[GRAPHIC OMITTED]
Smith Barney Principal
Return Fund
Zeros Plus
Emerging Growth
Series 2000
ANNUAL REPORT
November 30, 1998
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day. (Registered)
<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 provide the annual report for the Smith Barney Principal
Return Fund Zeros Plus Emerging Growth Series 2000 ("Fund") for the year ended
November 30, 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.
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 year ended November 30, 1998, the Fund posted a total return of 5.05%.
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 declines of 6.62% and 5.78%,
respectively. The Lehman Brothers Intermediate Term Government Bond Index
advanced 8.95% for the year ended November 30, 1998. Emerging-growth stocks
currently comprise approximately 43% of the net assets of the Fund with the
remaining balance accounted for by zero coupon U.S. Treasury Bonds.
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 1
<PAGE>
Market Overview
The period under review included one of the most volatile times for the
financial markets in the last decade. August 1998 in fact was the poorest month
for the overall stock market since October 1987. The market decline was
widespread, with the most intense pressures being felt in the mid- and
small-capitalization sectors of the market. In August alone, the Russell 2000
Index declined by 19.5%. Based on data supplied by our internal research, the
average decline for the NASDAQ universe of stocks, from their 52-week highs to
the lows, reached in October was almost 54%. By comparison, back in 1987, this
figure was about 45%. In 1990, the last overall bear market, the average decline
for the entire NASDAQ universe was about 42%. The last time that the average
NASDAQ decline was as severe as the recent market was back in 1974.
In our opinion, several factors contributed to the unusually weak performance by
the stock market during the summer including:
o Continued deterioration in key Asian economies, most notably Japan, the
region's most important country from an economic standpoint.
o Russia's default on its debt payments, which led to sizable write-offs for
commercial banks and other financial institutions, and substantial losses
by many leveraged investors whose portfolios were exposed to that
country's debt. This contributed to a "mini-snowball" effect whereby sound
investments were liquidated to fund margin calls left in the wake of
Russia's debt default.
o The Asian/Russian "contagion" began spreading to Latin America. Countries
which raised their interest rates to defend their currencies even though
those actions have had a negative impact on their economies.
o Investor expectations for corporate profits continued to be moderate,
particularly for multinational companies, as analysts factored in the
effects of a slowing global economy.
Anticipating the needs of the financial markets and many investors, the Federal
Reserve Board ("Fed") in September undertook a dramatic shift in its monetary
policy and provided a much-needed injection of liquidity to the system. While
initially disappointed by the magnitude of the interest rate cut, a surprise
reduction made in between regularly scheduled board meetings in October both
surprised and delighted the markets and led to a restoration of confidence by
investors in the stock and corporate bond markets. Dramatic recoveries occurred
in nearly all
- --------------------------------------------------------------------------------
2 1998 Annual Report to Shareholders
<PAGE>
indices including the Russell 2000 (an index that is representative of small-cap
stocks), yet it remains well under its twelve-month high, unlike the large
capitalization indices some of which went on to eclipse their highs in November.
Once again, the stock market held to its typical four-year pattern in which a
major low is recorded every four years during the off presidential election
year.
Investment Strategy and Market Outlook
We attempt to concentrate the Fund's portfolio holdings on those companies with
sales and earnings that are not overly dependent on trends in the general
economy. With the outlook for overall corporate profit growth more uncertain, we
believe that it is important to own those companies that can best control their
own fates.
We think that health-care securities represent just such an opportunity. In our
view, health-care stocks, particularly bio-technology companies, are heavily
domestic and are not affected by economic cycles. In addition, health-care
stocks are somewhat protected from many of the forces dragging down the
multinationals such as international economic crisis, political risk, economic
cycles and even year 2000 computer problems. Strong recent earnings performances
by Genzyme, Chiron and IDEC Pharmaceuticals, our largest health-care positions,
fit our criteria.
The combination of an easing Fed monetary policy, and the historically
undervalued levels of emerging-growth stocks makes us optimistic that we may
continue to experience a significant rebound. Moreover the portion of the Fund
that is invested in U.S. Treasury securities should help cushion the downside
somewhat during more volatile markets.
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
Heath B. McLendon
Chairman
/s/ Richard A. Freeman
Richard A. Freeman
Vice President and Investment Officer
December 14, 1998
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 3
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance
- --------------------------------------------------------------------------------
Net Asset Value
-------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================
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 $1.88 $2.88
================================================================================
It is the Fund's policy to distribute dividends and capital gains, if any,
annually.
- --------------------------------------------------------------------------------
Average Annual Total Returns
- --------------------------------------------------------------------------------
Without With
Sales Charge(1) Sales Charge(2)
================================================================================
Year Ended 11/30/98 5.05% (0.25)%
- --------------------------------------------------------------------------------
Five Years Ended 11/30/98 7.87 6.78
- --------------------------------------------------------------------------------
8/30/91* through 11/30/98 8.74 7.98
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without
Sales Charge(1)
================================================================================
8/30/91* through 11/30/98 83.75%
================================================================================
(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 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 -- November 1998
[PLOT POINTS TO COME]
+ Hypothetical illustration of $10,000 invested in shares of the Zeros Plus
Emerging Growth Series 2000 from August 30, 1991 (commencement of
operations), assuming deduction of the maximum 5.00% sales charge at the
time of investment and reinvestment of dividends and capital gains, if
any, at net asset value through November 30, 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) November 30, 1998
- --------------------------------------------------------------------------------
Common Stock Industry Breakdown
(as a percentage of total common stock)
[The following table was depicted as a pie chart in the printed material.]
Telecommunications 15.2%
Biotechnology 22.2%
Capital Goods 12.4%
Drug Delivery 3.0%
Pharmaceuticals 22.7%
Technology 24.5%
Percentage of
Top Ten Holdings Total Investments
================================================================================
U.S. Treasury Strips 57.2%
Tyco International Ltd. 5.3
Chiron Corp. 4.3
Genzyme Corp. - General Division 4.2
IDEC Pharmaceuticals Corp. 4.1
C-COR Electronics, Inc. 3.9
Quantum Corp. 3.8
Forest Laboratories, Inc. 3.0
Tech-Sym Corp. 2.9
Vertex Pharmaceuticals Inc. 2.6
================================================================================
- --------------------------------------------------------------------------------
6 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments November 30, 1998
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
COMMON STOCK -- 42.8%
Biotechnology -- 9.5%
95,000 Chiron Corp.* $ 2,149,375
100,000 Gensia Sicor Inc.* 462,500
50,000 Genzyme Corp. - General Division* 2,103,125
3,000 Genzyme Corp. - Tissue Repair* 9,188
5,402 Genzyme-Molecular Oncology* 18,909
- --------------------------------------------------------------------------------
4,743,097
- --------------------------------------------------------------------------------
Capital Goods -- 5.3%
40,000 Tyco International Ltd. 2,632,500
- --------------------------------------------------------------------------------
Drug Delivery -- 1.3%
100,000 Advanced Polymer Systems, Inc.* 637,500
- --------------------------------------------------------------------------------
Pharmaceutical -- 9.7%
32,000 Forest Laboratories Inc., Class A Shares 1,492,000
60,000 IDEC Pharmaceuticals Corp.* 2,017,500
55,000 Vertex Pharmaceuticals, Inc.* 1,302,812
- --------------------------------------------------------------------------------
4,812,312
- --------------------------------------------------------------------------------
Technology -- 10.5%
100,000 Excel Technology Inc.* 1,000,000
85,000 Quantum Corp.* 1,880,625
56,500 Tech-Sym Corp.* 1,416,031
80,000 VLSI Technology, Inc.* 915,000
- --------------------------------------------------------------------------------
5,211,656
- --------------------------------------------------------------------------------
Telecommunications -- 6.5%
135,050 C-COR Electronics, Inc.* 1,958,225
104,500 California Microwave, Inc.* 1,267,063
- --------------------------------------------------------------------------------
3,225,288
- --------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost-- $11,433,092) 21,262,353
================================================================================
FACE
AMOUNT SECURITY VALUE
================================================================================
U.S. TREASURY STRIPS-- 57.2%
$30,000,000 U.S. Treasury Strips, zero coupon due 2/15/00
(Cost-- $27,270,041) 28,388,100
================================================================================
TOTAL INVESTMENTS-- 100%
(Cost-- $38,703,133**) $49,650,453
================================================================================
* 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 November 30, 1998
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost~--~$38,703,133) $49,650,453
Cash 459,284
- --------------------------------------------------------------------------------
Total Assets 50,109,737
- --------------------------------------------------------------------------------
LIABILITIES:
Investment advisory fees payable 15,953
Payable for Fund shares purchased 9,997
Administration fees payable 7,977
Distribution fees payable 1,362
Accrued expenses 40,816
- --------------------------------------------------------------------------------
Total Liabilities 76,105
- --------------------------------------------------------------------------------
Total Net Assets $50,033,632
================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 6,197
Capital paid in excess of par value 37,266,884
Undistributed net investment income 1,561,508
Accumulated net realized gain on security transactions 251,723
Net unrealized appreciation of investments 10,947,320
- --------------------------------------------------------------------------------
Total Net Assets $50,033,632
================================================================================
Shares Outstanding 6,196,939
- --------------------------------------------------------------------------------
Net Asset Value (and redemption price) $ 8.07
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
8 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended November 30, 1998
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 2,335,842
Dividends 5,375
- --------------------------------------------------------------------------------
Total Investment Income 2,341,217
- --------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2) 213,776
Distribution fees (Note 2) 133,610
Administration fees (Note 2) 106,888
Shareholder communications 55,582
Shareholder and system servicing fees 33,214
Audit and legal 20,852
Trustees' fees 13,230
Custody 2,800
Other 5,369
- --------------------------------------------------------------------------------
Total Expenses 585,321
- --------------------------------------------------------------------------------
Net Investment Income 1,755,896
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (NOTE 3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 12,338,893
Cost of securities sold 9,380,861
- --------------------------------------------------------------------------------
Net Realized Gain 2,958,032
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year 13,078,845
End of year 10,947,320
- --------------------------------------------------------------------------------
Decrease in Net Unrealized Appreciation (2,131,525)
- --------------------------------------------------------------------------------
Net Gain on Investments 826,507
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 2,582,403
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 9
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended November 30,
- --------------------------------------------------------------------------------
1998 1997
================================================================================
OPERATIONS:
Net investment income $ 1,755,896 $ 1,977,400
Net realized gain 2,958,032 7,309,576
Decrease in net unrealized appreciation (2,131,525) (2,098,279)
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations 2,582,403 7,188,697
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (2,125,380) --
Net realized gains (2,872,512) (7,551,121)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (4,997,892) (7,551,121)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net asset value of shares issued for
reinvestment of dividends 4,872,682 7,366,972
Cost of shares reacquired (11,261,322) (13,598,864)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Fund Share Transactions (6,388,640) (6,231,892)
- --------------------------------------------------------------------------------
Decrease in Net Assets (8,804,129) (6,594,316)
NET ASSETS:
Beginning of year 58,837,761 65,432,077
- --------------------------------------------------------------------------------
End of year* $ 50,033,632 $ 58,837,761
================================================================================
* Includes undistributed net investment income of: $ 1,561,508 $ 1,930,992
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
The Zeros Plus Emerging Growth Series 2000 ("Fund") is a separate investment
fund of the Smith Barney Principal Return Fund ("Trust"). The Trust, a
Massachusetts business trust, is registered under the Investment Company Act of
1940, as amended, as a diversified, open-end management investment company.
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 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 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, pertaining to regulated investment companies and to make
distributions of
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 11
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
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.
On October 8, 1998, CFBDS, Inc. became the Fund's distributor. Prior to the
date, Salomon Smith Barney Inc. ("SSB"), another subsidiary of SSBH, was the
Fund's distributor. SSB, as well as certain other broker dealers, continues to
sell Fund shares to the public as members of the selling group.
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 year ended November 30, 1998, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases --
- --------------------------------------------------------------------------------
Sales $12,338,893
================================================================================
- --------------------------------------------------------------------------------
12 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
At November 30, 1998, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
================================================================================
Gross unrealized appreciation $ 11,822,803
Gross unrealized depreciation (875,483)
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 10,947,320
================================================================================
4. Repurchase Agreements
The Fund purchases (and its custodian takes possession of) U.S. government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day) at
an agreed-upon higher repurchase price. The Fund requires continual maintenance
of the market value of the collateral in amounts at least equal to the
repurchase price.
5. Shares of Beneficial Interest
At November 30, 1998, 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:
Year Ended Year Ended
November 30, 1998 November 30, 1997
================================================================================
Shares issued on reinvestment 604,422 854,637
Shares redeemed (1,365,032) (1,476,738)
- --------------------------------------------------------------------------------
Net Decrease (760,610) (622,101)
================================================================================
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 13
<PAGE>
Financial Highlights
For a share of beneficial interest outstanding throughout each year ended
November 30:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
===========================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $8.46 $8.63 $9.28 $8.15 $9.00
- -------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.28 0.28 0.30 0.27 0.27
Net realized and unrealized gain (loss) 0.13 0.78 (0.16) 1.48 (0.28)
- -------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.41 1.06 0.14 1.75 (0.01)
- -------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.31) -- (0.57) (0.27) (0.34)
Net realized gains (0.49) (1.23) (0.22) (0.35) (0.50)
- -------------------------------------------------------------------------------------------
Total Distributions (0.80) (1.23) (0.79) (0.62) (0.84)
- -------------------------------------------------------------------------------------------
Net Asset Value, End of Year $8.07 $8.46 $8.63 $9.28 $8.15
- -------------------------------------------------------------------------------------------
Total Return 5.05% 12.28% 1.55% 22.17% (0.20)%
- -------------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $ 50 $ 59 $ 65 $ 77 $ 75
- -------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.10% 1.05% 1.11% 1.17% 1.15%
Net investment income 3.30 3.15 3.15 3.12 3.27
- -------------------------------------------------------------------------------------------
Portfolio Turnover Rate 0% 0% 0% 6% 1%
===========================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
For Federal tax purposes the Fund hereby designates for the fiscal year ended
November 30, 1998:
o Total long-term capital gain distributions paid of $2,872,512.
o A total of 99.73% of the ordinary dividends paid by the Fund from
net investment income are derived from Federal obligations and may
be exempt from taxation at the state level.
- --------------------------------------------------------------------------------
14 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees of
Smith Barney Principal Return Fund:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the Zeros Plus Emerging Growth Series
2000 of Smith Barney Principal Return Fund as of November 30, 1998, the related
statement of operations for the year then ended, the statements of changes in
net assets for each of the years in the two-year period then ended and financial
highlights for each of the years in the four-year period then ended. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits. The financial
highlights for the year ended November 30, 1994, were audited by other auditors
whose report thereon, dated January 12, 1995 expressed an unqualified opinion on
those financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
November 30, 1998, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Zeros Plus Emerging Growth Series 2000 of Smith Barney Principal Return Fund as
of November 30, 1998, and the results of its operations for the year then ended
and the changes in its net assets for each of the years in the two-year period
then ended and financial highlights for each of the years in the four-year
period then ended, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
New York, New York
January 15, 1999
<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 18
<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
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
Investment Manager
Mutual Management Corp.
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 -- 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.
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
FD0306 1/99
[LOGO]
Smith Barney Principal
Return Fund
Security and
Growth Fund
---------------
ANNUAL REPORT
---------------
November 30, 1998
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.(R)
<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 annual report for the Smith Barney Principal
Return Fund -- Security & Growth Fund ("Fund") for the year ended November 30,
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. We hope you find this
report to be useful and informative.
Performance Update
For the year ended November 30, 1998, the Fund had a negative total return of
10.43% versus the 8.95% return for the Lehman Brothers Intermediate Term
Government Bond Index and the negative 6.62% return for the Russell 2000 Index.
And while we are clearly disappointed by the Fund's performance, our work
suggests the returns of the S&P 500 between now and 2003 probably will be
significantly less than the returns experienced over the last five years. It is
highly unlikely that P/E and price-to-sales ratios double as they have in the
last five years. In addition, earnings may slow somewhat because the easy
restructuring initiatives and labor downsizings have already occurred. In the
next five years, we also believe indexes such as the Russell 2000 could generate
annualized returns materially higher than the S&P 500.
The unsettled economic conditions in Asia and more recently, adverse
developments in Russia and Brazil caused a flight-to-quality by most investors.
This meant that U.S. Treasury bonds and large-capitalization stocks, especially
the top 25 names in the S&P 500, did quite well under these market conditions.
However, smaller issues were subjected to unrelenting selling and many issues
declined substantially. The average capitalization in the Fund was approximately
$250 million and this segment of the Russell 2000 Index of small and mid-cap
stocks declined approximately 30% through the period ended November 30, 1998.
The economic crises around the world raised fears of recession and for the first
time in 65 years, the word "deflation" once again came into vogue. Growth rates
around the world declined and most smaller-capitalization companies were
perceived to be more sensitive to falling aggregate demand on a
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 1
<PAGE>
worldwide basis. In effect, a two-tiered stock market developed, with a
valuation spread between large and small companies wider than any time since
1972-1973 and possibly the widest in history.
Investment Strategies
During its fiscal year, we elected not to re-balance the Fund as aggressively as
we might have in hindsight and allowed the Fund's zero coupon bond component to
reach about 70% of assets. This helped Fund performance because zero coupon
Treasuries were a major beneficiary of lower interest rates and the flight by
investors to the highest-quality instruments during the reporting period. In
addition, we identified those companies most vulnerable to international
economic difficulties and sold these securities. These issues generally were
sold at a substantial loss but much less so than if we had continued to own them
in the portfolio. We also tried to increase the percentage of issues that were
less vulnerable to loss of foreign business and those companies which we
believed had good near-term prospects.
Portfolio Changes*
Purchases in the Fund include United Road Services (URSI), Waddell & Reed (WDR),
Geoworks (GWRX), Inprise (INPR), and Wolverine Tube (WLV). These companies were
added to the portfolio or increased in size because their operations were
primarily domestic in nature or they served to enhance growth in a specialized
market.
Sales so far in 1998 included Alteon (ALTN), Alyn Corp (ALYN), Asia Pacific
Resources (ARH), Global Tech Appliances, Nabors Industries (NBR), Danka Business
Systems (DANKY) and Peak International (PEAKF). A number of these companies are
dependent on strength in the world economy including Asia for their sales and it
seemed prudent to move away from these positions. Moreover, some company stocks
were sold because their business prospects either changed for the worse or
improved business prospects were deemed far enough in the future that holding
these positions in current economic conditions did not seem prudent.
Market Outlook
We think that the most important market indicator to follow at this time is the
Commodity Research Bureau ("CRB") Index because it reflects whether the forces
of inflation or deflation are at work in the world. If the CRB Index continues
to decline, deflation will be the near-term risk and monetary authorities around
the world probably will act to reduce interest rates.
In this environment, corporate earnings could suffer but P/E ratios might be
enhanced by lower interest rates. (A P/E ratio shows the relationship between a
stock's price and the company's earnings for the last four quarters.) A
continuation of deflationary conditions may also cause investors to remain risk
- ----------
* Please note that the Fund's holdings are subject to change.
- --------------------------------------------------------------------------------
2 1998 Annual Report to Shareholders
<PAGE>
averse, and that means U.S. Treasury securities and the largest-sized companies
could continue in their roles as "safe havens." The gap between
larger-capitalized and smaller-capitalized companies may continue to widen.
The actions of the Federal Reserve Board and its counterparts around the world
are designed to reinvigorate the world economy and stimulate aggregate demand.
When this begins to happen, the CRB Index should reflect this fact by beginning
to advance as demand for raw materials, natural resources and industrial inputs
increases. When that happens, a significant change in the stock market should
occur and many smaller- and intermediate-capitalized companies could begin to
outperform larger-capitalized companies.
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
December 9, 1998
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 3
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance
- --------------------------------------------------------------------------------
Net Asset Value
---------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividend Distribution Returns(1)
================================================================================
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 $ 0.93 $ 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)
================================================================================
Year Ended 11/30/98 (10.43)% (14.00)%
- --------------------------------------------------------------------------------
3/30/95* through 11/30/98 7.54 6.35
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without
Sales Charge(1)
================================================================================
13/30/95* through 11/30/98 30.62%
================================================================================
(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 Annual Report to Shareholders
<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 -- November 1998
[GRAPHIC OMITTED]
[The following table was depicted as a line chart in the printed material.]
<TABLE>
<CAPTION>
3/30/95 5/95 11/95 5/96 11/96 5/97 11/97 5/98 11/30/98
<S> <C>
Security and Growth Fund $12,540
Russell 2000 Index $16,062
Lehman Brothers Intermediate
Term Government Bond Index $13,306
</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 November 30, 1998. 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 November 30, 1998
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
COMMON STOCK--29.1%
Basic Materials--3.2%
35,000 Freeport-McMoRan Copper, Inc. $ 457,188
150,000 RTI International Metals, Inc. (a)(b) 2,259,375
50,000 Wolverine Tube Inc. (a) 1,121,875
- --------------------------------------------------------------------------------
3,838,438
- --------------------------------------------------------------------------------
Business Services--2.2%
150,000 United Road Services Inc. (a) 2,700,000
- --------------------------------------------------------------------------------
Computer Peripheral--2.7%
150,000 Quantum Corp. (a) 3,318,750
- --------------------------------------------------------------------------------
Computer Software--9.9%
120,000 Adobe Systems, Inc. 5,370,000
1,100,000 Geoworks Corp. (a)(b) 3,162,500
250,000 Inprise Corp. (a)(b) 1,390,625
75,000 Macromedia Inc. (a) 2,095,312
- --------------------------------------------------------------------------------
12,018,437
- --------------------------------------------------------------------------------
Electronics Semiconductor--4.4%
470,000 California Micro Devices Corp. (a) 1,233,750
400,000 Cypress Semiconductor Corp. (a) 4,075,000
- --------------------------------------------------------------------------------
5,308,750
- --------------------------------------------------------------------------------
Financial--0.4%
20,000 Waddell & Reed Financial Inc. (b) 467,500
- --------------------------------------------------------------------------------
Manufacturing-Special--1.6%
100,000 Optical Coating Laboratory Inc. 1,875,000
4,090,908 Power Spectra Inc. (a)(c) 40,909
2,000,000 Power Spectra Inc. (a)(c)(d) 20,000
- --------------------------------------------------------------------------------
1,935,909
- --------------------------------------------------------------------------------
Medical Biotechnology--1.9%
337,500 Onyx Pharmaceuticals Inc. (a) 2,278,125
- --------------------------------------------------------------------------------
Medical Supplies--0.4%
565,900 Metra Bio Systems Inc. (a) 495,163
- --------------------------------------------------------------------------------
Oil & Gas-Domestic--0.3%
1,035,000 Abacan Resource Corp. (a) 323,437
- --------------------------------------------------------------------------------
Real Estate--0.4%
20,000 Arden Reality Group, Inc. 460,000
- --------------------------------------------------------------------------------
Restaurants--1.7%
300,000 Taco Cabana Inc., Class A Shares (a) 2,081,250
- --------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost--$44,073,997) 35,225,759
================================================================================
WARRANTS--0.1%
125,000 Aphton Corp., Expire 9/14/02 (Cost--$0) (a)(d) 93,750
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
6 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) November 30, 1998
- --------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
================================================================================
U.S. TREASURY STRIPS--69.0%
$115,000,000 U.S. Treasury Strips, zero coupon due 8/15/05
(Cost--$70,796,631) $ 83,609,600
================================================================================
REPURCHASE AGREEMENT--1.8%
2,138,000 Morgan Stanley, 5.250% due 12/1/98; Proceeds
at maturity--$2,138,312; (Fully collateralized
by U.S. Treasury Notes, 4.625% due 11/30/00;
Market value--$2,191,457)
(Cost--$2,138,000) 2,138,000
================================================================================
TOTAL INVESTMENTS--100%
(Cost--$117,008,628*) $121,067,109
================================================================================
(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.
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 7
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities November 30, 1998
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost--$117,008,628) $ 121,067,109
Cash 418
Collateral for securities on loan (Note 7) 2,625,808
Receivable for securities sold 2,083,993
Receivable for Fund shares sold 4,998
Dividends and interest receivable 546
- --------------------------------------------------------------------------------
Total Assets 125,782,872
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for securities on loan (Note 7) 2,625,808
Distribution fees payable 193,180
Payable for Fund shares sold 94,628
Management fees payable 49,610
Accrued expenses 92,225
- --------------------------------------------------------------------------------
Total Liabilities 3,055,451
- --------------------------------------------------------------------------------
Total Net Assets $ 122,727,421
================================================================================
NET ASSETS:
Par value of capital shares $ 14,054
Capital paid in excess of par value 122,429,730
Undistributed net investment income 4,083,876
Accumulated net realized loss
from security transactions (7,858,720)
Net unrealized appreciation of investments 4,058,481
- --------------------------------------------------------------------------------
Total Net Assets $ 122,727,421
================================================================================
Shares Outstanding 14,054,462
- --------------------------------------------------------------------------------
Net Asset Value (and redemption price) $ 8.73
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
8 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended November 30, 1998
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 6,036,694
Dividends 139,451
- --------------------------------------------------------------------------------
Total Investment Income 6,176,145
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 807,501
Distribution fees (Note 2) 403,751
Shareholder & system servicing fees 187,735
Shareholder communications 60,507
Trustees fees 20,623
Audit & legal 19,963
Custody 12,000
Other 2,467
- --------------------------------------------------------------------------------
Total Expenses 1,514,547
- --------------------------------------------------------------------------------
Net Investment Income 4,661,598
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS (NOTE 3):
Net Realized Loss From Security Transactions
(excluding short-term securities):
Proceeds from sales 94,534,256
Cost of securities sold 102,366,777
- --------------------------------------------------------------------------------
Net Realized Loss (7,832,521)
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year 19,629,221
End of year 4,058,481
- --------------------------------------------------------------------------------
Decrease in Net Unrealized Appreciation (15,570,740)
- --------------------------------------------------------------------------------
Net Loss on Investments (23,403,261)
- --------------------------------------------------------------------------------
Decrease in Net Assets From Operations $ (18,741,663)
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 9
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended November 30,
- --------------------------------------------------------------------------------
1998 1997
================================================================================
OPERATIONS:
Net investment income $ 4,661,598 $ 5,624,831
Net realized gain (loss) (7,832,521) 29,915,321
Decrease in net unrealized appreciation (15,570,740) (4,335,441)
- --------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Operations (18,741,663) 31,204,711
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (5,551,293) (497,465)
Net realized gains (1,372,771) (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 6,773,299 30,210,679
Cost of shares reacquired (62,738,587) (70,185,118)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Fund Share Transactions (55,965,288) (39,974,439)
- --------------------------------------------------------------------------------
Decrease in Net Assets (81,631,015) (39,648,167)
NET ASSETS:
Beginning of year 204,358,436 244,006,603
- --------------------------------------------------------------------------------
End of year* $122,727,421 $204,358,436
================================================================================
* Includes undistributed net investment income of: $ 4,083,876 $ 4,947,372
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
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 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 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
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 11
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (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
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.
On October 8, 1998, CFBDS, Inc. became the Fund's distributor. Prior to that
date Salomon Smith Barney Inc. ("SSB"), another subsidiary of SSBH, was the
Fund's distributor. SSB, as well as certain other broker-dealers, continues to
sell Fund shares to the public as members of the selling group.
Pursuant 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 year ended November 30, 1998, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $ 36,178,553
- --------------------------------------------------------------------------------
Sales 94,534,256
================================================================================
- --------------------------------------------------------------------------------
12 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
At November 30, 1998, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
================================================================================
Gross unrealized appreciation $ 19,706,365
Gross unrealized depreciation (15,647,884)
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 4,058,481
================================================================================
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 November 30, 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
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 13
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
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 year ended November 30, 1998, 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 November 30, 1998, 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.
Value Percentage
Acquisition Per Fair of Total
Security Date Shares Share Value Net Assets Cost
================================================================================
Power Spectra Inc. 9/11/95 4,090,908 $0.01 $ 40,909 0.03% $3,272,726
- --------------------------------------------------------------------------------
Power Spectra Inc. 4/10/97 2,000,000 0.01 20,000 0.02 500,000
================================================================================
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.
- --------------------------------------------------------------------------------
14 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
At November 30, 1998, the Fund loaned common stocks having a value of $2,398,950
and holds the following collateral for loaned securities:
Security Description Value
================================================================================
Euro Time Deposits:
Banco Bilboa Vizcaya, 5.563% due 12/1/98 $ 676,002
Bank Brussels Lambert, 5.625% due 12/1/98 676,002
Banque of Paribas, 5.625% due 12/1/98 676,002
Societe Generale, 5.625% due 12/1/98 450,668
Westdeutsche Landesbank, 5.625% due 12/1/98 147,134
- --------------------------------------------------------------------------------
Total $2,625,808
================================================================================
For the year ended November 30, 1998, securities lending income earned was
$17,012.
8. Shares of Beneficial Interest
At November 30, 1998, 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:
Year Ended Year Ended
November 30, 1998 November 30, 1997
================================================================================
Shares issued on reinvestment 721,825 2,947,383
Shares redeemed (6,865,212) (6,617,924)
- --------------------------------------------------------------------------------
Net Decrease (6,143,387) (3,670,541)
================================================================================
9. Affiliate Transaction
At November 30, 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.
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.
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 15
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of beneficial interest outstanding throughout each year ended
November 30:
<TABLE>
<CAPTION>
1998 1997 1996 1995(1)
=============================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 10.12 $ 10.22 $ 10.68 $ 9.60
- ---------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.32 0.28 0.33 0.28
Net realized and unrealized gain (loss) (1.35) 1.40 0.82 0.94
- ---------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (1.03) 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 Year $ 8.73 $ 10.12 $ 10.22 $ 10.68
- ---------------------------------------------------------------------------------------------
Total Return (10.43)% 16.42% 11.15% 12.70%++
- ---------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $122,727 $204,358 $244,007 $309,822
- ---------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.94% 0.92% 0.99% 1.02%+
Net investment income 2.88 2.62 2.88 4.07+
- ---------------------------------------------------------------------------------------------
Portfolio Turnover Rate 23% 20% 43% 26%
=============================================================================================
</TABLE>
(1) 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.
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
For Federal tax purposes the Fund hereby designates for the fiscal year ended
November 30, 1998:
o long term capital gain distributions paid of $1,372,771.
o A total of 95.79% of the ordinary dividends paid by the Fund has
been derived from Federal obligations and may be exempt from
taxation at the state level.
- --------------------------------------------------------------------------------
16 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees of
Smith Barney Principal Return Fund:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the Security and Growth Fund of Smith
Barney Principal Return Fund as of November 30, 1998, and the related statement
of operations for the year then ended, the statements of changes in net assets
for each of the years in the two-year period then ended and financial highlights
for each of the years in the three-year period then ended and for the period
from March 30, 1995 (commencement of operations) to November 30, 1995. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
November 30, 1998, by correspondence with the custodian. As to securities sold
but not yet delivered, we performed other appropriate auditing procedures. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Security and Growth Fund of Smith Barney Principal Return Fund as of November
30, 1998, and the results of its operations for the year then ended, the changes
in its net assets for each of the years in the two-year period then ended and
financial highlights for each of the years in the three-year period then ended
and for the period from March 30, 1995 to November 30, 1995, in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
New York, New York
January 15, 1999
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 17
<PAGE>
SOLOMON 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
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
Investment Manager
Mutual Management Corp.
Distributor
CFBDS, Inc.
Custodian
PNCBank, N.A.
This report is submitted for the general information of the shareholders of
Smith Barney Principal Return Fund -- Security and Growth Fund. It is not
authorized for distribution to prospective investors unless accompanied or
preceded by a current Prospectus for the Fund, which contains information
concerning the Fund's investment policies and expenses as well as other
pertinent information.
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
FD01052 1/99
