[GRAPHIC OMITTED]
Smith Barney Principal
Return Fund
Zeros Plus
Emerging Growth
Series 2000
------------------
SEMI-ANNUAL REPORT
------------------
May 31, 1999
Smith Barney Mutual Funds
<PAGE>
Smith Barney
Principal Return
Fund
[PHOTO OMITTED]
HEATH B. MCLENDON
Chairman
[PHOTO OMITTED]
RICHARD A. FREEMAN
Vice President and Investment Officer
Dear Shareholder:
We are pleased to present the semi-annual report for the Smith Barney Principal
Return Fund Zeros Plus Emerging Growth Series 2000 ("Fund") for the period ended
May 31, 1999. For your convenience, we have summarized the Fund's investment
strategy over this period. A comprehensive summary of performance and current
holdings can be found in the appropriate sections that follow.
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 typically 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, 1999, the Fund posted a total return of 8.32%.
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 11.03% and 6.16%,
respectively. The Lehman Brothers Intermediate Term Government Bond Index posted
a negative 0.23% in the most recent six-month period. Emerging growth stocks
currently comprise approximately 44% of the net assets of the Fund with the
balance accounted for by zero-coupon U.S. Treasury bonds.
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 1
<PAGE>
Market Overview
The past six months under review marked a recovery from some of the most
volatile times for the fixed income as well as equity markets this past decade.
The three interest-rate reductions instituted by the Federal Reserve Board
("Fed") beginning in September of 1998, led to a restoration of confidence in
the equity and corporate bond markets. The U.S. economy displayed considerable
resilience during and after the July through September 1998 market turmoil and
actually witnessed an acceleration in GDP growth thanks in large part to the
benefits of the "wealth effect" from the recovery in the stock market.
Once again, the major beneficiaries of the improving equity market climate were
the large-capitalization stocks with most of their indices reaching all-time
highs this spring. While remaining below the highs reached in April of 1998, the
Russell 2000 Index has begun to outperform some of the large capitalization
indices, such as the S&P 500 average with the latter's heavy concentration of
companies that had enjoyed several years of unprecedented outperformance. While
many analysts have pointed to the historical relative undervaluation of small-
and mid-capitalization company stocks for several years, a recent slowdown in
growth for a number of widely owned large-cap companies has investors wondering
whether the large-cap versus small-cap premium has not grown too wide. With so
many smaller companies selling at such attractive valuations, we have seen an
increase in acquisition activity in this area. One of our technology stocks,
VLSI, a semiconductor company, accepted a takeover offer from the Dutch
conglomerate Phillips, at a significant premium to its value prior to the offer.
While the Fed's interest rate reductions had the desirable effect of stabilizing
and then improving the outlook for the stock market, long-term interest rates
have increased considerably since the fall, as bond investors focus on an
economy that many, including the Fed, now view as being too strong with the
potential to cause an increase in the rate of inflation, the ultimate villain of
long-term bonds and correspondingly, equities. It should be noted that our
zero-coupon bonds should be relatively insensitive to moves in long-term rates
since they are of fairly short duration at this point and have a maturity of
about nine months. We believe that the increase in long-term interest rates from
4.75% in the fall, to the recent 6.00% level will eventually act to slow the
U.S. economy but not before the Fed may act to remove some of the liquidity it
added to the system last year.
- --------------------------------------------------------------------------------
2 1999 Semi-Annual Report to Shareholders
<PAGE>
Investment Strategy and Market Outlook
During the Fund's remaining months, we intend to emphasize primarily young,
innovative companies in dynamic industries that we believe possess above-average
earnings growth potential. Moreover, nearly 55% 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 recently experienced.
One of the most rapidly growing and most publicized technologies to emerge in
the twentieth century is the Internet and all the ancillary businesses that it
affects. With a user base numbering in the tens of millions, it has reached
critical mass faster than radio, television and cellular telephones, three of
this century's most important technological advances.
Two companies in the Fund, C-COR Electronics and Adaptive Broadband, may play an
important role in helping facilitate the growth of the Internet. C-COR
Electronics is a leading factor in supplying the hardware needed to modernize
the cable television infrastructure, judged by many experts as the most
effective means to rapidly deliver the Internet into the home. Adaptive
Broadband supplies equipment that facilitates the wireless transmission of
voice, video, data and the Internet from point to multipoint customers.
A recent debate has surfaced as to whether growth or value stocks will
outperform over the next year. We do not profess to know the answer but, we
always try to identify those growth companies that can best control their own
destinies. In the case of our aforementioned acquisition of VLSI, we had
believed that if Wall Street had not recognized the value of this company on the
stock market, investors would come along and monetize the value for us.
For the remainder of this century, Fed monetary policy and its impact on market
psychology should have an important impact on equity values. Unless long-term
rates decline below the recent 6.00% level, it is unlikely that the market can
continue to enjoy an increase in its historically high price/earnings ratio. In
this environment, it will be of paramount importance to own only those companies
that we believe have the potential to meet or exceed expectations.
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 3
<PAGE>
Thank you for your 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
July 7, 1999
- --------------------------------------------------------------------------------
4 1999 Semi-Annual Report to Shareholders
<PAGE>
- -----------------------------------------------------------------------------
Historical Performance
- -----------------------------------------------------------------------------
Net Asset Value
--------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
=============================================================================
5/31/99 $8.07 $8.47 $0.26 $0.00 8.32%+
- -----------------------------------------------------------------------------
11/30/98 8.46 8.07 0.31 0.49 5.05
- -----------------------------------------------------------------------------
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 $2.14 $2.88
=============================================================================
It is the Fund's policy to distribute dividends and capital gains, if any,
annually.
- --------------------------------------------------------------------------------
Average Annual Total Returns
- --------------------------------------------------------------------------------
Without With
Sales Charges(1) Sales Charges(2)
================================================================================
Six Months Ended 5/31/99+ 8.32% 2.96%
- --------------------------------------------------------------------------------
Year Ended 5/31/99 11.52 5.90
- --------------------------------------------------------------------------------
Five Years Ended 5/31/99 10.72 9.59
- --------------------------------------------------------------------------------
8/30/91* through 5/31/99 9.28 8.56
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without
Sales Charges(1)
================================================================================
8/30/91* through 5/31/99 99.04%
================================================================================
(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.
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 5
<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 1999
[GRAPHIC OMITTED]
+ 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, 1999. 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. Investors may not invest directly in an index.
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.
- --------------------------------------------------------------------------------
6 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Portfolio Highlights (unaudited) May 31, 1999
- --------------------------------------------------------------------------------
Common Stock Industry Breakdown
(as a percentage of total common stock)
[THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL.]
Telecommunications 22.0%
Biotechnology 20.8%
Capital Goods 13.3%
Drug Delivery 2.4%
Technology 18.8%
Pharmaceuticals 22.7%
Percentage of
Top Ten Holdings Total Investments
================================================================================
U.S. Treasury Strips 54.9%
C-COR Electronics, Inc. 6.2
Tyco International Ltd. 5.9
IDEC Pharmaceuticals Corp. 5.3
Chiron Corp. 4.2
Genzyme Corp. - General Division 3.9
Adaptive Broadband Corp. 3.5
Quantum Corp. 3.3
Forest Laboratories, Inc. 2.8
Excel Technology, Inc. 2.6
================================================================================
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 7
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) May 31, 1999
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
COMMON STOCK -- 44.1%
Biotechnology -- 9.2%
95,000 Chiron Corp.* $2,006,875
100,000 Gensia Sicor Inc.* 450,000
46,000 Genzyme Corp. - General Division* 1,865,875
3,000 Genzyme Corp. - Tissue Repair* 7,125
5,402 Genzyme - Molecular Oncology* 19,245
- --------------------------------------------------------------------------------
4,349,120
- --------------------------------------------------------------------------------
Capital Goods -- 5.9%
32,000 Tyco International Ltd. 2,796,000
- --------------------------------------------------------------------------------
Drug Delivery -- 1.0%
100,000 Advanced Polymer Systems, Inc.* 500,000
- -------------------------------------------------------------------------------
Pharmaceuticals -- 10.0%
28,000 Forest Laboratories, Inc., Class A Shares 1,333,500
50,000 IDEC Pharmaceuticals Corp.* 2,521,875
45,000 Vertex Pharmaceuticals Inc.* 902,813
- --------------------------------------------------------------------------------
4,758,188
- --------------------------------------------------------------------------------
Technology -- 8.3%
100,000 Excel Technology, Inc.* 1,250,000
80,000 Quantum Corp.* 1,585,000
50,000 Tech-Sym Corp.* 1,096,875
- --------------------------------------------------------------------------------
3,931,875
- --------------------------------------------------------------------------------
Telecommunications -- 9.7%
104,500 Adaptive Broadband Corp.* 1,658,937
125,050 C-COR Electronics, Inc.* 2,954,306
- --------------------------------------------------------------------------------
4,613,243
- --------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost -- $10,074,991) 20,948,426
================================================================================
FACE
AMOUNT SECURITY VALUE
================================================================================
U.S. TREASURY STRIPS -- 54.9%
$27,000,000 U.S. Treasury Strips, zero coupon due 2/15/00
(Cost -- $25,512,500) 26,056,890
================================================================================
REPURCHASE AGREEMENT -- 1.0%
474,000 J.P. Morgan Securities, Inc., 4.800% due
6/1/99; Proceeds at maturity -- $474,253;
(Fully collateralized by U.S. Treasury Notes
and Bonds, 5.625% to 12.750% due 5/15/01
to 5/15/17; Market value -- $483,481)
(Cost -- $474,000) 474,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $36,061,491**) $47,479,316
================================================================================
* Non-income producing security.
** Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
8 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) May 31, 1999
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $36,061,491) $47,479,316
Cash 395
Interest receivable 63
- --------------------------------------------------------------------------------
Total Assets 47,479,774
- --------------------------------------------------------------------------------
LIABILITIES:
Investment advisory fees payable 13,916
Administration fees payable 6,958
Accrued expenses 25,867
- --------------------------------------------------------------------------------
Total Liabilities 46,741
- --------------------------------------------------------------------------------
Total Net Assets $47,433,033
================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 5,602
Capital paid in excess of par value 32,298,180
Undistributed net investment income 777,501
Accumulated net realized gain from security transactions 2,933,925
Net unrealized appreciation of investments 11,417,825
- --------------------------------------------------------------------------------
Total Net Assets $47,433,033
================================================================================
Shares Outstanding 5,601,818
- --------------------------------------------------------------------------------
Net Asset Value (and redemption price) $ 8.47
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 9
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations (unaudited)
- --------------------------------------------------------------------------------
For the Six Months Ended May 31, 1999
INVESTMENT INCOME:
Interest $ 1,042,137
Dividends 1,825
- --------------------------------------------------------------------------------
Total Investment Income 1,043,962
- --------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2) 96,974
Distribution fees (Note 2) 60,609
Administration fees (Note 2) 48,487
Shareholder and system servicing fees 28,647
Audit and legal 12,702
Shareholder communications 7,357
Trustees' fees 6,866
Custody 3,186
Other 1,393
- --------------------------------------------------------------------------------
Total Expenses 266,221
- --------------------------------------------------------------------------------
Net Investment Income 777,741
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS (NOTE 3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 6,839,178
Cost of securities sold 4,156,976
- --------------------------------------------------------------------------------
Net Realized Gain 2,682,202
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of period 10,947,320
End of period 11,417,825
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 470,505
- --------------------------------------------------------------------------------
Net Gain on Investments 3,152,707
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 3,930,448
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Six Months Ended May 31, 1999 (unaudited)
and the Year Ended November 30, 1998
<TABLE>
<CAPTION>
1999 1998
===================================================================================
OPERATIONS:
<S> <C> <C>
Net investment income $ 777,741 $ 1,755,896
Net realized gain 2,682,202 2,958,032
Increase (decrease) in net unrealized appreciation 470,505 (2,131,525)
- -----------------------------------------------------------------------------------
Increase in Net Assets From Operations 3,930,448 2,582,403
- -----------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (1,561,748) (2,125,380)
Net realized gains -- (2,872,512)
- -----------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (1,561,748) (4,997,892)
- -----------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net asset value of shares issued for
reinvestment of dividends 1,513,905 4,872,682
Cost of shares reacquired (6,483,204) (11,261,322)
- -----------------------------------------------------------------------------------
Decrease in Net Assets From
Fund Share Transactions (4,969,299) (6,388,640)
- -----------------------------------------------------------------------------------
Decrease in Net Assets (2,600,599) (8,804,129)
NET ASSETS:
Beginning of period 50,033,632 58,837,761
- -----------------------------------------------------------------------------------
End of period* $ 47,433,033 $ 50,033,632
===================================================================================
* Includes undistributed net investment income of: $ 777,501 $ 1,561,508
===================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 11
<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 one other fund: Security and Growth Fund. The
financial statements and financial highlights for the other fund are presented
in a separate semi-annual report.
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 is determined in accordance with income tax regulations which may
differ from generally
- --------------------------------------------------------------------------------
12 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
accepted accounting principles; (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
SSBC Fund Management Inc. ("SSBC"), formerly known as Mutual Management Corp., a
subsidiary of Salomon Smith Barney Holdings Inc. ("SSBH"), acts as investment
adviser of the Fund. The Fund pays SSBC an investment advisory fee calculated at
an annual rate of 0.40% of the average daily net assets. SSBC 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.
CFBDS, Inc. acts as the Fund's distributor. Salomon Smith Barney Inc. ("SSB"),
another subsidiary of SSBH, acts as the primary broker for the Fund's portfolio
agency transactions. For the six months ended May 31, 1999, SSB did not receive
any brokerage commissions.
Pursant to a Distribution Plan, the Fund pays SSB 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 SSB.
3. Investments
During the six months ended May 31, 1999, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases --
- --------------------------------------------------------------------------------
Sales $6,839,178
================================================================================
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 13
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
At May 31, 1999, the aggregate gross unrealized appreciation and depreciation of
investments for Federal income tax purposes were substantially as follows:
===============================================================================
Gross unrealized appreciation $ 12,030,455
Gross unrealized depreciation (612,630)
- -------------------------------------------------------------------------------
Net unrealized appreciation $ 11,417,825
===============================================================================
4. Repurchase Agreements
The Fund purchases (and its custodian takes possession of) U.S. govern ment
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day) at
an agreed-upon higher repurchase price. The Fund requires continual maintenance
of the market value of the collateral in amounts at least equal to the
repurchase price.
5. Shares of Beneficial Interest
At May 31, 1999, the Fund had an unlimited number of shares of beneficial
interest authorized with a par value of $0.001 per share. The Fund 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, 1999 November 30, 1998
===============================================================================
Shares issued on reinvestment 189,951 604,422
Shares redeemed (785,072) (1,365,032)
- -------------------------------------------------------------------------------
Net Decrease (595,121) (760,610)
===============================================================================
- --------------------------------------------------------------------------------
14 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of beneficial interest outstanding throughout each year ended
November 30, except where noted:
<TABLE>
<CAPTION>
1999(1) 1998 1997 1996 1995 1994
============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 8.07 $ 8.46 $ 8.63 $ 9.28 $ 8.15 $ 9.00
- ------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.15 0.28 0.28 0.30 0.27 0.27
Net realized and unrealized
gain (loss) 0.51 0.13 0.78 (0.16) 1.48 (0.28)
- ------------------------------------------------------------------------------------------------------------
Total Income (Loss)
From Operations 0.66 0.41 1.06 0.14 1.75 (0.01)
- ------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.26) (0.31) -- (0.57) (0.27) (0.34)
Net realized gains -- (0.49) (1.23) (0.22) (0.35) (0.50)
- ------------------------------------------------------------------------------------------------------------
Total Distributions (0.26) (0.80) (1.23) (0.79) (0.62) (0.84)
- ------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 8.47 $ 8.07 $ 8.46 $ 8.63 $ 9.28 $ 8.15
- ------------------------------------------------------------------------------------------------------------
Total Return 8.32%++ 5.05% 12.28% 1.55% 22.17% (0.20)%
- ------------------------------------------------------------------------------------------------------------
Net Assets,
End of Period (millions) $ 47 $ 50 $ 59 $ 65 $ 77 $ 75
- ------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.10%+ 1.10% 1.05% 1.11% 1.17% 1.15%
Net investment income 3.21+ 3.30 3.15 3.15 3.12 3.27
- ------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 0% 0% 0% 0% 6% 1%
============================================================================================================
</TABLE>
(1) For the six months ended May 31, 1999 (unaudited).
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 15
<PAGE>
SALOMON SMITH BARNEY
----------------------------
A member of citigroup [LOGO]
Trustees
Paul R. Ades
Herbert Barg
Dwight B. Crane
Frank Hubbard
Heath B. McLendon, Chairman
Jerome Miller
Ken Miller
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
Paul A. Brook
Controller
Christina T. Sydor
Secretary
Investment Manager
SSBC Fund Management Inc.
Distributor
CFBDS, Inc.
Custodian
PNC Bank, N.A.
This report is submitted for the general informa tion of the shareholders of
Smith Barney Principal Return Fund -- Zeros Plus Emerging Growth Series 2000. It
is not authorized for distribu tion to prospective investors unless accom panied
or preceded by a current Prospectus for the Fund, which contains information
concerning the Fund's investment policies and expenses as well as other perti
nent information.
Salomon Smith Barney is a service mark of
Salomon Smith Barney Inc.
Smith Barney
Principal Return Fund
388 Greenwich Street, MF-2
New York, New York 10013
www.smithbarney.com
FD2403 7/99
[GRAPHIC OMITTED]
Smith Barney Principal
Return Fund
Security and
Growth Fund
------------------
SEMI-ANNUAL REPORT
------------------
May 31, 1999
Smith Barney Mutual Funds
<PAGE>
Smith Barney
Principal Return
Fund
[PHOTO OMITTED]
HEATH B. MCLENDON
Chairman
[PHOTO OMITTED]
JOHN G. GOODE
Vice President and
Investment Officer
Dear Shareholder:
We are pleased to present the semi-annual report for the Smith Barney Principal
Return Fund - Security and Growth Fund ("Fund") for the period ended May 31,
1999. 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. We hope you find this
report to be useful and informative.
Performance Update
For the six months ended May 31, 1999, the Fund returned 5.28%, excluding sales
charges. The zero coupon bonds held in the portfolio were approximately 57% of
the Fund's total investments. (Zero coupon bonds are bonds that do not pay
interest. These bonds are sold at a discount to their face value, which is
determined by the stated interest rate. The difference between the discounted
issue price and face value represents income earned.)
Currently the portfolio holds 57% of its assets in zero coupon strips, maturing
in the year 2005. These are held in order to assure that sufficient assets are
available to return an investor's original principal in the unlikely event all
common stocks in the portfolio were to lose 100% of their value. The remaining
43% of assets are invested in a portfolio of small- and mid-cap stocks.
Zero Coupon Bonds -- Maturity 2005
In the first week of October 1998, 89% of investors were bullish on bonds,
according to one financial institution that tracks sentiment readings in the
bond market. This is the highest figure we have seen, by a wide margin, in the
last decade. With the last bull market for bonds, in effect, having been
identified, bonds began to confound the consensus,
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 1
<PAGE>
with long rates moving from well below 5% to about 6%. Although the Fund's
holdings of zero coupon bonds have a maturity of only about six years, the
increase in interest rates did cause the price for the zeros held in the
portfolio to decline in the last six months' time. Prior to that, interest rates
had been declining, which provided a modest amount of upside to the portfolio.
Currently, long-term interest rates are at 6% and the bullish consensus on bonds
has recently fallen to less than 30%, a low number when one looks at the record
over the last ten years. We suspect that bonds could mount a rally in the next
few months and that the zero coupon component of the portfolio should do better
than the period since October.
Common Stocks
Included with this letter is a listing of our holdings in common stocks.
Approximately 65% of the common stocks in the Fund's portfolio are mid-cap in
size with market capitalizations of $1-$5 billion. About 34% of the common
stocks in the Fund's portfolio are in small-cap stocks in market capitalization.
Our heaviest portfolio industry concentrations are in technology and basic
materials.
The calendar year 1998 was a difficult one for managers of small- and mid-cap
portfolios. In a year in which the S&P 500 posted a 28% gain, indexes such as
the Russell 2000 actually declined a few percentage points. Unweighted indexes
such as the Value Line Index also showed that the average stock was in its own
private bear market. Another feature of the market, until recently, was the fact
that only a few stocks accounted for a disproportionate share of the gains
reported by many indexes. Finally, the Asian crisis and its effect on many
developing parts of the world such as Latin America caused many investors in
1998 to abandon smaller companies in favor of "safe haven" investments in the
largest, most liquid companies.
Several months ago, the gap in values between large- and smaller-capitalization
companies was wider than at any time in our experience. However, Alan Greenspan
and his associates around the world clearly favor policies to promote
"reflation," that is, higher growth rates for world GDP. In most parts of the
world, monetary and fiscal policies are being used to stimulate growth. The
stock market has begun to recognize that reflation would be bullish for smaller
and economically sensitive companies of the type held by the Fund. Since the
beginning of 1999, our equity holdings have advanced nearly 25% in price.
- --------------------------------------------------------------------------------
2 1999 Semi-Annual Report to Shareholders
<PAGE>
It is our belief that small- and mid-cap stocks will do much better than larger-
capitalization companies over the next three to five years. During the last five
years, P/E ratios doubled for the S&P 500, rising from about 14x in 1994 to
approximately 30x at present. Fully 15% of the annual returns to the S&P in the
last five years have come from P/E expansion. In our judgment, it is unlikely
that P/E expansion will continue into the future and that the S&P 500 index will
track underlying earnings growth rates of 6% - 8%.
In this environment, we believe smaller and mid-cap stocks can appreciate much
faster. Lower P/E ratios allow some room for expansion and many investors are
underweighted or not even represented in smaller companies. Secondly, many
smaller companies could well be acquired because of their favorable combination
of value and improving business prospects in a reflationary world economy.
Finally, many companies, recognizing their stocks are undervalued, have been
buying back shares. Even modest, positive money flows into the small- and
mid-cap arena could produce meaningful gains in share price.
Portfolio Changes
In the last year, significant new purchases of stocks included Union Pacific
Resources and Apache. Both stocks were purchased earlier this year when most
investors were negative on energy issues in general. Both companies should
benefit from the compelling supply/demand situation developing for domestic
natural gas.
Another important addition to the portfolio was Foundation Health Systems, a
leading HMO (health maintenance organization). With higher contract prices for
its services now being allowed, this company's share price has improved rather
dramatically in the last few months.
Other notable additions to the portfolio include IMC Global, St. Joe Company,
American Greetings, PMI Group, Clayton Homes, Waddell & Reed, Autodesk, Rexall
Sundown, CMAC Investment, Pier 1 Imports, Rostelecom, and Santa Cruz Operation.
Sales or reductions in positions occurred for Adobe Systems, Optical Coating
Laboratory and Macromedia. These were reduced or sold because they had reached
or exceeded our price objectives. Several positions with a great sensitivity to
foreign markets also were sold during the year. Domestic companies in the small-
and mid-cap area have very attractive valuations without the political and
economic risks often associated with foreign securities.
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 3
<PAGE>
Final Comments
It appears that both the bond and stock components of the portfolio may begin to
move in the same direction in the next few quarters. An improvement in the bond
market and continued broadening of the stock market would be beneficial to the
Fund's portfolio. We feel strongly that our holdings of small and mid-cap stocks
will outperform most indexes in the next three to five years.
Thank you for your investment in the Smith Barney Principal Return Fund -
Security and Growth Fund.
Sincerely,
/s/ Heath B. McLendon
Heath B. McLendon
Chairman
/s/ John G. Goode
John G. Goode
Vice President and
Investment Officer
June 10, 1999
- --------------------------------------------------------------------------------
4 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance
- --------------------------------------------------------------------------------
Net Asset Value
---------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
================================================================================
5/31/99 $ 8.73 $ 8.87 $0.31 $0.00 5.28%+
- --------------------------------------------------------------------------------
11/30/98 10.12 8.73 0.28 0.08 (10.43)
- --------------------------------------------------------------------------------
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 $1.24 $2.96
================================================================================
It is the Fund's policy to distribute dividends and capital gains, if any,
annually.
- --------------------------------------------------------------------------------
Average Annual Total Returns
- --------------------------------------------------------------------------------
Without With
Sales Charges(1) Sales Charges(2)
================================================================================
Six Months Ended 5/31/99+ 5.28% 1.11%
- --------------------------------------------------------------------------------
Year Ended 5/31/99 (1.80) (5.73)
- --------------------------------------------------------------------------------
3/30/95* through 5/31/99 7.94 6.88
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without
Sales Charge(1)
================================================================================
3/30/95* through 5/31/99 37.52%
================================================================================
(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.
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 5
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance (unaudited)
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Shares of the
Security and Growth Fund vs. Russell 2000 Index and
Lehman Brothers Intermediate Term Government Bond Index+
- --------------------------------------------------------------------------------
March 1995 -- May 1999
[GRAPHIC OMITTED]
[The following table was depicted as a line graph in the printed material.]
<TABLE>
<CAPTION>
Lehman Brothers Intermediate
Security and Growth Fund Russell 2000 Index Term Government Bond Index
<S> <C> <C> <C>
3/30/95
11/95
11/96
11/97
11/98
5/31/99 $17,834 $13,202 $13,276
</TABLE>
+ 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, 1999. 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. Investors may not invest directly in an index.
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.
- --------------------------------------------------------------------------------
6 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) May 31, 1999
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
COMMON STOCK -- 42.6%
Basic Materials -- 2.9%
120,000 RTI International Metals, Inc. (a)(b) $1,597,500
50,000 Wolverine Tube Inc. (a) 1,190,625
- --------------------------------------------------------------------------------
2,788,125
- --------------------------------------------------------------------------------
Building - Mobile Homes -- 0.6%
50,000 Clayton Homes Inc. 571,875
- --------------------------------------------------------------------------------
Business Services -- 1.2%
150,000 United Road Services Inc. (a) 1,162,500
- --------------------------------------------------------------------------------
Chemicals - Specialty -- 1.9%
50,000 Englehard Corp. (b) 1,012,500
40,000 IMC Global Inc. 837,500
- --------------------------------------------------------------------------------
1,850,000
- --------------------------------------------------------------------------------
Computer Peripheral -- 3.1%
150,000 Quantum Corp. (a) 2,971,875
- --------------------------------------------------------------------------------
Computer Software -- 7.8%
50,000 Adobe Systems, Inc. 3,706,250
10,000 Autodesk Inc. (a) 276,250
605,000 Geoworks Corp. (a)(b) 1,436,875
250,000 Inprise Corp. (a)(b) 921,875
200,000 Santa Cruz Operation Inc. (a) 1,187,500
- --------------------------------------------------------------------------------
7,528,750
- --------------------------------------------------------------------------------
Consumer Products -- 1.7%
20,000 American Greetings Corp. 572,500
100,000 Pier 1 Imports Inc. (b) 1,106,250
- --------------------------------------------------------------------------------
1,678,750
- --------------------------------------------------------------------------------
Electronics Semiconductor -- 5.6%
439,500 California Micro Devices Corp. (a) 988,875
400,000 Cypress Semiconductor Corp. (a) 4,450,000
- --------------------------------------------------------------------------------
5,438,875
- --------------------------------------------------------------------------------
Financial -- 3.3%
30,000 CMAC Investment Corp. (a) 1,516,875
20,000 The PMI Group Inc. 1,170,000
20,000 Waddell & Reed Financial Inc. (b) 482,500
- --------------------------------------------------------------------------------
3,169,375
- --------------------------------------------------------------------------------
Manufacturing - Special -- 2.1%
30,000 Optical Coating Laboratory Inc. 1,946,250
4,090,908 Power Spectra Inc. (a)(c) 40,909
2,000,000 Power Spectra Inc. (a)(c)(d) 20,000
- --------------------------------------------------------------------------------
2,007,159
- --------------------------------------------------------------------------------
Medical - HMO -- 3.7%
200,000 Foundation Health Systems Inc. (a) 3,575,000
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 7
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) May 31, 1999
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Medical Biotechnology -- 2.4%
285,000 Onyx Pharmaceuticals Inc. (a) $ 2,280,000
- --------------------------------------------------------------------------------
Medical Supplies -- 0.6%
565,900 Metra Bio Systems Inc. (a) 601,269
- --------------------------------------------------------------------------------
Oil & Gas - Domestic -- 3.5%
1,035,000 Abacan Resource Corp. (a) 160,425
50,000 Apache Corp. 1,800,000
100,000 Union Pacific Resources Inc. 1,393,750
- --------------------------------------------------------------------------------
3,354,175
- --------------------------------------------------------------------------------
Real Estate -- 0.6%
20,000 The St. Joe Co. 546,250
- --------------------------------------------------------------------------------
Telecommunications - Equpiment -- 0.9%
100,000 Premisys Communications Inc. (a) 868,750
- --------------------------------------------------------------------------------
Telecommunications - Service -- 0.3%
50,000 Rostelecom-Sponsored ADR (b) 334,375
- --------------------------------------------------------------------------------
Vitamins - Nutrition -- 0.4%
25,000 Rexall Sundown Inc. (a) 426,562
- --------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost -- $46,007,417) 41,153,665
================================================================================
FACE
AMOUNT SECURITY VALUE
================================================================================
U.S. TREASURY STRIPS -- 57.3%
$79,000,000 U.S. Treasury Strips, zero coupon due 8/15/05
(Cost -- $50,422,085) 55,431,930
================================================================================
REPURCHASE AGREEMENT -- 0.1%
99,000 J.P. Morgan Securities, Inc., 4.800% due 6/1/99;
Proceeds at maturity -- $99,053; (Fully
collateralized by U.S. Treasury Notes & Bonds,
5.625% to 12.750% due 5/15/01 to 5/15/17; Market
value -- $100,980)(Cost -- $99,000) 99,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $96,528,502*) $96,684,595
================================================================================
(a) Non-income producing security.
(b) All or a portion of this security is on loan (See Note 7).
(c) Security is valued by the Fund's Board of Trustees (See Note 6).
(d) 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.
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
8 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) May 31, 1999
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $96,528,502) $ 96,684,595
Cash 54
Collateral for securities on loan (Note 7) 4,897,900
Receivable for securities sold 2,389,634
Dividends and interest receivable 4,637
- --------------------------------------------------------------------------------
Total Assets 103,976,820
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for securities on loan (Note 7) 4,897,900
Management fees payable 610,275
Payable for securities purchased 188,954
Payable for Fund shares reacquired 58,154
Distribution fees payable 2,441
Accrued expenses 54,157
- --------------------------------------------------------------------------------
Total Liabilities 5,811,881
- --------------------------------------------------------------------------------
Total Net Assets $ 98,164,939
================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 11,070
Capital paid in excess of par value 96,874,169
Undistributed net investment income 1,758,896
Accumulated net realized loss from security transactions (635,289)
Net unrealized appreciation of investments 156,093
- --------------------------------------------------------------------------------
Total Net Assets $ 98,164,939
================================================================================
Shares Outstanding 11,069,512
- --------------------------------------------------------------------------------
Net Asset Value (and redemption price) $8.87
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 9
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations (unaudited)
- --------------------------------------------------------------------------------
For the Six Months Ended May 31, 1999
INVESTMENT INCOME:
Interest $ 2,275,619
Dividends 47,875
- --------------------------------------------------------------------------------
Total Investment Income 2,323,494
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 270,165
Distribution fees (Note 2) 135,082
Shareholder & system servicing fees 64,506
Audit & legal 14,321
Trustees' fees 12,465
Shareholder communications 8,976
Custody 5,984
Other 1,950
- --------------------------------------------------------------------------------
Total Expenses 513,449
- --------------------------------------------------------------------------------
Net Investment Income 1,810,045
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED Gain (LOSS)
ON INVESTMENTS (NOTE 3):
Net Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 42,403,910
Cost of securities sold 35,180,479
- --------------------------------------------------------------------------------
Net Realized Gain 7,223,431
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of period 4,058,481
End of period 156,093
- --------------------------------------------------------------------------------
Decrease in Net Unrealized Appreciation (3,902,388)
- --------------------------------------------------------------------------------
Net Gain on Investments 3,321,043
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 5,131,088
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Six Months Ended May 31, 1999 (unaudited)
and the Year Ended November 30, 1998
1999 1998
================================================================================
OPERATIONS:
Net investment income $ 1,810,045 $ 4,661,598
Net realized gain (loss) 7,223,431 (7,832,521)
Decrease in net unrealized appreciation (3,902,388) (15,570,740)
- --------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From
Operations 5,131,088 (18,741,663)
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (4,135,025) (5,551,293)
Net realized gains -- (1,372,771)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (4,135,025) (6,924,064)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 8):
Net asset value of shares issued
for reinvestment of dividends 4,000,610 6,773,299
Cost of shares reacquired (29,559,155) (62,738,587)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Fund Share Transactions (25,558,545) (55,965,288)
- --------------------------------------------------------------------------------
Decrease in Net Assets (24,562,482) (81,631,015)
NET ASSETS:
Beginning of period 122,727,421 204,358,436
- --------------------------------------------------------------------------------
End of period* $ 98,164,939 $ 122,727,421
================================================================================
* Includes undistributed net investment
income of: 1,758,896 $ 4,083,876
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 11
<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
one other fund: the Zeros Plus Emerging Growth Series 2000. The financial
statements and financial highlights for the other fund are presented in a
separate shareholder report.
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 for which market quotations are not
available will be valued in good faith at fair value by or under the direction
of the Board of Trustees; (d) securities maturing within 60 days are valued at
cost plus accreted discount, or minus amortized premium, which approximates
value; (e) 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; (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 by the Fund 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, 1998, reclassifications were made to the capital account to reflect
permanent book/tax differences and income and gains available for
- --------------------------------------------------------------------------------
12 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
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. Management Agreement and Other Transactions
SSBC Fund Management Inc. ("SSBC"), formerly known as Mutual Management Corp., 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 SSBC 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.
CFBDS, Inc., ("CFBDS") acts as the Fund's distributor. Pursuant to a
Distribution Plan, the Fund pays CFBDS 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 SSB.
3. Investments
During the six months ended May 31, 1999, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $14,518,127
- --------------------------------------------------------------------------------
Sales 42,403,910
================================================================================
At May 31, 1999, the aggregate gross unrealized appreciation and depreciation of
investments for Federal income tax purposes were substantially as follows:
================================================================================
Gross unrealized appreciation $ 15,722,712
Gross unrealized depreciation (15,566,619)
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 156,093
================================================================================
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 13
<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. 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, it 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, 1999, 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.
- --------------------------------------------------------------------------------
14 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
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, 1999, the Fund did not write any call or put
options.
6. Securities Valued by the Fund's Board of Trustees
The following securities held by the Fund on May 31, 1999, are 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 these securities.
<TABLE>
<CAPTION>
Value Percentage
Acquisition Per Fair of Total
Security Date Shares Share Value Net Assets Cost
==============================================================================================
<S> <C> <C> <C> <C> <C> <C>
Power Spectra Inc. 9/11/95 4,090,908 $0.01 $40,909 0.04% $3,272,726
- ----------------------------------------------------------------------------------------------
Power Spectra Inc. 4/10/97 2,000,000 0.01 20,000 0.02 500,000
==============================================================================================
</TABLE>
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.
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 15
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
At May 31, 1999, the Fund loaned common stocks having a value of $4,363,235 and
held the following collateral for loaned securities:
Security Description Value
================================================================================
Euro Time Deposits:
Bank Brussels Lambert, 4.937% due 6/1/99 $1,237,016
Caisse Des Dpts ET Consignations, 4.906% due 6/1/99 1,631,543
Society Generale, 4.625% due 6/1/99 897,731
Repurchase Agreement:
Morgan Stanley, 4.937% due 6/1/99 1,131,610
- --------------------------------------------------------------------------------
Total $4,897,900
================================================================================
Income earned on loaned securities for the six months ended May 31, 1999 was
$14,387.
8. Shares of Beneficial Interest
At May 31, 1999, the Fund had an unlimited number of shares of beneficial
interest authorized with a par value of $0.001 per share. The Fund 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, 1999 November 30, 1998
================================================================================
Shares issued on reinvestment 472,739 721,825
Shares reacquired (3,457,689) (6,865,212)
- --------------------------------------------------------------------------------
Net Decrease (2,984,950) (6,143,387)
================================================================================
9. Affiliated Transactions
At May 31, 1999, the Fund owned 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.
10. Capital Loss Carryforwards
At November 30, 1998, the Fund had, for Federal income tax purposes,
approximately $7,832,000 of capital loss carryforwards available to offset
future realized gains before expiration in 2006. To the extent that these
carryforward losses are used to offset gains, it is probable that the gains so
offset will not be distributed.
- --------------------------------------------------------------------------------
16 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of beneficial interest outstanding throughout each year ended
November 30, except where noted:
<TABLE>
<CAPTION>
1999(1) 1998 1997 1996 1995(2)
=============================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $8.73 $10.12 $10.22 $10.68 $9.60
- ---------------------------------------------------------------------------------------------
Income (Loss)
From Operations:
Net investment income 0.15 0.32 0.28 0.33 0.28
Net realized and
unrealized gain (loss) 0.30 (1.35) 1.40 0.82 0.94
- ---------------------------------------------------------------------------------------------
Total Income (Loss)
From Operations 0.45 (1.03) 1.68 1.15 1.22
- ---------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.31) (0.28) (0.03) (0.62) --
Net realized gains -- (0.08) (1.75) (0.99) (0.14)
- ---------------------------------------------------------------------------------------------
Total Distributions (0.31) (0.36) (1.78) (1.61) (0.14)
- ---------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $8.87 $8.73 $10.12 $10.22 10.68
- ---------------------------------------------------------------------------------------------
Total Return 5.28%++ (10.43)% 16.42% 11.15% 12.70%++
- ---------------------------------------------------------------------------------------------
Net Assets,
End of Period (000s) $98,165 $122,727 $204,358 $244,007 $309,822
- ---------------------------------------------------------------------------------------------
Ratios to Average
Net Assets:
Expenses 0.96%+ 0.94% 0.92% 0.99% 1.02%+
Net investment income 3.40+ 2.88 2.62 2.88 4.07+
- ---------------------------------------------------------------------------------------------
Portfolio Turnover Rate 14% 23% 20% 43% 26%
=============================================================================================
</TABLE>
(1) For the six months ended May 31, 1999 (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.
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 17
<PAGE>
SALOMON SMITH BARNEY
--------------------
a member of citigroup [LOGO]
Trustees
Paul R. Ades
Herbert Barg
Dwight B. Crane
Frank Hubbard
Heath B. McLendon, Chairman
Jerome Miller
Ken Miller
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
Paul A. Brook
Controller
Christina T. Sydor
Secretary
Investment Manager
SSBC Fund Management Inc.
Distributor
CFBDS, 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.
Salomon Smith Barney is a service mark of
Salomon Smith Barney Inc.
Smith Barney
Principal Return Fund
388 Greenwich Street, MF-2
New York, New York 10013
www.smithbarney.com
FD0951 7/99
