total Assets 53,722,927
- --------------------------------------------------------------------------------
LIABILITIES:
Capital gains distribution payable 165,984
Investment advisory fees payable 16,599
Administration fees payable 8,300
Distribution fees payable 1,216
Accrued expenses 35,398
- --------------------------------------------------------------------------------
Total Liabilities 227,497
- --------------------------------------------------------------------------------
Total Net Assets $53,495,430
================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 6,450
Capital paid in excess of par value 39,305,028
Undistributed net investment income 701,012
Accumulated net realized gain on security transactions 1,499,757
Net unrealized appreciation of investments 11,983,183
-----------
Total Net Assets $53,495,430
================================================================================
Shares Outstanding 6,450,308
- --------------------------------------------------------------------------------
Net Asset Value (and redemption price) $ 8.29
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
8 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations (unaudited)
- --------------------------------------------------------------------------------
For the Six Months Ended May 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest $ 1,204,000
Dividends 3,125
- --------------------------------------------------------------------------------
Total Investment Income 1,207,125
- --------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2) 113,841
Distribution fees (Note 2) 71,150
Administration fees (Note 2) 56,920
Shareholder and system servicing fees 33,436
Audit and legal 13,240
Shareholder communications 11,354
Trustees' fees 7,275
Custody 2,009
Other 2,500
- --------------------------------------------------------------------------------
Total Expenses 311,725
- --------------------------------------------------------------------------------
Net Investment Income 895,400
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (NOTE 3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 6,818,637
Cost of securities sold 5,319,099
- --------------------------------------------------------------------------------
Net Realized Gain 1,499,538
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of period 13,078,845
End of period 11,983,183
- --------------------------------------------------------------------------------
Decrease in Net Unrealized Appreciation (1,095,662)
- --------------------------------------------------------------------------------
Net Gain on Investments 403,876
- --------------------------------------------------------------------------------
Increase in Net Assets from Operations $ 1,299,276
================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 9
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Six Months Ended May 31, 1998 (unaudited)
and the Year Ended November 30, 1997
1998 1997
================================================================================
OPERATIONS:
Net investment income $ 895,400 $ 1,977,400
Net realized gain 1,499,538 7,309,576
Decrease in net unrealized appreciation (1,095,662) (2,098,279)
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations 1,299,276 7,188,697
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (2,125,380) --
Net realized gains (165,984) (7,551,121)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (2,291,364) (7,551,121)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net asset value of shares issued for
reinvestment of dividends 2,077,551 7,366,972
Cost of shares reacquired (6,427,794) (13,598,864)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Fund Share Transactions (4,350,243) (6,231,892)
- --------------------------------------------------------------------------------
Decrease in Net Assets (5,342,331) (6,594,316)
NET ASSETS:
Beginning of period 58,837,761 65,432,077
- --------------------------------------------------------------------------------
End of period* $ 53,495,430 $ 58,837,761
================================================================================
* Includes undistributed net investment
income of: $701,012 $1,930,992
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1998 Semi-Annual Report to Shareholders
<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 offered for sale to new investors. The
Trust consists of this Fund and two other funds: Zeros and Appreciation Series
1998 and 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 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 or 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; (j) the Fund intends
to comply with the applicable provisions of the Internal Revenue Code of 1986,
as amended,
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 11
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
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
Mutual Management Corp. ("MMC"), a subsidiary of Salomon Smith Barney Holdings
Inc. ("SSBH"), acts as investment adviser of the Fund. The Fund pays MMC an
investment advisory fee calculated at an annual rate of 0.40% of the average
daily net assets. MMC also acts as the Fund's administrator for which the Fund
pays a fee calculated at an annual rate of 0.20% of the average daily net
assets. These fees are calculated daily and paid monthly.
Pursant to a Distribution Plan, the Fund pays Smith Barney Inc. ("SB"), another
subsidiary of SSBH, 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, 1998, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases --
- --------------------------------------------------------------------------------
Sales $ 6,818,637
================================================================================
At May 31, 1998, the aggregate gross unrealized appreciation and depreciation of
investments for Federal income tax purposes were substantially as follows:
===============================================================================
Gross unrealized appreciation $12,031,636
Gross unrealized depreciation (48,453)
- -------------------------------------------------------------------------------
Net unrealized appreciation $11,983,183
===============================================================================
- --------------------------------------------------------------------------------
12 1998 Semi-Annual Report to Shareholders
<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, 1998, the Fund had an unlimited number of shares of beneficial
interest authorized with a par value of $0.001 per share. The Fund, Zeros and
Appreciation Series 1998 and 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, 1998 November 30, 1997
================================================================================
Shares issued on reinvestment 254,914 854,637
Shares redeemed (762,155) (1,476,738)
- --------------------------------------------------------------------------------
Net Decrease (507,241) (622,101)
================================================================================
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 13
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of beneficial interest outstanding throughout each period:
<TABLE>
<CAPTION>
1998(1) 1997 1996 1995 1994 1993
============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $8.46 $8.63 $9.28 $8.15 $9.00 $8.16
- ------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.14 0.28 0.30 0.27 0.27 0.26
Net realized and unrealized gain (loss) 0.03 0.78 (0.16) 1.48 (0.28) 0.96
- ------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.17 1.06 0.14 1.75 (0.01) 1.22
- ------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.31) -- (0.57) (0.27) (0.34) (0.29)
Net realized gains (0.03) (1.23) (0.22) (0.35) (0.50) (0.09)
- ------------------------------------------------------------------------------------------------------------
Total Distributions (0.34) (1.23) (0.79) (0.62) (0.84) (0.38)
- ------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $8.29 $8.46 $8.63 $9.28 $8.15 $9.00
- ------------------------------------------------------------------------------------------------------------
Total Return 2.03%++ 12.28% 1.55% 22.17% (0.20)% 15.72
- ------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (millions) $53 $59 $65 $77 $75 $97
- ------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.09%+ 1.05% 1.11% 1.17% 1.15% 1.10%
Net investment income 3.14+ 3.15 3.15 3.12 3.27 3.12
- ------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 0% 0% 0% 6% 1% 0%
- ------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(2) $0.05 $0.06 $0.06 $0.06 -- --
============================================================================================================
</TABLE>
(1) For the six months ended May 31, 1998 (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.
- --------------------------------------------------------------------------------
14 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Additional Shareholder Information (unaudited)
- --------------------------------------------------------------------------------
On February 6, 1998 a special meeting of shareholders of the Trust was held for
the purpose of voting on the following matters:
1. To elect Trustees of the Trust; and
2. To approve or disapprove the reclassification, modification and/or
elimination of certain fundamental investment policies.
The results of the vote on Proposal 1 were as follows:
Shares Voted Percentage Shares Voted Percentage
Name of Trustees For Shares Voted Against Shares Voted
================================================================================
Paul R. Ades 18,357,855.212 96.992% 569,401.879 3.008%
Herbert Barg 18,324,756.049 96.817 602,501.042 3.183
Dwight B. Crane 18,357,438.225 96.989 569,818.866 3.011
Frank Hubbard 18,355,307.898 96.978 571,949.193 3.022
Jerome Miller 18,357,924.291 96.992 569,332.800 3.008
Ken Miller 18,353,804.176 96.970 573,452.915 3.030
Heath B. McLendon 18,341,693.427 96.906 585,563.664 3.094
================================================================================
Proposal 2 requested that shareholders approve certain modifications to the
fundamental policies of the Fund in order to modernize them in view of certain
regulatory, business or industry developments that have occurred since original
adoption of these policies by the Fund. The following chart demonstrates that
all proposals were approved by shareholders.
================================================================================
Diversification Approved
- --------------------------------------------------------------------------------
Industry Concentration Approved
- --------------------------------------------------------------------------------
Borrowing Approved
- --------------------------------------------------------------------------------
Lending by the Fund Approved
- --------------------------------------------------------------------------------
Real Estate Approved
================================================================================
The information below reports the lowest percentage of shares voting for the
proposals, the highest percentage of shares voting against and abstaining by
shareholders of the Fund on all proposals.
Shares Percentage Shares Percentage Percentage
Voted of Shares Voted of Shares Shares of Shares
For Voted Against Voted Abstaining Abstained
================================================================================
3,218,804.422 90.053% 87,699.146 2.454% 267,825.908 7.493%
================================================================================
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 15
<PAGE>
Smith Barney SMITH BARNEY
Principal Return Fund
A Member of TravelersGroup [LOGO]
Trustees
Paul R. Ades
Herbert Barg
Dwight B. Crane
Frank Hubbard
Heath B. McLendon, Chairman
Jerome Miller
Ken Miller
Allan R. Johnson, Emeritus
John F. White, Emeritus
Officers
Heath B. McLendon
Chief Executive Officer
Lewis E. Daidone
Senior Vice President
and Treasurer
Richard A. Freeman
Vice President and
Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
Investment Manager
Mutual Management Corp.
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 -- 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
www.smithbarney.com
FD2403 7/98
[LOGO]
Smith Barney Principal
Return Fund
Zeros Plus
Emerging Growth
Series 2000
----------------------------
SEMI-ANNUAL REPORT
----------------------------
May 31, 1998
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.(SM)
<PAGE>
Smith Barney
Principal Return
Fund
[PHOTO OMITTED] [PHOTO OMITTED]
HEATH B. MCLENDON RICHARD A. FREEMAN
Chairman Vice President and
Investment Officer
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, 1998. 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. (A zero
coupon bond is a bond where no periodic interest payments are made. Investors
buy the bond at a discounted price and receive one payment at maturity.) 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 stocks of emerging growth companies. These emerging growth
companies are small- to medium-sized firms that we believe have significant
profit potential during a two to three year period.
For the six months ended May 31, 1998, the Fund posted a total return of 2.03%.
For the same period the Russell 2000 Index* and the Value Line Composite
Geometric Index,** two measures of performance that are more representative of
the stock portion of the Fund's portfolio, reported gains of 4.45% and 6.61%,
respectively. The Lehman Brothers Intermediate Term Government Bond Index***
advanced 3.53% in the most recent six-month period. Emerging growth stocks
currently
- ----------
* 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 Geometric Index is composed of 1,700 stocks tracked
by the Value Line Investment Survey.
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 1
<PAGE>
comprise approximately 45% of the net assets of the Fund with the remaining
balance accounted for by zero coupon U.S. Treasury bonds.
Market Overview
The past six-month period under review was one where the U.S. economy continued
to enjoy favorable conditions. The rate of inflation remains under 2% and the
annual unemployment rate (roughly 4.5%) is at a level not seen in more than 25
years. For the first time in a generation, Washington D.C. is forecasting a
budget surplus. Years of uninterrupted economic growth leading to a low rate of
unemployment (which in turn contributes to smaller government transfer payments)
have helped the federal budget considerably.
Another factor behind the budget progress is the significant increase in capital
gains generated by the high levels of the stock market and cash merger activity.
The decline in the maximum rate on long-term capital gains from 28% to 20% last
summer has also made many investors less reluctant to sell their holdings given
the more favorable tax treatments. Moreover, we believe that stock buybacks and
merger activity are even more important factors behind the overall market's
climb during the past few years than the more publicized inflow of large sums of
money into mutual funds.
Renewed weakness in Asian currencies, notably the Japanese yen, have led to
further declines in many Far Eastern stock markets and in some cases to levels
below last October's lows. This has led to a dramatic contraction in business
throughout the entire Asian region. Asia's woes have had a negative impact on
certain segments of the U.S. economy, especially the demand for technology
goods. An inventory correction witnessed by several sizeable computer
manufacturers in the U.S. has also contributed to a slowing in growth of
technology spending. We believe that the computer inventory correction is now
ending and should lead to stronger business conditions in the technology
industry by the fall.
Despite a favorable relative earnings outlook, small- and mid-capitalization
stocks have now fallen back to valuation levels last seen in 1990, the bottom of
the last small-capitalization stock cycle. According to our research analysts,
over the past 20 years, only during the 1987 stock market collapse have emerging
growth stocks had such relatively low valuations compared with large-
capitalization stocks. As of June 2, 1998, the average NASDAQ stock has declined
30% from its 52-week high. About 60% of all NASDAQ stocks are down more than 20%
and fully 84% are down more than 10%.
- ----------
*** The Lehman Brothers Intermediate Term Government Bond Index is comprised of
approximately 1,000 issues of U.S. Government Treasury and Agency Securities.
- --------------------------------------------------------------------------------
2 1998 Semi-Annual Report to Shareholders
<PAGE>
Investment Strategy and Market Outlook
We continue to emphasize primarily young, innovative companies in dynamic
industries that we believe possess above-average earnings growth during the next
few years. Moreover, nearly 60% of the Fund is invested in U.S. Treasury
securities that can help cushion the downside during a difficult market for
emerging growth stocks such as we recently experienced.
In an environment characterized by low inflation and low interest rates and
where corporate profit growth is moderating, we think that emerging growth
stocks offer very attractive values. We believe that the Fund's health care
stocks in particular have very favorable risk/reward characteristics given their
attractive earnings outlooks and low relative price earnings ratios (P/E ratio)
compared to their forecasted growth rates. (A P/E ratio shows the relationship
between a stock's price and the company's earnings for the last four quarters.)
Genzyme, IDEC Pharmaceuticals and Chiron are all Fund holdings that fit in that
category. With valuations at such historically low levels, the beginning of
possible higher merger activity in emerging growth stocks could also benefit
their performance going forward.
In closing, thank you for your continued confidence in our investment-management
approach. We look forward to helping you pursue your financial goals in the
years ahead.
Sincerely,
/s/ Heath B. McLendon /s/ Richard A. Freeman
Heath B. McLendon Richard A. Freeman
Chairman Vice President and
Investment Officer
June 23, 1998
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 3
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance
- --------------------------------------------------------------------------------
Net Asset Value
--------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
================================================================================
5/31/98 $8.46 $8.29 $0.31 $0.03 2.03%+
- --------------------------------------------------------------------------------
11/30/97 8.63 8.46 0.00 1.23 12.28
- --------------------------------------------------------------------------------
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 $1.88 $2.42
================================================================================
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 5/31/98+ 2.03% (3.12)%
- --------------------------------------------------------------------------------
Year Ended 5/31/98 11.34 5.74
- --------------------------------------------------------------------------------
Five Years Ended 5/31/98 9.34 8.22
- --------------------------------------------------------------------------------
8/30/91* through 5/31/98 8.95 8.13
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without
Sales Charge(1)
================================================================================
8/30/91* through 5/31/98 78.48%
================================================================================
(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 1998 Semi-Annual Report to Shareholders
<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 1998
[The following table was depicted as a line chart in the printed material.]
Zeros Plus Value Line Lehman Bros.
Emerging Growth Composite Intermediate Term
Series 2000 Index Gov't. Bond Index
----------- ----- -----------------
8/31/91 9500 10000 10000
11/91 9463 9463 10406
11/92 10328 10600 11251
11/93 11952 11673 12279
11/94 11928 11180 12075
11/95 14573 13386 13726
11/96 14800 15316 14502
11/97 16617 18327 15412
5/31/98 16955 19538 15956
+ 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, 1998. 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.
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 5
<PAGE>
- --------------------------------------------------------------------------------
Portfolio Highlights (unaudited) May 31, 1998
- --------------------------------------------------------------------------------
Common Stock Industry Breakdown
(as a percentage of total common stocks)
[The following table was depicted as a pie chart in the printed material.]
Biotechnology 18.3%
Capital Goods 11.8%
Drugs 3.3%
Pharmaceuticals 21.6%
Telecommunications 19.6%
Technology 25.4%
Percentage of
Top Ten Holdings Total Investments
================================================================================
U.S. Treasury Strips 56.1%
Tyco International Ltd. 5.2
C-COR Electronics, Inc. 4.4
California Microwave, Inc. 4.2
Genzyme Corp. - General Division 3.8
Quantum Corp. 3.7
IDEC Pharmaceuticals Corp. 3.5
Vertex Pharmaceuticals, Inc. 3.5
Chiron Corp. 3.4
Tech-Sym Corp. 3.3
================================================================================
- --------------------------------------------------------------------------------
6 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) May 31, 1998
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
COMMON STOCK -- 43.9%
Biotechnology -- 8.0%
100,000 Chiron Corp.* $ 1,806,250
100,000 Gensia Sicor Inc.* 425,000
75,000 Genzyme Corp.--General Division* 2,053,125
3,000 Genzyme Corp.-- Tissue Repair* 19,500
- --------------------------------------------------------------------------------
4,303,875
- --------------------------------------------------------------------------------
Capital Goods -- 5.2%
50,000 Tyco International Ltd. 2,768,750
- --------------------------------------------------------------------------------
Drugs -- 1.5%
100,000 Advanced Polymer Systems, Inc.* 787,500
- --------------------------------------------------------------------------------
Pharmaceutical -- 9.5%
40,000 Forest Laboratories Inc., Class A Shares* 1,320,000
60,000 IDEC Pharmaceuticals Corp.* 1,890,000
65,000 Vertex Pharmaceuticals, Inc.* 1,868,750
- --------------------------------------------------------------------------------
5,078,750
- --------------------------------------------------------------------------------
Technology -- 11.1%
100,000 Excel Technology Inc.* 1,012,500
90,000 Quantum Corp.* 1,968,750
60,500 Tech-Sym Corp.* 1,750,719
80,000 VLSI Technology, Inc.* 1,240,000
- --------------------------------------------------------------------------------
5,971,969
- --------------------------------------------------------------------------------
Telecommunications -- 8.6%
150,050 C-COR Electronics, Inc.* 2,382,044
104,500 California Microwave, Inc.* 2,240,218
- --------------------------------------------------------------------------------
4,622,262
- --------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost-- $12,810,523) 23,533,106
================================================================================
FACE
AMOUNT SECURITY VALUE
================================================================================
U.S. GOVERNMENT OBLIGATION -- 56.1%
$33,000,000 U.S. Treasury Strips, zero coupon due 2/15/00
(Cost-- $28,822,530) 30,083,130
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $41,633,053**) $53,616,236
================================================================================
* Non-income producing security.
** Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 7
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) May 31, 1998
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $41,633,053) $53,616,236
Cash 106,691
- --------------------------------------------------------------------------------
Total Assets 53,722,927
- --------------------------------------------------------------------------------
LIABILITIES:
Capital gains distribution payable 165,984
Investment advisory fees payable 16,599
Administration fees payable 8,300
Distribution fees payable 1,216
Accrued expenses 35,398
- --------------------------------------------------------------------------------
Total Liabilities 227,497
- --------------------------------------------------------------------------------
Total Net Assets $53,495,430
================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 6,450
Capital paid in excess of par value 39,305,028
Undistributed net investment income 701,012
Accumulated net realized gain on security transactions 1,499,757
Net unrealized appreciation of investments 11,983,183
-----------
Total Net Assets $53,495,430
================================================================================
Shares Outstanding 6,450,308
- --------------------------------------------------------------------------------
Net Asset Value (and redemption price) $ 8.29
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
8 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations (unaudited)
- --------------------------------------------------------------------------------
For the Six Months Ended May 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest $ 1,204,000
Dividends 3,125
- --------------------------------------------------------------------------------
Total Investment Income 1,207,125
- --------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2) 113,841
Distribution fees (Note 2) 71,150
Administration fees (Note 2) 56,920
Shareholder and system servicing fees 33,436
Audit and legal 13,240
Shareholder communications 11,354
Trustees' fees 7,275
Custody 2,009
Other 2,500
- --------------------------------------------------------------------------------
Total Expenses 311,725
- --------------------------------------------------------------------------------
Net Investment Income 895,400
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (NOTE 3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 6,818,637
Cost of securities sold 5,319,099
- --------------------------------------------------------------------------------
Net Realized Gain 1,499,538
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of period 13,078,845
End of period 11,983,183
- --------------------------------------------------------------------------------
Decrease in Net Unrealized Appreciation (1,095,662)
- --------------------------------------------------------------------------------
Net Gain on Investments 403,876
- --------------------------------------------------------------------------------
Increase in Net Assets from Operations $ 1,299,276
================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 9
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Six Months Ended May 31, 1998 (unaudited)
and the Year Ended November 30, 1997
1998 1997
================================================================================
OPERATIONS:
Net investment income $ 895,400 $ 1,977,400
Net realized gain 1,499,538 7,309,576
Decrease in net unrealized appreciation (1,095,662) (2,098,279)
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations 1,299,276 7,188,697
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (2,125,380) --
Net realized gains (165,984) (7,551,121)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (2,291,364) (7,551,121)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net asset value of shares issued for
reinvestment of dividends 2,077,551 7,366,972
Cost of shares reacquired (6,427,794) (13,598,864)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Fund Share Transactions (4,350,243) (6,231,892)
- --------------------------------------------------------------------------------
Decrease in Net Assets (5,342,331) (6,594,316)
NET ASSETS:
Beginning of period 58,837,761 65,432,077
- --------------------------------------------------------------------------------
End of period* $ 53,495,430 $ 58,837,761
================================================================================
* Includes undistributed net investment
income of: $701,012 $1,930,992
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1998 Semi-Annual Report to Shareholders
<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 offered for sale to new investors. The
Trust consists of this Fund and two other funds: Zeros and Appreciation Series
1998 and 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 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 or 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; (j) the Fund intends
to comply with the applicable provisions of the Internal Revenue Code of 1986,
as amended,
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 11
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
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
Mutual Management Corp. ("MMC"), a subsidiary of Salomon Smith Barney Holdings
Inc. ("SSBH"), acts as investment adviser of the Fund. The Fund pays MMC an
investment advisory fee calculated at an annual rate of 0.40% of the average
daily net assets. MMC also acts as the Fund's administrator for which the Fund
pays a fee calculated at an annual rate of 0.20% of the average daily net
assets. These fees are calculated daily and paid monthly.
Pursant to a Distribution Plan, the Fund pays Smith Barney Inc. ("SB"), another
subsidiary of SSBH, 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, 1998, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases --
- --------------------------------------------------------------------------------
Sales $ 6,818,637
================================================================================
At May 31, 1998, the aggregate gross unrealized appreciation and depreciation of
investments for Federal income tax purposes were substantially as follows:
===============================================================================
Gross unrealized appreciation $12,031,636
Gross unrealized depreciation (48,453)
- -------------------------------------------------------------------------------
Net unrealized appreciation $11,983,183
===============================================================================
- --------------------------------------------------------------------------------
12 1998 Semi-Annual Report to Shareholders
<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, 1998, the Fund had an unlimited number of shares of beneficial
interest authorized with a par value of $0.001 per share. The Fund, Zeros and
Appreciation Series 1998 and 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, 1998 November 30, 1997
================================================================================
Shares issued on reinvestment 254,914 854,637
Shares redeemed (762,155) (1,476,738)
- --------------------------------------------------------------------------------
Net Decrease (507,241) (622,101)
================================================================================
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 13
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of beneficial interest outstanding throughout each period:
<TABLE>
<CAPTION>
1998(1) 1997 1996 1995 1994 1993
============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $8.46 $8.63 $9.28 $8.15 $9.00 $8.16
- ------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.14 0.28 0.30 0.27 0.27 0.26
Net realized and unrealized gain (loss) 0.03 0.78 (0.16) 1.48 (0.28) 0.96
- ------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.17 1.06 0.14 1.75 (0.01) 1.22
- ------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.31) -- (0.57) (0.27) (0.34) (0.29)
Net realized gains (0.03) (1.23) (0.22) (0.35) (0.50) (0.09)
- ------------------------------------------------------------------------------------------------------------
Total Distributions (0.34) (1.23) (0.79) (0.62) (0.84) (0.38)
- ------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $8.29 $8.46 $8.63 $9.28 $8.15 $9.00
- ------------------------------------------------------------------------------------------------------------
Total Return 2.03%++ 12.28% 1.55% 22.17% (0.20)% 15.72
- ------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (millions) $53 $59 $65 $77 $75 $97
- ------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.09%+ 1.05% 1.11% 1.17% 1.15% 1.10%
Net investment income 3.14+ 3.15 3.15 3.12 3.27 3.12
- ------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 0% 0% 0% 6% 1% 0%
- ------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(2) $0.05 $0.06 $0.06 $0.06 -- --
============================================================================================================
</TABLE>
(1) For the six months ended May 31, 1998 (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.
- --------------------------------------------------------------------------------
14 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Additional Shareholder Information (unaudited)
- --------------------------------------------------------------------------------
On February 6, 1998 a special meeting of shareholders of the Trust was held for
the purpose of voting on the following matters:
1. To elect Trustees of the Trust; and
2. To approve or disapprove the reclassification, modification and/or
elimination of certain fundamental investment policies.
The results of the vote on Proposal 1 were as follows:
Shares Voted Percentage Shares Voted Percentage
Name of Trustees For Shares Voted Against Shares Voted
================================================================================
Paul R. Ades 18,357,855.212 96.992% 569,401.879 3.008%
Herbert Barg 18,324,756.049 96.817 602,501.042 3.183
Dwight B. Crane 18,357,438.225 96.989 569,818.866 3.011
Frank Hubbard 18,355,307.898 96.978 571,949.193 3.022
Jerome Miller 18,357,924.291 96.992 569,332.800 3.008
Ken Miller 18,353,804.176 96.970 573,452.915 3.030
Heath B. McLendon 18,341,693.427 96.906 585,563.664 3.094
================================================================================
Proposal 2 requested that shareholders approve certain modifications to the
fundamental policies of the Fund in order to modernize them in view of certain
regulatory, business or industry developments that have occurred since original
adoption of these policies by the Fund. The following chart demonstrates that
all proposals were approved by shareholders.
================================================================================
Diversification Approved
- --------------------------------------------------------------------------------
Industry Concentration Approved
- --------------------------------------------------------------------------------
Borrowing Approved
- --------------------------------------------------------------------------------
Lending by the Fund Approved
- --------------------------------------------------------------------------------
Real Estate Approved
================================================================================
The information below reports the lowest percentage of shares voting for the
proposals, the highest percentage of shares voting against and abstaining by
shareholders of the Fund on all proposals.
Shares Percentage Shares Percentage Percentage
Voted of Shares Voted of Shares Shares of Shares
For Voted Against Voted Abstaining Abstained
================================================================================
3,218,804.422 90.053% 87,699.146 2.454% 267,825.908 7.493%
================================================================================
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 15
<PAGE>
Smith Barney SMITH BARNEY
Principal Return Fund
A Member of TravelersGroup [LOGO]
Trustees
Paul R. Ades
Herbert Barg
Dwight B. Crane
Frank Hubbard
Heath B. McLendon, Chairman
Jerome Miller
Ken Miller
Allan R. Johnson, Emeritus
John F. White, Emeritus
Officers
Heath B. McLendon
Chief Executive Officer
Lewis E. Daidone
Senior Vice President
and Treasurer
Richard A. Freeman
Vice President and
Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
Investment Manager
Mutual Management Corp.
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 -- 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
www.smithbarney.com
FD2403 7/98
[GRAPHIC OMITTED]
Smith Barney Principal
Return Fund
Security and
Growth Fund
-----------------------------------------
SEMI-ANNUAL REPORT
-----------------------------------------
May 31, 1998
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day(SM).
<PAGE>
Smith Barney
Principal
Return Fund
[PHOTO OMITTED] [PHOTO OMITTED]
HEATH B. MCLENDON JOHN G. GOODE
Chairman Vice President and
Investment Officer
Dear Shareholder:
We are pleased to provide the semi-annual report for the Smith Barney Principal
Return Fund -- Security & Growth Fund ("Fund") for the period ended May 31,
1998. 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.
Performance Update
For the six months ended May 31, 1998, the Fund posted a negative 3.97% total
return. The zero coupon bonds held in the Fund appreciated by approximately
4.95%. (Zero coupon bonds are bonds that pay interest only at maturity. These
bonds are sold at a discount to their face value, which is determined by the
stated interest rate.) The zero coupon bonds represent more than 50% of the
Fund's total portfolio and are sufficient to return investors' original capital
at maturity, without regard to the value of the stock portion of the portfolio.
The stock and cash component of the Fund fell approximately 12.9%. The closest
benchmark to the portfolio of stocks held in the Fund is the Russell 2000 Index.
(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 Index appreciated approximately 6.2% during the six months
under review.
The primary factors affecting Fund performance included:
o The bond market remained strong as interest rates declined during the last
six months. A number of factors contributed to this. One of the most
important factors influencing the markets was the Asian economic crisis,
which sent many foreign investors scrambling for investment "safe" havens.
U.S. Treasury securities, because of their high quality and liquidity,
have been a particular favorite of many global investors. Also helping
U.S. interest rates were the generally strong U.S. dollar and the
elimination of the U.S. government's deficit. With approximately 50% of
Fund assets in zero coupon bonds maturing in 2005, lower interest rates
led to higher bond prices in the Fund's portfolio.
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 1
<PAGE>
o In recent quarters, stock market performance has become much narrower with
a larger percentage of investment dollars finding their way into
large-capitalization stocks, especially the mega-capitalization stocks
that account for the largest 25 to 50 positions within the S&P 500 Index.
The ratio of the Russell 2000 Index divided by the Russell 1000 (an index
that represents large-capitalization stocks), shows that smaller company
issues, especially smaller company value stocks, have been out of favor
since 1994.
o In the previous four years before 1994 just the reverse was true as
smaller-sized company value stocks outperformed larger-sized company
stocks. We believe that value investing within the small capitalization
stock universe should be rewarding during the next three to five years. We
anticipate single-digit returns (i.e., 6%-8%) for the S&P 500 during this
period with earnings growth, although at a slower rate, being offset by
P/E compression. (The S&P 500 Index is a capitalization-weighted measure
of 500 widely held common stocks.) P/E expansion explains much of the
absolute and relative performance of the S&P 500 since 1994. In our
opinion, small-capitalization company value stocks can outperform the S&P
500 by a significant amount in the next few years.
o We believe that the technology, energy and biotechnology sectors offer
some of the best values in the market today. However, these segments of
the market, especially in the smaller company sector, have been
challenging as investment dollars have migrated increasingly to larger
companies in recent quarters.
Market Outlook
We believe that it is likely that earnings for the S&P 500 will increase in the
5%-6% range this year and possibly 4% next year which suggests to us that many
companies will be experiencing earnings disappointments. Many of the largest
U.S. companies are experiencing a decline in their foreign business and the
strong U.S. dollar also affects their foreign earnings. Smaller-sized companies
often derive a larger percentage of their sales and earnings from domestic
operations and their growth prospects, in many cases, could be superior to those
for larger companies. In the first quarter of 1998, earnings for the Russell
2000 companies increased roughly 8% compared to about 4% for the companies in
the S&P 500 Index.
The value inherent in small-capitalization stocks relative to larger-sized
companies is as compelling as at any time in the last 25 years. Consequently, we
believe the Russell 2000 index will outperform the Russell 1000 Index by a
substantial margin in the next three to five years.
- --------------------------------------------------------------------------------
2 1998 Semi-Annual Report to Shareholders
<PAGE>
Investment Strategy
Generally speaking, we are looking for companies whose growth prospects we
believe will be superior in the coming years but whose shares are available at
much more attractive valuations. Many S&P 500 companies command P/E ratios that
are three times or more the underlying growth rate of earnings. We believe it
should be possible, in many instances, to find companies that provide growth
rates that are equal to or greater than the P/E necessary to acquire them. We
look forward to benefiting from what we believe will be the much-improved
performance of smaller capitalization value stocks in the years ahead.
We thank you for your investment in the Smith Barney Principal Return Fund --
Security and Growth Fund.
Sincerely,
/s/ Heath B. McLendon /s/ John G. Goode
Heath B. McLendon John G. Goode
Chairman Vice President and
Investment Officer
July 13, 1998
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 3
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance
- --------------------------------------------------------------------------------
Net Asset Value
----------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
================================================================================
5/31/98 $10.12 $ 9.36 $0.28 $0.08 (3.97)%+
- --------------------------------------------------------------------------------
11/30/97 10.22 10.12 0.03 $1.75 16.42
- --------------------------------------------------------------------------------
11/30/96 10.68 10.22 0.62 0.99 11.15
- --------------------------------------------------------------------------------
3/30/95* - 11/30/95 9.60 10.68 0.00 0.14 12.70+
================================================================================
Total $0.93 $2.96
================================================================================
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 5/31/98+ (3.97)% (7.79)%
- --------------------------------------------------------------------------------
Year Ended 5/31/98 10.83 6.39
- --------------------------------------------------------------------------------
3/30/95* through 5/31/98 11.20 9.78
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without
Sales Charge(1)
================================================================================
3/30/95* through 5/31/98 40.05%
================================================================================
(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.
- --------------------------------------------------------------------------------
4 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance (unaudited)
- --------------------------------------------------------------------------------
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+
- --------------------------------------------------------------------------------
March 1995 -- May 1998
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE CHART IN THE PRINTED MATERIAL.]
Lehman Brothers
Security Standard Intermediate
and Growth & Poor's 500 Term Government Russell 2000
Fund Index Bond Index Index
- --------------------------------------------------------------------------------
(amounts in dollars)
3/30/95 9,600 10,000 10,000 10,000
5/95 10,170 10,653 10,401 10,398
11/95 10,819 12,237 10,877 11,963
5/96 12,030 13,679 10,873 14,131
11/96 12,026 15,644 11,493 13,938
5/97 12,131 17,706 11,647 15,115
11/97 14,000 20,104 12,214 17,201
5/31/98 13,445 23,133 12,645 18,326
+ 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, 1998. 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 2,000 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.
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 5
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) May 31, 1998
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
COMMON STOCK -- 46.0%
Business Services -- 1.4%
150,000 United Road Services, Inc.(a) $ 2,400,000
- --------------------------------------------------------------------------------
Computer Peripheral -- 2.3%
175,000 Quantum Corp.(a)(b) 3,828,125
- --------------------------------------------------------------------------------
Computer Software -- 8.0%
200,000 Adobe Systems, Inc.(a)(b) 7,987,500
861,700 Geoworks Corp.(a) 3,931,506
100,000 Macromedia Inc.(a) 1,584,375
- --------------------------------------------------------------------------------
13,503,381
- --------------------------------------------------------------------------------
Consumer Products -- 1.1%
100,000 Global-Tech Appliances Inc.(a) 1,875,000
- --------------------------------------------------------------------------------
Electronics Semiconductor -- 5.5%
470,000 California Micro Devices Corp.(a) 2,702,500
400,000 Cypress Semiconductor Corp.(a) 3,425,000
100,000 Peak International Ltd.(a)(b) 1,606,250
746,000 SEEQ Technology 1,585,250
- --------------------------------------------------------------------------------
9,319,000
- --------------------------------------------------------------------------------
Forest Products -- 1.2%
980,200 Asia Pacific Resource International
Holding Ltd., Class A Shares(a) 2,021,663
- --------------------------------------------------------------------------------
Manufacturing-Special -- 2.4%
150,000 Optical Coating Laboratory Inc. 2,550,000
2,727,272 Power Spectra Inc.(a)(c) 1,145,454
2,000,000 Power Spectra Inc.(a)(d)(e) 420,000
- --------------------------------------------------------------------------------
4,115,454
- --------------------------------------------------------------------------------
Medical Biotechnology -- 5.8%
450,000 Alteon Corp.(a) 1,715,625
181,500 Aphton Corp.(a)(f) 2,364,531
100,000 Neurex Corp.(a) 2,806,250
350,000 Onyx Pharmaceuticals Inc.(a) 2,800,000
- --------------------------------------------------------------------------------
9,686,406
- --------------------------------------------------------------------------------
Medical Products & Supplies -- 1.4%
965,000 Metra Biosystems, Inc.(a) 2,352,188
- --------------------------------------------------------------------------------
Metals-Diversified -- 6.1%
200,000 Alyn Corp.(a) 1,600,000
150,000 Commonwealth Industries Inc. 2,193,750
300,000 RMI Titanium Co.(a)(b) 6,431,250
- --------------------------------------------------------------------------------
10,225,000
- --------------------------------------------------------------------------------
Office Equipment & Supplies -- 2.0%
200,000 Danka Business Systems PLC(b) 3,375,000
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
6 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) May 31, 1998
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Oil & Gas -- 1.6%
2,500,000 Abacan Resource Corp.(a) $ 937,500
75,000 Nabors Industries, Inc.(a) 1,767,187
- --------------------------------------------------------------------------------
2,704,687
- --------------------------------------------------------------------------------
Paper -- 2.0%
100,000 Schweitzer Mauduit International Inc. 3,306,250
- --------------------------------------------------------------------------------
Restaurant -- 5.1%
250,000 Lone Star Steakhouse & Saloon, Inc.(a) 4,218,750
675,000 Taco Cabana Inc., Class A Shares(a) 4,303,125
- --------------------------------------------------------------------------------
8,521,875
- --------------------------------------------------------------------------------
Telecommunications -- 0.1%
6,500 CellNet Data Systems(a) 158,438
- --------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost -- $94,163,445) $ 77,392,467
================================================================================
FOREIGN STOCK -- 0.9% 220,000 Canadian Fracmaster Ltd.
(Cost -- $1,590,357) 1,436,426
================================================================================
FACE
AMOUNT SECURITY VALUE
================================================================================
U.S. TREASURY STRIPS -- 52.6%
$132,000,000 U.S. Treasury Strips, zero coupon due 8/15/05
(Cost -- $78,372,804) 88,413,600
================================================================================
REPURCHASE AGREEMENT -- 0.5%
785,000 Chase Manhattan Bank, 5.50% due 6/1/98; Proceeds
at maturity -- $785,360; (Fully collateralized by
U.S. TreasuryNotes, 5.50% due 1/31/03; Market
value -- $800,701)(Cost -- $785,000) 785,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $174,911,606*) $168,027,493
================================================================================
(a) Non-income producing security.
(b) A portion of this security is on loan (See Note 7).
(c) Security issued 2,727,272 warrants which are exercisable under certain
conditions and have a current value of $0 and a cost of $0.
(d) Security is valued by the Fund's Board of Trustees (See Note 6).
(e) Security is exempt from registration under Rule 144a of the Securities Act
of 1933. This security may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers.
(f) Security issued with 125,000 warrants which are exercisable under certain
conditions and have a current value of $39,062 and a cost of $0.
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 7
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) May 31, 1998
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $174,911,606) $168,027,493
Cash 50,112
Dividends and interest receivable 18,222
Collateral for securities loaned (Note 7) 19,336,500
- --------------------------------------------------------------------------------
Total Assets 187,432,327
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for securities loaned (Note 7) 19,336,500
Capital gains distribution payable 1,371,883
Distribution fees payable 198,058
Management fees payable 72,623
Payable for Fund shares sold 3,531
Accrued expenses 86,746
- --------------------------------------------------------------------------------
Total Liabilities 21,069,341
- --------------------------------------------------------------------------------
Total Net Assets $166,362,986
================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 17,765
Capital paid in excess of par value 154,359,343
Undistributed net investment income 1,852,800
Accumulated net realized gain from security transactions and
options 17,017,191
Net unrealized depreciation of investments (6,884,113)
- --------------------------------------------------------------------------------
Total Net Assets $166,362,986
================================================================================
Shares Outstanding 17,764,730
- --------------------------------------------------------------------------------
Net Asset Value (and redemption price) $9.36
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
8 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations (unaudited)
- --------------------------------------------------------------------------------
For the Six Months Ended May 31, 1998
INVESTMENT INCOME:
Interest $ 3,228,421
Dividends 85,360
- --------------------------------------------------------------------------------
Total Investment Income 3,313,781
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 468,217
Distribution fees (Note 2) 234,109
Shareholder and system servicing fees 108,348
Shareholder communications 16,033
Audit and legal 11,289
Trustees' fees 11,116
Custody 5,444
Other 1,616
- --------------------------------------------------------------------------------
Total Expenses 856,172
- --------------------------------------------------------------------------------
Net Investment Income 2,457,609
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND OPTIONS (NOTE 3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 50,300,478
Cost of securities sold 33,284,175
- --------------------------------------------------------------------------------
Net Realized Gain 17,016,303
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation (Depreciation)
of Investments:
Beginning of period 19,629,221
End of period (6,884,113)
- --------------------------------------------------------------------------------
Decrease in Net Unrealized Appreciation (26,513,334)
- --------------------------------------------------------------------------------
Net Loss on Investments and Options (9,497,031)
- --------------------------------------------------------------------------------
Decrease in Net Assets From Operations $ (7,039,422)
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 9
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Six Months Ended May 31, 1998 (unaudited)
and the Year Ended November 30, 1997
1998 1997
================================================================================
OPERATIONS:
Net investment income $ 2,457,609 $ 5,624,831
Net realized gain 17,016,303 29,915,321
Decrease in net unrealized appreciation (26,513,334) (4,335,441)
- --------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Operations (7,039,422) 31,204,711
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (5,552,181) (497,465)
Net realized gains (1,371,883) (30,380,974)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (6,924,064) (30,878,439)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 8):
Net asset value of shares issued
for reinvestment of dividends 5,425,816 30,210,679
Cost of shares reacquired (29,457,780) (70,185,118)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Fund Share Transactions (24,031,964) (39,974,439)
- --------------------------------------------------------------------------------
Decrease in Net Assets (37,995,450) (39,648,167)
NET ASSETS:
Beginning of period 204,358,436 244,006,603
- --------------------------------------------------------------------------------
End of period* $166,362,986 $204,358,436
================================================================================
* Includes undistributed net investment income of: $ 1,852,800 $ 4,947,372
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
The Security and Growth Fund ("Fund") is a separate investment fund of the Smith
Barney Principal Return Fund ("Trust"). The Trust, a Massachusetts business
trust, is registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. Shares of the Fund are not
currently 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 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 an 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 or 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; (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
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 11
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
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
Mutual Management Corp. ("MMC"), a subsidiary of Salomon Smith Barney Holdings
Inc. ("SSBH"), through its Davis Skaggs Investment Management division, acts as
investment manager of the Fund. The Fund pays MMC 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 SSBH, 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, 1998, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $ 29,122,540
- --------------------------------------------------------------------------------
Sales 50,300,478
================================================================================
At May 31, 1998, the aggregate gross unrealized appreciation and depreciation of
investments for Federal income tax purposes were substantially as follows:
================================================================================
Gross unrealized appreciation $ 18,210,877
Gross unrealized depreciation (25,094,990)
- --------------------------------------------------------------------------------
Net unrealized depreciation $ (6,884,113)
================================================================================
4. Repurchase Agreements
The Fund purchases (and its custodian takes possession of) U.S. government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day) at
an agreed-upon higher repurchase price. The Fund requires continual maintenance
of the market value of the collateral in amounts at least equal to the
repurchase price.
- --------------------------------------------------------------------------------
12 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
5. Option Contracts
Premiums paid when put or call options are purchased by the Fund, represent
investments, which are marked-to-market daily. When a purchased option expires,
the Fund will realize a loss in the amount of the premium paid. When the Fund
enters into a closing sales transaction, the Fund will realize a gain or loss
depending on whether the proceeds from the closing sales transaction are greater
or less than the premium paid for the option. When the Fund exercises a put
option, they will realize a gain or loss from the sale of the underlying
security and the proceeds from such sale will be decreased by the premium
originally paid. When the Fund exercises a call option, the cost of the security
which the Fund purchases upon exercise will be increased by the premium
originally paid.
At May 31, 1998, the Fund held no purchased call or put 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.
During the six months ended May 31, 1998, the Fund did not write any call or put
options.
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 13
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
6. Security Valued by the Fund's Board of Directors
The following security held by the Fund on May 31, 1998, is illiquid and valued
at fair value in good faith by, or under the direction of, the Fund's Board of
Trustees taking into consideration the appropriate economic, financial and other
pertinent available information pertaining to this security.
Value Percentage
Acquisition Per Fair of Total
Security Date Shares Unit Value Net Assets Cost
================================================================================
Power Spectra Inc. 4/10/97 2,000,000 $0.21 $420,000 0.25% $500,000
================================================================================
7. Lending of Portfolio Securities
The Fund has an agreement with its custodian whereby the custodian may lend
securities owned by the Fund to brokers, dealers and other financial
organizations, and receives a lender fee. Fees earned by the Fund on securities
lending are recorded as interest income. Loans of securities by the Fund are
collateralized by cash, U.S. government, securities or high quality money market
instruments that are maintained at all times in an amount at least equal to the
current market value of the securities loaned, plus a margin which may vary
depending on the type of securities loaned. The custodian establishes and
maintains the collateral in a segregated account. The Fund maintains exposure
for the risk of any losses in the investment of amounts received as collateral.
At May 31, 1998, the Fund loaned common stocks having a value of $18,376,489 and
holds the following collateral for loaned securities.
Security Description Value
================================================================================
Euro Time Deposits:
Banco Bilboa Vizcaya, 5.719% due 6/1/98 $ 3,552,349
Banque of Paribas, 5.719% due 6/1/98 4,224,415
Societe Generale, 5.719% due 6/1/98 3,552,349
Svenka, 5.656% due 6/1/98 3,552,349
Westdeutsche Landesbank, 5.656% due 6/1/98 3,552,349
Repurchase Agreement:
Merrill Lynch, 5.600% due 6/1/98 902,689
- --------------------------------------------------------------------------------
Total $19,336,500
================================================================================
- --------------------------------------------------------------------------------
14 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
8. Shares of Beneficial Interest
At May 31, 1998, 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, 1998 November 30, 1997
================================================================================
Shares issued on reinvestment 2,947,383 577,828
Shares redeemed (6,617,924) (3,010,947)
- --------------------------------------------------------------------------------
Net Decrease (3,670,541) (2,433,119)
================================================================================
9. Affiliate Transaction
At May 31, 1998, the Fund owns approximately 25% of Power Spectra, Inc., which
represents less than 1% of the Fund's total net assets. Therefore, under the
Investment Company Act of 1940, Power Spectra would be considered an affiliate
of the Fund.
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 15
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of beneficial interest outstanding throughout each period:
1998(1) 1997 1996 1995(2)
================================================================================
Net Asset Value,
Beginning of Period $10.12 $10.22 $10.68 $9.60
- --------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.14 0.28 0.33 0.28
Net realized and
unrealized gain (loss) (0.54) 1.40 0.82 0.94
- --------------------------------------------------------------------------------
Total Income (Loss) From
Operations (0.40) 1.68 1.15 1.22
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.28) (0.03) (0.62) --
Net realized gains (0.08) (1.75) (0.99) (0.14)
- --------------------------------------------------------------------------------
Total Distributions (0.36) (1.78) (1.61) (0.14)
- --------------------------------------------------------------------------------
Net Asset Value,
End of Period $9.36 $10.12 $10.22 $10.68
- --------------------------------------------------------------------------------
Total Return (3.97)%++ 16.42% 11.15% 12.70%++
- --------------------------------------------------------------------------------
Net Assets, End
of Period (000s) $166,363 $204,358 $244,007 $309,822
- --------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.91%+ 0.92% 0.99% 1.02%+
Net investment income 2.62+ 2.62 2.88 4.07+
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 16% 20% 43% 26%
- --------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions $0.06 $0.04 $0.05 $0.06
================================================================================
(1) For the six months ended May 31, 1998 (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.
- --------------------------------------------------------------------------------
16 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Additional Shareholder Information (unaudited)
- --------------------------------------------------------------------------------
On February 6, 1998, a special meeting of the shareholders of the Trust was held
to elect Trustees of the Trust.
The results of the vote were as follows:
Shares Voted Percentage Shares Voted Percentage
Name of Trustees For Shares Voted Against Shares Voted
================================================================================
Paul R. Ades 18,357,855.212 96.992% 569,401.879 3.008%
Herbert Barg 18,324,756.049 96.817 602,501.042 3.183
Dwight B. Crane 18,357,438.225 96.989 569,818.866 3.011
Frank Hubbard 18,355,307.898 96.978 571,949.193 3.022
Jerome Miller 18,357,924.291 96.992 569,332.800 3.008
Ken Miller 18,353,804.176 96.970 573,452.915 3.030
Heath B. McLendon 18,341,693.427 96.906 585,563.664 3.094
================================================================================
On February 20, 1998, a special meeting of the shareholders of the Fund was held
to approve certain modifications to the fundamental policies of the Fund in
order to modernize them in view of certain regulatory, business or industry
developments that have occurred since original adoption of these policies by the
Fund. The following chart demonstrates that all proposals were approved by
shareholders.
================================================================================
Diversification Approved
- --------------------------------------------------------------------------------
Industry Concentration Approved
- --------------------------------------------------------------------------------
Borrowing Approved
- --------------------------------------------------------------------------------
Lending by the Fund Approved
- --------------------------------------------------------------------------------
Real Estate Approved
================================================================================
The information below reports the lowest percentage of shares voting for the
proposals, the highest percentage of shares voting against and abstaining by
shareholders of the Fund on all proposals.
Shares Percentage Shares Percentage Percentage
Voted of Shares Voted of Shares Shares of Shares
For Voted Against Voted Abstaining Abstained
================================================================================
9,139,834.665 89.937% 200,285.147 1.970% 822,405.817 8.093%
================================================================================
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 17
<PAGE>
Smith Barney
Principal
Return Fund
SMITH BARNEY
A Member of TravelersGroup[LOGO]
Trustees
Paul R. Ades
Herbert Barg
Dwight B. Crane
Frank Hubbard
Heath B. McLendon, Chairman
Jerome Miller
Ken Miller
Allan R. Johnson, Emeritus
John F. White, 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
Investment Manager
Mutual Management Corp.
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
www.smithbarney.com
FD0951 7/98
