-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OK7D9Mj447BGLwYHPMsceqTODMky45G51QajmMwf1EzYmfI82ONliHP+/vqU12up x7vlgP7gqiC/s/rtMq3KQA== 0000091155-97-000136.txt : 19970311 0000091155-97-000136.hdr.sgml : 19970311 ACCESSION NUMBER: 0000091155-97-000136 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970310 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SMITH BARNEY APPRECIATION FUND INC CENTRAL INDEX KEY: 0000089558 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 132653031 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-01940 FILM NUMBER: 97553321 BUSINESS ADDRESS: STREET 1: TWO WORLD TRADE CENTER CITY: NEW YORK STATE: NY ZIP: 10048 BUSINESS PHONE: 6175731332 FORMER COMPANY: FORMER CONFORMED NAME: SMITH BARNEY SHEARSON APPRECIATION FUND INC DATE OF NAME CHANGE: 19931015 FORMER COMPANY: FORMER CONFORMED NAME: SHEARSON LEHMAN BROTHERS APPRECIATION FUND INC DATE OF NAME CHANGE: 19930326 FORMER COMPANY: FORMER CONFORMED NAME: SHEARSON LEHMAN APPRECIATION FUND INC/MD/ DATE OF NAME CHANGE: 19930326 N-30D 1 [GRAPHIC] Smith Barney [GRAPHIC] Appreciation Fund Inc. ------------------------------ ANNUAL REPORT ------------------------------ December 31, 1996 [LOGO] Smith Barney Mutual Funds Investing in your future. Every day. Smith Barney Appreciation Fund Inc. ================================================================================ The Smith Barney Appreciation Fund is for investors who want long-term appreciation of capital through investments primarily in stocks. The Fund invests in a strong core of growth stocks consisting primarily of blue chip companies that are dominant in their industries. The remainder of the portfolio is built with themes that the Fund's portfolio manager, Harry D. Cohen, believes will allow the Fund to take advantage of the prevailing market environment. NASDAQ SYMBOLS Class A SHAPX Class B SAPBX Class C SAPCX Smith Barney Appreciation Fund's Average Annual Total Returns* - -------------------------------------------------------------------------------- Inception Date One-Year Five-Year Ten-Year Since Inception - -------------------------------------------------------------------------------- Class A 3/10/70 19.25% 11.94% 13.34% 12.08% - -------------------------------------------------------------------------------- Class B 11/6/92 18.29% N/A N/A 12.93% - -------------------------------------------------------------------------------- Class C 2/4/93 18.34% N/A N/A 12.02% - -------------------------------------------------------------------------------- * Assumes reinvestment of all dividends and capital gain distributions, if any, at net asset value and does not reflect the deduction of the applicable sales charges with respect to Class A shares or the applicable contingent deferred sales charges with respect to Class B and C shares, which would reduce the performance quoted. ================================================================================ "At Smith Barney Mutual Funds, your investment needs come first. Our goal is to deliver consistent [GRAPHIC] and competitive returns over time using a wide range of investment strategies." JESSICA M. BIBLIOWICZ President, Smith Barney Appreciation Fund Inc. - -------------------------------------------------------------------------------- WHAT'S INSIDE - -------------------------------------------------------------------------------- Shareholder Letter.......................................................... 1 An Interview with Portfolio Manager Harry D. Cohen.............................................................. 3 Historical Performance...................................................... 4 Schedule of Investments..................................................... 8 Statement of Assets and Liabilities........................................ 13 Statement of Operations.................................................... 14 Statements of Changes in Net Assets........................................ 15 Notes to Financial Statements.............................................. 16 Financial Highlights....................................................... 19 Independent Auditors' Report............................................... 22 Tax Information............................................................ 23 - -------------------------------------------------------------------------------- Shareholder Letter - -------------------------------------------------------------------------------- [GRAPHIC] [GRAPHIC] Heath B. Harry D. Mclendon Cohen Chairman and Vice President and Chief Executive Officer Investment Officer Fellow Shareholder: It is a pleasure to write to you as the Smith Barney Appreciation Fund enters its twenty-seventh year and we begin our nineteenth year of management of this Fund on behalf of shareholders. Once again, we take this opportunity to review the Fund's results this past year and to discuss how the Fund is positioned for 1997. Coming out of a very strong 1995, our strategy was to position the Fund so that it had some downside protection, along with the potential for appreciation. For the year ended December 31, 1996, the Fund's Class A shares had a total return of 19.25%, trailing slightly the Standard & Poor's 500 Index, which gained 22.95% over the same time period. In last year's annual letter, we expressed some caution coming off the terrific stock market of 1995. Clearly, our caution, which was expressed in the form of some cash reserves and the sale of some of our seemingly overpriced stocks, was misplaced. However, due to higher returns on the equity portion of the Fund's portfolio, we were able to provide shareholders with a good competitive return with lower levels of risk than the market as a whole. Our goal always has been to deliver consistent positive returns over the long term. We have sought to accomplish that objective over the past eighteen years by owning great companies, allowing them to compound earnings and dividend growth, and taking some money off the table when the market seemed euphoric. Core positions are maintained for very long periods of time, and positions in such stocks as Johnson & Johnson, Minnesota Mining and Manufacturing, Procter & Gamble and Wal-Mart have been represented in the Fund for well over a decade. The rapid rise in interest rates in early 1996 had no negative impact on stock prices. In our view, this is attributable to two factors--rising productivity leading to sharp profit growth, and big inflows of money in the market as more and more people across the country decided to invest. With the exception of a brief dip in July, the stock market seemed to have a life of its own. Corporate earnings increased at a good pace, but the price investors were willing to pay for those earnings went up even faster. For some of our long-time holdings such as Coca-Cola, Microsoft and Gillette, stock prices went to levels we viewed as extreme, and some profits were taken. On the other hand, we did find stocks that seemed to offer compelling value. Allstate, for example, became the Fund's top position as its operations were strengthening rapidly and sharply, a fact that many investors were slow to notice. Other insurance stocks were selected for the Fund's portfolio as well, based on our perception that they were undervalued relative to their prospects. We believe that the insurance sector is undergoing a transformation similar to that experienced by the banking sector during the last two years. In short, it appears that companies are exiting low-return businesses and focusing on better capital management to enhance shareholder returns. In our view, Chubb and ITT Hartford Group are clear examples of this trend. During the reporting period, energy stocks were and still remain prominent holdings of the Appreciation Fund. Our prediction a year ago of surprises on the upside for oil prices was on target and stocks such as Amoco, Mobil, Amerada Hess, Unocal and Royal Dutch began to rise as investors started to realize that - -------------------------------------------------------------------------------- Smith Barney Appreciation Fund Inc. 1 these energy stocks offered better-than-average dividends, lower-than-average valuations and improving fundamentals. Healthcare companies continue to be a favorite long-term theme for the Fund, and the presence of Johnson & Johnson and Merck in its top-ten holdings attests to that fact. Earnings growth for many healthcare companies has continued in the mid-teens range driven primarily by new products. Technology has been trickier for us, and Intel has been our focus stock with smaller, but profitable, positions in Hewlett Packard, Texas Instruments and IBM. However, we have been underweighted in other areas of technology, based on our fears of rapid product obsolescence. Finally, our biggest disappointment of the year was AT&T, where despite a huge restructuring the company continues to face heavy competition in its core long-distance business. - -------------------------------------------------------------------------------- "At current levels of valuation, everything needs to continue to go right for stocks to advance materially, while not much needs to go wrong for prices to stumble." - -------------------------------------------------------------------------------- After many years of reminding investors of the wisdom of owning stocks, we are now in the peculiar position of being asked why we have cash reserves, since the stock market is obviously such a great place to be. In other words, people have asked us: "Why the caution over the past year, and especially now, when the U.S. economy is performing well?" It is not because we expect a recession (we do not); or that we expect inflation to surge (we do not); or that we expect interest rates to soar (we do not). Rather, we have remained cautious because the rise in the stock market over the past few years has discounted an awful lot of good news and leaves little margin for accidents or disappointments. At current levels of valuation, everything needs to continue to go right for stocks to advance materially, while not much needs to go wrong for prices to stumble. In summary, we remain committed to the Ap pre ciation Fund's philosophy of putting the interests of our shareholders first. We will continue to try and provide reasonable returns by owning the best companies we can find, while building a cushion against the market volatility that has lately become so prevalent. In closing, we appreciate your support and will continue to work hard to help you achieve your financial goals. Sincerely, /s/ Heath B. McLendon /s/ Harry D. Cohen Heath B. McLendon Harry D. Cohen Chairman and Vice President and Chief Executive Officer Investment Officer January 24, 1997 - -------------------------------------------------------------------------------- Top Ten Holdings* December 31, 1996 - -------------------------------------------------------------------------------- 1. Eastman Kodak Co. 3.50% - -------------------------------------------------------------------------------- 2. Allstate Corp. 3.39 - -------------------------------------------------------------------------------- 3. Amoco Corp. 2.41 - -------------------------------------------------------------------------------- 4. Mobil Corp. 2.36 - -------------------------------------------------------------------------------- 5. Chase Manhattan Corp. 2.35 - -------------------------------------------------------------------------------- 6. Merck & Co., Inc. 2.26 - -------------------------------------------------------------------------------- 7. Xerox Corp. 2.07 - -------------------------------------------------------------------------------- 8. General Electric Co. 1.91 - -------------------------------------------------------------------------------- 9. Intel Corp. 1.87 - -------------------------------------------------------------------------------- 10. Johnson & Johnson 1.81 - -------------------------------------------------------------------------------- * As a percentage of total investments. - -------------------------------------------------------------------------------- 2 1996 Annual Report to Shareholders - -------------------------------------------------------------------------------- An Interview with Portfolio Manager Harry D. Cohen - -------------------------------------------------------------------------------- Taking Advantage of Long-Term Growth Opportunities Harry "Hersh" Cohen, Portfolio Manager of the Smith Barney Appreciation Fund, recently spoke with us and shared some insights regarding his investment style and his thoughts on the current state of the market. Mr. Cohen has been a manager of the Appreciation Fund since January 1979 and has been with Smith Barney since 1969. He received a B.A. degree from Case Western University and a Ph.D. in Psychology from Tufts University. Hersh, how would you describe the Smith Barney Appreciation Fund's investment approach? Hersh: We seek to buy great American blue chip companies and hold on to them for the long term. Our strategy is to select companies with dominant market positions, global franchises, seasoned and respected management teams and excellent balance sheets. Because of their steadiness, these stocks can be comforting in periods of market excess. Our goal is to make money in an up market with less risk in a down market. We invest primarily in classic S&P 500 growth stocks, and around this core we invest in thematic plays and look for special situations such as restructuring candidates or undervalued companies that are more dependent on economic cycles. One of the theme areas we have been bullish on for some time and that has helped the Fund's performance this past year has been the energy sector. We like select energy companies because of greater-than-expected global demand for oil and gas, continuing cost savings from restructuring and attractive relative valuations. Hersh, with your more than twenty-five years in the securities business, it's clear your first love remains the stock market. But how has your degree in psychology influenced how you manage stocks? Hersh: In my opinion, there are three factors that move the stock market--earnings, interest rates and psychology. I think my background in psychology has given me an advantage over the years in at least one of those areas and has made me somewhat skeptical whenever investors get too euphoric or too gloomy. In bull markets, we tend to be cautious. In bear markets (remember those?), we tend to find compelling stories overlooked by the exiting herd. While we strongly believe that Wall Street is a great place to be, as veteran market observers we like to remind investors that there will be potholes along the way. In our view, the key to successful stock investing is to stay diversified, remain patient and maintain a long-term perspective. The Appreciation Fund is designed for conservative, long-term investors who want exposure to stocks but want some downside protection in declining markets. Hersh, many people are saying this stock market is different from those in the past. With valuations at historical extremes, how long do you think the current bull market can last? Hersh: In many ways, this bull market is different in terms of longevity and high valuations. For example, this is the first bull market in history to have lasted six years without a downturn of at least 10% in the major indices. When you consider that market corrections have usually oc curred every two or three years, you can easily see why some people are saying this time is different. With respect to valuations, many analysts interpret an S&P 500 dividend yield of 3% or less as a strong "sell" signal. With the S&P 500's current dividend yield at approximately 2.0% and many other traditional market measurements at historical highs, one could make the case that stocks have gotten too expensive and investors should be concerned. As massive inflows of money into stock funds continue and the longest bull market of the twentieth century thunders on, investors who think market corrections are a thing of the past could be in for some unpleasant surprises. - -------------------------------------------------------------------------------- Smith Barney Appreciation Fund Inc. 3 - -------------------------------------------------------------------------------- Historical Performance -- Class A Shares - -------------------------------------------------------------------------------- Net Asset Value ------------------ Beginning End Income Capital Gain Total Year Ended of Year of Year Dividends Distributions Returns(1) ================================================================================ 12/31/96 $11.90 $12.85 $ 0.19 $ 1.14 19.25% - -------------------------------------------------------------------------------- 12/31/95 10.15 11.90 0.20 1.00 29.26 - -------------------------------------------------------------------------------- 12/31/94 11.01 10.15 0.18 0.60 (0.77) - -------------------------------------------------------------------------------- 12/31/93 10.66 11.01 0.16 0.36 8.13 - -------------------------------------------------------------------------------- 12/31/92 10.26 10.66 0.15 0.09 6.29 - -------------------------------------------------------------------------------- 12/31/91 8.30 10.26 0.20 0.07 26.94 - -------------------------------------------------------------------------------- 12/31/90 8.66 8.30 0.25 0.08 (0.27) - -------------------------------------------------------------------------------- 12/31/89 7.04 8.66 0.24 0.22 29.55 - -------------------------------------------------------------------------------- 12/31/88 6.49 7.04 0.19 0.13 13.45 - -------------------------------------------------------------------------------- 12/31/87 6.54 6.49 0.26 0.25 6.95 ================================================================================ Total $ 2.02 $ 3.94 ================================================================================ - -------------------------------------------------------------------------------- Historical Performance -- Class B Shares - -------------------------------------------------------------------------------- Net Asset Value ------------------ Beginning End Income Capital Gain Total Year Ended of Year of Year Dividends Distributions Returns(1) ================================================================================ 12/31/96 $11.88 $12.81 $ 0.09 $ 1.14 18.29% - -------------------------------------------------------------------------------- 12/31/95 10.14 11.88 0.11 1.00 28.29 - -------------------------------------------------------------------------------- 12/31/94 11.00 10.14 0.10 0.60 (1.53) - -------------------------------------------------------------------------------- 12/31/93 10.65 11.00 0.08 0.36 7.38 - -------------------------------------------------------------------------------- Inception*--12/31/92 10.55 10.65 0.16 0.09 3.28+ ================================================================================ Total $ 0.54 $ 3.19 ================================================================================ - -------------------------------------------------------------------------------- Historical Performance -- Class C Shares - -------------------------------------------------------------------------------- Net Asset Value ------------------ Beginning End Income Capital Gain Total Year Ended of Year of Year Dividends Distributions Returns(1) ================================================================================ 12/31/96 $11.88 $12.81 $ 0.10 $ 1.14 18.34% - -------------------------------------------------------------------------------- 12/31/95 10.14 11.88 0.11 1.00 28.29 - -------------------------------------------------------------------------------- 12/31/94 11.00 10.14 0.11 0.60 (1.41) - -------------------------------------------------------------------------------- Inception*--12/31/93 10.99 11.00 0.08 0.36 4.09+ ================================================================================ Total $ 0.40 $ 3.10 ================================================================================ - -------------------------------------------------------------------------------- Historical Performance -- Class Y Shares - -------------------------------------------------------------------------------- Net Asset Value ------------------ Beginning End Income Capital Gain Total Year Ended of Year of Year Dividends Distributions Returns(1) ================================================================================ Inception*--12/31/96 $12.10 $12.86 $ 0.22 $ 1.14 17.65%+ ================================================================================ - -------------------------------------------------------------------------------- 4 1996 Annual Report to Shareholders - -------------------------------------------------------------------------------- Historical Performance -- Class Z Shares - -------------------------------------------------------------------------------- Net Asset Value ------------------ Beginning End Income Capital Gain Total Year Ended of Year of Year Dividends Distributions Returns(1) ================================================================================ 12/31/96 $11.91 $12.87 $ 0.23 $ 1.14 19.66% - -------------------------------------------------------------------------------- 12/31/95 10.16 11.91 0.23 1.00 29.52 - -------------------------------------------------------------------------------- 12/31/94 11.02 10.16 0.22 0.60 (0.41) - -------------------------------------------------------------------------------- 12/31/93 10.66 11.02 0.18 0.36 8.47 - -------------------------------------------------------------------------------- Inception*- 12/31/92 10.55 10.66 0.16 0.09 3.38+ ================================================================================ Total $ 1.02 $ 3.19 ================================================================================ IT IS THE FUND'S POLICY TO DISTRIBUTE DIVIDENDS AND CAPITAL GAINS, IF ANY, ANNUALLY. - -------------------------------------------------------------------------------- Average Annual Total Return - -------------------------------------------------------------------------------- Without Sales Charge(1) --------------------------------------------------- Class A Class B Class C Class Y Class Z ================================================================================ Year Ended 12/31/96 19.25% 18.29% 18.34% N/A 19.66% - -------------------------------------------------------------------------------- Five Years Ended 12/31/96 11.94 N/A N/A N/A N/A - -------------------------------------------------------------------------------- Ten Years Ended 12/31/96 13.34 N/A N/A N/A N/A - -------------------------------------------------------------------------------- Inception* through 12/31/96 12.08 12.93 12.02 17.65%+ 14.12 ================================================================================ Without Sales Charge(2) --------------------------------------------------- Class A Class B Class C Class Y Class Z ================================================================================ Year Ended 12/31/96 13.26% 13.29% 17.34% N/A 19.66% - -------------------------------------------------------------------------------- Five Years Ended 12/31/96 10.80 N/A N/A N/A N/A - -------------------------------------------------------------------------------- Ten Years Ended 12/31/96 12.77 N/A N/A N/A N/A - -------------------------------------------------------------------------------- Inception* through 12/31/96 11.87 12.77 12.02 17.65%+ 14.12 ================================================================================ - -------------------------------------------------------------------------------- Cumulative Total Return - -------------------------------------------------------------------------------- Without Sales Charge(1) ================================================================================ Class A (12/31/86 through 12/31/96) 249.82% - -------------------------------------------------------------------------------- Class A (Inception* through 12/31/96) 2,032.73 - -------------------------------------------------------------------------------- Class B (Inception* through 12/31/96) 65.72 - -------------------------------------------------------------------------------- Class C (Inception* through 12/31/96) 55.80 - -------------------------------------------------------------------------------- Class Y (Inception* through 12/31/96) 17.65+ - -------------------------------------------------------------------------------- Class Z (Inception* through 12/31/96) 73.09 ================================================================================ (1) Assumes reinvestment of all dividends and capital gain distributions, if any, at net asset value and does not reflect the deduction of the applicable sales charges with respect to Class A shares or the applicable contingent deferred sales charges ("CDSC") with respect to Class B and C shares. (2) Assumes reinvestment of all dividends and capital gain distributions, if any, at net asset value. In addition, Class A shares reflect the deduction of the maximum initial sales charge of 5.00%; Class B shares reflect the deduction of a 5.00% CDSC, which applies if shares are redeemed within one year from initial purchase and declines thereafter by 1.00% per year until no CDSC is incurred. Class C shares reflect the deduction of a 1.00% CDSC, which applies if shares are redeemed within the first year of purchase. * The inception dates for Class A, B, C, Y and Z shares are March 10, 1970, November 6, 1992, February 4, 1993, January 30, 1996 and November 6, 1992, respectively. + Total return is not annualized, as it may not be representative of the total return for the year. - -------------------------------------------------------------------------------- Smith Barney Appreciation Fund Inc. 5 Smith Barney Appreciation Fund Inc. [The following table was depicted as a line graph in the printed material] Growth of $10,000 invested in Class A Shares of the Smith Barney Appreciation Fund Inc. vs. the Standard & Poor's 500 Stock Index* March 10, 1970 - December 31, 1996 Smith Barney Appreciation Fund Inc. S&P 500 Index January 1979: Hersh Cohen becomes the Portfolio Manager of the [GRAPHIC] Smith Barney Appreciation Fund Inc.
Smith Barney S&P 500 Date Appreciation Index Return 1970 War in Cambodia escalates 10,995 10,583 5.83% 1971 Freeze on wages and prices 12,840 12,096 14.30% NASDAQ introduced 1972 Watergate break-in 12,724 14,395 19.00% Nixon visits China 1973 OPEC oil embargo 9,167 12,280 -14.69% 1974 Nixon resigns as President 6,903 9,030 -26.47% 1975 U.S. involvement in Vietnam ends 8,197 12,391 37.23% 1976 Bicentennial celebration 9,877 15,356 23.93% 1977 U.S. energy crisis 9,521 14,257 -7.16% 1978 Genocide in Cambodia 11,580 15,195 6.58% Camp David accords 1979 Three Mile Island disaster 16,790 18,021 18.60% Iran hostage crisis begins 1980 Reagan elected President 22,787 23,878 32.50% in landslide 1981 Assassination attempts on Reagan 23,214 22,703 -4.92% and Pope. First space shuttle launch 1982 Worst U.S. recession in 40 years 28,717 27,596 21.55%
* Hypothetical illustration of $10,000 invested in Class A shares on March 10, 1970, assuming deduction of the maximum 5.00% sales charge at the time of investment and reinvestment of dividends and capital gains, if any, at net asset value through December 31, 1996. The Standard & Poor's 500 Index is an index composed of widely held common stocks listed on the New York Stock Exchange, American Stock Exchange and over-the-counter market. Figures for the index include reinvestment of dividends. The index is unmanaged and is not subject to the same management and trading expenses as a mutual fund. The performance of the Fund's other classes may be greater or less than the Class A shares' performance indicated on this chart, depending on whether greater or - -------------------------------------------------------------------------------- 6 1996 Annual Report to Shareholders For more than twenty-five years and through all market cycles, the Smith Barney Appreciation Fund has delivered consistent long-term growth. - -------------------------------------- Average Annual Total Return of the Smith Barney Appreciation Fund vs. the S&P 500 Since Cohen Became Manager (Since January 31, 1979) SB Appreciation Fund (Class A Shares) S&P 500 17.07%** 16.17% - --------------------------------------
Smith Barney S&P 500 Date Appreciation Index Return 1983 Beirut bombing 35,317 33,822 22.56% 1984 Iran/Iraq conflict 35,965 35,942 6.27% 1985 U.S. becomes debtor nation 48,344 47,347 31.73% Gramm-Rudman Act 1986 Tax reform 57,929 56,182 18.66% Bombing of Libya 1987 Market correction 62,005 59,131 5.25% 1988 RJR Nabisco buyout 70,290 68,924 16.56% 1989 Collapse of high-yield bond market 91,062 90,724 31.63% Berlin Wall falls 1990 Iraq invasion of Kuwait 90,819 87,903 -3.11% 1991 U.S. recession 115,284 114,625 30.40% 1992 Riots in Los Angeles 122,535 123,348 7.61% 1993 World Trade Center terrorist bombing 132,501 135,757 10.06% Passage of NAFTA 1994 Orange County bankruptcy 131,480 137,535 1.31% 1995 Dow rises above 4000, then 5000 169,945 189,152 37.53% 1996 Dow rises above 6500 202,803 232,562 22.95%
lesser sales charges and fees were incurred by shareholders investing in other classes. All figures represent past performance and are not a guarantee of future results. Investment returns and principal value will fluctuate, and redemption value may be more or less than the original cost. No adjustment has been made for shareholder tax liability on dividends or capital gains. ** Please note that this figure assumes reinvestment of all dividends and capital gains distributions at net asset value and does not reflect deduction of the applicable sales charge with respect to Class A shares, which would have reduced the Fund's performance. - -------------------------------------------------------------------------------- Smith Barney Appreciation Fund Inc. 7 - -------------------------------------------------------------------------------- Schedule of Investments December 31, 1996 - -------------------------------------------------------------------------------- SHARES SECURITY VALUE ================================================================================ COMMON STOCKS -- 86.9% Aerospace -- 3.2% 775,000 Allied Signal, Inc. $ 51,925,000 185,500 Boeing Co.+ 19,732,563 250,000 Lockheed Martin Corp. 22,875,000 300,000 Rockwell International Corp. 18,262,500 - -------------------------------------------------------------------------------- 112,795,063 - -------------------------------------------------------------------------------- Airlines -- 0.8% 135,000 AMR Corp.+ ++ 11,896,875 250,000 UAL Corp.++ 15,625,000 - -------------------------------------------------------------------------------- 27,521,875 - -------------------------------------------------------------------------------- Auto-Parts & Accessories -- 0.6% 325,000 Goodyear Tire & Rubber Co. 16,696,875 250,000 New Holland N.V.+ ++ 5,218,750 - -------------------------------------------------------------------------------- 21,915,625 - -------------------------------------------------------------------------------- Automobile -- 2.0% 500,000 Chrysler Corp. 16,500,000 975,000 General Motors Corp. 54,356,250 - -------------------------------------------------------------------------------- 70,856,250 - -------------------------------------------------------------------------------- Banking -- 6.0% 920,000 Chase Manhattan Corp. 82,110,000 1,000,000 Fannie Mae 37,250,000 150,000 First of America Bank Corp. 9,018,750 325,000 First Virginia Banks, Inc. 15,559,375 300,000 National City Corp. 13,462,500 150,000 Union Planters Corp. 5,850,000 175,000 Wells Fargo & Co. 47,206,250 - -------------------------------------------------------------------------------- 210,456,875 - -------------------------------------------------------------------------------- Beverage, Food and Tobacco -- 1.7% 325,000 CPC International, Inc. 25,187,500 700,000 McDonalds Corp. 31,675,000 100,000 Sara Lee Corp. 3,725,000 - -------------------------------------------------------------------------------- 60,587,500 - -------------------------------------------------------------------------------- Broadcasting -- 0.2% 375,000 Scandinavian Broadcasting Systems++ 6,515,625 - -------------------------------------------------------------------------------- Chemicals -- 3.3% 575,000 E.I. du Pont de Nemours & Co. 54,265,625 500,000 Hercules, Inc. 21,625,000 1,050,000 Olin Corp. 39,506,250 - -------------------------------------------------------------------------------- 115,396,875 - -------------------------------------------------------------------------------- See Notes to Financial Statements. - -------------------------------------------------------------------------------- 8 1996 Annual Report to Shareholders - -------------------------------------------------------------------------------- Schedule of Investments (continued) December 31, 1996 - -------------------------------------------------------------------------------- SHARES SECURITY VALUE ================================================================================ Computer Software & Services -- 0.6% 260,000 Microsoft Corp.++ $ 21,482,500 - -------------------------------------------------------------------------------- Consumer Products -- 4.5% 300,000 First Brands Corp. 8,512,500 275,000 Gillette Co.+ 21,381,250 350,000 Kimberly-Clark Corp. 33,337,500 300,000 Mattel, Inc. 8,325,000 800,000 Newell Co. 25,200,000 275,000 Procter & Gamble Co. 29,562,500 50,700 Progressive Corp. 3,415,912 100,000 Rubbermaid, Inc. 2,275,000 475,000 Tyco International Ltd. 25,115,625 - -------------------------------------------------------------------------------- 157,125,287 - -------------------------------------------------------------------------------- Diversified/Conglomerates -- 6.3% 1,525,000 Eastman Kodak Co. 122,381,250 515,000 Honeywell, Inc. 33,861,250 350,000 Host Marriott Services Corp.++ 3,193,750 750,000 Minnesota Mining & Manufacturing Co. 62,156,250 - -------------------------------------------------------------------------------- 221,592,500 - -------------------------------------------------------------------------------- Electrical Equipment -- 4.3% 550,000 AMP, Inc. 21,106,250 250,000 Emerson Electric Co. 24,187,500 675,000 General Electric Co. 66,740,625 75,000 Johnson Controls, Inc. 6,215,625 475,000 Texas Instruments, Inc.+ 30,281,250 - -------------------------------------------------------------------------------- 148,531,250 - -------------------------------------------------------------------------------- Entertainment & Leisure -- 1.7% 100,000 Dick Clark Productions, Inc.++ 1,150,000 400,000 Time Warner, Inc. 15,000,000 600,000 Walt Disney Co. 41,775,000 - -------------------------------------------------------------------------------- 57,925,000 - -------------------------------------------------------------------------------- Environmental Control -- 2.1% 775,000 IMC Global, Inc. 30,321,875 1,300,000 WMX Technologies, Inc. 42,412,500 - -------------------------------------------------------------------------------- 72,734,375 - -------------------------------------------------------------------------------- Financial Services -- 3.0% 700,000 American Express Co. 39,550,000 425,000 Associates First Capital Corp. 18,753,125 200,000 Enron Corp. 8,625,000 425,000 Household International, Inc. 39,206,250 - -------------------------------------------------------------------------------- 106,134,375 - -------------------------------------------------------------------------------- See Notes to Financial Statements. - -------------------------------------------------------------------------------- Smith Barney Appreciation Fund Inc. 9 - -------------------------------------------------------------------------------- Schedule of Investments (continued) December 31, 1996 - -------------------------------------------------------------------------------- SHARES SECURITY VALUE ================================================================================ Healthcare/Drugs/Hospital Supplies -- 11.1% 800,000 Abbott Laboratories, Inc. $ 40,600,000 825,000 American Home Products Corp. 48,365,625 100,000 Amgen, Inc.++ 5,437,500 475,000 Bristol-Myers Squibb Co. 51,656,250 100,000 Forest Labs, Inc., Class A Shares++ 3,275,000 375,000 Hillenbrand Industries, Inc. 13,593,750 1,275,000 Johnson & Johnson 63,431,250 1,000,000 Merck and Co., Inc. 79,250,000 200,000 SmithKline Beecham PLC 13,600,000 285,000 Unilever NV 49,946,250 275,000 Warner Lambert Co. 20,625,000 - -------------------------------------------------------------------------------- 389,780,625 - -------------------------------------------------------------------------------- Insurance -- 6.9% 2,050,000 Allstate Corp. 118,643,750 250,000 American International Group, Inc. 27,062,500 850,000 Chubb Corp. 45,687,500 10,000 CMAC Investment Corp. 367,500 175,000 CNA Financial Corp.++ 18,725,000 300,000 ITT Hartford Group, Inc. 20,250,000 331,700 Leucadia National Corp. 8,872,975 - -------------------------------------------------------------------------------- 239,609,225 - -------------------------------------------------------------------------------- Machinery -- 1.3% 515,000 Dal-Tile International Inc. 10,493,125 550,000 Kennametal, Inc. 21,381,250 535,000 Stanley Works 14,445,000 - -------------------------------------------------------------------------------- 46,319,375 - -------------------------------------------------------------------------------- Metals -- 0.2% 300,000 Battle Mountain Gold Co. 2,062,500 200,000 Homestake Mining Co. 2,850,000 - -------------------------------------------------------------------------------- 4,912,500 - -------------------------------------------------------------------------------- Office Equipment & Supplies -- 3.4% 250,000 Electronic Data Systems Corp. 10,812,500 230,000 International Business Machines Corp. 34,730,000 1,375,000 Xerox Corp. 72,359,375 - -------------------------------------------------------------------------------- 117,901,875 - -------------------------------------------------------------------------------- Oil-Domestic -- 1.8% 75,000 Atlantic Richfield Co. 9,937,500 27,900 El Paso Natural Gas Co. 1,408,950 50,000 Exxon Corp. 4,900,000 60,000 Newport News Shipbuilding Inc. 900,000 300,000 Tenneco, Inc. 13,537,500 750,000 Union Pacific Resources Group, Inc. 21,937,500 450,000 USX-Marathon Group 10,743,750 - -------------------------------------------------------------------------------- 63,365,200 - -------------------------------------------------------------------------------- See Notes to Financial Statements. - -------------------------------------------------------------------------------- 10 1996 Annual Report to Shareholders - -------------------------------------------------------------------------------- Schedule of Investments (continued) December 31, 1996 - -------------------------------------------------------------------------------- SHARES SECURITY VALUE ================================================================================ Oil-International -- 7.2% 600,000 Amerada Hess Corp. $ 34,725,000 1,050,000 Amoco Corp. 84,525,000 125,000 Ashland Inc. 5,484,375 200,000 Chevron Corp. 13,000,000 675,000 Mobil Corp. 82,518,750 190,000 Royal Dutch Petroleum Co. ADR 32,442,500 - -------------------------------------------------------------------------------- 252,695,625 - -------------------------------------------------------------------------------- Paper and Paper Products -- 0.8% 75,000 Accent Color Sciences, Inc.++ 637,500 150,000 Mead Corp. 8,718,750 310,000 St. Joe Paper Co. 20,150,000 - -------------------------------------------------------------------------------- 29,506,250 - -------------------------------------------------------------------------------- Publishing -- 3.6% 715,000 Gannett Co. 53,535,625 425,000 Meredith Corp. 22,418,750 950,000 New York Times Co., Class A Shares 36,100,000 225,000 Scholastic Corp.++ 15,131,250 - -------------------------------------------------------------------------------- 127,185,625 - -------------------------------------------------------------------------------- Real Estate -- 0.1% 30,000 General Reinsurance Corp. 4,732,500 - -------------------------------------------------------------------------------- Retail -- 2.6% 200,000 Albertsons Inc. 7,125,000 300,000 Gap, Inc. 9,037,500 700,000 J.C. Penney, Inc. 34,125,000 1,700,000 Wal-Mart Stores, Inc. 38,887,500 - -------------------------------------------------------------------------------- 89,175,000 - -------------------------------------------------------------------------------- Technology -- 3.5% 125,000 Chiron Corp.++ 2,328,125 675,000 Hewlett-Packard Co. 33,918,750 500,000 Intel Corp. 65,468,750 500,000 Thermo Electron Corp. 20,625,000 - -------------------------------------------------------------------------------- 122,340,625 - -------------------------------------------------------------------------------- Telephone/Communications -- 4.1% 550,000 American Telephone & Telegraph Corp. 23,925,000 700,000 Bell Atlantic Corp.+ 45,325,000 550,000 GTE Corp. 25,025,000 243,063 Lucent Technologies, Inc. 11,241,664 500,000 SBC Communications, Inc. 25,875,000 900,000 Tele-Communications Inc., Class A Shares++ 11,756,250 - -------------------------------------------------------------------------------- 143,147,914 - -------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost -- $2,033,483,191) 3,042,243,314 ================================================================================ See Notes to Financial Statements. - -------------------------------------------------------------------------------- Smith Barney Appreciation Fund Inc. 11 - -------------------------------------------------------------------------------- Schedule of Investments (continued) December 31, 1996 - -------------------------------------------------------------------------------- FACE AMOUNT SECURITY VALUE ================================================================================ REPURCHASE AGREEMENTS -- 13.1% $ 218,456,000 Chase Manhattan Bank, 6.500% due 1/2/97; Proceeds at maturity -- $218,534,855; (Fully collateralized by U.S. Treasury Notes, 5.875% due 10/31/98; Market value -- $223,091,440) $ 218,456,000 240,550,000 Goldman Sachs & Co., 6.520% due 1/2/97; Proceeds at maturity -- $240,637,094; (Fully collateralized by U.S. Treasury Notes, 5.750% due 12/31/98; Market value -- $245,464,198) 240,550,000 - -------------------------------------------------------------------------------- TOTAL REPURCHASE AGREEMENTS (Cost -- $459,006,000) 459,006,000 ================================================================================ TOTAL INVESTMENTS -- 100% (Cost -- $2,492,489,191*) $3,501,249,314 ================================================================================ + A portion of the security position is on loan (See Note 5). ++ Non-income producing security. * Aggregate cost for Federal income tax purposes is subtantially the same. See Notes to Financial Statements. - -------------------------------------------------------------------------------- 12 1996 Annual Report to Shareholders - -------------------------------------------------------------------------------- Statement of Assets and Liabilities December 31, 1996 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (Cost -- $2,033,483,191) $3,042,243,314 Repurchase agreements (Cost -- $459,006,000) 459,006,000 Cash and cash equivalents 21,920,500 Receivable for Fund shares sold 3,141,953 Dividends and interest receivable 4,538,729 - -------------------------------------------------------------------------------- Total Assets 3,530,850,496 - -------------------------------------------------------------------------------- LIABILITIES: Payable for securities loaned (Note 5) 21,849,000 Payable for securities purchased 11,287,474 Payable for Fund shares purchased 5,665,792 Dividends payable 2,836,744 Investment advisory fees payable 1,303,497 Distribution fees payable 522,221 Administration fees payable 469,084 Accrued expenses 488,150 - -------------------------------------------------------------------------------- Total Liabilities 44,421,962 - -------------------------------------------------------------------------------- Total Net Assets $3,486,428,534 ================================================================================ NET ASSETS: Par value of capital shares $ 271,505 Capital paid in excess of par value 2,395,676,122 Overdistributed net investment income (6,493) Accumulated net realized gain from security transactions 81,727,277 Net unrealized appreciation of investments 1,008,760,123 - -------------------------------------------------------------------------------- Total Net Assets $3,486,428,534 ================================================================================ Shares Outstanding: Class A 163,392,466 --------------------------------------------------------------------------- Class B 88,543,916 --------------------------------------------------------------------------- Class C 1,990,958 --------------------------------------------------------------------------- Class Y 5,690,452 --------------------------------------------------------------------------- Class Z 11,887,327 --------------------------------------------------------------------------- Net Asset Value: Class A (and redemption price) $12.85 --------------------------------------------------------------------------- Class B* $12.81 --------------------------------------------------------------------------- Class C** $12.81 --------------------------------------------------------------------------- Class Y (and redemption price) $12.86 --------------------------------------------------------------------------- Class Z (and redemption price) $12.87 --------------------------------------------------------------------------- Class A Maximum Public Offering Price Per Share (net asset value plus 5.26% of net asset value per share) $13.53 ================================================================================ * Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if shares are redeemed within one year from initial purchase (See Note 2). ** Redemption price is NAV of Class C shares reduced by a 1.00% CDSC if shares are redeemed within the first year of purchase. See Notes to Financial Statements. - -------------------------------------------------------------------------------- Smith Barney Appreciation Fund Inc. 13 - -------------------------------------------------------------------------------- Statement of Operations For the Year Ended December 31, 1996 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends $ 59,369,747 Interest 22,572,945 Less: Foreign withholding tax (313,455) - -------------------------------------------------------------------------------- Total Investment Income 81,629,237 - -------------------------------------------------------------------------------- EXPENSES: Distribution fees (Note 2) 15,711,344 Investment advisory fees (Note 2) 14,352,911 Administration fees (Note 2) 5,262,374 Shareholder and system servicing fees 3,423,628 Shareholder communications 551,750 Custody 172,657 Registration fees 160,287 Audit and legal 47,598 Directors' fees 25,067 Other 67,133 - -------------------------------------------------------------------------------- Total Expenses 39,774,749 - -------------------------------------------------------------------------------- Net Investment Income 41,854,488 - -------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE 3): Realized Gain From Security Transactions (excluding short-term securities): Proceeds from sales 1,874,019,642 Cost of securities sold 1,601,825,612 - -------------------------------------------------------------------------------- Net Realized Gain 272,194,030 - -------------------------------------------------------------------------------- Change in Net Unrealized Appreciation of Investments: Beginning of year 754,211,115 End of year 1,008,760,123 - -------------------------------------------------------------------------------- Increase in Net Unrealized Appreciation 254,549,008 - -------------------------------------------------------------------------------- Net Gain on Investments 526,743,038 - -------------------------------------------------------------------------------- Increase in Net Assets From Operations $ 568,597,526 ================================================================================ See Notes to Financial Statements. - -------------------------------------------------------------------------------- 14 1996 Annual Report to Shareholders - -------------------------------------------------------------------------------- Statements of Changes in Net Assets For the Years Ended December 31, - -------------------------------------------------------------------------------- 1996 1995 - -------------------------------------------------------------------------------- OPERATIONS: Net investment income $ 41,854,488 $ 41,762,727 Net realized gain 272,194,030 276,898,722 Increase in net unrealized appreciation 254,549,008 388,853,268 - -------------------------------------------------------------------------------- Increase in Net Assets From Operations 568,597,526 707,514,717 - -------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income (42,986,059) (43,641,495) Net realized gains (283,582,979) (235,509,609) - -------------------------------------------------------------------------------- Decrease in Net Assets From Distributions to Shareholders (326,569,038) (279,151,104) - -------------------------------------------------------------------------------- FUND SHARE TRANSACTIONS (NOTE 6): Net proceeds from sale of shares 394,471,394 306,829,899 Net asset value of shares issued for reinvestment of dividends 308,650,791 269,686,363 Cost of shares reacquired (525,373,906) (495,067,915) - -------------------------------------------------------------------------------- Increase in Net Assets From Fund Share Transactions 177,748,279 81,448,347 - -------------------------------------------------------------------------------- Increase in Net Assets 419,776,767 509,811,960 NET ASSETS: Beginning of year 3,066,651,767 2,556,839,807 - -------------------------------------------------------------------------------- End of year* $ 3,486,428,534 $ 3,066,651,767 ================================================================================ * Includes undistributed (overdistributed) net investment income of: $ (6,493) $ 467,289 ================================================================================ See Notes to Financial Statements. - -------------------------------------------------------------------------------- Smith Barney Appreciation Fund Inc. 15 - -------------------------------------------------------------------------------- Notes to Financial Statements - -------------------------------------------------------------------------------- 1. Significant Accounting Policies The Smith Barney Appreciation Fund Inc. ("Fund"), a Maryland corporation, is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company. The significant accounting policies consistently followed by the Fund are: (a) security transactions are accounted for on trade date; (b) securities traded on national securities markets are valued at the closing prices on such markets; securities for which no sales price was reported are valued at bid price, or in the absence of a recent bid price, at the bid equivalent obtained from one or more of the major market makers in the securities; U.S. Government and Agency obligations are valued at the mean between the closing bid and asked prices on each day; (c) securities maturing within 60 days are valued at cost plus accreted discount, or minus amortized premium, which approximates market value; (d) dividend income is recorded on the ex-dividend date; foreign dividends are recorded on the earlier of the ex-dividend date or as soon as practical after the Fund determines the existence of a dividend declaration after excercising reasonable due diligence; (e) interest income is recorded on the accrual basis; (f) dividends and distributions to shareholders are recorded on the ex-dividend date; (g) gains or losses on the sale of securities are calculated by using the specific identification method; (h) direct expenses are charged to each class; management fees and general fund expenses are allocated on the basis of relative net assets; (i) the accounting records are maintained in U.S. dollars. All assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the rate of exchange of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, and income and expenses are translated at the rate of exchange quoted on the respective date that such transactions are recorded. Differences between income and expense amounts recorded and collected or paid are adjusted when reported by the custodian bank; (j) the Fund intends to comply with the applicable provisions of the Internal Revenue Code of 1986, as amended, pertaining to regulated investment companies and to make distributions of taxable income sufficient to relieve it from substantially all Federal income and excise taxes; (k) the character of income and gains distributed are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. At December 31, 1996, reclassifications were made to the Fund's capital accounts to reflect permanent book/tax differences and income and gains available for distributions under income tax regulations. Net investment income, net realized gains and net assets were not affected by this change; and (l) estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ. 2. Management Agreement and Other Transactions Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith Barney Holdings Inc. ("SBH"), acts as investment adviser of the Fund. The Fund pays SBMFM an investment advisory fee calculated at the annual rate of 0.55% on the Fund's average daily net assets up to $250 million; 0.513% on the next $250 million; 0.476% on the next $500 million; 0.439% on the next $1 billion; 0.402% on the next $1 billion; and 0.365% on average daily net assets in excess of $3 billion. This fee is calculated daily and paid monthly. SBMFM also serves as the Fund's administrator for which the Fund pays a fee calculated at an annual rate of 0.20% on the Fund's average daily net assets up to $250 million; 0.187% on the next $250 million; 0.174% on the next $500 million; 0.161% on the next $1 billion; 0.148% on the next $1 billion and 0.135% - -------------------------------------------------------------------------------- 16 1996 Annual Report to Shareholders - -------------------------------------------------------------------------------- Notes to Financial Statements (continued) - -------------------------------------------------------------------------------- on the average daily net assets in excess of $3 billion. This fee is calculated daily and paid monthly. Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of Fund shares and primary broker for its portfolio agency transactions. For the year ended December 31, 1996, SB received brokerage commissions of $685,248 and sales charges of approximately $1.8 million on sales of the Fund's Class A shares. There is a contingent deferred sales charge ("CDSC") of 5.00% on Class B shares, which applies if redemption occurs within one year from initial purchase and declines thereafter by 1.00% per year until no CDSC is incurred. Class C shares have a 1.00% CDSC, which applies if redemption occurs within the first year of purchase. In addition, Class A shares have a 1.00% CDSC, which applies if redemption occurs within the first year of purchase. This CDSC only applies to those purchases of Class A shares, which, when combined with current holdings of Class A shares, equal or exceed $500,000 in the aggregate. These purchases do not incur an initial sales charge. For the year ended December 31, 1996, CDSCs paid to SB were approximately: Class A Class B Class C ================================================================================ CDSCs $11,000 $1,512,000 $6,000 ================================================================================ Pursuant to a Distribution Plan, the Fund pays a service fee with respect to its Class A, B and C shares calculated at the annual rate of 0.25% of the average daily net assets of each respective class. In addition, the Fund also pays a distribution fee with respect to Class B and C shares calculated at the annual rate of 0.75% of the average daily net assets for each class. For the year ended December 31, 1996, total Distribution Plan fees were as follows: Class A Class B Class C ================================================================================ Distribution Plan Fees $5,002,144 $10,505,436 $203,764 ================================================================================ All officers and one Director of the Fund are employees of SB. 3. Investments During the year ended December 31, 1996, the aggregate cost of purchases and proceeds from sales of investments (including maturities, but excluding short-term securities) were as follows: ================================================================================ Purchases $1,740,358,580 - -------------------------------------------------------------------------------- Sales 1,874,019,642 ================================================================================ At December 31, 1996, the aggregate gross unrealized appreciation and depreciation of investments were as follows: ================================================================================ Gross unrealized appreciation $1,016,334,129 * Gross unrealized depreciation (7,574,006)* - -------------------------------------------------------------------------------- Net unrealized appreciation $1,008,760,123 * ================================================================================ * Substantially the same for Federal income tax purposes. 4. Repurchase Agreements The Fund purchases (and its custodian take possession of) U.S. Government securities from banks and securities dealers subject to agreements to resell the securities to the sellers at a future date (generally, the next business day) at an agreed-upon higher repurchase price. The Fund requires continual maintenance of the market value of the collateral in amounts at least equal to the repurchase price. 5. Lending of Portfolio Securities The Fund has an agreement with its custodian whereby the custodian may lend securities owned by the Fund to brokers, dealers and other financial organizations, and receives a lenders fee, which is shared 60% by the Fund and 40% by the custodian. Fees earned by the Fund on securities lending are recorded in interest income. Loans of securities by the Fund are collateralized by cash, U.S. Government securities or high quality money market instruments that are maintained at all times in an amount at least equal to the current market value of the loaned securities, plus a margin which may vary between 2% and 5% depending on the type of securities loaned. The custodian establishes and maintains the collateral in a - -------------------------------------------------------------------------------- Smith Barney Appreciation Fund Inc. 17 - -------------------------------------------------------------------------------- Notes to Financial Statements (continued) - -------------------------------------------------------------------------------- segregated account. The Fund maintains exposure for the risk of any losses in the investment of amounts received as collateral. At December 31, 1996, the Fund loaned common stocks having a value of approximately $21,291,188 and received cash collateral of $21,849,000 for the loan. 6. Capital Shares At December 31, 1996, the Fund had one billion shares of capital stock authorized with a par value of $0.001 per share. The Fund has the ability to issue multiple classes of shares. Each share of a class represents an identical interest and has the same rights except that each class bears expenses specifically related to the distribution of its shares. At December 31, 1996, total paid-in capital amounted to the following for each class: Amount ================================================================================ Class A $1,316,247,236 - -------------------------------------------------------------------------------- Class B 855,499,368 - -------------------------------------------------------------------------------- Class C 23,734,409 - -------------------------------------------------------------------------------- Class Y 72,895,480 - -------------------------------------------------------------------------------- Class Z 127,571,134 ================================================================================ Transactions in shares of each class were as follows:
Year Ended Year Ended December 31, 1996* December 31, 1995** -------------------------- -------------------------- Shares Amount Shares Amount ========================================================================================== Class A Shares sold 9,260,907 $ 117,695,953 7,620,507 $ 89,452,092 Shares issued on reinvestment 15,028,456 194,134,793 14,668,264 174,069,009 Shares redeemed (23,277,287) (296,148,846) (26,276,992) (300,583,374) - ------------------------------------------------------------------------------------------ Net Increase (Decrease) 1,012,076 $ 15,681,900 (3,988,221) $ (37,062,273) ========================================================================================== Class B Shares sold 14,063,585 $ 177,522,362 14,923,988 $ 177,804,234 Shares issued on reinvestment 7,590,786 97,239,506 6,941,401 81,718,744 Shares redeemed (16,308,833) (206,058,028) (13,719,120) (161,328,324) - ------------------------------------------------------------------------------------------ Net Increase 5,345,538 $ 68,703,840 8,146,269 $ 98,194,654 ========================================================================================== Class C Shares sold 1,107,577 $ 14,081,521 1,074,749 $ 12,534,789 Shares issued on reinvestment 170,128 2,180,889 94,795 1,116,130 Shares redeemed (520,423) (6,647,865) (432,791) (4,957,997) - ------------------------------------------------------------------------------------------ Net Increase 757,282 $ 9,614,545 736,753 $ 8,692,922 ========================================================================================== Class Y Shares sold 5,690,452 $ 72,895,480 973,805 $ 12,162,013 Shares issued on reinvestment -- -- 13,581 161,209 Shares redeemed -- -- (987,386) (12,189,962) - ------------------------------------------------------------------------------------------ Net Increase 5,690,452 $ 72,895,480 -- $ 133,260 ========================================================================================== Class Z Shares sold 982,703 $ 12,276,078 1,316,558 $ 14,876,771 Shares issued on reinvestment 1,164,767 15,095,603 1,060,434 12,621,271 Shares redeemed (1,289,446) (16,519,167) (1,345,826) (16,008,258) - ------------------------------------------------------------------------------------------ Net Increase 858,024 $ 10,852,514 1,031,166 $ 11,489,784 ==========================================================================================
* For Class Y shares, transactions are for the period from January 30, 1996 (inception date) to December 31, 1996. ** For Class Y shares, transactions are for the period from October 13, 1995 to November 27, 1995. - -------------------------------------------------------------------------------- 18 1996 Annual Report to Shareholders - -------------------------------------------------------------------------------- Financial Highlights - -------------------------------------------------------------------------------- For a share of each class of capital stock outstanding throughout each year:
Class A Shares 1996 1995(1) 1994 1993(1) 1992 =========================================================================================================================== Net Asset Value, Beginning of Year $11.90 $10.15 $11.01 $10.66 $10.26 - --------------------------------------------------------------------------------------------------------------------------- Income (Loss) From Operations: Net investment income 0.19 0.20 0.16 1.15 0.18 Net realized and unrealized gain (loss) 2.09 2.75 (0.24) 0.72 0.46 - --------------------------------------------------------------------------------------------------------------------------- Total Income (Loss) From Operations 2.28 2.95 (0.08) 0.87 0.64 - --------------------------------------------------------------------------------------------------------------------------- Less Distributions From: Net investment income (0.19) (0.20) (0.18) (0.16) (0.15) Net realized gains (1.14) (1.00) (0.60) (0.36) (0.09) - --------------------------------------------------------------------------------------------------------------------------- Total Distributions (1.33) (1.20) (0.78) (0.52) (0.24) - --------------------------------------------------------------------------------------------------------------------------- Net Asset Value, End of Year $12.85 $11.90 $10.15 $11.01 $10.66 - --------------------------------------------------------------------------------------------------------------------------- Total Return 19.25% 29.26% (0.77) 8.13% 6.29% - --------------------------------------------------------------------------------------------------------------------------- Net Assets, End of Year (000s) $2,100,275 $ 1,932,573 $1,689,268 $1,579,248 $1,712,411 - --------------------------------------------------------------------------------------------------------------------------- Ratios to Average Net Assets: Expenses 1.00% 1.02% 1.02% 1.03% 0.88% Net investment income 1.52 1.71 1.61 1.35 1.58 - --------------------------------------------------------------------------------------------------------------------------- Portfolio Turnover Rate 62% 57% 52% 52% 21% - --------------------------------------------------------------------------------------------------------------------------- Average commissions per share paid on equity transactions (2) $ 0.06 $ 0.06 -- -- -- =========================================================================================================================== Class B Shares 1996 1995(1) 1994 1993(1) 1992(1)(3) =========================================================================================================================== Net Asset Value Beginning of Year $11.88 $10.14 $11.00 $10.65 $10.55 - --------------------------------------------------------------------------------------------------------------------------- Income (Loss) From Operations: Net investment income 0.08 0.11 0.13 0.06 0.01 Net realized and unrealized gain (loss) 2.08 2.74 (0.29) 0.73 0.34 - --------------------------------------------------------------------------------------------------------------------------- Total Income (Loss) From Operations 2.16 2.85 (0.16) 0.79 0.35 - --------------------------------------------------------------------------------------------------------------------------- Less Distributions From: Net investment income (0.09) (0.11) (0.10) (0.08) (0.16) Net realized gains (1.14) (1.00) (0.60) (0.36) (0.09) - --------------------------------------------------------------------------------------------------------------------------- Total Distributions (1.23) (1.11) (0.70) (0.44) (0.25) - --------------------------------------------------------------------------------------------------------------------------- Net Asset Value, End of Year $12.81 $11.88 $10.14 $11.00 $10.65 - --------------------------------------------------------------------------------------------------------------------------- Total Return 18.29% 28.29% (1.53) 7.38% 3.28%++ - --------------------------------------------------------------------------------------------------------------------------- Net Assets, End of Year (000s) $1,134,419 988,069 $ 761,000 $1,285,966 $1,122,249 - --------------------------------------------------------------------------------------------------------------------------- Ratios to Average Net Assets: Expenses 1.78% 1.77% 1.80% 1.83% 1.82%+ Net investment income 0.74 0.96 0.83 0.56 0.64+ - --------------------------------------------------------------------------------------------------------------------------- Portfolio Turnover Rate 62% 57% 52% 52% 21% - --------------------------------------------------------------------------------------------------------------------------- Average commissions per share paid on equity transactions (2) $ 0.06 $ 0.06 -- -- -- ===========================================================================================================================
(1) 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 income method did not accord with the results of operations. (2) As of September 1995, the SECinstituted new guidelines requiring the disclosure of average commissions per share. (3) For the period from November 6, 1992 (inception date) to December 31, 1992. ++ Total return is not annualized, as it may not be representative of the total return for the year. + Annualized. - -------------------------------------------------------------------------------- Smith Barney Appreciation Fund Inc. 19 - -------------------------------------------------------------------------------- Financial Highlights (continued) - -------------------------------------------------------------------------------- For a share of each class of capital stock outstanding throughout each year:
Class Y Class C Shares Shares ----------------------------------------------- --------- 1996 1995(1) 1994 1993(1)(2) 1996(1)(3) ======================================================================================================== Net Asset Value, Beginning of Year $ 11.88 $ 10.14 $11.00 $10.99 $ 12.10 - -------------------------------------------------------------------------------------------------------- Income (Loss) From Operations: Net investment income 0.09 0.11 0.10 0.07 0.23 Net realized and unrealized gain (loss) 2.08 2.74 (0.25) 0.38 1.89 - -------------------------------------------------------------------------------------------------------- Total Income (Loss) From Operations 2.17 2.85 (0.15) 0.45 2.12 - -------------------------------------------------------------------------------------------------------- Less Distributions From: Net investment income (0.10) (0.11) (0.11) (0.08) (0.22) Net realized gains (1.14) (1.00) (0.60) (0.36) (1.14) - -------------------------------------------------------------------------------------------------------- Total Distributions (1.24) (1.11) (0.71) (0.44) (1.36) - -------------------------------------------------------------------------------------------------------- Net Asset Value, End of Year $ 12.81 $ 11.88 $10.14 $11.00 $ 12.86 - -------------------------------------------------------------------------------------------------------- Total Return 18.34% 28.29% (1.41) 4.09%++ 17.65%++ - -------------------------------------------------------------------------------------------------------- Net Assets, End of Year (000s) $25,505 $14,653 $5,040 $2,214 $73,196 - -------------------------------------------------------------------------------------------------------- Ratios to Average Net Assets: Expenses 1.77% 1.77% 1.66% 1.68%+ 0.66%+ Net investment income 0.75 0.96 0.98 0.71+ 2.06+ - -------------------------------------------------------------------------------------------------------- Portfolio Turnover Rate 62% 57% 52% 52% 62% - -------------------------------------------------------------------------------------------------------- Average commissions per share paid on equity transactions(4) $ 0.06 $ 0.06 -- -- $ 0.06 ========================================================================================================
(1) 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 income method did not accord with results of operations. (2) For the period from February 4, 1993 (inception date) to December 31, 1993. (3) For the period from January 30, 1996 (inception date) to December 31, 1996. (4) As of September 1995, the SEC instituted new guidelines requiring the disclosure of average commissions per share. ++ Total return is not annualized, as it may not be representative of the total return for the year. + Annualized. - -------------------------------------------------------------------------------- 20 1996 Annual Report to Shareholders - -------------------------------------------------------------------------------- Financial Highlights (continued) - -------------------------------------------------------------------------------- For a share of each class of capital stock outstanding throughout each year:
Class Z Shares 1996 1995(1) 1994 1993(1) 1992(2) ==================================================================================================================== Net Asset Value, Beginning of Year $11.91 $10.16 $11.02 $10.66 $10.55 - -------------------------------------------------------------------------------------------------------------------- Income (Loss) From Operations: Net investment income 0.24 0.23 0.20 0.19 0.03 Net realized and unrealized gain (loss) 2.09 2.75 (0.24) 0.71 0.33 - -------------------------------------------------------------------------------------------------------------------- Total Income (Loss) From Operations 2.33 2.98 (0.04) 0.90 0.36 - -------------------------------------------------------------------------------------------------------------------- Less Distributions From: Net investment income (0.23) (0.23) (0.22) (0.18) (0.16) Net realized gains (1.14) (1.00) (0.60) (0.36) (0.09) - -------------------------------------------------------------------------------------------------------------------- Total Distributions (1.37) (1.23) (0.82) (0.54) (0.25) - -------------------------------------------------------------------------------------------------------------------- Net Asset Value, End of Year $12.87 $11.91 $10.16 $11.02 $10.66 - -------------------------------------------------------------------------------------------------------------------- Total Return 19.66% 29.52% (0.41)% 8.47% 3.38%++ - -------------------------------------------------------------------------------------------------------------------- Net Assets, End of Year (000s) $153,034 $131,357 $101,532 $157,876 $151,427 - -------------------------------------------------------------------------------------------------------------------- Ratios to Average Net Assets: Expenses 0.64% 0.77% 0.64% 0.66% 0.80%+ Net investment income 1.88 1.96 1.99 1.73 1.66+ - -------------------------------------------------------------------------------------------------------------------- Portfolio Turnover Rate 62% 57% 52% 52% 21% - -------------------------------------------------------------------------------------------------------------------- Average commissions per share paid on equity transactions(3) $0.06 $0.06 -- -- -- ====================================================================================================================
(1) 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 income method did not accord with results of operations. (2) For the period from November 6, 1992 (inception date) to December 31, 1992. (3) As of September 1995, the SEC instituted new guidelines requiring the disclosure of average commissions per share. ++ Total return is not annualized, as it may not be representative of the total return for the year. + Annualized. - -------------------------------------------------------------------------------- Smith Barney Appreciation Fund Inc. 21 - -------------------------------------------------------------------------------- Independent Auditors' Report - -------------------------------------------------------------------------------- The Shareholders and Board of Directors of Smith Barney Appreciation Fund Inc.: We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Smith Barney Appreciation Fund Inc. as of December 31, 1996, the related statement of operations for the year then ended, and the statements of changes in net assets and financial highlights for each of the years in the two-year period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights for each of the years in the three-year period ended December 31, 1994 were audited by other auditors whose report thereon, dated February 8, 1995, expressed an unqualified opinion on those financial highlights. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 1996, by correspondence with the custodian. As to securities purchased but not received, we performed other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Smith Barney Appreciation Fund Inc. as of December 31, 1996, the results of its operations for the year then ended, and the changes in its net assets and financial highlights for each of the years in the two-year period then ended, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP New York, New York February 13, 1997 - -------------------------------------------------------------------------------- 22 1996 Annual Report to Shareholders - -------------------------------------------------------------------------------- Tax Information (unaudited) - -------------------------------------------------------------------------------- The amount of long-term capital gains paid by the Fund to its shareholders for the fiscal year ended December 31, 1996, was $197,702,960. The Fund designates 45.74% of the ordinary dividends paid during the fiscal year ended December 31, 1996 as qualifying for the corporate dividends received deduction. - -------------------------------------------------------------------------------- Smith Barney Appreciation Fund Inc. 23 [This page intentionally left blank] SMITH BARNEY APPRECIATION FUND INC. Directors Herbert Barg Alfred Bianchetti Martin Brody Dwight Crane Burt N. Dorsett Elliot S. Jaffe Stephen Kaufman Joseph McCann Heath B. McLendon, Chairman Cornelius C. Rose, Jr. OFFICERS Heath B. McLendon Chief Executive Officer Jessica M. Bibliowicz President Lewis E. Daidone Senior Vice President and Treasurer Harry D. Cohen Vice President and Investment Officer Thomas M. Reynolds Controller Christina T. Sydor Secretary INVESTMENT MANAGER Smith Barney Mutual Funds Management Inc. DISTIBUTORS Smith Barney Inc. PFS Distributors, Inc. CUSTODIAN PNC Bank, N.A. SHAREHOLDER SERVICING AGENT First Data Investor Services Group, Inc. P.O. Box 9134 Boston, MA 02205-9134 This report is submitted for the general information of the shareholders of Smith Barney Appreciation Fund Inc. It is not authorized for distribution to prospective investors unless accompanied or preceded by an effective prospectus for the Fund, which contains information concerning the Fund's investment policies and expenses as well as other pertinent information. SMITHBARNEY A Member of TravelersGroup [LOGO] SMITH BARNEY APPRECIATION FUND INC. SMITH BARNEY MUTUAL FUNDS 388 Greenwich Street New York, New York 10013 FD0312 2/97 -----END PRIVACY-ENHANCED MESSAGE-----