<PAGE>
PRINCIPAL RETURN FUND
ZEROS AND APPRECIATION SERIES 1996
DEAR SHAREHOLDER:
The first half of Smith Barney Shearson Principal Return Fund -- Zeros and
Appreciation Series 1996 fiscal year ended May 31, 1994 was certainly a
difficult period for the financial markets. Stocks had their most important
downward thrust since the summer of 1990, and the bond market had a decline
equivalent to a full-scale bear market. The yield on long-term treasury bonds
rose from 5.9% to 7.5%, creating large losses in many fixed income portfolios.
Despite the very poor environment, the Fund was essentially unchanged, gaining
eight-tenths of 1% during this period. In some ways, the past six months
demonstrated most strongly the validity of the original premise on which you
bought the Fund. The intermediate-term zero coupon treasury notes declined
in value, but since they mature in less than two years, the decline was
buffered considerably. The stock portfolio, filled as it is with high quality
securities, suffered far less than more speculative portfolios.
The recent decline in the financial markets had more to do with the cooling of
speculative excesses than with any fundamental deterioration in the economy.
The increase in short-term interest rates by the Federal Reserve led to an
exaggerated response in the bond market, but the economy should be able to
withstand the higher rates and grow at a moderate pace. Corporate earnings
should continue to improve as years of cost-cutting become reflected in the
bottom line of corporations. The over-exuberant attitude of stock market
participants has cooled, which is a much healthier state of affairs for the
market. We expect better results going into the second half of the year.
Over the past six months, we have continued to focus on companies and groups
where we feel expectations are unjustifiably low or have been significantly
reduced. During periods where we view the market as vulnerable, as we have in
the past few months, it is important to emphasize areas that are not extended
or
overvalued. On this premise, we have added meaningfully to both Eastman Kodak
Company (Kodak) and American Telephone & Telegraph Company on their price
pullbacks earlier in the year. In the case of Kodak, we believe there is
significant upside in the stock as investors discover the value of its core
imaging business, its superior patent library, and management's new-found
focus
on creating shareholder wealth. We added to American Telephone & Telegraph
Company as we continue to believe it will be one of the leaders in the
development of the information superhighway with its global network,
attractive
portfolio of alliances and its marketing expertise. We also continue to have
solid representation in the cable stocks, TeleCommunications, Inc. and Comcast
Corporation, which although depressed, have been sufficiently washed out to
warrant a good bounce once their cable values get recognized through likely
mergers, alliances or joint ventures. A new position in Motorola, Inc. was
instituted as the stock price came down from its lofty heights. The company is
well
1
<PAGE>
positioned to participate in the growth of wireless communications and
semiconductor industries. We have also increased our positions in the rails,
specifically Burlington Northern, Inc. and Union Pacific Corporation, as an
extended play on the economy and the pickup in intermodal transport, further
amplified by their cost cutting efforts.
We continue to hold a core of great growth companies which include such names
as
Gillette Company, Home Depot, Inc., Disney (Walt) Company, Johnson & Johnson,
and Microsoft Corporation. We believe that these superior growth companies
will
continue to regain favor as we enter an environment where the economy no
longer
gives such a dramatic edge to cyclical companies.
Our major themes have not changed since our year-end letter to you. We
continue
to emphasize such themes as the reindustrialization of Middle America
(specifically autos), Telecommunications/Information and Restructuring
Candidates. Our restructuring theme, which has worked so well to date,
provided
ample opportunity for profit taking. We continue to take profits in some of
our
restructuring candidates which have had strong performance over the last few
quarters and may be approaching full value. These positions include such
companies as: Allied Signal, Inc., Xerox Corporation and Avon Products, Inc.
Additional sales in the Fund resulted from both eliminations of positions and
rebalancing of the portfolio. Partial profits were realized in duPont (E.I.),
deNemours & Company, Disney (Walt) Corporation, Minnesota Mining and
Manufacturing Company, Pepsico Inc., NationsBank Corporation, Intel
Corporation,
General Electric Company, and Microsoft Corporation as stock appreciation had
created outsized holdings in the Fund. We eliminated disappointing positions
in
Cooper Industries and Allstate, as well as profitable positions in Readers
Digest, Pep Boys, Grainer, Pfizer and Pacific Bell.
We believe our approach of owning quality companies and proven managements
remains valid. We will also continue to look for individual stocks that are
likely to resist further decline, and have the fundamentals to support future
price gains. We thank you for your continued support.
Sincerely,
/s/ Heath B. McLendon /s/ Harry D. Cohen /s/ Harold L. Williamson,
Jr.
Heath B. McLendon Harry D. Cohen Harold L. Williamson, Jr.
Chairman of the Board Vice President and Vice President and
Investment Officer Investment Officer
June 27, 1994
2
<PAGE>
SEMI-ANNUAL REPORT
SMITH BARNEY SHEARSON
PRINCIPAL
RETURN
FUND --
Zeros and Appreciation
Series 1996
......................
MAY 31, 1994
SMITH BARNEY
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros and Appreciation Series 1996
- - ------------------------------------------------------------------------------
- - --
PORTFOLIO HIGHLIGHTS (UNAUDITED) MAY 31,
1994
<TABLE>
PORTFOLIO ALLOCATION
DESCRIPTION OF PIE CHARTS IN SHAREHOLDER REPORT
Industry Breakdown
Pie chart depicting the allocation of the Principal Return Fund (Zeros and
Appreciation Series 1996) investment securities held at May 31, 1994 by
industry classification. The pie is broken in pieces representing industries
in
the following percentages:
<CAPTION>
INDUSTRY PERCENTAGE
<S> <C>
Convertible Bond, Repurchase Agreement,
and Net Other Assets and Liabilities 1.8%
U.S. Treasury Notes 60.4%
Common Stocks 37.8%
</TABLE>
<TABLE>
TOP TEN COMMON STOCK HOLDINGS
<CAPTION>
Percentage
of
Company Net Assets
- - ----------------------------------------------------------------------
<S> <C>
DUPONT (E.I.) DENEMOURS & COMPANY 1.4%
GENERAL ELECTRIC COMPANY 1.4
EASTMAN KODAK COMPANY 1.1
MINNESOTA MINING AND MANUFACTURING COMPANY 1.0
AMERICAN TELEPHONE & TELEGRAPH COMPANY 1.0
CHEMICAL BANKING CORPORATION 1.0
JOHNSON & JOHNSON 0.9
ROYAL DUTCH PETROLEUM COMPANY 0.9
AMERICAN INTERNATIONAL GROUP, INC. 0.9
WAL-MART STORES, INC. 0.9
</TABLE>
3
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros and Appreciation Series 1996
<TABLE>
- - ------------------------------------------------------------------------------
- - --
PORTFOLIO OF INVESTMENTS (UNAUDITED) MAY 31,
1994
<CAPTION>
MARKET
VALUE
SHARES
(NOTE 1)
- - ------------------------------------------------------------------------------
- - ----------
<S> <C>
<C>
COMMON STOCKS - 37.8%
CONSUMER SERVICES - 6.9%
10,000 AirTouch Communications+ $
243,750
1,100 CBS, Inc.
287,100
12,000 Comcast Corporation, Class A
209,250
13,000 Disney (Walt) Company
562,250
15,000 Donnelly (RR) & Sons Company
412,500
600 GC Companies, Inc.+
19,050
3,500 Gannett, Inc.
185,062
1,000 Gaylord Entertainment Company, Class A
23,000
4,000 Grupo Televisa S.A.
231,000
5,000 Harcourt General, Inc.
185,000
14,000 Home Depot, Inc.
631,750
4,000 Penney (J.C.), Inc.
204,500
2,500 QVC Network, Inc.+
80,000
1,000 Scandinavian Broadcasting System S.A.+
25,250
15,000 TeleCommunications, Inc., Class A
313,125
15,000 Time Warner, Inc.
581,250
12,000 Toys "R" Us, Inc.+
426,000
3,000 Tribune Company
176,250
1,000 Viacom, Inc. Class B+
28,750
30,000 Wal-Mart Stores, Inc.
705,000
---------------------------------------------------------------------------
- - ----------
5,529,837
---------------------------------------------------------------------------
- - ----------
FINANCIAL SERVICES - 6.6%
8,500 Aetna Life & Casualty Company
460,063
8,000 American International Group, Inc.
747,000
8,000 Bank of New York, Inc.
236,000
5,000 Barnett Banks, Inc.
230,625
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
4
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros and Appreciation Series 1996
<TABLE>
- - ------------------------------------------------------------------------------
- - --
PORTFOLIO OF INVESTMENTS (UNAUDITED) (continued) MAY 31,
1994
<CAPTION>
MARKET
VALUE
SHARES
(NOTE 1)
- - ------------------------------------------------------------------------------
- - ----------
<S> <C>
<C>
COMMON STOCKS (CONTINUED)
FINANCIAL SERVICES (CONTINUED)
20,000 Chemical Banking Corporation $
767,500
1,500 Chubb Corporation
120,938
5,000 CIGNA Corporation
344,375
15,000 Citicorp+
592,500
8,000 Federal National Mortgage Association
668,000
3,000 First Virginia Banks, Inc.
115,875
5,000 KeyCorp
162,500
9,000 NationsBank Corporation
498,375
7,000 UNUM Corporation
328,125
---------------------------------------------------------------------------
- - ----------
5,271,876
---------------------------------------------------------------------------
- - ----------
ENERGY - 3.8%
6,500 Amerada Hess Corporation
321,750
4,000 Burlington Resources, Inc.
166,500
8,000 Exxon Corporation
488,000
6,000 Mobil Corporation
486,000
7,000 Royal Dutch Petroleum Company
748,125
2,500 Schlumberger Ltd.
143,125
10,000 Texaco, Inc.
635,000
---------------------------------------------------------------------------
- - ----------
2,988,500
---------------------------------------------------------------------------
- - ----------
CAPITAL GOODS - 3.4%
12,000 AlliedSignal, Inc.
421,500
3,000 AMP Inc.
194,250
2,500 Caterpillar, Inc.
267,187
22,000 General Electric Company
1,091,750
7,000 Ingersoll-Rand Company
245,000
7,000 United Technologies Corporation
464,625
---------------------------------------------------------------------------
- - ----------
2,684,312
---------------------------------------------------------------------------
- - ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
5
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros and Appreciation Series 1996
<TABLE>
- - ------------------------------------------------------------------------------
- - --
PORTFOLIO OF INVESTMENTS (UNAUDITED) (continued) MAY 31,
1994
<CAPTION>
MARKET
VALUE
SHARES
(NOTE 1)
- - ------------------------------------------------------------------------------
- - ----------
<S> <C>
<C>
COMMON STOCKS (CONTINUED)
CONSUMER NON-DURABLES - 3.0%
5,000 Avon Products, Inc. $
294,375
7,000 Crown Cork & Seal, Inc.
252,875
9,000 Gillette Company
627,750
18,000 PepsiCo, Inc.
648,000
10,000 Procter & Gamble Company
563,750
---------------------------------------------------------------------------
- - ----------
2,386,750
---------------------------------------------------------------------------
- - ----------
DIVERSIFIED - 2.9%
5,000 Alco Standard Corporation
290,000
18,000 Eastman Kodak Company
843,750
16,000 Minnesota Mining and Manufacturing Company
816,000
7,000 Tenneco, Inc.
335,125
---------------------------------------------------------------------------
- - ----------
2,284,875
---------------------------------------------------------------------------
- - ----------
BASIC INDUSTRIES - 2.5%
18,000 duPont (E.I.) deNemours & Company
1,116,000
2,000 Hercules, Inc.
210,750
10,000 International Paper Company
692,500
---------------------------------------------------------------------------
- - ----------
2,019,250
---------------------------------------------------------------------------
- - ----------
TECHNOLOGY - 2.4%
4,500 Intel Corporation
281,250
2,500 International Business Machines Corporation
158,125
12,000 Microsoft Corporation+
645,000
2,000 Motorola, Inc.
93,500
5,000 Pitney Bowes, Inc.
195,625
5,400 Xerox Corporation
542,700
---------------------------------------------------------------------------
- - ----------
1,916,200
---------------------------------------------------------------------------
- - ----------
CONSUMER DURABLES - 2.0%
7,000 Chrysler Corporation
347,375
5,000 Ford Motor Company
288,750
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros and Appreciation Series 1996
<TABLE>
- - ------------------------------------------------------------------------------
- - --
PORTFOLIO OF INVESTMENTS (UNAUDITED) (continued) MAY 31,
1994
<CAPTION>
MARKET
VALUE
SHARES
(NOTE 1)
- - ------------------------------------------------------------------------------
- - ----------
<S> <C>
<C>
COMMON STOCKS (CONTINUED)
CONSUMER DURABLES (CONTINUED)
9,000 General Motors Corporation $
483,750
6,000 Goodyear Tire & Rubber Company
232,500
4,500 Whirlpool Corporation
241,313
- - ------------------------------------------------------------------------------
- - ----------
1,593,688
- - ------------------------------------------------------------------------------
- - ----------
HEALTH CARE - 1.7%
5,000 Bristol-Meyers Squibb
273,125
17,000 Johnson & Johnson
752,250
10,000 Merck & Company, Inc.
305,000
- - ------------------------------------------------------------------------------
- - ----------
1,330,375
- - ------------------------------------------------------------------------------
- - ----------
UTILITIES - 1.5%
14,500 American Telephone & Telegraph Company
790,250
3,000 Bell Atlantic Corporation
160,125
7,000 NYNEX Corporation
264,250
- - ------------------------------------------------------------------------------
- - ----------
1,214,625
- - ------------------------------------------------------------------------------
- - ----------
TRANSPORTATION - 1.1%
3,000 Burlington Northern, Inc.
167,250
6,000 CSX Corporation
459,000
4,000 Union Pacific Corporation
236,000
- - ------------------------------------------------------------------------------
- - ----------
862,250
- - ------------------------------------------------------------------------------
- - ----------
TOTAL COMMON STOCKS (Cost $23,478,914)
$30,082,538
- - ------------------------------------------------------------------------------
- - ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros and Appreciation Series 1996
<TABLE>
- - ------------------------------------------------------------------------------
- - --
PORTFOLIO OF INVESTMENTS (UNAUDITED) (continued) MAY 31,
1994
<CAPTION>
MARKET
VALUE
FACE VALUE
(NOTE 1)
- - ------------------------------------------------------------------------------
- - ------------
<S> <C> <C>
<C>
U.S. TREASURY NOTES - 60.4% (Cost $45,410,536)
$53,000,000 U.S. Treasury Notes-Strips,
Zero Coupon due 2/15/96++
$48,011,640
- - ------------------------------------------------------------------------------
- - ------------
CONVERTIBLE BOND - 0.2% (Cost $180,750)
150,000 Savoy Pictures Entertainment, Inc.,
7.000% due 7/1/03
124,500
- - ------------------------------------------------------------------------------
- - ------------
REPURCHASE AGREEMENT - 1.6% (Cost $1,258,000)
1,258,000 Agreement with Morgan Stanley & Company, dated
5/31/94 bearing 4.100% to be repurchased at
$1,258,143 on 6/1/94, collateralized by $1,258,000
U.S. Treasury Bond 11.750% due 11/15/14
1,258,000
- - ------------------------------------------------------------------------------
- - ------------
TOTAL INVESTMENTS (Cost $70,328,200*) 100.0%
79,476,678
OTHER ASSETS AND LIABILITIES (NET) (0.0)
(14,003)
- - ------------------------------------------------------------------------------
- - ------------
NET ASSETS 100.0%
$79,462,675
- - ------------------------------------------------------------------------------
- - ------------
<FN>
* Aggregate cost for Federal tax purposes.
+ Non-income producing security.
++ Effective yield is 5.780%.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros and Appreciation Series 1996
<TABLE>
- - ------------------------------------------------------------------------------
- - --
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) MAY 31,
1994
<S> <C>
<C>
ASSETS:
Investments, at value ($70,328,200) (Note 1)
See accompanying schedule
$79,476,678
Dividends and interest receivables
120,289
- - ------------------------------------------------------------------------------
- - ------------
TOTAL ASSETS
79,596,967
- - ------------------------------------------------------------------------------
- - ------------
LIABILITIES:
Payable for Fund shares redeemed $ 55,856
Investment advisory fee payable (Note 2) 20,201
Accrued legal and audit fees 13,500
Administration fee payable (Note 2) 13,468
Accrued shareholder reports expense 10,243
Transfer agent fees payable (Note 2) 8,300
Custodian fees payable (Note 2) 6,000
Due to custodian 318
Accrued expenses and other payables 6,406
- - ------------------------------------------------------------------------------
- - ------------
TOTAL LIABILITIES
134,292
- - ------------------------------------------------------------------------------
- - ------------
NET ASSETS
$79,462,675
- - ------------------------------------------------------------------------------
- - ------------
NET ASSETS CONSIST OF:
Undistributed net investment income
$ 1,915,858
Accumulated net realized gain on investments sold
4,712,968
Unrealized appreciation of investments
9,148,478
Par value
8,345
Paid-in capital in excess of par value
63,677,026
- - ------------------------------------------------------------------------------
- - ------------
TOTAL NET ASSETS
$79,462,675
- - ------------------------------------------------------------------------------
- - ------------
NET ASSET VALUE and redemption price per share
($79,462,675 / 8,344,949 shares of beneficial interest
outstanding)
$9.52
- - ------------------------------------------------------------------------------
- - ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros and Appreciation Series 1996
<TABLE>
- - ------------------------------------------------------------------------------
- - --
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED MAY 31,
1994
<S> <C>
<C>
INVESTMENT INCOME:
Interest
$ 2,165,047
Dividends
385,084
- - ------------------------------------------------------------------------------
- - -----------
TOTAL INVESTMENT INCOME
2,550,131
- - ------------------------------------------------------------------------------
- - -----------
EXPENSES:
Investment advisory fee (Note 2) $ 126,040
Administration fee (Note 2) 84,027
Transfer agent fees (Note 2) 50,073
Legal and audit fees 17,346
Custodian fees (Note 2) 16,227
Amortization of organization costs (Note 5) 8,303
Trustees' fees and expenses (Note 2) 3,547
Other 11,029
- - ------------------------------------------------------------------------------
- - -----------
TOTAL EXPENSES
316,592
- - ------------------------------------------------------------------------------
- - -----------
NET INVESTMENT INCOME
2,233,539
- - ------------------------------------------------------------------------------
- - -----------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
(NOTES 1 AND 3):
Net realized gain on investments during the period
3,612,706
Net unrealized depreciation of investments during the
period
(5,701,558)
- - ------------------------------------------------------------------------------
- - -----------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
(2,088,852)
- - ------------------------------------------------------------------------------
- - -----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
$ 144,687
- - ------------------------------------------------------------------------------
- - -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros and Appreciation Series 1996
<TABLE>
- - ------------------------------------------------------------------------------
- - --
STATEMENT OF CHANGES IN NET ASSETS
<CAPTION>
SIX MONTHS
ENDED
YEAR
5/31/94
ENDED
(UNAUDITED)
11/30/93
<S> <C>
<C>
Net investment income $ 2,233,539
$ 4,846,693
Net realized gain on investments during the period 3,612,706
12,532,076
Net unrealized depreciation of investments during the
period (5,701,558)
(9,529,809)
- - ------------------------------------------------------------------------------
- - ------------
Net increase in net assets resulting from operations 144,687
7,848,960
Distributions to shareholders from:
Net investment income (4,057,107)
(6,613,025)
Net realized capital gain on investments (11,293,760)
(3,896,983)
Net increase/(decrease) in net assets from Fund share
transactions (Note 4) 3,516,083
(15,196,729)
- - ------------------------------------------------------------------------------
- - ------------
Net decrease in net assets (11,690,097)
(17,857,777)
NET ASSETS:
Beginning of period 91,152,772
109,010,549
- - ------------------------------------------------------------------------------
- - ------------
End of period (including undistributed net investment
income of $1,915,858 and $3,739,426, respectively) $ 79,462,675
$ 91,152,772
- - ------------------------------------------------------------------------------
- - ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros and Appreciation Series 1996
<TABLE>
- - ------------------------------------------------------------------------------
- - --
FINANCIAL HIGHLIGHTS
FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<CAPTION>
SIX MONTHS
ENDED YEAR YEAR YEAR
YEAR PERIOD
5/31/94 ENDED ENDED ENDED
ENDED ENDED
(UNAUDITED) 11/30/93++ 11/30/92++ 11/30/91
11/30/90++ 11/30/89*
<S> <C> <C> <C> <C>
<C> <C>
Net asset value,
beginning of period $ 11.45 $ 11.75 $ 11.42 $ 10.77 $
11.38 $ 9.50
- - ------------------------------------------------------------------------------
- - ------------------------
Income From Investment
Operations:
Net investment income 0.28 0.53 0.54 0.62
0.55 0.63
Net realized and
unrealized gain/(loss)
on investments (0.25) 0.31 0.95 0.84
(0.30) 1.25
- - ------------------------------------------------------------------------------
- - ------------------------
Total from investment
operations 0.03 0.84 1.49 1.46
0.25 1.88
- - ------------------------------------------------------------------------------
- - ------------------------
Less Distributions:
Dividends from net
investment income (0.52) (0.72) (0.65) (0.69)
(0.63) --
Distributions from net
realized capital gains (1.44) (0.42) (0.51) (0.12)
(0.23) --
- - ------------------------------------------------------------------------------
- - ------------------------
Total Distributions (1.96) (1.14) (1.16) (0.81)
(0.86) 0.00
- - ------------------------------------------------------------------------------
- - ------------------------
Net asset value, end of
period $ 9.52 $ 11.45 $ 11.75 $ 11.42 $
10.77 $ 11.38
- - ------------------------------------------------------------------------------
- - ------------------------
Total return+++ 0.08% 7.85% 13.64% 14.56%
2.29% 19.79%
- - ------------------------------------------------------------------------------
- - ------------------------
Ratios/Supplemental Data:
Net assets, end of period
(in 000's) $79,463 $91,153 $109,011 $115,356
$121,493 $162,867
Ratio of expenses to
average net assets 0.75%** 0.77%+ 0.77% 0.81%
0.85% 0.84%**
Ratio of net investment
income to average net
assets 5.27%** 4.76% 4.85% 5.26%
5.21% 5.79%**
Portfolio turnover rate 4% 20% 11% 17%
3% 32%
- - ------------------------------------------------------------------------------
- - ------------------------
<FN>
* The Fund commenced operations on January 16, 1989.
** Annualized.
+ The operating expense ratio excludes interest expense. The annualized ratio
including interest expense was 0.78%.
++ The per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for this year
since
use of the undistributed method did not accord with results of operations.
+++Total return represents aggregate total return for the periods indicated.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros and Appreciation Series 1996
- - ------------------------------------------------------------------------------
- - --
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Shearson Principal Return Fund (the "Trust") was organized on
October 18, 1988, under the laws of the Commonwealth of Massachusetts as a
"Massachusetts business trust." The Trust is a diversified, open-end
management
investment company registered with the Securities and Exchange Commission
under
the Investment Company Act of 1940, as amended. The Trust consists of four
series, Zeros and Appreciation Series 1996, which commenced operations on
January 16, 1989, Zeros and Appreciation Series 1998 which commenced
operations
on January 25, 1991, Zeros Plus Emerging Growth Series 2000, which commenced
operations on August 30, 1991, and Zeros Plus European Equities Series 1999
which has not yet commenced operations. Zeros and Appreciation Series 1996
(the
"Fund") expects to terminate operations on March 1, 1996. The following is a
summary of significant accounting policies consistently followed by the Fund
in
the preparation of its financial statements.
Portfolio valuation: Listed securities traded on a national securities
exchange
are valued at the last reported sales price; securities traded in the
over-the-counter market and listed securities for which no sale was reported
are
valued at the bid price or, in the absence of a recent bid price, at the bid
equivalent as obtained from one or more of the major market makers in the
securities. Investments in U.S. government securities (other than short-term
securities) are valued at the quoted bid price in the over-the-counter market.
Short-term investments that mature in 60 days or less are valued at amortized
cost whenever the Board of Trustees determines that amortized cost reflects
the
fair value of those investments. Investments in securities for which market
quotations are not available are valued at fair value as determined in good
faith by the Board of Trustees.
Repurchase agreements: The Fund may engage in repurchase agreement
transactions.
Under the terms of a typical repurchase agreement, the Fund takes possession
of
an underlying debt obligation subject to an obligation of the seller to
repurchase, and the Fund to resell, the obligation at an agreed-upon price and
time, thereby determining the yield during the Fund's holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The value of the collateral
held
by the Fund is at least equal at all times to the total amount of the
repurchase
obligations, including interest. In the event of counterparty default, the
Fund
has the right to use the collateral to offset losses incurred. There is
potential loss to the Fund in the event that the Fund is
13
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros and Appreciation Series 1996
- - ------------------------------------------------------------------------------
- - --
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
delayed or prevented from exercising its rights to dispose of the collateral
securities, including the risk of a possible decline in the value of the
underlying securities during the period while the Fund seeks to assert its
rights. The Fund's investment adviser, acting under the supervision of the
Board
of Trustees, reviews the value of the collateral and the creditworthiness of
those banks and dealers with which the Fund enters into repurchase agreements
to
evaluate potential risks.
Securities transactions and investment income: Securities transactions are
recorded as of the trade date. Realized gains and losses from securities
transactions are recorded on the identified cost basis. Dividend income is
recorded on the ex-dividend date. Interest income is recorded on the accrual
basis (primarily from accretion of U.S. Treasury Notes).
Dividends and distributions to shareholders: Dividends from net investment
income and distributions of net realized capital gains of the Fund, if any,
will
be distributed annually after the close of the fiscal year in which they are
earned. In addition, in order to avoid the application of a 4% nondeductible
excise tax on certain undistributed amounts of ordinary income and capital
gains, the Fund may make an additional distribution of any undistributed
ordinary income or capital gains shortly before December 31st of each year,
and
expects to pay any other dividends and distributions as are necessary to avoid
the application of this tax. Income distributions and capital gain
distributions
are determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due
to
differing treatments of income and gains on various investment securities held
by the Fund, timing differences and differing characterization of
distributions
made by the Fund as a whole.
Federal income taxes: It is the Fund's policy to comply with the requirements
of
the Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and to distribute substantially all of its taxable income
to its shareholders. Therefore, no Federal income tax provision is required.
14
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros and Appreciation Series 1996
- - ------------------------------------------------------------------------------
- - --
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
2. INVESTMENT ADVISORY FEE, ADMINISTRATION FEE AND OTHER TRANSACTIONS
The Trust has entered into an investment advisory agreement (the "Advisory
Agreement") with Smith Barney Asset Management, a division of Smith, Barney
Advisers, Inc. ("SBA"), which is controlled by Smith Barney Holdings Inc.
("Holdings"). Holdings is a wholly owned subsidiary of The Travelers Inc.
Under
the advisory agreement, the Fund pays a monthly fee at the annual rate of .30%
of the value of its average daily net assets.
Prior to April 21, 1994, the Trust was party to an administration agreement
with
The Boston Company Advisors, Inc. ("Boston Advisors"), an indirect wholly
owned
subsidiary of Mellon Bank Corporation ("Mellon"). Under this agreement, the
Fund
paid a monthly fee at the annual rate of .20% of the value of its average
daily
net assets.
As of the close of business on April 21, 1994, SBA succeeded Boston Advisors
as
the Fund's administrator. The new administration agreement contains
substantially the same terms and conditions, including the level of fees, as
the
predecessor agreement.
As of the close of business on April 21, 1994, the Fund has also entered into
a
sub-administration agreement (the "Sub-Administration Agreement") with Boston
Advisors. Under the Sub-Administration Agreement, Boston Advisors is paid a
portion of the fee paid by the Fund to SBA at a rate agreed upon from time to
time between SBA and Boston Advisors.
For the six months ended May 31, 1994, the Fund incurred total brokerage
commissions of $14,999 of which $690 was paid to Smith Barney, Inc. ("Smith
Barney").
No officer, director or employee of Smith Barney or any parent or subsidiary
of
Smith Barney receives any compensation from the Trust for serving as a Trustee
or officer of the Trust. The Trust pays each Trustee who is not an officer,
director or employee of Smith Barney or any of its affiliates $2,000 per annum
plus $500 per meeting attended and reimburses each Trustee for travel and
out-of-pocket expenses.
Boston Safe Deposit and Trust Company, an indirect wholly owned subsidiary of
Mellon, serves as the Trust's custodian. The Shareholder Services Group, Inc.,
a
subsidiary of First Data Corporation, serves as the Trust's transfer agent.
15
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros and Appreciation Series 1996
- - ------------------------------------------------------------------------------
- - --
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding U.S.
government securities and short-term investments, aggregated $3,118,250 and
$11,489,431, respectively, for the six months ended May 31, 1994. There were
no
purchases of long-term U.S. government securities for the six months ended May
31, 1994. Proceeds from sales of long-term U.S. government securities
aggregated
$3,628,400 for the six months ended May 31, 1994.
At May 31, 1994, aggregate gross unrealized appreciation for all securities in
which there was an excess of value over tax cost was $9,787,991, and aggregate
gross unrealized depreciation for all securities in which there was an excess
of
tax cost over value was $639,513.
<TABLE>
4. SHARES OF BENEFICIAL INTEREST
The Trust may issue an unlimited number of shares of beneficial interest of
the
Fund with a par value of $.001 per share. The Fund, Zeros and Appreciation
Series 1998, Zeros Plus European Equities Series 1999 and Zeros Plus Emerging
Growth Series 2000 each constitutes a sub-trust under the Master Trust
Agreement. Changes in shares of beneficial interest of the Fund were as
follows:
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED
MAY 31, 1994
NOVEMBER 30, 1993
Shares Amount Shares
Amount
- - ------------------------------------------------------------------------------
- - ----------------
<S> <C> <C> <C>
<C>
Issued as reinvestment of
dividends 1,578,933 $ 15,141,963 960,816
$ 10,396,024
Redeemed (1,194,263) (11,625,880)
(2,281,849) (25,592,753)
- - ------------------------------------------------------------------------------
- - ----------------
Net increase/(decrease) 384,670 $ 3,516,083
(1,321,033) $(15,196,729)
- - ------------------------------------------------------------------------------
- - ----------------
</TABLE>
Shares of the Fund are not currently being offered for sale to new investors,
although the Fund, upon at least 30 days' notice to shareholders, may commence
a
continuous offering if the Board of Trustees determines it to be in the best
interests of the Fund and its shareholders.
5. ORGANIZATION COSTS
The Fund bears all costs in connection with its organization including the
fees
and expenses of registering and qualifying its shares for distribution under
Federal and state securities regulations. All such costs were amortized on the
straight-line
16
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros and Appreciation Series 1996
- - ------------------------------------------------------------------------------
- - --
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
method over a period of five years from the commencement of operations of the
Fund. As of May 31, 1994, all such costs have been fully amortized.
6. LINE OF CREDIT
The Fund and several affiliated entities participate in a $50 million line of
credit provided by Continental Bank N.A. under an Amended and Restated Line of
Credit Agreement (the "Agreement") dated April 30, 1992, primarily for
temporary
or emergency purposes, including the meeting of redemption requests that
otherwise might require the untimely disposition of securities. Under this
Agreement, the Fund may borrow up to the lesser of $25 million or 20% of its
net
assets. Interest is payable either at the bank's Money Market Rate or the
London
Interbank Offered Rate (LIBOR) plus .375% on an annualized basis. The Fund and
the other affiliated entities are charged an aggregate commitment fee of
$125,000 which is allocated equally among each of the participants. The
Agreement requires, among other provisions, each participating fund to
maintain
a ratio of net assets (not including funds borrowed pursuant to the Agreement)
to aggregate amount of indebtedness pursuant to the Agreement of no less than
5
to 1. During the six months ended May 31, 1994, the Fund had an average
outstanding daily balance of $48,901 with interest rates ranging from 3.31% to
3.94%. Interest expense totalled $1,231 for the six months ended May 31, 1994.
At May 31, 1994, the Fund had no outstanding borrowings under this Agreement.
17
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros and Appreciation Series 1996
- - ------------------------------------------------------------------------------
- - --
PARTICIPANTS
DISTRIBUTOR
Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
INVESTMENT ADVISER
Smith Barney
Asset Management
Two World Trade Center
New York, New York 10048
ADMINISTRATOR
Smith, Barney Advisers, Inc.
1345 Avenue of the Americas
New York, New York 10105
SUB-ADMINISTRATOR
The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
AUDITORS AND COUNSEL
Coopers & Lybrand
One Post Office Square
Boston, Massachusetts 02109
Willkie Farr & Gallagher
153 East 53rd Street
New York, New York 10022
TRANSFER AGENT
The Shareholder Services Group, Inc.
Exchange Place
Boston, Massachusetts 02109
CUSTODIAN
Boston Safe Deposit and
Trust Company
One Boston Place
Boston, Massachusetts 02108
18
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros and Appreciation Series 1996
- - ------------------------------------------------------------------------------
- - --
OUR APPROACH TO MUTUAL FUND INVESTING
1. PERSONAL SERVICE
The Smith Barney Financial Consultant ("FC") is highly trained and deeply
committed to client service. Your FC works with you to establish a
relationship
based on one-to-one communication and the highest standards of quality.
2. ANALYZING YOUR NEEDS
Defining your needs and establishing specific goals is the first step toward
any
successful investment program. The Smith Barney Strategic Asset Allocator -- a
sophisticated financial planning tool -- can help you and your FC evaluate
your
resources and objectives. This groundwork then becomes the basis for a
strategy
designed specifically for you. Your FC can use the Strategic Asset Allocator
on
a periodic basis to ensure that your investment strategy is keeping pace with
your changing needs and goals.
3. A UNIQUE MUTUAL FUND INVESTMENT PROGRAM
Your Smith Barney FC offers a number of mutual fund assessment tools that are
unmatched in the financial services industry. Smith Barney FCs have access to
a
proprietary mutual fund research database that provides information at their
fingertips on more than 2,100 funds. In addition, working with another
proprietary system known as the Mutual Fund Evaluation Service, your FC can
help
guide you through the complex mutual fund maze. Specifically, the Evaluation
Service can provide a clear picture of the past performance of mutual funds
you
currently own. Presented in both graphic and numerical form, this illustration
provides a wealth of easily understood data on more than 2,100 funds. This
complimentary service allows you to judge whether your mutual fund has helped
meet your investment needs.
4. LOOKING AHEAD
Selecting a mutual fund should not be a one-event process that ends with the
purchase of shares. You can count on the expertise of your FC as he or she
continues to monitor and evaluate your funds, to suggest new strategies and to
listen. That, in our opinion, is how to use mutual funds to help achieve your
financial goals.
19
<PAGE>
PRINCIPAL
RETURN FUND --
Zeros and Appreciation Series 1996
TRUSTEES
Paul R. Ades
Herbert Barg
Allan R. Johnson
Heath B. McLendon
Ken Miller
John F. White
OFFICERS
Heath B. McLendon
Chairman of the Board
Stephen J. Treadway
President
Richard P. Roelofs
Executive Vice President
Harry D. Cohen
Vice President and
Investment Officer
Harold L. Williamson, Jr.
Vice President and
Investment Officer
Susan C. Fulenwider
Vice President and
Investment Officer
Lewis E. Daidone
Treasurer
Christina T. Sydor
Secretary
This report is submitted for the
general information of the
shareholders of Smith Barney
Shearson Principal Return Fund --
Zeros and Appreciation Series
1996. It is not a prospectus,
circular or representation
intended for use in the purchase
or sale of shares of the Fund or of
any securities mentioned in this
report.
SMITH BARNEY
- - ------------
SMITH BARNEY SHEARSON
MUTUAL FUNDS
Two World Trade Center
New York, New York 10048
Fund 123
FD2225 G4
<PAGE>
Smith Barney Shearson
PRINCIPAL
RETURN
SEMI-
ANNUAL
REPORT FUND --
ZEROS AND APPRECIATION
SERIES 1998
......................
MAY 31, 1994
SMITH BARNEY
------------
<PAGE>
PRINCIPAL RETURN FUND
Zeros and Appreciation Series 1998
DEAR SHAREHOLDER:
The first half of Smith Barney Shearson Principal Return Fund -- Zeros and
Appreciation Series 1998 fiscal year ended May 31, 1994 was certainly a
difficult period for the financial markets. Stocks had their most important
decline since the summer of 1990, and the bond market was battered by a
full-scale bear market. The yield on long-term treasury bonds rose from 5.9%
to
7.5%, creating large losses in many fixed income portfolios. While the Fund
suffered a decline during this terribly difficult period, it was contained to
a
loss of 2.26%. In some ways, the past six months demonstrated most strongly
the
validity of the original premise on which you bought the Fund. The
intermediate-term zero coupon treasury notes declined in value, but since they
mature in just over four years, the decline was buffered considerably. The
stock portfolio, filled as it is with high quality securities, suffered far
less than more speculative portfolios.
The recent decline in the financial markets had more to do with the cooling of
speculative excesses than with any fundamental deterioration in the economy.
The increase in short-term interest rates by the Federal Reserve led to an
exaggerated response in the bond market, but the economy should be able to
withstand the higher rates and grow at a moderate pace. Corporate earnings
should continue to improve as years of cost-cutting become reflected in the
bottom line of corporations. The over-exuberant attitude of stock market
participants has cooled, which is a much healthier state of affairs for the
market. We expect better results going into the second half of the year.
Over the past six months, we have continued to focus on companies and groups
where we feel expectations are unjustifiably low or have been significantly
reduced. During periods where we view the market as vulnerable, as we have in
the past few months, it is important to emphasize areas that are not extended
or
overvalued. On this premise, we have added meaningfully to both Eastman Kodak
Company (Kodak) and American Telephone & Telegraph Company, on their price
pullbacks earlier this year. In the case of Kodak, we believe there is
significant upside in the stock as investors discover the value of its core
imaging business, its superior patent library, and management's new-found
focus
on creating shareholder wealth. We added to American Telephone & Telegraph
Company, as we continue to believe it will be one of the leaders in the
development of the information superhighway with its global network,
attractive
portfolio of alliances and marketing expertise. We continue to have solid
representation in the cable stocks, TeleCommunications, Inc. and Comcast
Corporation, which although depressed have been sufficiently washed out to
warrant a good bounce once their cable values get recognized through likely
mergers, alliances or joint ventures. A new position in Motorola, Inc. was
instituted as the stock price came down from its lofty heights.
1
<PAGE>
<TABLE>
The company is well positioned to participate in the growth of wireless
communications and semiconductor industries. We have also increased our
position
in the rails, specifically Burlington Northern, as an extended play on the
economy and the pickup in intermodal transport, further amplified by their
cost
cutting efforts.
We continue to hold a core of great growth companies which include such names
as
Gillette Company, Home Depot, Inc., Disney (Walt) Company, Johnson & Johnson,
and Microsoft Corporation. We believe that these superior growth companies
will
continue to regain favor as we enter an environment where the economy no
longer
gives a dramatic edge to cyclical companies.
Our major themes have not changed since our year-end letter to you. We
continue
to emphasize such themes as the reindustrialization of Middle America
(specifically autos), Telecommunications/Information and Restructuring
Candidates. Our restructuring theme, which has worked so well to date,
provided
ample opportunity for profit taking. We continue to take profits in some of
our
restructuring candidates which have had strong performance over the last few
quarters and may be approaching full value. These positions include such
companies as: Allied Signal, Inc., Xerox Corporation and Avon Products, Inc.
Additional sales in the Fund resulted from both eliminations of positions and
rebalancing of the portfolio. Partial profits were realized in Unum
Corporation,
Disney (Walt) Company, Minnesota Mining and Manufacturing Company, Pepsico
Inc.,
Citicorp, Intel Corporation, Toys R Us, Inc., and Microsoft Corporation as
stock
appreciation had created outsized holdings in the Fund. We eliminated
disappointing positions in Cooper Industries and Allstate, as well as
profitable
positions in Nalco Chemical, Readers Digest, Pep Boys, Pfizer and Pacific
Bell.
We believe our approach of owning quality companies and proven managements
remains valid. We will also continue to look for individual stocks that are
likely to resist further decline, and have the fundamentals to support future
price gains. We thank you for your continued support.
Sincerely,
<S> <C> <C>
/s/ HEATH B. MCLENDON /s/ HARRY D. COHEN /s/ HAROLD L. WILLIAMSON,
JR.
- - --------------------- ------------------ ----------------------------
- - -
Heath B. McLendon Harry D. Cohen Harold L. Williamson, Jr.
Chairman of the Board Vice President and Vice President and
Investment Officer Investment Officer
June 27, 1994
</TABLE>
2
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros and Appreciation Series 1998
- - ------------------------------------------------------------------------------
- - --
PORTFOLIO HIGHLIGHTS (UNAUDITED) MAY 31,
1994
- - ------------------------------------------------------------------------------
- - --
PORTFOLIO ALLOCATION
<TABLE>
Pie chart depicting the allocation of the Principal Return Fund (Zeros and
Apprectiation Series 1998) investment securities held at May 31, 1994 by
industry classification. The pie is broken in pieces representing industries
in the following percentages:
<CAPTION>
INDUSTRY PERCENTAGE
<S> <C>
Convertible Bond, Commercial Paper,
and Net Other Assets and Liabilities 2.3%
U.S. Treasury Notes 61.3%
Common Stocks 36.4%
</TABLE>
<TABLE>
TOP TEN COMMON STOCK HOLDINGS
<CAPTION>
Percentage of
Company Net Assets
- - ----------------------------------------------------------------------
<S> <C>
DUPONT (E.I.) DENEMOURS & COMPANY 1.2%
EASTMAN KODAK COMPANY 1.1
MINNESOTA MINING AND MANUFACTURING COMPANY 1.0
AMERICAN TELEPHONE & TELEGRAPH COMPANY 1.0
FEDERAL NATIONAL MORTGAGE ASSOCIATION 0.9
DISNEY (WALT) COMPANY 0.9
GENERAL ELECTRIC COMPANY 0.9
TEXACO, INC. 0.8
UNUM CORPORATION 0.8
PEPSICO, INC. 0.8
</TABLE>
3
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros and Appreciation Series 1998
<TABLE>
- - ------------------------------------------------------------------------------
- - ---------
PORTFOLIO OF INVESTMENTS (UNAUDITED) MAY
31, 1994
- - ------------------------------------------------------------------------------
- - ---------
<CAPTION>
MARKET
VALUE
SHARES
(NOTE 1)
- - ------------------------------------------------------------------------------
- - ---------
<C> <S>
<C>
COMMON STOCKS - 36.4%
FINANCIAL SERVICES - 7.0%
10,000 Aetna Life & Casualty Company $
541,250
4,500 American International Group, Inc.
420,188
12,000 Bank of New York, Inc.
354,000
9,000 Barnett Banks, Inc.
415,125
6,000 Chase Manhattan Corporation
226,500
20,000 Chemical Banking Corporation
767,500
3,000 Chubb Corporation
241,875
6,000 CIGNA Corporation
413,250
18,000 Citicorp+
711,000
13,000 Federal National Mortgage Association
1,085,500
4,000 First Virginia Banks, Inc.
154,500
7,000 KeyCorp
227,500
7,000 NationsBank Corporation
387,625
10,000 Republic New York Corporation
476,250
20,000 UNUM Corporation
937,500
4,000 Wells Fargo & Company
627,500
- - ------------------------------------------------------------------------------
- - ---------
7,987,063
- - ------------------------------------------------------------------------------
- - ---------
CONSUMER SERVICES - 6.8%
12,000 AirTouch Communications+
292,500
1,500 CBS, Inc.
391,500
18,000 Comcast Corporation, Class A
313,875
24,000 Disney (Walt) Company
1,038,000
22,000 Donnelly (RR) & Sons Company
605,000
800 GC Companies, Inc.+
25,400
5,500 Gannett, Inc.
290,812
6,500 Grupo Televisa S.A.
375,375
6,500 Harcourt General, Inc.
240,500
18,000 Home Depot, Inc.
812,250
6,000 Penney (J.C.), Inc.
306,750
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
4
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros and Appreciation Series 1998
<TABLE>
- - ------------------------------------------------------------------------------
- - ---------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (continued) MAY
31, 1994
- - ------------------------------------------------------------------------------
- - ---------
<CAPTION>
MARKET
VALUE
SHARES
(NOTE 1)
- - ------------------------------------------------------------------------------
- - ---------
<C> <S>
<C>
COMMON STOCKS (CONTINUED)
CONSUMER SERVICES (CONTINUED)
3,500 QVC Network, Inc.+ $
112,000
1,500 Scandinavian Broadcasting System S.A.+
37,875
5,000 Sears Roebuck & Company
253,125
22,000 Tele-Communications, Inc., Class A
459,250
20,000 Time Warner, Inc.
775,000
15,000 Toys "R" Us, Inc.+
532,500
4,500 Tribune Company
264,375
1,500 Viacom Inc., Class B+
43,125
30,000 Wal-Mart Stores, Inc.
705,000
- - ------------------------------------------------------------------------------
- - ---------
7,874,212
- - ------------------------------------------------------------------------------
- - ---------
ENERGY - 3.6%
8,000 Amerada Hess Corporation
396,000
7,000 Burlington Resources, Inc.
291,375
13,000 Exxon Corporation
793,000
8,000 Mobil Corporation
648,000
8,000 Royal Dutch Petroleum Company
855,000
4,000 Schlumberger Ltd.
229,000
15,000 Texaco, Inc.
952,500
- - ------------------------------------------------------------------------------
- - ---------
4,164,875
- - ------------------------------------------------------------------------------
- - ---------
CAPITAL GOODS - 2.9%
15,000 AlliedSignal, Inc.
526,875
4,500 AMP Inc.
291,375
2,500 Caterpillar Inc.
267,187
6,000 Emerson Electric Company
366,000
20,000 General Electric Company
992,500
9,000 Ingersoll-Rand Company
315,000
9,000 United Technologies Corporation
597,375
- - ------------------------------------------------------------------------------
- - ---------
3,356,312
- - ------------------------------------------------------------------------------
- - ---------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
5
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros and Appreciation Series 1998
<TABLE>
- - ------------------------------------------------------------------------------
- - ---------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (continued) MAY
31, 1994
- - ------------------------------------------------------------------------------
- - ---------
<CAPTION>
MARKET
VALUE
SHARES
(NOTE 1)
- - ------------------------------------------------------------------------------
- - ---------
<C> <S>
<C>
COMMON STOCKS (CONTINUED)
CONSUMER NON-DURABLES - 2.8%
7,000 Avon Products, Inc. $
412,125
4,000 Coca-Cola Company
161,500
15,000 Crown Cork & Seal, Inc.
541,875
10,000 Gillette Company
697,500
10,000 International Flavors & Fragrances, Inc.
385,000
4,000 Newell Company
181,500
25,000 PepsiCo, Inc.
900,000
- - ------------------------------------------------------------------------------
- - ---------
3,279,500
- - ------------------------------------------------------------------------------
- - ---------
DIVERSIFIED - 2.8%
6,000 Alco Standard Corporation
348,000
27,000 Eastman Kodak Company
1,265,625
22,000 Minnesota Mining and Manufacturing Company
1,122,000
10,000 Tenneco, Inc.
478,750
- - ------------------------------------------------------------------------------
- - ---------
3,214,375
- - ------------------------------------------------------------------------------
- - ---------
TECHNOLOGY - 2.5%
6,500 Intel Corporation
406,250
4,000 International Business Machines Corporation
253,000
16,000 Microsoft Corporation+
860,000
3,000 Motorola, Inc.
140,250
10,000 Pitney Bowes, Inc.
391,250
8,000 Xerox Corporation
804,000
- - ------------------------------------------------------------------------------
- - ---------
2,854,750
- - ------------------------------------------------------------------------------
- - ---------
BASIC INDUSTRIES - 2.1%
22,000 duPont (E.I.) deNemours & Company
1,364,000
3,000 Hercules, Inc.
316,125
10,000 International Paper Company
692,500
- - ------------------------------------------------------------------------------
- - ---------
2,372,625
- - ------------------------------------------------------------------------------
- - ---------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros and Appreciation Series 1998
<TABLE>
- - ------------------------------------------------------------------------------
- - ----------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (continued)
MAY 31, 1994
- - ------------------------------------------------------------------------------
- - ----------
<CAPTION>
MARKET
VALUE
SHARES
(NOTE 1)
- - ------------------------------------------------------------------------------
- - ----------
<C> <S>
<C>
COMMON STOCKS (CONTINUED)
CONSUMER DURABLES - 1.9%
11,000 Chrysler Corporation $
545,875
7,000 Ford Motor Company
404,250
12,000 General Motors Corporation
645,000
8,000 Goodyear Tire & Rubber Company
310,000
6,000 Whirlpool Corporation
321,750
- - ------------------------------------------------------------------------------
- - ----------
2,226,875
- - ------------------------------------------------------------------------------
- - ----------
UTILITIES - 1.5%
20,500 American Telephone & Telegraph Company
1,117,250
4,000 Bell Atlantic Corporation
213,500
10,000 NYNEX Corporation
377,500
- - ------------------------------------------------------------------------------
- - ----------
1,708,250
- - ------------------------------------------------------------------------------
- - ----------
HEALTH CARE - 1.5%
6,000 Bristol-Meyers Squibb
327,750
18,000 Johnson & Johnson
796,500
12,000 Merck & Company, Inc.
366,000
3,000 Schering-Plough Corporation
195,750
- - ------------------------------------------------------------------------------
- - ----------
1,686,000
- - ------------------------------------------------------------------------------
- - ----------
TRANSPORTATION - 1.0%
5,000 Burlington Northern, Inc.
278,750
6,000 CSX Corporation
459,000
7,000 Union Pacific Corporation
413,000
- - ------------------------------------------------------------------------------
- - ----------
1,150,750
- - ------------------------------------------------------------------------------
- - ----------
TOTAL COMMON STOCKS (Cost $34,798,807)
41,875,587
- - ------------------------------------------------------------------------------
- - ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros and Appreciation Series 1998
<TABLE>
- - ------------------------------------------------------------------------------
- - ---------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (continued) MAY
31, 1994
- - ------------------------------------------------------------------------------
- - ---------
<CAPTION>
MARKET
VALUE
FACE VALUE
(NOTE 1)
- - ------------------------------------------------------------------------------
- - ---------
<C> <S>
<C>
U.S. TREASURY NOTES - 61.3% (COST $66,438,367)
$93,000,000 U.S. Treasury Notes -- Strips,
Zero Coupon due 8/15/98++
$70,401,921
- - ------------------------------------------------------------------------------
- - ---------
CONVERTIBLE BOND - 0.1% (COST $241,000)
200,000 Savoy Pictures Entertainment, Inc.,
7.00% due 7/1/03
166,000
- - ------------------------------------------------------------------------------
- - ---------
COMMERCIAL PAPER - 2.2% (COST $2,477,000)
2,477,000 Ford Motor Credit Company,
4.25% due 6/1/94
2,477,000
- - ------------------------------------------------------------------------------
- - ---------
TOTAL INVESTMENTS (Cost $103,955,174*) 100.0%
114,920,508
OTHER ASSETS AND LIABILITIES (NET) (0.0)
(2,478)
- - ------------------------------------------------------------------------------
- - ---------
NET ASSETS 100.0%
$114,918,030
- - ------------------------------------------------------------------------------
- - ---------
<FN>
* Aggregate cost for Federal tax purposes.
+ Non-income producing security.
++ Effective yield is 6.683%.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros and Appreciation Series 1998
<TABLE>
- - ------------------------------------------------------------------------------
- - ----------
STATEMENTS OF ASSETS AND LIABILITIES (unaudited)
MAY 31, 1994
- - ------------------------------------------------------------------------------
- - ----------
<S> <C>
<C>
ASSETS:
Investments, at value (Cost $103,955,174) (Note 1)
See accompanying schedule
$114,920,508
Cash
2,616
Dividends and interest receivable
159,967
Unamortized organization costs (Note 5)
39,549
- - ------------------------------------------------------------------------------
- - ----------
TOTAL ASSETS
115,122,640
- - ------------------------------------------------------------------------------
- - ----------
LIABILITIES:
Payable for Fund shares redeemed $85,598
Investment advisory fee payable (Note 2) 29,291
Shareholder servicing fees payable (Note 2) 24,409
Administration fee payable (Note 2) 19,527
Transfer agent fees payable (Note 2) 15,760
Accrued legal and audit fees 13,500
Custodian fees payable (Note 2) 6,000
Accrued expenses and other payables 10,525
- - ------------------------------------------------------------------------------
- - ----------
TOTAL LIABILITIES
204,610
- - ------------------------------------------------------------------------------
- - ----------
NET ASSETS
$114,918,030
- - ------------------------------------------------------------------------------
- - ----------
NET ASSETS CONSIST OF:
Undistributed net investment income $
2,271,667
Accumulated net realized gain on investments sold
5,082,002
Unrealized appreciation of investments
10,965,334
Par value
14,573
Paid-in capital in excess of par value
96,584,454
- - ------------------------------------------------------------------------------
- - ----------
TOTAL NET ASSETS
$114,918,030
- - ------------------------------------------------------------------------------
- - ----------
NET ASSET VALUE and redemption price per share
($114,918,030 / 14,572,675 shares of beneficial interest
outstanding)
$7.89
- - ------------------------------------------------------------------------------
- - ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros and Appreciation Series 1998
<TABLE>
- - ------------------------------------------------------------------------------
- - -----------
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED
MAY 31, 1994
- - ------------------------------------------------------------------------------
- - -----------
<S> <C>
<C>
INVESTMENT INCOME:
Interest
$ 2,775,767
Dividends
544,466
- - ------------------------------------------------------------------------------
- - -----------
TOTAL INVESTMENT INCOME
3,320,233
- - ------------------------------------------------------------------------------
- - -----------
EXPENSES:
Investment advisory fee (Note 2) $187,180
Shareholder servicing fees (Note 2) 155,983
Administration fee (Note 2) 124,786
Transfer agent fees (Note 2) 92,793
Custodian fees (Note 2) 19,386
Legal and audit fees 17,846
Amortization of organization costs (Note 5) 11,979
Trustees' fees and expenses (Note 2) 3,547
Other 15,899
- - ------------------------------------------------------------------------------
- - -----------
TOTAL EXPENSES
629,399
- - ------------------------------------------------------------------------------
- - -----------
NET INVESTMENT INCOME
2,690,834
- - ------------------------------------------------------------------------------
- - -----------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
(NOTES 1 AND 3):
Net realized gain on investments during the period
4,307,140
Net unrealized depreciation of investments during the period
(9,701,833)
- - ------------------------------------------------------------------------------
- - -----------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
(5,394,693)
- - ------------------------------------------------------------------------------
- - -----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS
$(2,703,859)
- - ------------------------------------------------------------------------------
- - -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros and Appreciation Series 1998
<TABLE>
- - ------------------------------------------------------------------------------
- - -----------
STATEMENT OF CHANGES IN NET ASSETS
- - ------------------------------------------------------------------------------
- - -----------
<CAPTION>
SIX MONTHS
ENDED
YEAR
5/31/94
ENDED
(UNAUDITED)
11/30/93
<S> <C>
<C>
Net investment income $ 2,690,834 $
6,380,649
Net realized gain on investments during the period 4,307,140
12,854,126
Net unrealized depreciation of investments during the
period (9,701,833)
(4,191,417)
- - ------------------------------------------------------------------------------
- - -----------
Net increase/(decrease) in net assets resulting from
operations (2,703,859)
15,043,358
Distributions to shareholders from:
Net investment income (6,790,387)
(7,173,390)
Net realized gain on investments (12,079,264)
(1,915,783)
Net decrease in net assets from Fund share transactions
(Note 4) (84,223)
(35,454,961)
- - ------------------------------------------------------------------------------
- - -----------
Net decrease in net assets (21,657,733)
(29,500,776)
NET ASSETS:
Beginning of period 136,575,763
166,076,539
- - ------------------------------------------------------------------------------
- - -----------
End of period (including undistributed net investment
income of $2,271,667 and $6,371,220, respectively) $114,918,030
$136,575,763
- - ------------------------------------------------------------------------------
- - -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros and Appreciation Series 1998
<TABLE>
- - ------------------------------------------------------------------------------
- - -----------
FINANCIAL HIGHLIGHTS
FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
- - ------------------------------------------------------------------------------
- - -----------
<CAPTION>
SIX MONTHS
ENDED YEAR YEAR
PERIOD
5/31/94 ENDED ENDED
ENDED
(UNAUDITED) 11/30/93+ 11/30/92+
11/30/91*
<S> <C> <C> <C>
<C>
Net asset value, beginning of
period $9.38 $9.02 $8.40
$7.60
- - ------------------------------------------------------------------------------
- - -----------
Income From Investment Operations:
Net investment income 0.19 0.38 0.37
0.39
Net realized and unrealized
gain/(loss) on investments (0.37) 0.48 0.68
0.41
- - ------------------------------------------------------------------------------
- - -----------
Total from investment operations (0.18) 0.86 1.05
0.80
- - ------------------------------------------------------------------------------
- - -----------
Less Distributions:
Dividends from net investment
income (0.47) (0.40) (0.43)
- - --
Distributions from net realized
capital gains (0.84) (0.10) --
- - --
- - ------------------------------------------------------------------------------
- - -----------
Total distributions (1.31) (0.50) (0.43)
0.00
- - ------------------------------------------------------------------------------
- - -----------
Net asset value, end of period $7.89 $9.38 $9.02
$8.40
- - ------------------------------------------------------------------------------
- - -----------
Total return++ (2.26)% 9.99% 12.86%
10.53%
- - ------------------------------------------------------------------------------
- - -----------
Ratios/Supplemental Data:
Net assets, end of period (in
000's) $114,918 $136,576 $166,077
$195,956
Ratio of expenses to average net
assets 1.01%** 0.97% 1.01%
1.05%**
Ratio of net investment income to
average net assets 4.31%** 4.15% 4.39%
5.04%**
Portfolio turnover rate 3% 17% 4%
20%
- - ------------------------------------------------------------------------------
- - -----------
<FN>
* The Fund commenced operations on January 25, 1991.
** Annualized.
+ The per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for this year
since
use of the undistributed method did not accord with results of operations.
++ Total return represents aggregate total return for the periods indicated.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros and Appreciation Series 1998
- - ------------------------------------------------------------------------------
- - --
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- - ------------------------------------------------------------------------------
- - --
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Shearson Principal Return Fund (the "Trust") was organized on
October 18, 1988, under the laws of the Commonwealth of Massachusetts as a
"Massachusetts business trust." The Trust is a diversified, open-end
management
investment company registered with the Securities and Exchange Commission
under
the Investment Company Act of 1940, as amended. The Trust consists of four
series, Zeros and Appreciation Series 1996, which commenced operations on
January 16, 1989, Zeros and Appreciation Series 1998 which commenced
operations
on January 25, 1991, Zeros Plus Emerging Growth Series 2000, which commenced
operations on August 30, 1991 and Zeros Plus European Equities Series 1999
which
has not yet commenced operations. Zeros and Appreciation Series 1998 (the
"Fund") expects to terminate operations on August 31, 1998. The following is a
summary of significant accounting policies consistently followed by the Fund
in
the preparation of its financial statements.
Portfolio valuation: Listed securities traded on a national securities
exchange
are valued at the last reported sales price; securities traded in the
over-the-counter market and listed securities for which no sale was reported
are
valued at the bid price or, in the absence of a recent bid price, at the bid
equivalent as obtained from one or more of the major market makers in the
securities. Investments in U.S. government securities (other than short-term
securities) are valued at the quoted bid price in the over-the-counter market.
Short-term investments that mature in 60 days or less are valued at amortized
cost whenever the Board of Trustees determines that amortized cost reflects
the
fair value of those investments. Investments in securities for which market
quotations are not available are valued at fair value as determined in good
faith by the Board of Trustees.
Repurchase agreements: The Fund may engage in repurchase agreement
transactions.
Under the terms of a typical repurchase agreement, the Fund takes possession
of
an underlying debt obligation subject to an obligation of the seller to
repurchase, and the Fund to resell, the obligation at an agreed-upon price and
time, thereby determining the yield during the Fund's holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The value of the collateral
held
by the Fund is at least equal at all times to the total amount of the
repurchase
obligations, including interest. In the event of counterparty default, the
Fund
has the right to use the collateral to offset losses incurred. There is
potential loss to the Fund in the event that the Fund is
13
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros and Appreciation Series 1998
- - ------------------------------------------------------------------------------
- - --
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
- - ------------------------------------------------------------------------------
- - --
delayed or prevented from exercising its rights to dispose of the collateral
securities, including the risk of a possible decline in the value of the
underlying securities during the period while the Fund seeks to assert its
rights. The Fund's investment adviser, acting under the supervision of the
Board
of Trustees, reviews the value of the collateral and the creditworthiness of
those banks and dealers with which the Fund enters into repurchase agreements
to
evaluate potential risks.
Securities transactions and investment income: Securities transactions are
recorded as of the trade date. Realized gains and losses from securities
transactions are recorded on the identified cost basis. Dividend income is
recorded on the ex-dividend date. Interest income is recorded on the accrual
basis (primarily from accretion of U.S. Treasury Notes.)
Dividends and distributions to shareholders: Dividends from net investment
income of the Fund and distributions of net realized capital gains of the
Fund,
if any, will be distributed annually after the close of the fiscal year in
which
they are earned. In addition, in order to avoid the application of a 4%
nondeductible excise tax on certain undistributed amounts of ordinary income
and
capital gains, the Fund may make an additional distribution of any
undistributed
ordinary income or capital gains shortly before December 31st of each year,
and
expects to pay any other dividends and distributions as are necessary to avoid
the application of this tax. Income distributions and capital gain
distributions
are determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due
to
differing treatments of income and gains on various investment securities held
by the Fund, timing differences and differing characterization of
distributions
made by the Fund as a whole.
Federal income taxes: It is the Fund's policy to comply with the requirements
of
the Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and to distribute substantially all of its taxable income
to its shareholders. Therefore, no Federal income tax provision is required.
2. INVESTMENT ADVISORY FEE, ADMINISTRATION FEE AND OTHER TRANSACTIONS
The Trust has entered into an investment advisory agreement (the "Advisory
Agreement") with Smith Barney Asset Management, a division of Smith, Barney
Advisers, Inc. ("SBA") which is controlled by Smith Barney Holdings Inc.
14
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros and Appreciation Series 1998
- - ------------------------------------------------------------------------------
- - --
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
- - ------------------------------------------------------------------------------
- - --
("Holdings"). Holdings is a wholly owned subsidiary of The Travelers Inc.
Under
the Advisory Agreement, the Fund pays a monthly fee at the annual rate of .30%
of the value of its average daily net assets.
Prior to April 21, 1994 the Trust was party to an administration agreement
with
The Boston Company Advisors, Inc. ("Boston Advisors"), an indirect wholly
owned
subsidiary of Mellon Bank Corporation ("Mellon"). Under this agreement, the
Fund
paid a monthly fee at the annual rate of .20% of the value of its average
daily
net assets.
As of the close of business on April 21, 1994, SBA succeeded Boston Advisors
as
the Fund's administrator. The new administration agreement contains
substantially the same terms and conditions, including the level of fees, as
the
predecessor agreement.
As of the close of business on April 21, 1994, the Fund has also entered into
a
sub-administration agreement (the "Sub-Administration Agreement") with Boston
Advisors. Under the Sub-Administration Agreement, Boston Advisors is paid a
portion of the fee paid by the Fund to SBA at a rate agreed upon from time to
time between SBA and Boston Advisors.
Smith Barney Inc. ("Smith Barney") serves as shareholder servicing agent and
is
paid an annual fee at the rate of .25% of the value of the Fund's average
daily
net assets for certain activities not provided by the Fund's transfer agent.
For the six months ended May 31, 1994, the Fund incurred total brokerage
commissions of $20,475 of which $1,800 was paid to Smith Barney.
No officer, director or employee of Smith Barney or any parent or subsidiary
of
Smith Barney receives any compensation from the Trust for serving as a Trustee
or officer of the Trust. The Trust pays each Trustee who is not an officer,
director or employee of Smith Barney or any of its affiliates $2,000 per annum
plus $500 per meeting attended and reimburses each Trustee for travel and
out-of-pocket expenses.
Boston Safe Deposit and Trust Company, an indirect wholly owned subsidiary of
Mellon, serves as the Trust's custodian. The Shareholder Services Group, Inc.,
a
subsidiary of First Data Corporation, serves as the Trust's transfer agent.
15
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros and Appreciation Series 1998
- - ------------------------------------------------------------------------------
- - --
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
- - ------------------------------------------------------------------------------
- - --
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding U.S.
government securities and short-term investments, aggregated $4,310,514 and
$14,555,930, respectively, for the six months ended May 31, 1994. There were
no
purchases of U.S. government securities for the six months ended May 31, 1994.
Proceeds from sales of U.S. government securities aggregated $9,331,990 for
the
six months ended May 31, 1994.
At May 31, 1994, aggregate gross unrealized appreciation for all securities in
which there was an excess of value over tax cost was $11,624,787, and
aggregate
gross unrealized depreciation for all securities in which there was an excess
of
tax cost over value was $659,453.
<TABLE>
4. SHARES OF BENEFICIAL INTEREST
The Trust may issue an unlimited number of shares of beneficial interest of
the
Fund with a par value of $.001 per share. The Fund, Zeros and Appreciation
Series 1996, Zeros Plus European Equities Series 1999 and Zeros Plus Emerging
Growth Series 2000 each constitutes a sub-trust under the Master Trust
Agreement. Changes in shares of beneficial interest of the Fund were as
follows:
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED
MAY 31, 1994
NOVEMBER 30, 1994
Shares Amount Shares
Amount
- - ------------------------------------------------------------------------------
- - ----------------
<S> <C> <C> <C>
<C>
Issued as reinvestment of
dividends 2,294,698 $ 18,678,841 1,039,356
$ 9,021,620
Redeemed (2,288,435) (18,763,064)
(4,880,410) (44,476,581)
- - ------------------------------------------------------------------------------
- - ----------------
Net increase/(decrease) 6,263 $ (84,223)
(3,841,054) $(35,454,961)
- - ------------------------------------------------------------------------------
- - ----------------
</TABLE>
Shares of the Fund are not currently being offered for sale to new investors,
although the Fund, upon at least 30 days' notice to shareholders, may commence
a
continuous offering if the Board of Trustees determines it to be in the best
interests of the Fund and its shareholders.
5. ORGANIZATION COSTS
The Fund bears all costs in connection with its organization including the
fees
and expenses of registering and qualifying its shares for distribution under
Federal and
16
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros and Appreciation Series 1998
- - ------------------------------------------------------------------------------
- - --
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
- - ------------------------------------------------------------------------------
- - --
state securities regulations. All such costs are being amortized on the
straight-line method over a period of five years from the commencement of
operations of the Fund. In the event that any of the initial shares of the
Fund
are redeemed during such amortization period, the Fund will be reimbursed for
any unamortized costs in the same proportion as the number of shares redeemed
bears to the number of initial shares outstanding at the time of redemption.
6. LINE OF CREDIT
The Fund and several affiliated entities participate in a $50 million line of
credit provided by Continental Bank N.A. under an Amended and Restated Line of
Credit Agreement (the "Agreement") dated April 30, 1992, primarily for
temporary
or emergency purposes, including the meeting of redemption requests that
otherwise might require the untimely disposition of securities. Under this
Agreement, the Fund may borrow up to the lesser of $25 million or 20% of its
net
assets. Interest is payable either at the bank's Money Market Rate or the
London
Interbank Offered Rate (LIBOR) plus .375% on an annualized basis. The Fund and
the other affiliated entities are charged an aggregate commitment fee of
$125,000 which is allocated equally among each of the participants. The
Agreement requires, among other provisions, each participating fund to
maintain
a ratio of net assets (not including funds borrowed pursuant to the Agreement)
to aggregate amount of indebtedness pursuant to the Agreement of no less than
5
to 1. During the six months ended May 31, 1994, the Fund had an average
outstanding daily balance of $95,055 with interest rates ranging from 3.31% to
3.88%. Interest expense totalled $2,699 for the six months ended May 31, 1994.
At May 31, 1994, the Fund had no outstanding borrowings under this Agreement.
17
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros and Appreciation Series 1998
- - ------------------------------------------------------------------------------
- - --
PARTICIPANTS
- - ------------------------------------------------------------------------------
- - --
DISTRIBUTOR
Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
INVESTMENT ADVISER
Smith Barney
Asset Management
Two World Trade Center
New York, New York 10048
ADMINISTRATOR
Smith, Barney Advisers, Inc.
1345 Avenue of the Americas
New York, New York 10105
SUB-ADMINISTRATOR
The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
AUDITORS AND COUNSEL
Coopers & Lybrand
One Post Office Square
Boston, Massachusetts 02109
Willkie Farr & Gallagher
153 East 53rd Street
New York, New York 10022
TRANSFER AGENT
The Shareholder Services Group, Inc.
Exchange Place
Boston, Massachusetts 02109
CUSTODIAN
Boston Safe Deposit and
Trust Company
One Boston Place
Boston, Massachusetts 02108
18
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros and Appreciation Series 1998
- - ------------------------------------------------------------------------------
- - --
OUR APPROACH TO MUTUAL FUND INVESTING
- - ------------------------------------------------------------------------------
- - --
1. PERSONAL SERVICE
The Smith Barney Financial Consultant ("FC") is highly trained and deeply
committed to client service. Your FC works with you to establish a
relationship
based on one-to-one communication and the highest standards of quality.
2. ANALYZING YOUR NEEDS
Defining your needs and establishing specific goals is the first step toward
any
successful investment program. The Smith Barney Strategic Asset Allocator -- a
sophisticated financial planning tool -- can help you and your FC evaluate
your
resources and objectives. This groundwork then becomes the basis for a
strategy
designed specifically for you. Your FC can use the Strategic Asset Allocator
on
a periodic basis to ensure that your investment strategy is keeping pace with
your changing needs and goals.
3. A UNIQUE MUTUAL FUND INVESTMENT PROGRAM
Your Smith Barney FC offers a number of mutual fund assessment tools that are
unmatched in the financial services industry. Smith Barney FCs have access to
a
proprietary mutual fund research database that provides information at their
fingertips on more than 2,100 funds. In addition, working with another
proprietary system known as the Mutual Fund Evaluation Service, your FC can
help
guide you through the complex mutual fund maze. Specifically, the Evaluation
Service can provide a clear picture of the past performance of mutual funds
you
currently own. Presented in both graphic and numerical form, this illustration
provides a wealth of easily understood data on more than 2,100 funds. This
complimentary service allows you to judge whether your mutual fund has helped
meet your investment needs.
4. LOOKING AHEAD
Selecting a mutual fund should not be a one-event process that ends with the
purchase of shares. You can count on the expertise of your FC as he or she
continues to monitor and evaluate your funds, to suggest new strategies and to
listen. That, in our opinion, is how to use mutual funds to help achieve your
financial goals.
19
<PAGE>
PRINCIPLE
RETURN FUND --
Zeros and Appreciation Series 1998
TRUSTEES
Paul R. Ades
Herbert Barg
Allan R. Johnson
Heath B. McLendon
Ken Miller
John F. White
OFFICERS
Heath B. McLendon
Chairman of the Board
Stephen J. Treadway
President
Richard P. Roelofs
Executive Vice President
Harry D. Cohen
Vice President and
Investment Officer
Harold L. Williamson, Jr.
Vice President and
Investment Officer
Susan C. Fulenwider
Vice President and
Investment Officer
Lewis E. Daidone
Treasurer
Christina T. Sydor
Secretary
This report is submitted
for the general information
of the shareholders of Smith
Barney Shearson Principal
Return Fund--Zeros and
Appreciation Series 1998.
It is not a prospectus,
circular or representation
intended for use in the
purchase or sale of shares of
the Fund or of any securities
mentioned in this report.
SMITH BARNEY
- - ------------
SMITH BARNEY SHEARSON
MUTUAL FUNDS
Two World Trade Center
New York, New York 10048
Fund 123
FD2229 G4
<PAGE>
PRINCIPAL RETURN FUND
Zeros Plus Emerging Growth Series 2000
DEAR SHAREHOLDER:
For the first half of the fiscal year ended May 31, 1994, the net asset value
of the Fund declined 4.93%. This compared with a gain of 0.24% for the
Standard
& Poors Daily Price Index of 500 Common Stocks (S&P 500). The Value Line
Index,
which represents a better measure of performance for the kinds of securities
held in the Fund, declined 1.2% in the same six month period. These
unmanaged indices track the movement of common stock prices. Following a
strong
six month period ended November 31, 1993, growth stocks as well as Treasury
securities suffered a sharp correction. Approximately 60% of the net assets of
the Fund are invested in Zero Coupon U.S. Treasury Notes maturing in the year
2000 with the balance invested in growth stocks.
For the first time in five years, the Federal Reserve Board changed its
monetary policy from one of accommodation, in which reserves were created
quite
abundantly and interest rates kept at historically low levels, to one of
neutrality, where the Federal Funds rate so far has been increased 125 basis
points and the discount rate 50 basis points. From the low point reached in
1993, the yield on the 30 year Treasury Bond increased from 5.74% to a recent
range of 7.25% to 7.55%. This sharp increase in long-term interest rates not
only contributed to a decline in the value of Treasury Notes but in the
overall
valuation of the stock market. Remember though, that at maturity, our Notes
will be priced at $100 compared to their recent price of $68 regardless of
monetary policy.
Several factors contributed to the disproportionate rise in long rates
compared
to short-term interest rates a) fears that the strengthening economy would
lead
to a pickup in the rate of inflation, b) the liquidation of leveraged bond
positions which were put on with the expectation that interest rates would
continue falling, c) concern over a weak U.S. dollar and its
potentia**********************************************************************
******************************************************************************
******************************************************************************
******************************************************************************
******************************************************************************
******************************************************************************
****************************************************s. In addition, the
Clinton Administration's tax
hike will also act as a drag on consumer spending. If in fact, this scenario
unfolds, it would be considered quite positive for the credit markets and may
eventually lead to a decline in the level of interest rates. Stock prices
because of their linkage to bond prices would also react favorably to a
decline
in interest rates, even if it would mean a somewhat lower level of profits
from
a slowing in business.
1
<PAGE>
We continue to be quite optimistic about the outlook for top-tier
biotechnology,
technology and telecommunications companies. The latter group appears
particularly attractive with the explosion of wireless communications and
significant capital expenditures being undertaken by cable and telephone
companies. C-COR Electronics, Inc. and California Microwave, Inc. have seen a
surge in orders in recent quarters. Genentech, our largest shareholding
continues to make great progress not only in the clinic, but in achieving
record
sales and earnings.
In the Fund, we try to own companies whose sales and earnings depend more on
innovation and leadership positions in emerging industries rather than on the
vicissitudes of the economy. Price/Earnings multiples on growth stocks are
influenced by the level of interest rates and the expected growth rate in
earnings for the particular company. While we have no control over interest
rates, we try to buy companies able to grow significantly faster than the
average U.S. corporation. If our companies achieve strong, consistent earnings
growth, their stock prices should appreciate at a rate approximating their
earnings growth rates, provided there are no further increases in interest
rates. While the markets have indeed been turbulent, we fully expect our
stocks
to provide a strong return over the long term. When combined with the
guaranteed
appreciation of the Zeros, we hope to offer you a rewarding return on your
investment.
We value your trust and support and will continue to strive to provide you
with
the highest level of investment management.
Sincerely,
/s/ Heath B. McLendon /s/ Richard A. Freeman
Heath B. McLendon Richard A. Freeman
Chairman of the Board Vice President and
Investment Officer
June 29, 1994
2
<PAGE>
SEMI-ANNUAL REPORT
SMITH BARNEY SHEARSON
PRINCIPAL
RETURN
FUND --
Zeros Plus Emerging Growth
Series 2000
......................
MAY 31, 1994
SMITH BARNEY
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros Plus Emerging Growth Series 2000
<TABLE>
- - ------------------------------------------------------------------------------
- - --
PORTFOLIO HIGHLIGHTS (UNAUDITED) MAY 31,
1994
PORTFOLIO ALLOCATION
DESCRIPTION OF PIE CHARTS IN SHAREHOLDER REPORT
Industry Breakdown
Pie chart depicting the allocation of the Principal Return Fund (Zeros Plus
Emerging Growth Series 2000) investment securities held at May 31, 1994 by
industry classification. The pie is broken in pieces representing industries
in
the following percentages:
<CAPTION>
INDUSTRY PERCENTAGE
<S> <C>
U.S. Treasury Notes and Net Other
Assets and Liabilities 60.7%
Common Stocks 39.3%
</TABLE>
<TABLE>
TOP TEN COMMON STOCK HOLDINGS
<CAPTION>
Percentage of
Company Net Assets
- - ----------------------------------------------------------------------
<S> <C>
GENENTECH, INC. 4.2%
CHIRON CORPORATION 4.1
TECH-SYM CORPORATION 3.7
CALIFORNIA MICROWAVE, INC. 3.5
LOTUS DEVELOPMENT CORPORATION 3.4
VLSI TECHNOLOGY, INC. 2.6
C-COR ELECTRONICS, INC. 2.4
VERTEX PHARMACEUTICALS, INC. 2.4
GENZYME CORPORATION 2.2
QUANTUM CORPORATION 2.0
</TABLE>
3
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros Plus Emerging Growth Series 2000
<TABLE>
- - ------------------------------------------------------------------------------
- - --
PORTFOLIO OF INVESTMENTS (UNAUDITED) MAY 31,
1994
<CAPTION>
MARKET
VALUE
SHARES
(NOTE 1)
- - ------------------------------------------------------------------------------
- - ---------
<S> <C>
<C>
COMMON STOCKS - 39.3%
TECHNOLOGY - 20.6%
137,500 California Microwave, Inc.+ $
2,801,562
93,525 C-COR Electronics, Inc.+
1,940,644
20,000 Cirrus Logic, Inc.+
681,250
46,000 Lotus Development Corporation+
2,760,000
160,000 Network System Corporation+
1,070,000
100,000 Quantum Corporation+
1,637,500
50,000 Tandem Computers, Inc.+
575,000
144,000 Tech-Sym Corporation+
2,970,000
150,000 VLSI Technology, Inc.+
2,128,125
- - ------------------------------------------------------------------------------
- - ---------
16,564,081
- - ------------------------------------------------------------------------------
- - ---------
HEALTH CARE - 14.9%
70,000 Biomatrix, Inc.+
437,500
51,000 Chiron Corporation+
3,264,000
50,000 Cor Therapeutics, Inc.+
468,750
125,000 Fischer Imaging Corporation+
546,875
70,000 Genentech, Inc.+
3,360,000
63,000 Genzyme Corporation+
1,795,500
25,000 IDEC Pharmaceuticals Corporation+
93,750
85,000 TSI, Inc.+
79,687
150,000 Vertex Pharmaceuticals, Inc.+
1,912,500
- - ------------------------------------------------------------------------------
- - ---------
11,958,562
- - ------------------------------------------------------------------------------
- - ---------
CAPITAL GOODS - 1.9%
33,000 Tyco International Ltd.
1,567,500
- - ------------------------------------------------------------------------------
- - ---------
BASIC INDUSTRIES - 1.9%
60,000 Wellman, Inc.
1,530,000
- - ------------------------------------------------------------------------------
- - ---------
TOTAL COMMON STOCKS (Cost $29,276,050)
31,620,143
- - ------------------------------------------------------------------------------
- - ---------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
4
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros Plus Emerging Growth Series 2000
<TABLE>
- - ------------------------------------------------------------------------------
- - --
PORTFOLIO OF INVESTMENTS (UNAUDITED) (continued) MAY 31,
1994
<CAPTION>
MARKET
VALUE
FACE VALUE
(NOTE 1)
- - ------------------------------------------------------------------------------
- - --------------
<S> <C> <C>
<C>
U.S. TREASURY NOTES - 60.9% (Cost $45,901,360)
$72,000,000 U.S. Treasury Notes-Strips, Zero Coupon due 2/15/00++
$48,918,953
- - ------------------------------------------------------------------------------
- - --------------
TOTAL INVESTMENTS (Cost $75,177,410*) 100.2%
80,539,096
OTHER ASSETS AND LIABILITIES (NET) (0.2)
(170,734)
- - ------------------------------------------------------------------------------
- - --------------
NET ASSETS 100.0%
$80,368,362
- - ------------------------------------------------------------------------------
- - --------------
<FN>
* Aggregate cost for Federal tax purposes.
+ Non-income producing security.
++ Effective yield is 6.877%.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
5
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros Plus Emerging Growth Series 2000
- - ------------------------------------------------------------------------------
- - --
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) MAY 31,
1994
<TABLE>
<S> <C>
<C>
ASSETS:
Investments, at value (Cost $75,177,410) (Note 1)
See accompanying schedule
$80,539,096
Cash
80,172
Unamortized organization costs (Note 5)
58,151
Dividends receivable
3,600
- - ------------------------------------------------------------------------------
- - ----------
TOTAL ASSETS
80,681,019
- - ------------------------------------------------------------------------------
- - ----------
LIABILITIES:
Payable for Fund shares redeemed $ 115,765
Notes payable (Note 6) 100,034
Investment advisory fee payable (Note 2) 27,549
Shareholder servicing fees payable (Note 2) 17,218
Administration fee payable (Note 2) 13,775
Transfer agent fees payable (Note 2) 10,000
Custodian fees payable (Note 2) 4,000
Accrued expenses and other payables 24,316
- - ------------------------------------------------------------------------------
- - ----------
TOTAL LIABILITIES
312,657
- - ------------------------------------------------------------------------------
- - ----------
NET ASSETS
$80,368,362
- - ------------------------------------------------------------------------------
- - ----------
NET ASSETS CONSIST OF:
Undistributed net investment income $
1,166,139
Accumulated net realized gain on investments sold
798,068
Unrealized appreciation of investments
5,361,686
Par value
10,322
Paid-in capital in excess of par value
73,032,147
- - ------------------------------------------------------------------------------
- - ----------
TOTAL NET ASSETS
$80,368,362
- - ------------------------------------------------------------------------------
- - ----------
NET ASSET VALUE and redemption price per share
($80,368,362/10,321,543 shares of beneficial interest
outstanding)
$7.79
- - ------------------------------------------------------------------------------
- - ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros Plus Emerging Growth Series 2000
- - ------------------------------------------------------------------------------
- - --
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED MAY 31,
1994
<TABLE>
<S> <C>
<C>
INVESTMENT INCOME:
Interest
$1,885,396
Dividends
22,650
- - ------------------------------------------------------------------------------
- - ----------
TOTAL INVESTMENT INCOME
1,908,046
- - ------------------------------------------------------------------------------
- - ----------
EXPENSES:
Investment advisory fee (Note 2) $178,721
Shareholder servicing fee (Note 2) 111,701
Administration fee (Note 2) 89,360
Transfer agent fees (Note 2) 66,155
Legal and audit fees 17,346
Custodian fees (Note 2) 13,968
Amortization of organization costs (Note 5) 12,921
Trustees' fees and expenses (Note 2) 3,547
Other 14,131
- - ------------------------------------------------------------------------------
- - ----------
TOTAL EXPENSES
507,850
- - ------------------------------------------------------------------------------
- - ----------
NET INVESTMENT INCOME
1,400,196
- - ------------------------------------------------------------------------------
- - ----------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS (NOTES 1 AND 3):
Net realized gain on investments during the period
1,282,021
Net unrealized depreciation of investments during the period
(6,910,863)
- - ------------------------------------------------------------------------------
- - ----------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
(5,628,842)
- - ------------------------------------------------------------------------------
- - ----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS
$(4,228,646)
- - ------------------------------------------------------------------------------
- - ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros Plus Emerging Growth Series 2000
<TABLE>
- - ------------------------------------------------------------------------------
- - --
STATEMENT OF CHANGES IN NET ASSETS
<CAPTION>
SIX MONTHS
YEAR
ENDED
ENDED
5/31/94
11/30/93
(UNAUDITED)
<S> <C>
<C>
Net investment income $ 1,400,196 $
3,406,399
Net realized gain on investments during the period 1,282,021
4,834,559
Net unrealized appreciation/(depreciation) of
investments during the period (6,910,863)
7,293,854
- - ------------------------------------------------------------------------------
- - ---------
Net increase/(decrease) in net assets resulting from
operations (4,228,646)
15,534,812
Distributions to shareholders from:
Net investment income (3,635,988)
(4,426,224)
Net realized capital gains on investments
(5,03*************************************************************************
******************************************************************************
******************************************************************************
******************************************************************************
******************************************************************************
******************************************************************************
*************************************************-----------------------------
End of period (including undistributed net investment
income of $1,166,139 and $3,401,931, respectively) $80,368,362
$96,865,184
- - ------------------------------------------------------------------------------
- - ---------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros Plus Emerging Growth Series 2000
<TABLE>
- - ------------------------------------------------------------------------------
- - --
FINANCIAL HIGHLIGHTS
FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<CAPTION>
SIX MONTHS YEAR YEAR
PERIOD
ENDED ENDED ENDED
ENDED
5/31/94 11/30/93++
11/30/92++ 11/30/91*
(UNAUDITED)
<S> <C> <C> <C>
<C>
Net asset value, beginning of period $ 9.00 $ 8.16 $ 7.57
$ 7.60
- - ------------------------------------------------------------------------------
- - --------------
Income From Investment Operations:
Net investment income 0.14 0.26 0.26
0.07
Net realized and unrealized gain/(loss)
on investments (0.53) 0.96 0.43
(0.10)
- - ------------------------------------------------------------------------------
- - --------------
Total from investment operations (0.39) 1.22 0.69
(0.03)
- - ------------------------------------------------------------------------------
- - --------------
Less Distributions:
Dividends from net investment income (0.34) (0.29)
(0.10) --
Distributions from net realized
capital gains (0.48) (0.09) --
- - --
- - ------------------------------------------------------------------------------
- - --------------
Total distributions (0.82) (0.38)
(0.10) 0.00
- - ------------------------------------------------------------------------------
- - --------------
Net asset value, end of period $ 7.79 $ 9.00 $ 8.16
$ 7.57
- - ------------------------------------------------------------------------------
- - --------------
Total return+++ (4.93)% 15.72%
9.15% (0.39)%
- - ------------------------------------------------------------------------------
- - --------------
Ratios/Supplemental Data:
Net assets, end of period (in 000's) $80,368 $96,865 $125,327
$157,425
Ratio of operating expenses to
average net assets 1.14%** 1.10%
1.15%+ 1.18%**
Ratio of net investment income to
average net assets 3.13%** 3.12%
3.31% 3.56%**
Portfolio turnover rate 1% 0%
0% 2%
- - ------------------------------------------------------------------------------
- - --------------
<FN>
* The Fund commenced operations on August 30, 1991.
** Annualized.
+ The operating expense ratio excludes interest expense. The operating
expense
ratio including interest expense is 1.16%.
++ The per share amounts have been calculated using the monthly average
shares
method, which more appropriately presents per share data for this year
since
the use of the undistributed method did not accord with results of
operations.
+++ Total return represents aggregate total return for the periods indicated.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros Plus Emerging Growth Series 2000
- - ------------------------------------------------------------------------------
- - --
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Shearson Principal Return Fund (the "Trust") was organized on
October 18, 1988, under the laws of the Commonwealth of Massachusetts as a
"Massachusetts business trust." The Trust is a diversified, open-end
management
investment company registered with the Securities and Exchange Commission
under
the Investment Company Act of 1940, as amended. The Trust consists of four
series, Zeros and Appreciation Series 1996, which commenced operations on
January 16, 1989, Zeros and Appreciation Series 1998 which commenced
operations
on January 25, 1991, Zeros Plus Emerging Growth Series 2000 which commenced
operations on August 30, 1991 and Zeros Plus European Equities Series 1999,
which has not yet commenced operations. Zeros Plus Emerging Growth Series 2000
(the "Fund") expects to terminate operations on February 28, 2000. The
following
is a summary of significant accounting policies consistently followed by the
Fund in the preparation of its financial statements.
Portfolio valuation: Listed securities traded on a national securities
exchange
are valued at the last reported sales price; securities traded in the
over-the-counter market and listed securities for which no sale was reported
are
valued at the bid price or, in the absence of a recent bid price, at the bid
equivalent as obtained from one or more of the major market makers in the
securities. Investments in U.S. government securities (other than short-term
securities) are valued at the quoted bid price in the over-the-counter market.
Short-term investments that mature in 60 days or less are valued at amortized
cost whenever the Board of Trustees determines that amortized cost reflects
the
fair value of those investments. Investments in securities for which market
quotations are not available are valued at fair value as determined in good
faith by the Board of Trustees.
Repurchase agreements: The Fund may engage in repurchase agreement
transactions.
Under the terms of a typical repurchase agreement, the Fund takes possession
of
an underlying debt obligation subject to an obligation of the seller to
repurchase, and the Fund to resell, the obligation at an agreed-upon price and
time, thereby determining the yield during the Fund's holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The value of the collateral
held
by the Fund is at least equal at all times to the total amount of the
repurchase
obligations, including interest. In the event of counterparty default, the
Fund
has the right to use the collateral to offset losses incurred. There is
potential loss to the Fund in the event that the Fund is
10
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros Plus Emerging Growth Series 2000
- - ------------------------------------------------------------------------------
- - --
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
delayed or prevented from exercising its rights to dispose of the collateral
securities, including the risk of a possible decline in the value of the
underlying securities during the period while the Fund seeks to assert its
rights. The Fund's investment adviser, acting under the supervision of the
Trust's Board of Trustees, reviews the value of the collateral and the
creditworthiness of those banks and dealers with which the Fund enters into
repurchase agreements to evaluate potential risks.
Securities transactions and investment income: Securities transactions are
recorded as of the trade date. Realized gains and losses from securities
transactions are recorded on the identified cost basis. Dividend income is
recorded on the ex-dividend date. Interest income is recorded on the accrual
basis.
Dividends and distributions to shareholders: Dividends from net investment
income of the Fund and distributions of net realized capital gains of the
Fund,
if any, will be distributed annually after the close of the fiscal year in
which
they are earned. In addition, in order to avoid the application of a 4%
nondeductible excise tax on certain undistributed amounts of ordinary income
and
capital gains, the Fund may make an additional distribution of any
undistributed
ordinary income or capital gains shortly before December 31st of each year,
and
expects to pay any other dividends and distributions as are necessary to avoid
the application of this tax. Income distributions and capital gain
distributions
are determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due
to
differing treatments of income and gains on various investment securities held
by the Fund, timing differences and differing characterization of
distributions
made by the Fund as a whole.
Federal income taxes: It is the Fund's policy to comply with the requirements
of
the Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and to distribute substantially all of its taxable income
to its shareholders. Therefore, no Federal income tax provision is required.
2. INVESTMENT ADVISORY FEE, ADMINISTRATION FEE
AND OTHER TRANSACTIONS
The Trust has entered into an investment advisory agreement (the "Advisory
Agreement") with Smith Barney Asset Management, a division of Smith, Barney
Advisers, Inc. ("SBA"), which is controlled by Smith Barney Holdings Inc.
("Holdings"). Holdings is a wholly owned subsidiary of The Travelers Inc.
Under
11
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros Plus Emerging Growth Series 2000
- - ------------------------------------------------------------------------------
- - --
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
the Advisory Agreement, the Fund pays a monthly fee at the annual rate of .40%
of the value of its average daily net assets.
Prior to April 21, 1994, the Trust was party to an administration agreement
with
The Boston Company Advisors, Inc. ("Boston Advisors"), an indirect wholly
owned
subsidiary of Mellon Bank Corporation ("Mellon"). Under this agreement, the
Fund
paid a monthly fee at the annual rate of .20% of the value of its average
daily
net assets.
As of the close of business on April 21, 1994, SBA succeeded Boston Advisors
as
the Fund's administrator. The new administration agreement contains
substantially the same terms and conditions, including the level of fees, as
the
predecessor agreement.
As of the close of business on April 21, 1994, the Fund has also entered into
a
sub-administration agreement (the "Sub-Administration Agreement") with Boston
Advisors. Under the Sub-Administration Agreement, Boston Advisors is paid a
portion of the fee paid by the Fund to SBA at a rate agreed upon from time to
time between SBA and Boston Advisors.
Smith Barney Inc. ("Smith Barney") serves as shareholder servicing agent and
is
paid an annual fee at the rate of .25% of the value of the Fund's average
daily
net assets for certain activities not provided by the Fund's transfer agent.
No officer, director or employee of Smith Barney or any parent or subsidiary
of
Smith Barney receives any compensation from the Trust for serving as a Trustee
or officer of the Trust. The Trust pays each Trustee who is not an officer,
director or employee of Smith Barney or any of its affiliates $2,000 per annum
plus $500 per meeting attended and reimburses each Trustee for travel and
out-of-pocket expenses.
Boston Safe Deposit and Trust Company, an indirect wholly owned subsidiary of
Mellon, serves as the Trust's custodian. The Shareholder Services Group, Inc.,
a
subsidiary of First Data Corporation, serves as the Trust's transfer agent.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding U.S.
government securities and short-term investments, aggregated $765,075 and
$6,034,194, respectively, for the six months ended May 31, 1994. There were no
purchases of U.S.
12
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros Plus Emerging Growth Series 2000
- - ------------------------------------------------------------------------------
- - --
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
government securities for the six months ended May 31, 1994. Proceeds from
sales
of long-term U.S. government securities aggregated $7,015,103 for the six
months
ended May 31, 1994.
At May 31, 1994, aggregate gross unrealized appreciation for all securities in
which there was an excess of value over tax cost was $10,418,207, and
aggregate
gross unrealized depreciation for all securities in which there was an excess
of
tax cost over value was $5,056,521.
<TABLE>
4. SHARES OF BENEFICIAL INTEREST
The Trust may issue an unlimited number of shares of beneficial interest of
the
Fund with a par value of $.001 per share. The Fund, Zeros and Appreciation
Series 1996, Zeros and Appreciation Series 1998 and Zeros Plus European
Equities
Series 1999 each constitute a sub-trust under the Master Trust Agreement.
Changes in shares of beneficial interest of the Fund were as follows:
<CAPTION>
SIX MONTHS ENDED YEAR
ENDED
MAY 31, 1994 NOVEMBER
30, 1993
Shares Amount Shares
Amount
- - ------------------------------------------------------------------------------
- - ------------
<S> <C> <C> <C>
<C>
Issued as reinvestment of
dividends 1,033,616 $ 8,589,355 734,363 $
5,757,650
Redeemed (1,477,828) (12,183,346) (5,324,977)
(43,941,750)
- - ------------------------------------------------------------------------------
- - ------------
Net decrease (444,212) $(3,593,991) (4,590,614)
$(38,184,100)
- - ------------------------------------------------------------------------------
- - ------------
</TABLE>
Shares of the Fund are not currently being offered for sale to new investors,
although the Fund, upon at least 30 days' notice to shareholders, may commence
a
continuous offering if the Trust's Board of Trustees determines it to be in
the
best interests of the Fund and its shareholders.
5. ORGANIZATION COSTS
The Fund bears all costs in connection with its organization including the
fees
and expenses of registering and qualifying its shares for distribution under
Federal and state securities regulations. All such costs are being amortized
on
the straight-line method over a period of five years from the commencement of
operations of the Fund. In the event that any of the initial shares of the
Fund
are redeemed during such amortization period, the Fund will be reimbursed for
any unamortized costs in
13
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros Plus Emerging Growth Series 2000
- - ------------------------------------------------------------------------------
- - --
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
the same proportion as the number of shares redeemed bears to the number of
initial shares outstanding at the time of redemption.
6. NOTES PAYABLE
The Fund and several affiliated entities participate in a $50 million line of
credit provided by Continental Bank N.A. under an Amended and Restated Line of
Credit Agreement (the "Agreement") dated April 30, 1992, primarily for
temporary
or emergency purposes, including the meeting of redemption requests that
otherwise might require the untimely disposition of securities. Under this
Agreement, the Fund may borrow up to the lesser of $25 million or 20% of its
net
assets. Interest is payable either at the bank's Money Market Rate or the
London
Interbank Offered Rate (LIBOR) plus .375% on an annualized basis. The Fund and
the other affiliated entities are charged an aggregate commitment fee of
$125,000 which is allocated equally among each of the participants. The
Agreement requires, among other provisions, each participating fund to
maintain
a ratio of net assets (not including funds borrowed pursuant to the Agreement)
to aggregate amount of indebtedness pursuant to the Agreement of no less than
5
to 1. During the six months ended May 31, 1994, the Fund had an average
outstanding daily balance of $67,033 with interest rates ranging from 3.31% to
4.81%. Interest expense totalled $1,973 for the six months ended May 31, 1994.
At May 31, 1994, the Fund had an outstanding notes payable balance of $100,034
under this Agreement.
14
<PAGE>
Smith Barney Shearson
PRINCIPAL RETURN FUND --
Zeros Plus Emerging Growth Series 2000
- - ------------------------------------------------------------------------------
- - --
PARTICIPANTS
DISTRIBUTOR
Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
INVESTMENT ADVISER
Smith Barney
Asset Management
Two World Trade Center
New York, New York 10048
ADMINISTRATOR
Smith, Barney Advisers, Inc.
1345 Avenue of the Americas
New York, New York 10105
SUB-ADMINISTRATOR
The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
AUDITORS AND COUNSEL
Coopers & Lybrand
One Post Office
S*****************************************************************************
******************************************************************************
******************************************************************************
******************************************************************************
******************************************************************************
******************************************************************************
*********************************************---------------------------------
- - -
OUR APPROACH TO MUTUAL FUND INVESTING
1. PERSONAL SERVICE
The Smith Barney Financial Consultant ("FC") is highly trained and deeply
committed to client service. Your FC works with you to establish a
relationship
based on one-to-one communication and the highest standards of quality.
2. ANALYZING YOUR NEEDS
Defining your needs and establishing specific goals is the first step toward
any
successful investment program. The Smith Barney Strategic Asset Allocator -- a
sophisticated financial planning tool -- can help you and your FC evaluate
your
resources and objectives. This groundwork then becomes the basis for a
strategy
designed specifically for you. Your FC can use the Strategic Asset Allocator
on
a periodic basis to ensure that your investment strategy is keeping pace with
your changing needs and goals.
3. A UNIQUE MUTUAL FUND INVESTMENT PROGRAM
Your Smith Barney FC offers a number of mutual fund assessment tools that are
unmatched in the financial services industry. Smith Barney FCs have access to
a
proprietary mutual fund research database that provides information at their
fingertips on more than 2,100 funds. In addition, working with another
proprietary system known as the Mutual Fund Evaluation Service, your FC can
help
guide you through the complex mutual fund maze. Specifically, the Evaluation
Service can provide a clear picture of the past performance of mutual funds
you
currently own. Presented in both graphic and numerical form, this illustration
provides a wealth of easily understood data on more than 2,100 funds. This
complimentary service allows you to judge whether your mutual fund has helped
meet your investment needs.
4. LOOKING AHEAD
Selecting a mutual fund should not be a one-event process that ends with the
purchase of shares. You can count on the expertise of your FC as he or she
continues to monitor and evaluate your funds, to suggest new strategies and to
listen. That, in our opinion, is how to use mutual funds to help achieve your
financial goals.
16
<PAGE>
PRINCIPAL
RETURN FUND --
Zeros Plus Emerging Growth
Series 2000
TRUSTEES
Paul R. Ades
Herbert Barg
Allan R. Johnson
Heath B. McLendon
Ken Miller
John F. White
OFFICERS
Heath B. McLendon
Chairman of the Board
Stephen J. Treadway
President
Richard P. Roelofs
Executive Vice President
Richard A. Freeman
Vice President and
Investment Officer
Susan C. Fulenwider
Vice President and
Investment Officer
Lewis E. Daidone
Treasurer
Christina T. Sydor
Secretary
This report is submitted for the
general information of the
shareholders of Smith Barney
Shearson Principal Return Fund --
Zeros Plus Emerging Growth
Series 1996. It is not a prospectus,
circular or representation intend-
ed for use in the purchase or sale
of shares of the Fund or of any
securities mentioned in this
report.
SMITH BARNEY
- - ------------
SMITH BARNEY SHEARSON
MUTUAL FUNDS
Two World Trade Center
New York, New York 10048
Fund 123
FD2228 G4
