[LOGO]
SMITH BARNEY PRINCIPAL
RETURN Fund
SECURITY AND
GROWTH Fund
S E M I - A N N U A L R E P O R T
MAY 31, 2000
[LOGO] Smith Barney
Mutual Funds
"Your Serious Money, Professionally Managed."
NOT FDIC INSURED o NOT BANK GUARANTEED o MAY LOSE VALUE
<PAGE>
A Message from the Chairman
[PHOTO]
HEATH B.
MCLENDON
Chairman
Dear Shareholder:
The U.S. economy has continued its rate of historic growth in the new
millennium. However, the U.S. markets continue to be characterized by record
volatility, leaving many investors with little or no clear indication of the
future direction of the market.
At SSB Citi Asset Management, Citigroup's asset management division, we remain
firmly committed to our belief that individual company selection should continue
to be the primary focus of investors in any market. We believe that those
companies with excellent products, strong management and a sound business plan
should be well-positioned to deliver continued earnings growth in the evolving
global economy.
We provide some 100 million individuals, businesses, governments and
institutions in over 100 countries, with a broad range of financial products and
services. SSB Citi Asset Management offers you access to a broad range of
products including equities, fixed income and money markets. Our global
resources are extensive, far-reaching and powerful, with a strong presence in
the U.S., Europe, Japan, Latin America, Asia Pacific and Australia.
We invite you to explore our capabilities as a market leader in areas such as
retirement, tax and estate planning. When you invest with SSB Citi Asset
Management, you can do so with the confidence that your interests come first,
your investment success is paramount, and that the ultimate in resources is
being committed to your financial future. Thank you for investing with us.
Sincerely,
/s/ Heath B. McLendon
Heath B. McLendon
Chairman
June 12, 2000
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Smith Barney Principal Return Fund 1
<PAGE>
Shareholder Letter
[PHOTO]
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,
2000. In this report, we have summarized the period's prevailing economic and
market conditions and outlined the Fund's portfolio strategy.(1)
Investment Objective
The Fund's management team invests a portion of its assets in zero coupon
bonds,(2) which may maintain the preservation of the original capital invested
in the Fund. The remainder of the assets in the Fund are invested in companies
that the team believes have the ability to appreciate substantially faster than
the market. Most of the companies targeted are small- to mid-cap in size.
Performance Update
For the six months ended May 31, 2000, the Fund returned 32.54%.(3) In
comparison, the Russell 2000 Index(4) returned 5.50% and the Lehman Brothers
Intermediate Term Government Bond Index(5) returned 1.55% for the same period.
Additionally, the Standard & Poor's 500 Index ("S&P 500")(6) returned 2.90% for
the same period.
----------
(1) The information provided represents the opinion of the manager and is not
intended to be a forecast of future results. Further, there is no
assurance that certain securities will remain in or out of the portfolio.
(2) A zero coupon bond is an investment vehicle that makes no periodic
interest payments but instead is sold at a deep discount from its face
value. The buyer of such a bond receives the rate of return by the gradual
appreciation of the security, which is redeemed at face value on a
specified maturity date.
(3) The return cited does not reflect sales charges because the maximum
initial sales charge of 4.00% was only applicable during the Fund's
initial offering period.
(4) 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. An investor cannot invest directly in an index.
(5) The Lehman Brothers Intermediate Term Government Bond Index is comprised
of approximately 1,000 issues of U.S. Government Treasury and Agency
securities. An investor cannot invest directly in an index.
(6) The S&P 500 Index is a market capitalization-weighted measure of 500
widely held common stocks. An investor cannot invest directly in an index.
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2 2000 Semi-Annual Report to Shareholders
<PAGE>
Many of the stocks in the Fund are catagorized as small- and mid-cap companies.
The Fund's holding in zero coupon bonds returned only 1.76% during the period,
in large part due to rising interest rates. We look to the bond segment of the
Fund's portfolio as a way to help protect shareholders' initial investments in
the event of any stock market downturn. However, the strength of the U.S. stock
market has continued and we are proud to report the stock portion of the Fund's
portfolio returned 82.33% during the period. (Past performance is not indicative
of future results.)
Factors Affecting Fund Performance(7)
The performance of the Fund during the period was closely tied to the
appreciation of a number of the Fund's common stock holdings, especially those
in the technology sector during December 1999 through the middle of March 2000.
Many investors during this time participated in what we believe to be one of the
most speculative periods in Wall Street's history.
The focus was on those so-called "New Economy" stocks, to the virtual exclusion
of all other market segments. (The "New Economy" is represented by shares of
companies in the technology, Internet and telecommunications industries.) During
this period, we chose to begin a phased sale of a substantial part of the Fund's
technology holdings because we believed the market was in the midst of a
speculative "bubble." The Fund's positions in Geoworks, Adobe Systems, and
Cypress Semiconductor all were reduced significantly in the first quarter of
this year.
A Major Shift in Investor Focus - March 2000 through May 2000
Investor enthusiasm for technology issues peaked about mid-March of this year
and the performance of the overall stock market broadened out. The prices of
many small and mid-cap stocks began to appreciate as well. The proceeds from the
sale of the Fund's technology holdings were used to increase holdings in many
companies we regarded as depressed in price but with potentially great value.
Companies such as AmeriSource Health, R&B Falcon, Precision Castparts, Anadarko
Petroleum, Crane Co., Burlington Resources and First American Financial were
some of the more significant additions to the Fund's portfolio during the
period. Generally speaking, these stocks have performed in line with our
expectations since the end of the first quarter.
----------
(7) Please note that the Fund's holdings are subject to change and any
discussion of holdings is as of May 31, 2000. Please refer to pages 10
through 12 for a complete list and percentage breakdown of the Fund's
holdings.
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Smith Barney Principal Return Fund 3
<PAGE>
A Scorecard for the Last Six Months
Included in the table below and on the next page are the top 15 and bottom 15
performers based on stock performance* in the Fund from November 30, 1999
through May 31, 2000.
Portfolio Holdings Update**
November 30, 1999 through May 31, 2000
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Price
Top 15 Performers for the Fund Change
--------------------------------------------------------------------------------
RTI International Metals (producer of titanium and fabricated 96%
metal products)
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AmeriSource Health (wholesale distributor of pharmaceuticals and 96
related health care services)
--------------------------------------------------------------------------------
R&B Falcon (provides marine contact drilling and ancillary services) 87
--------------------------------------------------------------------------------
Rostelecom ADR (long distance and telecommunications company) 83
--------------------------------------------------------------------------------
Precision Castparts (manufactures complex structural castings and 79
airfoil castings
--------------------------------------------------------------------------------
Anadarko Petroleum (engaged in the exploration, development, 77
production and marketing of natural gas, crude oil and natural
gas liquids)
--------------------------------------------------------------------------------
Adobe Systems (provider of graphic design, publishing and imaging 64
software for the Internet and print production)
--------------------------------------------------------------------------------
Geoworks (provider of mobile e-commerce and information services, 63
software and technical services)
--------------------------------------------------------------------------------
Cypress Semiconductor (designs, develops and manufactures digital and 55
mixed-signal integrated circuits)
--------------------------------------------------------------------------------
Aphton Corp. (biopharmaceutical company which develops products using 44
its vaccine-like technology)
--------------------------------------------------------------------------------
Crane Company (diversified manufacturer of engineered industrial 44
products)
--------------------------------------------------------------------------------
Foundation Health Systems (managed health care organization) 42
--------------------------------------------------------------------------------
Burlington Resources (a holding company engaged in the exploration, 36
production and marketing of crude oil and natural gas)
--------------------------------------------------------------------------------
Enzo Biochem (manufactures and markets health care products based on 35
molecular biology and engineering techniques)
--------------------------------------------------------------------------------
First American (provides managed vision care plans and programs) 29
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----------
* Source: Davis Skaggs Investment Management. Please note the returns cited
in the chart above only reflect changes in the price of the securities
(not total return) and do not reflect dividend distributions. Past
performance is not indicative of future results.
** The chart above highlights the top 15 and bottom 15 performers of the 50
common stocks held in the Fund's portfolio during the reporting period.
Portfolio holdings are subject to change.
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4 2000 Semi-Annual Report to Shareholders
<PAGE>
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Price
Bottom 15 Performers for the Fund Change
--------------------------------------------------------------------------------
McKesson HBOC (health care supply management company) (30)%
--------------------------------------------------------------------------------
Smurfit-Stone (manufactures corrugated container, boxboard and (26)
folding cartons)
--------------------------------------------------------------------------------
Clayton Homes (produces, sells, finances and insures primarily low to (13)
medium-priced manufactured homes)
--------------------------------------------------------------------------------
CIT Group (diversified finance organization offering secured commercial (12)
and consumer financing)
--------------------------------------------------------------------------------
Allegheny Technologies (provides specialty materials, including (10)
stainless steel, nickel, and cobalt based alloys)
--------------------------------------------------------------------------------
Mattel (designs, manufactures, markets and distributes a variety of (5)
family products on a worldwide basis)
--------------------------------------------------------------------------------
IMC Global (worldwide producer, supplier, manufacturer and distributor (5)
of crop nutrients, animal feed ingredients and salt)
--------------------------------------------------------------------------------
Health Management Associates (provides general acute health services in (4)
nonurban locations)
--------------------------------------------------------------------------------
PMI Group (underwrites residential mortgages and title insurance) 2
--------------------------------------------------------------------------------
Engelhard (manufactures and markets technology-based performance 5
products for industrial customers)
--------------------------------------------------------------------------------
Brush Engineered Materials (manufactures engineered materials 7
producing beryllium)
--------------------------------------------------------------------------------
Wolverine Tube (manufactures and distributes copper and alloy tubes, 9
rods, bars and strip products)
--------------------------------------------------------------------------------
Countrywide Credit (engages primarily in the mortgage banking business 9
by purchasing, selling and servicing mortgage loans)
--------------------------------------------------------------------------------
JDA Software Group (a leading provider of integrated software products 9
and professional services)
--------------------------------------------------------------------------------
Equifax (provides information services to businesses to help them grant 12
credit and process credit cards)
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Smith Barney Principal Return Fund 5
<PAGE>
Looking Ahead
In our view, the next few years may be characterized by a substantial change in
the stock market landscape. In other words, we think Wall Street's rear view
mirror may serve as a poor guide for the immediate future. One of the biggest
changes may occur in market leadership. Between 1994 and the end of last year,
the price-to-earnings ("P/E") ratio(8) for the S&P 500 doubled, which produced
an annual return of 15% from P/E expansion alone. Most of this occurred because
the largest 50 companies of the S&P 500 saw a dramatic increase in their P/E
ratios as many mutual funds and investors, in general, concentrated their assets
in the shares of these companies. We think further increase in the P/E ratios
for these stocks may be unlikely and some P/E contraction may be a more likely
scenario. If this contraction does in fact occur, we believe the S&P 500 may
produce annualized returns of 6% to 8% in the next few years. (Of course, no
guarantees can be given that our expectations will be met.)
We also believe the remaining 450 stocks of the S&P 500 may perform better over
the next three to five years and their P/E ratios may increase somewhat, in
contrast to the potential trends for the P/E ratios of the largest 50 companies.
In our opinion, the "Not So Nifty 450," as one Wall Street firm has recently
described these companies, may outperform their larger counterparts over the
long term.
About five years ago, many "Old Economy" companies began to recognize that
constructing new facilities destroyed rather than created wealth. (The "Old
Economy" is represented by established "blue-chip" companies.) As a result, we
think that many products may be in shorter supply in the next few years and
their prices may increase. Already, we are seeing record prices for natural gas
and gasoline, and the nation may face a shortage of electricity in some areas
over the next few months. Paper prices have been increasing recently, reflecting
supply constraints as well. A strong U.S. dollar has helped offset these
increases somewhat, but it is our belief that the day is fast approaching when
pricing power may return to some areas of the economy. We think having some
holdings in the natural resources sector in the Fund's portfolio may allow us to
capture opportunities if these favorable trends develop for these industries.
(Of course, no guarantees can be given that this will in fact occur.)
----------
(8) P/E ratio is the price of a stock divided by its earnings per share.
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6 2000 Semi-Annual Report to Shareholders
<PAGE>
We previously indicated that small- and mid-cap stocks have been performing
better in recent months. We feel that this trend should continue for at least
several more years and these areas of the market may outperform the S&P 500 by a
substantial margin. This, of course, is the area of the market where most of the
Fund's stock holdings are concentrated.
We believe there will also be a tremendous increase in merger and acquisition
activity within the small and mid-cap areas of the stock market. This suggests
to us that value stocks may also do well in the future. We will continue to look
for growth stocks when they are available at prices that seem reasonable. (Value
stocks are the shares of companies that are believed to be undervalued but have
good longer-term business prospects. Growth stocks are the shares of companies
with the potential for faster-than-average growth within their industries.)
However, we think the risks of investing in value stocks may be lower, with
prospective returns comparable to those of many growth stocks.
Every portfolio manager yearns for a market where his or her investment style is
in favor. After 31 years in the mutual fund business, I am looking forward to
the next few years with great enthusiasm because value investing, long ignored
by Wall Street, may, in my opinion, make a major comeback.
Thank you for your investment in the Smith Barney Principal Return Fund -
Security and Growth Fund. We look forward to helping you achieve your financial
goals in the new century.
Sincerely,
/s/ John G. Goode
John G. Goode
Vice President and
Investment Officer
June 12, 2000
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Smith Barney Principal Return Fund 7
<PAGE>
--------------------------------------------------------------------------------
Historical Performance
--------------------------------------------------------------------------------
Net Asset Value
--------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
================================================================================
5/31/00 $ 9.56 $12.09 $0.39 $0.09 32.54%+
--------------------------------------------------------------------------------
11/30/99 8.73 9.56 0.31 0.00 13.47
--------------------------------------------------------------------------------
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 $1.63 $3.05
================================================================================
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 5/31/00+ 32.54% N/A
--------------------------------------------------------------------------------
Year Ended 5/31/00 42.85 N/A
--------------------------------------------------------------------------------
3/30/95* through 5/31/00 13.94 13.04%
================================================================================
--------------------------------------------------------------------------------
Cumulative Total Return
--------------------------------------------------------------------------------
Without
Sales Charges(1)
================================================================================
3/30/95* through 5/31/00 96.46%
================================================================================
(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% which was applicable during the
initial offering period.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
* Commencement of operations.
--------------------------------------------------------------------------------
8 2000 Semi-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 -- May 2000
<LINE CHART OMITTED>
+ Hypothetical illustration of $10,000 invested in shares of the Fund on
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,
2000. 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. An investor 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.
--------------------------------------------------------------------------------
Smith Barney Principal Return Fund 9
<PAGE>
--------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) May 31, 2000
--------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
COMMON STOCK -- 54.9%
Aerospace/Defense -- 1.2%
50,000 Raytheon Co., Class B Shares $ 1,171,875
--------------------------------------------------------------------------------
Basic Materials -- 9.1%
90,000 Allegheny Technologies Inc. (a) 2,030,625
50,000 Brush Engineered Materials Inc. 871,875
75,000 Commonwealth Industries, Inc. 468,750
200,000 Kaiser Aluminum Corp. (b) 887,500
35,000 Precision Castparts Corp. 1,706,250
95,000 RTI International Metals, Inc. (b) 1,235,000
50,000 USX - U.S. Steel Group 1,128,125
60,000 Wolverine Tube Inc. (b) 990,000
--------------------------------------------------------------------------------
9,318,125
--------------------------------------------------------------------------------
Building/Construction -- 0.9%
100,000 Clayton Homes, Inc. (a) 887,500
--------------------------------------------------------------------------------
Chemicals -- 3.4%
82,500 Engelhard Corp. 1,438,594
90,000 IMC Global Inc. 1,383,750
40,000 Lyondell Chemical Co. 667,500
--------------------------------------------------------------------------------
3,489,844
--------------------------------------------------------------------------------
Electronics - Semiconductor -- 1.1%
25,000 Cypress Semiconductor Corp. (a) 1,051,562
6,090,908 Power Spectra, Inc. (b)(c) 60,909
--------------------------------------------------------------------------------
1,112,471
--------------------------------------------------------------------------------
Energy -- 6.7%
1,035,000 Abacan Resource Corp. (b) 18,630
35,000 Anadarko Petroleum Corp. (a) 1,857,187
15,000 Burlington Resources Inc. 686,250
80,000 R&B Falcon Corp. (b) 1,875,000
42,500 USX - Marathon Group 1,155,469
55,218 Varco International, Inc. (b) 1,201,008
--------------------------------------------------------------------------------
6,793,544
--------------------------------------------------------------------------------
Environmental Services -- 0.3%
50,000 IMCO Recycling Inc. 334,375
--------------------------------------------------------------------------------
Financial Services -- 4.6%
50,000 The CIT Group, Inc. 915,625
60,000 Countrywide Credit Industries, Inc. 1,845,000
20,000 Cullen/Frost Bankers, Inc. 530,000
50,000 Equifax Inc. 1,384,375
--------------------------------------------------------------------------------
4,675,000
--------------------------------------------------------------------------------
See Notes to Financial Statements.
--------------------------------------------------------------------------------
10 2000 Semi-Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) May 31, 2000
--------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Health Care -- 9.9%
150,000 AmeriSource Health Corp. (b) $ 3,656,250
55,000 Aphton Corp. (b) 1,127,500
26,000 Enzo Biochem Inc. (b) 916,500
190,000 Foundation Health Systems Inc., Class A Shares (b) 2,280,000
100,000 Health Management Associates, Inc. (b) 1,181,250
60,000 McKesson HBOC, Inc. 986,250
--------------------------------------------------------------------------------
10,147,750
--------------------------------------------------------------------------------
Insurance -- 6.0%
18,000 Aetna Inc. 1,201,500
60,700 The First American Corp. 1,009,138
200,000 Fremont General Corp. 875,000
27,000 The PMI Group, Inc. 1,370,250
30,000 Radian Group Inc. 1,650,000
--------------------------------------------------------------------------------
6,105,888
--------------------------------------------------------------------------------
Leisure -- 2.4%
50,000 Carnival Corp. 1,356,250
80,000 Mattel, Inc. (a) 1,085,000
--------------------------------------------------------------------------------
2,441,250
--------------------------------------------------------------------------------
Manufacturing -- 1.0%
40,000 Crane Co. 1,055,000
--------------------------------------------------------------------------------
Packaging/Containers -- 0.8%
60,000 Smurfit-Stone Container Corp. (a) 851,250
--------------------------------------------------------------------------------
Retail -- 1.0%
5,000 Costco Wholesale Corp. (b) 159,687
100,000 Pier 1 Imports Inc. 850,000
--------------------------------------------------------------------------------
1,009,687
--------------------------------------------------------------------------------
Technology -- 5.4%
20,000 Adobe Systems, Inc. 2,251,250
65,000 Geoworks Corp. (b) 698,750
140,000 IKOS Systems, Inc. (b) 1,207,500
40,000 Inprise Corp. (b) 222,500
75,000 JDA Software Group, Inc. (b) 1,153,125
--------------------------------------------------------------------------------
5,533,125
--------------------------------------------------------------------------------
Telecommunications -- 1.1%
20,000 Cable & Wireless PLC 332,422
50,000 Rostelecom, Sponsored ADR (a) 759,375
--------------------------------------------------------------------------------
1,091,797
--------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost -- $51,587,387) 56,018,481
================================================================================
See Notes to Financial Statements.
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Smith Barney Principal Return Fund 11
<PAGE>
--------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) May 31, 2000
--------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
================================================================================
U.S. TREASURY STRIPS -- 41.2%
$59,000,000 U.S. Treasury Strips, zero coupon due 8/15/05
(Cost -- $40,484,075) $ 42,075,850
================================================================================
REPURCHASE AGREEMENT -- 3.9%
4,024,000 Morgan Stanley Dean Witter & Co., 6.330% due 6/1/00;
Proceeds at maturity -- $4,024,708; (Fully
collateralized by U.S. Treasury Bonds and Notes,
6.250% to 9.375% due 5/31/01 to 8/15/23;
Market value -- $4,107,072) (Cost -- $4,024,000) 4,024,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $96,095,462*) $102,118,331
================================================================================
(a) All or a portion of this security is on loan (See Note 7).
(b) Non-income producing security.
(c) Security is valued by the Fund's Board of Trustees (See Note 6).
* Aggregate cost for Federal income tax purposes is substantially the same
See Notes to Financial Statements.
--------------------------------------------------------------------------------
12 2000 Semi-Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) May 31, 2000
--------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $96,095,462) $102,118,331
Cash 84
Collateral for securities on loan (Note 7) 5,591,800
Dividends and interest receivable 71,343
--------------------------------------------------------------------------------
Total Assets 107,781,558
--------------------------------------------------------------------------------
LIABILITIES:
Payable for securities on loan (Note 7) 5,591,800
Payable for securities purchased 322,481
Distribution fees payable 240,625
Management fees payable 44,034
Payable for Fund shares purchased 4,443
Accrued expenses 43,872
--------------------------------------------------------------------------------
Total Liabilities 6,247,255
--------------------------------------------------------------------------------
Total Net Assets $101,534,303
================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 8,400
Capital paid in excess of par value 70,233,068
Undistributed net investment income 1,286,263
Accumulated net realized gain from security transactions
and options 23,986,010
Net unrealized appreciation of investments and foreign
currencies 6,020,562
--------------------------------------------------------------------------------
Total Net Assets $101,534,303
================================================================================
Shares Outstanding 8,399,686
--------------------------------------------------------------------------------
Net Asset Value (and redemption price) $12.09
--------------------------------------------------------------------------------
See Notes to Financial Statements.
--------------------------------------------------------------------------------
Smith Barney Principal Return Fund 13
<PAGE>
--------------------------------------------------------------------------------
Statement of Operations (unaudited)
--------------------------------------------------------------------------------
For the Six Months Ended May 31, 2000
INVESTMENT INCOME:
Interest $ 1,790,523
Dividends 245,233
--------------------------------------------------------------------------------
Total Investment Income 2,035,756
--------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 245,034
Distribution fees (Note 2) 122,517
Shareholder and system servicing fees 59,472
Audit and legal 18,450
Shareholder communications 11,323
Trustees' fees 6,411
Custody 2,988
Other 3,674
--------------------------------------------------------------------------------
Total Expenses 469,869
--------------------------------------------------------------------------------
Net Investment Income 1,565,887
--------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS AND OPTIONS (NOTES 3 AND 5):
Realized Gain From:
Security transactions (excluding short-term securities) 23,998,044
Options purchased 43,316
Options written 84,397
--------------------------------------------------------------------------------
Net Realized Gain 24,125,757
--------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of period 4,622,981
End of period 6,020,562
--------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 1,397,581
--------------------------------------------------------------------------------
Net Gain on Investments and Options 25,523,338
--------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 27,089,225
================================================================================
See Notes to Financial Statements.
--------------------------------------------------------------------------------
14 2000 Semi-Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Statements of Changes in Net Assets
--------------------------------------------------------------------------------
For the Six Months Ended May 31, 2000 (unaudited)
and the Year Ended November 31, 1999
2000 1999
================================================================================
OPERATIONS:
Net investment income $ 1,565,887 $ 3,270,765
Net realized gain 24,125,757 8,507,982
Increase in net unrealized appreciation 1,397,581 564,500
--------------------------------------------------------------------------------
Increase in Net Assets From Operations 27,089,225 12,343,247
--------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (3,530,353) (4,135,024)
Net realized gains (757,897) --
--------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (4,288,250) (4,135,024)
--------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 8):
Net proceeds from sale of shares 6,529 54,767
Net asset value of shares issued
for reinvestment of dividends 4,127,278 4,000,610
Cost of shares reacquired (14,077,574) (46,313,926)
--------------------------------------------------------------------------------
Decrease in Net Assets From
Fund Share Transactions (9,943,767) (42,258,549)
--------------------------------------------------------------------------------
Increase (Decrease) in Net Assets 12,857,208 (34,050,326)
NET ASSETS:
Beginning of period 88,677,095 122,727,421
--------------------------------------------------------------------------------
End of period* $101,534,303 $ 88,677,095
================================================================================
* Includes undistributed net investment
income of: $ 1,286,263 $3,250,729
================================================================================
See Notes to Financial Statements.
--------------------------------------------------------------------------------
Smith Barney Principal Return Fund 15
<PAGE>
--------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
--------------------------------------------------------------------------------
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 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; (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, 1999,
reclassifications were made to the capital account to reflect permanent book/tax
differences and income and gains available for distributions under income tax
regulations. Net investment income, net realized gains and net assets were not
affected by this change; (j) the Fund intends to comply with the applicable
provisions of the Internal Revenue Code of 1986, as amended, pertaining to
regulated investment
--------------------------------------------------------------------------------
16 2000 Semi-Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
--------------------------------------------------------------------------------
companies and to make distributions of taxable income sufficient to relieve it
from substantially all Federal income and excise taxes; and (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
SSB Citi Fund Management LLC ("SSBC"), a subsidiary of Salomon Smith Barney
Holdings Inc. ("SSBH"), which, in turn, is a subsidiary of Citigroup Inc.
("Citigroup"), 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.
Citi Fiduciary Trust Company ("CFTC"), formerly known as Smith Barney Private
Trust Company, another subsidiary of Citigroup, acts as the Fund's transfer
agent and PFPC Global Fund Services ("PFPC") acts as the Fund's sub-transfer
agent. CFTC receives account fees and asset-based fees that vary according to
the size and type of account. PFPC is responsible for shareholder recordkeeping
and financial processing for all shareholder accounts and is paid by CFTC.
During the six months ended May 31, 2000, the Fund paid transfer agent fees of
$55,036 to CFTC.
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.
For the six months ended May 31, 2000, Salomon Smith Barney Inc. ("SSB")
received brokerage commissions of $7,200.
All officers and one Trustee of the Trust are employees of SSB.
3. Investments
During the six months ended May 31, 2000, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $ 29,764,592
--------------------------------------------------------------------------------
Sales 42,791,258
================================================================================
--------------------------------------------------------------------------------
Smith Barney Principal Return Fund 17
<PAGE>
--------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
--------------------------------------------------------------------------------
At May 31, 2000, the aggregate gross unrealized appreciation and depreciation of
investments for Federal income tax purposes were substantially as follows:
================================================================================
Gross unrealized appreciation $ 14,283,689
Gross unrealized depreciation (8,260,820)
--------------------------------------------------------------------------------
Net unrealized appreciation $ 6,022,869
================================================================================
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, 2000, the Fund held no purchased call or put option contracts.
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.
--------------------------------------------------------------------------------
18 2000 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.
The following written call option transactions occurred during the six months
ended May 31, 2000:
Number of
Contracts Premium
================================================================================
Options written, outstanding at November 30, 1999 0 $ 0
Options written during the six months ended May 31, 2000 200 84,397
Options expired (200) (84,397)
--------------------------------------------------------------------------------
Options written, outstanding at May 31, 2000 0 $ 0
================================================================================
6. Securities Valued by the Fund's Board of Trustees
The following securities held by the Fund on May 31, 2000, 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 0.04% $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.
--------------------------------------------------------------------------------
Smith Barney Principal Return Fund 19
<PAGE>
--------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
--------------------------------------------------------------------------------
At May 31, 2000, the Fund loaned common stocks having a value of $5,315,484 and
held the following collateral for loaned securities:
Security Description Value
================================================================================
Time Deposits:
Bank Brussels Lambert, 6.810% due 6/1/00 $ 176,189
CAISSE, 6.810% due 6/1/00 1,495,105
Chase Manhattan Bank, 6.810% due 6/1/00 920,065
Firstar Bank, 6.810% due 6/1/00 920,065
UBS Securities, 6.810% due 6/1/00 1,098,788
Commercial Paper:
Repsol, 6.640% due 7/5/00 981,588
--------------------------------------------------------------------------------
Total $5,591,800
================================================================================
Income earned from securities lending by the Fund for the six months ended May
31, 2000, was $6,193.
8. Shares of Beneficial Interest
At May 31, 2000, the Fund had an unlimited number of shares of beneficial
interest authorized with a par value of $0.001 per share.
Transactions in shares of the Fund were as follows:
Six Months Ended Year Ended
May 31, 2000 November 30, 1999
================================================================================
Shares sold 647 412
Shares issued on reinvestment 412,538 472,327
Shares reacquired (1,287,395) (5,253,305)
--------------------------------------------------------------------------------
Net Decrease (874,210) (4,780,566)
================================================================================
9. Affiliated Transactions
At May 31, 2000, the Fund owned approximately 23% of Power Spectra, Inc. (with a
value of $60,909), 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. Subsequent Event
Effective June 5, 2000, the Board of Directors of the Fund approved a
Distribution Agreement with SSB, replacing the Distribution Agreement with
CFBDS.
--------------------------------------------------------------------------------
20 2000 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>
2000(1) 1999 1998 1997 1996 1995(2)
========================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 9.56 $ 8.73 $ 10.12 $ 10.22 $ 10.68 $ 9.60
--------------------------------------------------------------------------------------------------------
Income (Loss)
From Operations:
Net investment income 0.19 0.36 0.32 0.28 0.33 0.28
Net realized and
unrealized gain (loss) 2.82 0.78 (1.35) 1.40 0.82 0.94
--------------------------------------------------------------------------------------------------------
Total Income (Loss)
From Operations 3.01 1.14 (1.03) 1.68 1.15 1.22
--------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.39) (0.31) (0.28) (0.03) (0.62) --
Net realized gains (0.09) -- (0.08) (1.75) (0.99) (0.14)
--------------------------------------------------------------------------------------------------------
Total Distributions (0.48) (0.31) (0.36) (1.78) (1.61) (0.14)
--------------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $ 12.09 $ 9.56 $ 8.73 $ 10.12 $ 10.22 $ 10.68
--------------------------------------------------------------------------------------------------------
Total Return 32.54%++ 13.47% (10.43)% 16.42% 11.15% 12.70%++
--------------------------------------------------------------------------------------------------------
Net Assets,
End of Period (millions) $ 102 $ 89 $ 123 $ 204 $ 244 $ 310
--------------------------------------------------------------------------------------------------------
Ratios to Average
Net Assets:
Expenses 0.96%+ 0.92% 0.94% 0.92% 0.99% 1.02%+
Net investment income 3.19+ 3.23 2.88 2.62 2.88 4.07+
--------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 33% 31% 23% 20% 43% 26%
========================================================================================================
</TABLE>
(1) For the six months ended May 31, 2000 (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 21
<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
SSB Citi Fund Management LLC
Distributor
CFBDS, Inc.
Custodian
PFPC Trust Company
Transfer Agent
Citi Fiduciary Trust Company
338 Greenwich Street, 22nd Floor
New York, New York 10013
Sub-Transfer Agent
PFPC Global Fund Services
P.O. Box 9699
Providence, Rhode Island 02940-9699
This report is submitted for the general information of shareholders of Smith
Barney Principal Return Fund -- Security and Growth Fund, but it may also be
used as sales literature when proceeded or accompanied by the current
Prospectus, which gives details about charges, expenses, investment objectives
and operating policies of the Fund. If used as sales material after August 31,
2000, this report must be accompanied by performance information for the most
recently completed calendar quarter.
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/mutualfunds
FD0951 7/00
