Smith Barney Principal
Return Fund
Security and
Growth Fund
A N N U A L R E P O R T
November 30, 1999
[LOGO] Smith Barney
Mutual Funds
NOT FDIC INSURED o NOT BANK GUARANTEED o MAY LOSE VALUE
<PAGE>
Smith Barney [PHOTO] [PHOTO]
Principal Return
Fund HEATH B. JOHN G.
MCLENDON GOODE
Chairman Vice President and
Investment Officer
Dear Shareholder:
We are pleased to present the annual report for the Smith Barney Principal
Return Fund - Security and Growth Fund ("Fund") for the year ended November 30,
1999. We hope you find this report useful and informative. In this report, we
comment on how the Fund has performed and our near-term expectations for the
financial markets. For your convenience, a detailed summary of the Fund's
historical performance as well as its current holdings can be found in the
appropriate sections that follow. Any discussion of the Fund's holdings is as of
November 30, 1999. Please refer to pages 7 and 8 for a list of the Fund's
holdings.
Performance Update
The opening lines of Charles Dickens' A Tale of Two Cities begins with the
sentence: "It was the best of times, it was the worst of times." In our view,
this phrase captures the essence of the Security and Growth Fund's performance
during its fiscal year.
For the year ended November 30, 1999, the Fund returned 13.47%, excluding the
effects of sales charges. (For additional Fund performance information, please
refer to page five). The closest benchmark to the portfolio of stocks held in
the Fund is the Russell 2000 Index. (The Russell 2000 Index is made up of 2,000
smaller-capitalized U.S.-based companies whose common stocks trade on either the
New York, American or Nasdaq stock exchanges.) The Russell 2000 Index returned
15.67% during the one-year period under review.
As of November 30, 1999, the portfolio held roughly 53% of its assets in zero
coupon strips, maturing in the year 2005. These are held in order to assure that
sufficient assets are available to return an investor's original principal in
the unlikely event all common stocks in the portfolio were to lose 100% of their
value. Approximately 40% of assets were invested in a
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Smith Barney Principal Return Fund 1
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portfolio of small- and mid-cap stocks, areas of the market that represent what
we think are solid investment opportunities.
Technology
During the period, the Fund was overweighted in technology stocks and our stock
selections did very well relative to the sector in general. We are pleased to
report that Cypress Semiconductor, Adobe Systems, and, recently, Geoworks, have
appreciated in excess of 100% since the beginning of 1999. Because of the
tremendous enthusiasm and euphoria that seems to surround many technology issues
today, we have been "leaning against the wind" and taking a few profits while
still maintaining a large presence in the sector.
The technology stocks in the portfolio were purchased in 1997 through 1998 at a
time when investor expectations were very low and their prices were depressed.
Cypress and Adobe Systems have made the transition from being considered "broken
growth stocks" to now being thought of as dynamic plays by many investors as
specialty semiconductor and software opportunities, respectively. In recent
weeks, Geoworks seems to have been "discovered" by many Internet investors,
rising from $4 to approximately $9 as of the writing of this report.
Health Care
Until recently, our health care exposure was modest because of the sector's high
valuations. However, a number of leading companies in drug distribution,
hospital management and HMOs (health maintenance organizations) generally sold
off to the point where we felt their valuations were more attractive. Many of
the companies saw their stock prices decline 50% or more since the end of last
year. During the period, we established new positions in AmeriSource Health,
Health Management Systems, Foundation Health and McKesson.
Basic Materials-Energy
With the world economy beginning to grow again, we think that the prospects have
improved substantially for many companies in the basic materials and energy
sectors. These sectors accounted for 22% of the Standard & Poor's 500 Index
("S&P 500") in 1990 and today represent just over 9% of the Index. (The S&P 500
Index is a capitalization-weighted index measure of 500 widely held common
stocks.) Earnings are improving dramatically for many companies and the level of
merger and acquisition ("M&A") activity is increasing rapidly. In addition, many
companies are using cash flow to repurchase shares.
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2 1999 Annual Report to Shareholders
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Our largest holding in basic materials is Smurfit-Stone, a major producer of
corrugated and containerboard products. Prices are rising and Smurfit-Stone's
earnings and cash flows should be positively affected by this trend. In basic
materials, other substantial holdings in the Fund include Engelhard Corp., Brush
Wellman and IMC Global. Union Pacific Resources and R&B Falcon, a drilling rig
company, are our largest holdings in energy.
Looking Ahead at the New Millennium
In our opinion, winning investment strategies for many investors in the next
five years may differ from those that produced solid results in recent years.
The best news probably is behind us with regard to inflation and interest rates
and it was positive news on these fronts that helped cause Price/Earnings
("P/E") ratios for the S&P 500 Index to double between 1994 through 1999. (A P/E
ratio is the price of the stock divided by the earnings per share.)
We think that it is unlikely that P/E ratios will double from 28X earnings today
to something in excess of 50X earnings in 2004. In fact, we anticipate some P/E
compression among large-cap growth stocks in the next few years and single-digit
returns from these types of stocks in the future. Rising earnings may be
partially offset rather than augmented by P/E contraction.
While no guarantees can be given, chances are very good that small- and mid-cap
stocks will perform well relative to larger-sized companies over the next three
to five years. The valuations between small- and large-sized companies are
greater than at any time in the last 40 years. In our view, it will take little
in the way of funds flows to begin to change these relative valuations in favor
of smaller-company performance. Even if large mutual funds do not become major
investors, share repurchases, LBOs (leveraged buyouts) and M&A activity should
be sufficient to provide the necessary capital to improve the valuations of many
small- and mid-cap stocks.
Our main message to shareholders is that the investment "rear view mirror" may
be a poor guide to achieving acceptable absolute and relative investment
performance over the next few years. And while past performance is never
indicative of future results, we firmly believe our extensive experience as
investors (i.e., 30 or more years) in analyzing the stock market and its
changing characteristics has given us the necessary flexibility and skills to
prudently manage your assets over time.
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Smith Barney Principal Return Fund 3
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Thank you for your investment in the Smith Barney Principal Return Fund -
Security and Growth Fund. We look forward to help you achieve your financial
goals in the new century.
Sincerely,
/s/ Heath B. McLendon /s/ John G. Goode
Heath B. McLendon John G. Goode
Chairman Vice President and
Investment Officer
December 8, 1999
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4 1999 Annual Report to Shareholders
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Historical Performance
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Net Asset Value
------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================
11/30/99 $ 8.73 $ 9.56 $0.31 $0.00 13.47%
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11/30/98 10.12 8.73 0.28 0.08 (10.43)
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11/30/97 10.22 10.12 0.03 1.75 16.42
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11/30/96 10.68 10.22 0.62 0.99 11.15
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3/30/95* - 11/30/95 9.60 10.68 0.00 0.14 12.70+
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Total $1.24 $2.96
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It is the Fund's policy to distribute dividends and capital gains, if any,
annually.
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Average Annual Total Returns
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Without With
Sales Charges(1) Sales Charges(2)
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Year Ended 11/30/99 13.47% N/A
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3/30/95* through 11/30/99 8.78 7.84%
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Cumulative Total Return
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Without
Sales Charges(1)
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3/30/95* through 11/30/99 48.22%
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(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charge.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, shares reflect the deduction of the
maximum initial sales charge of 4.00% 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.
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Smith Barney Principal Return Fund 5
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Historical Performance (unaudited)
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Growth of $10,000 Invested in Shares of the
Security and Growth Fund vs. Russell 2000 Index and
Lehman Brothers Intermediate Term Government Bond Index+
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March 1995 -- November 1999
<PLOT POINTS TO COME FOR LINE CHART>
+ 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, 1999. The Lehman Brothers Intermediate Term
Government Bond Index is comprised of approximately 1,000 issues of U.S.
Government Treasury and Agency Securities. The Russell 2000 Index is a
capitalization weighted total return index which is comprised of 2,000 of
the smallest capitalized U.S. domiciled companies with less than average
growth orientation whose common stock is traded in the United States on
the New York Stock Exchange, American Stock Exchange and NASDAQ. The
indexes are unmanaged and are not subject to the same management and
trading expenses of a mutual fund. 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.
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6 1999 Annual Report to Shareholders
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Schedule of Investments November 30, 1999
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SHARES SECURITY VALUE
================================================================================
COMMON STOCK -- 39.9%
Basic Materials -- 2.4%
50,000 Brush Wellman Inc. $ 812,500
20,000 Precision Castparts Corp. 543,750
50,000 Wolverine Tube Inc. (a) 759,375
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2,115,625
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Building - Manufactured Housing -- 1.1%
100,000 Clayton Homes, Inc. 1,018,750
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Chemicals -- 1.8%
50,000 Engelhard Corp. 840,625
50,000 IMC Global Inc. 806,250
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1,646,875
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Computer Peripheral -- 0.6%
75,000 Quantum Corp. - Hard Disk Drive (a) 515,625
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Computer Software -- 7.9%
50,000 Adobe Systems, Inc. 3,434,375
550,000 Geoworks Corp. (a) 3,626,563
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7,060,938
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Electronics - Semiconductors -- 5.4%
175,000 Cypress Semiconductor Corp. (a) 4,768,750
6,090,908 Power Spectra, Inc. (a)(b) 60,909
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4,829,659
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Energy -- 2.9%
1,035,000 Abacan Resource Corp. (a) 124,200
80,000 R&B Falcon Corp. (a) 990,000
50,000 Santa Fe Snyder Corp. (a) 400,000
85,000 Union Pacific Resources Group Inc. 1,110,312
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2,624,512
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Financial -- 4.0%
60,700 The First American Financial Corp. 781,512
27,000 The PMI Group, Inc. (c) 1,348,313
30,000 Radian Group Inc. 1,466,250
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3,596,075
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Health Care -- 9.2%
150,000 AmeriSource Health Corp. (a) 1,856,250
190,000 Foundation Health Systems Inc., Class A Shares (a)(c) 1,603,125
150,000 Health Management Associates, Inc. (a) 1,846,875
40,000 McKesson HBOC, Inc. 935,000
155,000 Onyx Pharmaceuticals Inc. (a) 1,336,875
70,000 Rexall Sundown, Inc. (a) 717,500
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8,295,625
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See Notes to Financial Statements.
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Smith Barney Principal Return Fund 7
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Schedule of Investments (continued) November 30, 1999
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SHARES SECURITY VALUE
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Packaging - Containers -- 1.1%
50,000 Smurfit-Stone Container Corp. (a) $ 959,375
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Retail -- 0.8%
100,000 Pier 1 Imports Inc. 693,750
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Telecommunications -- 2.7%
200,000 Premisys Communications, Inc. (a) 1,987,500
50,000 Rostelecom-Sponsored ADR (a)(c) 415,625
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2,403,125
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TOTAL COMMON STOCK
(Cost -- $33,617,294) 35,759,934
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PREFERRED STOCK -- 0.8%
95,000 USX Corp., 6.750% Exchangeable
(Cost -- $973,750) 670,700
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WARRANTS -- 0.2%
125,000 Aphton Corp. expiring 9/14/02 with an
exercise price of $12.50 (Cost -- $0) (a)(b) 187,500
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FACE
AMOUNT SECURITY VALUE
================================================================================
U.S. TREASURY STRIPS -- 53.1%
$68,000,000 U.S. Treasury Strips, zero coupon due 8/15/05
(Cost -- $45,001,389) 47,597,280
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REPURCHASE AGREEMENT -- 6.0%
5,375,000 Goldman, Sachs & Co., 5.630% due 12/1/99;
Proceeds at maturity -- $5,375,841;
(Fully collateralized by U.S. Treasury Notes and
Bonds, 5.250% to 11.875% due 11/30/00 to 11/15/28;
Market value -- $5,482,512) (Cost -- $5,375,000) 5,375,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $84,967,433*) $89,590,414
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(a) Non-income producing security.
(b) Security is valued by the Fund's Board of Trustees (See Note 6).
(c) All or a portion of this security is on loan (See Note 7).
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
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8 1999 Annual Report to Shareholders
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Statement of Assets and Liabilities November 30, 1999
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ASSETS:
Investments, at value (Cost -- $84,967,433) $89,590,414
Cash 810
Collateral for securities on loan (Note 7) 3,463,000
Dividends and interest receivable 4,141
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Total Assets 93,058,365
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LIABILITIES:
Payable for securities on loan (Note 7) 3,463,000
Payable for securities purchased 473,438
Distribution fees payable 232,135
Payable for Fund shares purchased 131,319
Management fees payable 37,999
Accrued expenses 43,379
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Total Liabilities 4,381,270
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Total Net Assets $88,677,095
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NET ASSETS:
Par value of shares of beneficial interest $ 9,274
Capital paid in excess of par value 80,175,961
Undistributed net investment income 3,250,729
Accumulated net realized gain from security transactions
and options 618,150
Net unrealized appreciation of investments 4,622,981
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Total Net Assets $88,677,095
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Shares Outstanding 9,273,896
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Net Asset Value (and redemption price) $9.56
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See Notes to Financial Statements.
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Smith Barney Principal Return Fund 9
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Statement of Operations For the Year Ended November 30, 1999
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INVESTMENT INCOME:
Interest $ 4,037,050
Dividends 165,374
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Total Investment Income 4,202,424
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EXPENSES:
Management fees (Note 2) 505,103
Distribution fees (Note 2) 252,552
Shareholder and system servicing fees 102,497
Audit and legal 40,830
Trustees' fees 12,543
Shareholder communications 6,898
Custody 5,621
Other 5,615
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Total Expenses 931,659
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Net Investment Income 3,270,765
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REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND OPTIONS (NOTES 3 AND 5):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) 9,900,002
Purchased options (411,003)
Written options (981,017)
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Net Realized Gain 8,507,982
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Change in Net Unrealized Appreciation of Investments:
Beginning of year 4,058,481
End of year 4,622,981
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Increase in Net Unrealized Appreciation 564,500
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Net Gain on Investments and Options 9,072,482
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Increase in Net Assets From Operations $ 12,343,247
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See Notes to Financial Statements.
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10 1999 Annual Report to Shareholders
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Statements of Changes in Net Assets
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For the Years Ended November 30,
1999 1998
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OPERATIONS:
Net investment income $ 3,270,765 $ 4,661,598
Net realized gain (loss) 8,507,982 (7,832,521)
Increase (decrease) in net unrealized
appreciation 564,500 (15,570,740)
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Increase (Decrease) in Net Assets From Operations 12,343,247 (18,741,663)
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DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (4,135,024) (5,551,293)
Net realized gains -- (1,372,771)
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Decrease in Net Assets From
Distributions to Shareholders (4,135,024) (6,924,064)
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FUND SHARE TRANSACTIONS (NOTE 8):
Net proceeds from sale of shares 54,767 --
Net asset value of shares issued
for reinvestment of dividends 4,000,610 6,773,299
Cost of shares reacquired (46,313,926) (62,738,587)
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Decrease in Net Assets From
Fund Share Transactions (42,258,549) (55,965,288)
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Decrease in Net Assets (34,050,326) (81,631,015)
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NET ASSETS:
Beginning of year 122,727,421 204,358,436
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End of year* $88,677,095 $122,727,421
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* Includes undistributed net investment income of: $3,250,729 $4,083,876
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See Notes to Financial Statements.
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Smith Barney Principal Return Fund 11
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Notes to Financial Statements
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1. Significant Accounting Policies
The Security and Growth Fund ("Fund") is a separate investment fund of the Smith
Barney Principal Return Fund ("Trust"). The Trust, a Massachusetts business
trust, is registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. Shares of the Fund are not
currently offered for sale to new investors. The Trust consists of this Fund and
one other fund: the Zeros Plus Emerging Growth Series 2000. The financial
statements and financial highlights for the other fund are presented in a
separate shareholder report.
The significant accounting policies consistently followed by the Fund are: (a)
security transactions are accounted for on trade date; (b) securities traded on
a national securities exchange are valued at the last sale price on that
exchange or, if there were no sales, at the current quoted bid price;
over-the-counter securities and listed securities are valued at the bid price at
the close of business on each day; U.S. government securities are valued at the
quoted bid price in the over-the-counter market; (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
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12 1999 Annual Report to Shareholders
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Notes to Financial Statements (continued)
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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
SSB Citi Fund Management LLC ("SSBC"), formerly known as SSBC Fund Management
Inc., a subsidiary of Salomon Smith Barney Holdings Inc. ("SSBH"), through its
Davis Skaggs Investment Management division, acts as investment manager of the
Fund. The Fund pays SSBC a management fee calculated at an annual rate of 0.50%
of the average daily net assets. This fee is calculated daily and paid monthly.
Effective October 1999, Smith Barney Private Trust Company ("Private Trust"),
another subsidiary of Citigroup, became the Fund's transfer agent and PFPC
Global Fund Services ("PFPC") became the Fund's sub-transfer agent. Private
Trust receives account fees and asset-based fees that vary according to the
account size and type of account. PFPC is responsible for shareholder
recordkeeping and financial processing for all shareholder accounts and is paid
by Private Trust. During the period October 1, 1999 through November 30, 1999,
the Fund paid transfer agent fees of $16,677 to Smith Barney Private Trust
Company.
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 year ended November 30, 1999, Salomon Smith Barney Inc. ("SSB") received
brokerage commissions of $2,100.
All officers and one Trustee of the Trust are employees of SSB.
3. Investments
During the year ended November 30, 1999, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
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Purchases $ 30,863,283
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Sales 79,983,152
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Smith Barney Principal Return Fund 13
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Notes to Financial Statements (continued)
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At November 30, 1999, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
================================================================================
Gross unrealized appreciation $ 12,374,454
Gross unrealized depreciation (7,751,473)
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Net unrealized appreciation $ 4,622,981
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4. Repurchase Agreements
The Fund purchases (and its custodian takes possession of) U.S. government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day) at
an agreed-upon higher repurchase price. The Fund requires continual maintenance
of the market value of the collateral in amounts at least equal to the
repurchase price.
5. Option Contracts
Premiums paid when put or call options are purchased by the Fund, represent
investments, which are marked-to-market daily. When a purchased option expires,
the Fund will realize a loss in the amount of the premium paid. When the Fund
enters into a closing sales transaction, the Fund will realize a gain or loss
depending on whether the proceeds from the closing sales transaction are greater
or less than the premium paid for the option. When the Fund exercises a put
option, 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, 1999, the Fund held no purchased call or put options.
When the Fund writes a call or put option, an amount equal to the premium
received by the Fund is recorded as a liability, the value of which is
marked-to-market daily. When a written option expires, the Fund realizes a gain
equal to the amount of the premium received. When the Fund enters into a closing
purchase transaction, the Fund realizes a gain (or loss if the cost of the
closing purchase transaction exceeds the premium received when the option was
sold) without regard to any unrealized gain or loss on the underlying security,
and the liability related to such option is eliminated. When a written call
option is exercised the cost of the security sold will be decreased by the
premium originally received. When a written put option is exercised, the amount
of the premium originally received will reduce the cost of the security which
the Fund purchased upon exercise. When written index options are exercised,
settlement is made in cash.
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14 1999 Annual Report to Shareholders
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Notes to Financial Statements (continued)
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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 year ended
November 30, 1999:
Number of
Contracts Premium
================================================================================
Options written, outstanding at November 30, 1998 0 $ 0
Options written during the year ended November 30, 1999 1,200 492,583
Options cancelled in closing purchase transactions (1,200) (492,583)
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Options written, outstanding at November 30, 1999 0 $ 0
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6. Securities Valued by the Fund's Board of Trustees
The following securities held by the Fund on November 30, 1999, are illiquid and
valued at fair value in good faith by, or under the direction of, the Fund's
Board of Trustees taking into consideration the appropriate economic, financial
and other pertinent available information pertaining to these securities.
Value Percentage
Acquisition Per Fair of Total
Security Date Shares Share Value Net Assets Cost
================================================================================
Aphton Corp. Warrants 6/17/96 125,000 $1.50 $187,500 0.21% $ 0
Power Spectra Inc. 9/11/95 4,090,908 0.01 40,909 0.05 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.
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Smith Barney Principal Return Fund 15
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Notes to Financial Statements (continued)
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At November 30, 1999, the Fund loaned common stocks having a value of $3,367,063
and held the following collateral for loaned securities:
Security Description Value
================================================================================
Time Deposits:
Bank Brussels Lambert, 5.7813% due 12/1/99 $ 343,670
Banque of Paribas, 5.7500% due 12/199 343,670
Barclays Bank PLC, 5.6875% due 12/1/99 343,670
Chase, 5.6875% due 12/1/99 343,670
UBS Securities, 5.4365% due 12/1/99 377,218
Floating Rate Note:
Sigma Finance, 5.8200% due 12/199 1,039,211
Repurchase Agreement:
JP Morgan, 5.7200% due 12/1/99 671,891
- --------------------------------------------------------------------------------
Total $3,463,000
================================================================================
Income earned on loaned securities for the year ended November 30, 1999 was
$30,406.
8. Shares of Beneficial Interest
At November 30, 1999, the Fund had an unlimited number of shares of beneficial
interest authorized with a par value of $0.001 per share. The Fund and the Zeros
Plus Emerging Growth Series 2000 each constitute a sub-trust under the Master
Trust Agreement.
Transactions in shares of the Fund were as follows:
Year Ended Year Ended
November 30, 1999 November 30, 1998
================================================================================
Shares sold 412 --
Shares issued on reinvestment 472,327 721,825
Shares reacquired (5,253,305) (6,865,212)
- --------------------------------------------------------------------------------
Net Decrease (4,780,566) (6,143,387)
================================================================================
9. Affiliated Transactions
At November 30, 1999, 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.
- --------------------------------------------------------------------------------
16 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of beneficial interest outstanding throughout each year ended
November 30:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995(1)
======================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $8.73 $10.12 $10.22 $10.68 $9.60
- --------------------------------------------------------------------------------------
Income (Loss)
From Operations:
Net investment income 0.36 0.32 0.28 0.33 0.28
Net realized and
unrealized gain (loss) 0.78 (1.35) 1.40 0.82 0.94
- --------------------------------------------------------------------------------------
Total Income (Loss)
From Operations 1.14 (1.03) 1.68 1.15 1.22
- --------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.31) (0.28) (0.03) (0.62) --
Net realized gains -- (0.08) (1.75) (0.99) (0.14)
- --------------------------------------------------------------------------------------
Total Distributions (0.31) (0.36) (1.78) (1.61) (0.14)
- --------------------------------------------------------------------------------------
Net Asset Value,
End of Year $9.56 $8.73 $10.12 $10.22 $10.68
- --------------------------------------------------------------------------------------
Total Return 13.47% (10.43)% 16.42% 11.15% 12.70%++
- --------------------------------------------------------------------------------------
Net Assets,
End of Year (000s) $88,677 $122,727 $204,358 $244,007 $309,822
- --------------------------------------------------------------------------------------
Ratios to Average
Net Assets:
Expenses 0.92% 0.94% 0.92% 0.99% 1.02%+
Net investment income 3.23 2.88 2.62 2.88 4.07+
- --------------------------------------------------------------------------------------
Portfolio Turnover Rate 31% 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.
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 17
<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, 1999, 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 four-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, 1999, by correspondence with the custodian. As to securities
purchased but not yet received, 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, 1999, 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 four-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 14, 2000
- --------------------------------------------------------------------------------
18 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
For Federal tax purposes the Fund hereby designates for the fiscal year ended
November 30, 1999:
o A corporate dividends received deductions of 2.33%.
o A total of 93.79% 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.
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 19
<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
PNC Bank, N.A.
Transfer Agent
Smith Barney Private 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 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/mutualfunds
FD01052 1/00
[GRAPHIC OMITTED]
Smith Barney Principal
Return Fund
Zeros Plus
Emerging Growth
Series 2000
-------------
ANNUAL REPORT
-------------
November 30, 1999
[LOGO] Smith Barney
Mutual Funds
NOT FDIC INSURED - NOT BANK GUARANTEED - MAY LOSE VALUE
<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 final annual report for the Smith Barney Principal
Return Fund-Zeros Plus Emerging Growth Series 2000 ("Fund") for the year ended
November 30, 1999. For your convenience, we have summarized the Fund's
investment strategy during the period. A comprehensive summary of performance
and current holdings can be found in the appropriate sections that follow.
Performance Summary
The Fund commenced operations on August 30, 1991 and will mature on February 29,
2000. The chart below compares the Fund's solid returns versus its benchmarks
and the Russell 2000 Index for the period ended November 30, 1999.
One-Year Three-Year Five-Year Since
Total Total Total Inception
Return Return Return 8/30/91
-----------------------------------------
Fund (without sales charges) 32.43% 56.21% 93.81% 143.35%
Fund (with sales charges)(1) N/A N/A N/A 131.18%
Value Line Composite
Geometric Index(2) (1.13)% 11.47% 52.70% 70.75%
Lehman Brothers Intermediate
Term Gov't. Bond Index(2) 1.20% 17.17% 40.71% 67.91%
Russell 2000 Index(2) 15.67% 33.29% 99.59% 186.24%
- --------------
(1) Please note that the return figures, with the effects of sales charges,
for the one-year, three-year and five-year periods are not applicable
(N/A) since sales charges were only levied during the Fund's offering
period in 1991.
(2) The Value Line Composite Geometric Index is composed of the 1,700 stocks
tracked by the Value Line Investment Survey. The Lehman Brothers
Intermediate Term Government Bond Index is a broad measure of the
performance of intermediate (one to ten year) U.S. government bonds.
Indexes include the reinvestment of dividends and capital gains, if any,
and exclude sales charges. The Russell 2000 Index measures the performance
of the 2,000 smallest companies in the Russell 3000 Index. Russell 3000
Index measures the performance of the 3,000 largest U.S. companies based
on total market capitalization, which represents approximately 98% of the
investable U.S. equity market.
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 1
<PAGE>
Market Overview
In contrast to the troubled conditions that prevailed in the global stock
markets a year ago, investor confidence for the most part returned during the
Fund's final full fiscal year. A year ago, while the markets began to recover
from the summer's turmoil, many investors remained concerned that the U.S.
economy would be negatively affected by the forces that had been hurting many
overseas economies. The Federal Reserve Board's ("Fed") series of interest rate
reductions last year alleviated many of those concerns and enabled the economy
to continue growing in an uninterrupted manner.
Unlike weakness displayed in the first half of the Fund's fiscal year, the
Russell 2000 Index, a measure of performance for smaller-capitalization stocks,
outperformed the large-capitalization Standard & Poor's 500 Index ("S&P 500")
for the six-month period ended November 30, 1999. (S&P 500 is an index of widely
held common stocks listed on the New York and American Stock Exchanges and the
over-the-counter markets.)
No longer were many investors shunning companies simply because their market
capitalizations were small, as they saw a series of disappointing profit
performances by some well known large capitalization companies. However, much of
the improvement seen in the overall stock market and smaller-sized company
stocks in the second half of the Fund's fiscal year was concentrated in
technology-related companies -- particularly those addressing wireless
communications and the burgeoning Internet economy.
During the period, many investors began to focus on an economy that appeared to
be too strong with the potential to cause an increase in inflation. Concerns of
an overheated economy did not go unnoticed by the Fed, which has raised
short-term interest rates three times this year and having removed the stimulus
afforded by its interest rate reductions during and just following the market
turmoil of 1998.
Investment Strategy and Market Outlook
In the Fund, we continued to emphasize primarily young, innovative companies in
dynamic industries that we believe possess above-average earnings growth during
the next few years. Moreover, the portion of the Fund invested in U.S. Treasury
securities has helped cushion the downside during turbulent periods in the stock
market.
During the Fund's life, we have sought to identify and invest in companies that
supply a product or offer a service that allows people to live more enjoyable
lives, save businesses time and money or, in the case of pharmaceutical
companies, offer drugs that are so efficacious that it becomes virtually
impossible for doctors not to prescribe the drugs broadly. Also, we sought to
own companies that have some measure of
- --------------------------------------------------------------------------------
2 1999 Annual Report to Shareholders
<PAGE>
exclusivity with their products or services either through patent protection or
the establishment of a strong franchise position. In our view, this pricing
power has enabled these companies to maintain strong market positions, and that
in turn has helped them to achieve above-average profitability over the long
term.
We remain convinced that well-positioned biotechnology companies and those
supplying products that help facilitate the growth of the Internet should be the
cornerstones of a prudently created investment portfolio. However, we thought it
is important that we own companies for the long term. We have sought to own
companies that have a reasonable probability of becoming profitable and not
businesses that are simply caught up in the emotional euphoria present in
rapidly growing areas of the economy.
Thank you for your investment in the Smith Barney Principal Return Fund-Zeros
Plus Emerging Growth Series 2000. We hope you are satisfied with the results we
have achieved over the life of the Fund.
Sincerely,
/s/ Heath B. McLendon /s/ Richard A. Freeman
Heath B. McLendon Richard A. Freeman
Chairman Vice President and
Investment Officer
December 20, 1999
- --------------------------------------------------------------------------------
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)
================================================================================
11/30/99 $8.07 $9.29 $0.26 $1.08 32.43%
- --------------------------------------------------------------------------------
11/30/98 8.46 8.07 0.31 0.49 5.05
- --------------------------------------------------------------------------------
11/30/97 8.63 8.46 0.00 1.23 12.28
- --------------------------------------------------------------------------------
11/30/96 9.28 8.63 0.57 0.22 1.55
- --------------------------------------------------------------------------------
11/30/95 8.15 9.28 0.27 0.35 22.17
- --------------------------------------------------------------------------------
11/30/94 9.00 8.15 0.34 0.50 (0.20)
- --------------------------------------------------------------------------------
11/30/93 8.16 9.00 0.29 0.09 15.72
- --------------------------------------------------------------------------------
11/30/92 7.57 8.16 0.10 0.00 9.15
- --------------------------------------------------------------------------------
8/30/91* - 11/30/91 7.60 7.57 0.00 0.00 (0.39)+
================================================================================
Total $2.14 $3.96
================================================================================
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 11/30/99 32.43% N/A
- --------------------------------------------------------------------------------
Five Years Ended 11/30/99 14.15 N/A
- --------------------------------------------------------------------------------
8/30/91* through 11/30/99 11.37 10.68%
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without
Sales Charge(1)
================================================================================
8/30/91* through 11/30/99 143.35%
================================================================================
(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% 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.
- --------------------------------------------------------------------------------
4 1999 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 1999
[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, 1999. The Value Line
Composite Index - Geometric, composed of approximately 1,700 stocks, is a
geometric average of the daily price percentage change in each stock
covering both large and small capitalized companies. The Lehman Brothers
Intermediate Term Government Bond Index is comprised of approximately
1,000 issues of U.S. Government Treasury and Agency securities. These
indexes are unmanaged and are not subject to the same management and
trading expenses of a mutual fund. Investors may not invest directly in an
index.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost. No adjustment
has been made for shareholder tax liability on dividends or capital gains.
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 5
<PAGE>
- --------------------------------------------------------------------------------
Portfolio Highlights (unaudited) November 30, 1999
- --------------------------------------------------------------------------------
Common Stock Industry Breakdown
(as a percentage of total common stock)
[The following table has been depicted as a pie chart in the printed materials.]
Telecommunications 31.4%
Biotechnology 18.6%
Capital Goods 9.2%
Drug Delivery 1.4%
Technology 13.8%
Pharmaceuticals 25.6%
Percentage of
Top Ten Holdings Total Investments
================================================================================
U.S. Treasury Strips 47.1%
C-COR Electronics, Inc. 9.5
IDEC Pharmaceuticals Corp. 6.8
Adaptive Broadband Corp. 6.0
Chiron Corp. 5.9
Tyco International Ltd. 4.6
Goldman, Sachs & Co. 3.4
Genzyme Corp. - General Division 3.1
Forest Laboratories, Inc. 2.7
Quantum Corp. 2.4
================================================================================
- --------------------------------------------------------------------------------
6 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments November 30, 1999
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
COMMON STOCK -- 49.5%
Biotechnology -- 9.2%
95,000 Chiron Corp.* $ 3,117,187
46,000 Genzyme Corp. - General Division* 1,656,000
5,402 Genzyme Corp. - Molecular Oncology* 26,672
8,234 Genzyme Corp. - Surgical Products* 44,258
3,000 Genzyme Corp. - Tissue Repair* 5,156
- --------------------------------------------------------------------------------
4,849,273
- --------------------------------------------------------------------------------
Capital Goods -- 4.6%
60,000 Tyco International Ltd. 2,403,750
- --------------------------------------------------------------------------------
Drug Delivery -- 0.7%
100,000 Advanced Polymer Systems, Inc.* 362,500
- --------------------------------------------------------------------------------
Pharmaceutical -- 12.7%
28,000 Forest Laboratories, Inc., Class A Shares* 1,433,250
28,000 IDEC Pharmaceuticals Corp.* 3,549,000
100,000 SICOR Inc.* 478,125
45,000 Vertex Pharmaceuticals Inc.* 1,195,313
- --------------------------------------------------------------------------------
6,655,688
- --------------------------------------------------------------------------------
Technology -- 6.8%
75,000 Excel Technology, Inc.* 1,096,875
80,000 Quantum Corp. - DLT & Storage Systems* 1,260,000
40,000 Quantum Corp. - Hard Disk Drive* 275,000
50,000 Tech - Sym Corp.* 943,750
- --------------------------------------------------------------------------------
3,575,625
- --------------------------------------------------------------------------------
Telecommunications -- 15.5%
79,500 Adaptive Broadband Corp.* 3,160,125
98,000 C-COR.net Corp.* 5,004,125
- --------------------------------------------------------------------------------
8,164,250
- --------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost -- $9,206,648) 26,011,086
================================================================================
FACE
AMOUNT SECURITY VALUE
================================================================================
U.S. TREASURY STRIPS -- 47.1%
$25,000,000 U.S. Treasury Strips, zero coupon due 2/15/00
(Cost -- $24,590,665) 24,730,750
================================================================================
REPURCHASE AGREEMENT -- 3.4%
1,807,000 Goldman, Sachs & Co., 5.630% due 12/1/99;
Proceeds at maturity -- $1,807,283; (Fully
collateralized by U.S. Treasury Notes and Bonds,
5.250% to 11.875% due 11/30/00 to 11/15/28;
Market value -- $1,843,144) (Cost -- $1,807,000) 1,807,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $35,604,313**) $52,548,836
================================================================================
* 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, 1999
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $35,604,313) $52,548,836
Cash 11
Dividends and interest receivable 283
- --------------------------------------------------------------------------------
Total Assets 52,549,130
- --------------------------------------------------------------------------------
LIABILITIES:
Investment advisory fees payable 17,334
Administration fees payable 8,667
Dividends payable 1,033
Distribution fees payable 610
Accrued expenses 37,844
- --------------------------------------------------------------------------------
Total Liabilities 65,488
- --------------------------------------------------------------------------------
Total Net Assets $52,483,642
================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 5,652
Capital paid in excess of par value 32,708,144
Undistributed net investment income 1,505,675
Accumulated net realized gain from security transactions 1,319,648
Net unrealized appreciation of investments 16,944,523
- --------------------------------------------------------------------------------
Total Net Assets $52,483,642
================================================================================
Shares Outstanding 5,652,398
- --------------------------------------------------------------------------------
Net Asset Value (and redemption price) $ 9.29
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
8 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended November 30, 1999
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 2,061,662
Dividends 3,325
- --------------------------------------------------------------------------------
Total Investment Income 2,064,987
- --------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2) 201,701
Distribution fees (Note 2) 126,063
Administration fees (Note 2) 100,850
Shareholder and system servicing fees 61,816
Audit and legal 42,604
Shareholder communications 13,108
Trustees' fees 6,535
Custody 2,456
Other 3,820
- --------------------------------------------------------------------------------
Total Expenses 558,953
- --------------------------------------------------------------------------------
Net Investment Income 1,506,034
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS (NOTE 3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 13,562,218
Cost of securities sold 6,948,937
- --------------------------------------------------------------------------------
Net Realized Gain 6,613,281
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year 10,947,320
End of year 16,944,523
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 5,997,203
- --------------------------------------------------------------------------------
Net Gain on Investments 12,610,484
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $14,116,518
================================================================================
See Notes to Financial Statements.
Smith Barney Principal Return Fund 9
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended November 30,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
=======================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 1,506,034 $ 1,755,896
Net realized gain 6,613,281 2,958,032
Increase (decrease) in net unrealized appreciation 5,997,203 (2,131,525)
- ---------------------------------------------------------------------------------------
Increase in Net Assets From Operations 14,116,518 2,582,403
- ---------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (1,561,867) (2,125,380)
Net realized gains (5,545,356) (2,872,512)
- ---------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (7,107,223) (4,997,892)
- ---------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net asset value of shares issued for
reinvestment of dividends 6,902,647 4,872,682
Cost of shares reacquired (11,461,932) (11,261,322)
- ---------------------------------------------------------------------------------------
Decrease in Net Assets From
Fund Share Transactions (4,559,285) (6,388,640)
- ---------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets 2,450,010 (8,804,129)
NET ASSETS:
Beginning of year 50,033,632 58,837,761
- ---------------------------------------------------------------------------------------
End of year* $ 52,483,642 $ 50,033,632
=======================================================================================
* Includes undistributed net investment income of: $ 1,505,675 $ 1,561,508
=======================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1999 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 shareholder report.
The significant accounting policies consistently followed by the Fund are:(a)
security transactions are accounted for on trade date; (b) securities traded on
a national securities exchange are valued at the last sale price on that
exchange or, if there were no sales, at the current quoted bid price;
over-the-counter securities and listed securities are valued at the bid price at
the close of business on each day; U.S. government securities (other than
short-term securities) are valued at the quoted bid price in the
over-the-counter market; investment in securities for which market quotations
are not available are valued at fair value as determined by the Board of
Trustees; (c) securities maturing within 60 days are valued at cost plus
accreted discount, or minus amortized premium, which approximates value; (d)
interest income, adjusted for amortization of premium and accretion of discount,
is recorded on an accrual basis; (e) dividend income is recorded on the
ex-dividend date; foreign income dividends are recorded on the ex-dividend date
or as soon as practical after the Fund determines the existence of a dividend
declaration after exercising reasonable due diligence; (f) the accounting
records of the Fund are maintained in U.S. dollars. All assets and liabilities
denominated in foreign currencies are translated into U.S. dollars based on the
rate of exchange of such currencies against U.S. dollars on the date of
valuation. Purchases and sales of securities, and income and expenses are
translated at the rate of exchange quoted on the respective date that such
transactions are recorded. Differences between income or expense amounts
recorded and collected or paid are adjusted when reported by the custodian bank;
(g) gains or losses on the sale of securities are calculated by using the
specific identification method; (h) dividends and distributions to shareholders
are recorded on the ex-dividend date; (i) the character of income and gains to
be distributed is determined in accordance with income tax regulations which may
differ from generally
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 11
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
accepted accounting principles. At November 30, 1999, reclassifications were
made to the Fund's undistributed net investment income and accumulated net
realized gains 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 companies and to make
distributions of taxable income sufficient to relieve it from substantially all
Federal income and excise taxes; and (k) estimates and assumptions are required
to be made regarding assets, liabilities and changes in net assets resulting
from operations when financial statements are prepared. Changes in the economic
environment, financial markets and any other parameters used in determining
these estimates could cause actual results to differ.
2. Investment Advisory Agreement, Administration Agreement and Other
Transactions
SSB Citi Fund Management LLC ("SSBC"), formerly known as SSBC Fund Management
Inc., a subsidiary of Salomon Smith Barney Holdings Inc. ("SSBH"), which, in
turn, is a subsidiary of Citigroup Inc. ("Citigroup") acts as investment adviser
of the Fund. The Fund pays SSBC an investment advisory fee calculated at an
annual rate of 0.40% of the average daily net assets. SSBC also acts as the
Fund's administrator for which the Fund pays a fee calculated at an annual rate
of 0.20% of the average daily net assets. These fees are calculated daily and
paid monthly.
Effective October 1999, Smith Barney Private Trust Company ("Private Trust"),
another subsidiary of Citigroup, became the Fund's transfer agent and PFPC
Global Fund Services ("PFPC") became the Fund's sub-transfer agent. Private
Trust receives account fees and asset-based fees that vary according to the
account size and type of account. PFPC is responsible for shareholder
recordkeeping and financial processing for all shareholder accounts and is paid
by Private Trust. During the period October 1, 1999 through November 30, 1999,
the Fund paid transfer agent fees of $8,996 to Private Trust.
CFBDS, Inc. acts as the Fund's distributor. Salomon Smith Barney Inc. ("SSB"),
another subsidiary of SSBH, acts as the primary broker for the Fund's portfolio
agency transactions. For the year ended November 30, 1999, SSB did not receive
any brokerage commissions.
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.
- --------------------------------------------------------------------------------
12 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
3. Investments
During the year ended November 30, 1999, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases --
- --------------------------------------------------------------------------------
Sales $13,562,218
================================================================================
At November 30, 1999, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
================================================================================
Gross unrealized appreciation $17,388,302
Gross unrealized depreciation (443,779)
- --------------------------------------------------------------------------------
Net unrealized appreciation $16,944,523
================================================================================
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, 1999, the Fund had an unlimited number of shares of beneficial
interest authorized with a par value of $0.001 per share. The Fund and Security
and Growth Fund, each constitutes a sub-trust under the Master Trust Agreement.
Transactions in shares of the Fund were as follows:
Year Ended Year Ended
November 30, 1999 November 30, 1998
================================================================================
Shares issued on reinvestment 760,023 604,422
Shares reacquired (1,304,564) (1,365,032)
- --------------------------------------------------------------------------------
Net Decrease (544,541) (760,610)
================================================================================
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 13
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of beneficial interest outstanding throughout each year ended
November 30:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
=========================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $8.07 $8.46 $8.63 $9.28 $8.15
- -----------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.27 0.28 0.28 0.30 0.27
Net realized and unrealized gain (loss) 2.29 0.13 0.78 (0.16) 1.48
- -----------------------------------------------------------------------------------------
Total Income From Operations 2.56 0.41 1.06 0.14 1.75
- -----------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.26) (0.31) -- (0.57) (0.27)
Net realized gains (1.08) (0.49) (1.23) (0.22) (0.35)
- -----------------------------------------------------------------------------------------
Total Distributions (1.34) (0.80) (1.23) (0.79) (0.62)
- -----------------------------------------------------------------------------------------
Net Asset Value, End of Year $9.29 $8.07 $8.46 $8.63 $9.28
- -----------------------------------------------------------------------------------------
Total Return 32.43% 5.05% 12.28% 1.55% 22.17%
- -----------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $52 $50 $59 $65 $77
- -----------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.11% 1.10% 1.05% 1.11% 1.17%
Net investment income 2.99 3.30 3.15 3.15 3.12
- -----------------------------------------------------------------------------------------
Portfolio Turnover Rate 0% 0% 0% 0% 6%
- -----------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
For Federal tax purposes the Fund hereby designates for the fiscal year ended
November 30, 1999:
o Total long-term capital gain distributions paid of $5,545,356.
o A total of 98.94% 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 1999 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, 1999, 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 five-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.
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, 1999, 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, 1999, 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 five-year
period then ended, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
New York, New York
January 14, 1999
- --------------------------------------------------------------------------------
Smith Barney Principal Return Fund 15
<PAGE>
SALOMON SMITH BARNEY
----------------------------
A member of citigroup [LOGO]
Trustees
Paul R. Ades
Herbert Barg
Dwight B. Crane
Frank Hubbard
Heath B. McLendon, Chairman
Jerome Miller
Ken Miller
John F. White, Emeritus
Officers
Heath B. McLendon
Chief Executive Officer
Lewis E. Daidone
Senior Vice President
and Treasurer
Richard A. Freeman
Vice President and
Investment Officer
Paul A. Brook
Controller
Christina T. Sydor
Secretary
Investment Manager
SSB Citi Fund Management LLC
Distributor
CFBDS, Inc.
Custodian
PNCBank, N.A.
Transfer Agent
Smith Barney Private Turst Company
388 Greenwich Street, 22nd Floor
New York, New York 10013
Sub-Transfer Agent
PFPC Global Fund Services
P.O. Box 9699
Providence, Rhode Island 02940
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/mutualfunds
FD0306 1/00
