N-CSRS 1 dncsrs.txt SMITH BARNEY APPRECIATION FUND UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-1940 Smith Barney Appreciation Fund Inc. (Exact name of registrant as specified in charter) 125 Broad Street, New York, NY 10004 (Address of principal executive offices) (Zip code) Christina T. Sydor, Esq. 300 First Stamford Place Stamford, CT 06902 (Name and address of agent for service) Registrant's telephone number, including area code: (800) 451-2010 Date of fiscal year end: December 31 Date of reporting period: June 30, 2003 ITEM 1. REPORT TO STOCKHOLDERS. The Semi-Annual Report to Stockholders is filed herewith. SMITH BARNEY APPRECIATION FUND INC. CLASSIC SERIES | SEMI-ANNUAL REPORT | JUNE 30, 2003 [LOGO] Smith Barney Mutual Funds Your Serious Money. Professionally Managed.(R) Your Serious Money. Professionally Managed.(R) is a registered service mark of Citigroup Global Markets Inc. NOT FDIC INSURED . NOT BANK GUARANTEED . MAY LOSE VALUE [PHOTO] HERSH COHEN, PORTFOLIO MANAGER [PHOTO] SCOTT K. GLASSER, PORTFOLIO MANAGER [GRAPHIC] Classic Series Semi-Annual Report . June 30, 2003 SMITH BARNEY APPRECIATION FUND INC. HERSH COHEN Hersh Cohen has more than 34 years of securities business experience. Education: BA from Case Western Reserve University; Ph.D. in Psychology from Tufts University SCOTT K. GLASSER Scott Glasser has more than 10 years of securities business experience and has been working with the Fund since 1995. Education: BA from Middlebury College; MBA in Finance from Pennsylvania State University FUND OBJECTIVE The Fund seeks long-term appreciation of shareholders' capital by investing primarily in equity securities of U.S. companies. The Fund typically invests in medium and large capitalization companies but may also invest in small capitalization companies. FUND FACTS FUND INCEPTION --------------------- March 10, 1970 MANAGER INVESTMENT INDUSTRY EXPERIENCE --------------------- 34 Years (Hersh Cohen) 10 Years (Scott K. Glasser) What's Inside Letter from the Chairman.............................................. 1 Schedule of Investments............................................... 2 Statement of Assets and Liabilities................................... 7 Statement of Operations............................................... 8 Statements of Changes in Net Assets................................... 9 Notes to Financial Statements......................................... 10 Financial Highlights.................................................. 15
[LOGO] Smith Barney Mutual Funds Your Serious Money. Professionally Managed./R/ Your Serious Money. Professionally Managed.(R) is a registered service mark of Citigroup Global Markets Inc. Investment Products: Not FDIC Insured . Not Bank Guaranteed . May Lose Value LETTER FROM THE CHAIRMAN [PHOTO] R. Jay Gerken R. JAY GERKEN, CFA Chairman, President and Chief Executive Officer Dear Shareholder, The philosopher Bertrand Russell famously remarked that, "Change is one thing, progress is another." You will notice in the following pages that we have begun to implement some changes to your shareholder report and we will be reflecting other changes in future reports. Our aim is to make meaningful improvements in reporting on the management of your Fund and its performance, not just to enact change for change's sake. Please bear with us during this transition period. We know that you have questions about fund managers' decisions and plans, and we want to be sure that you have easy access to the information you need. Keeping investors informed is, and always will be, one of my top priorities as Chairman of your Fund. To that end, we encourage you to go to our website: www.smithbarneymutualfunds.com where you can find additional insight on your Fund. We have also included a separate Manager Commentary along with this report, which we hope will give you a better understanding of your Fund and its management. We invite you to read this report in full. Please take the opportunity to talk to your financial adviser about this report or any other questions or concerns you have about your Fund and your financial future. As always, thank you for entrusting your assets to us. We look forward to helping you continue to meet your financial goals. Sincerely, /s/ R. Jay Gerken R. Jay Gerken, CFA Chairman, President and Chief Executive Officer July 23, 2003 1 Smith Barney Appreciation Fund Inc. | 2003 Semi-Annual Report to Shareholders SCHEDULE OF INVESTMENTS (UNAUDITED) JUNE 30, 2003
SHARES SECURITY VALUE ------------------------------------------------------- COMMON STOCK -- 87.3% Aerospace and Defense -- 1.2% 600,000 Lockheed Martin Corp. $ 28,542,000 350,000 United Technologies Corp. 24,790,500 ------------------------------------------------------- 53,332,500 ------------------------------------------------------- Auto Components -- 0.2% 1,000,000 Delphi Corp. 8,630,000 ------------------------------------------------------- Banks -- 3.7% 1,200,000 Bank One Corp. 44,616,000 500,000 Fifth Third Bancorp 28,670,000 300,000 M&T Bank Corp. 25,266,000 300,000 U.S. Bancorp 7,350,000 800,000 Washington Mutual, Inc. 33,040,000 600,000 Wells Fargo & Co. 30,240,000 ------------------------------------------------------- 169,182,000 ------------------------------------------------------- Beverages -- 2.1% 400,000 The Coca-Cola Co. 18,564,000 1,700,000 PepsiCo, Inc. 75,650,000 ------------------------------------------------------- 94,214,000 ------------------------------------------------------- Biotechnology -- 1.5% 800,000 Amgen, Inc.+ 53,152,000 300,000 Biogen, Inc.+ 11,400,000 200,000 Vicuron Pharmaceuticals, Inc.+ 2,836,000 ------------------------------------------------------- 67,388,000 ------------------------------------------------------- Building Products -- 0.6% 1,200,000 Masco Corp. 28,620,000 ------------------------------------------------------- Chemicals -- 2.5% 1,500,000 E.I. du Pont de Nemours & Co. 62,460,000 1,000,000 PPG Industries, Inc. 50,740,000 ------------------------------------------------------- 113,200,000 ------------------------------------------------------- Commercial Services and Supplies -- 2.1% 500,000 Automatic Data Processing Inc. 16,930,000 200,000 ChoicePoint Inc.+ 6,904,000 600,000 First Data Corp. 24,864,000 2,000,000 Waste Management, Inc. 48,180,000 ------------------------------------------------------- 96,878,000 ------------------------------------------------------- Commingled Fund -- 0.2% 1,000,000 iShares MSCI Japan Index Fund+ 7,270,000 ------------------------------------------------------- Communications Equipment -- 1.7% 1,000,000 3Com Corp.+ 4,680,000 1,500,000 Cisco Systems, Inc.+ 25,035,000 1,500,000 Corning, Inc.+ 11,085,000 4,000,000 Motorola, Inc. 37,720,000 ------------------------------------------------------- 78,520,000 -------------------------------------------------------
See Notes to Financial Statements. 2 Smith Barney Appreciation Fund Inc. | 2003 Semi-Annual Report to Shareholders SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 2003
SHARES SECURITY VALUE --------------------------------------------------------------------- Computers and Peripherals -- 1.3% 2,000,000 Gateway, Inc.+ $ 7,300,000 550,000 International Business Machines Corp. 45,375,000 1,000,000 Maxtor Corp.+ 7,510,000 ------------------------------------------------------------------ 60,185,000 ------------------------------------------------------------------ Diversified Telecommunication Services -- 1.6% 1,500,000 SBC Communications, Inc. 38,325,000 800,000 Verizon Communications Inc. 31,560,000 ------------------------------------------------------------------ 69,885,000 ------------------------------------------------------------------ Electric Utilities -- 1.0% 800,000 Cinergy Corp. 29,432,000 200,000 Public Service Enterprise Group Inc. 8,450,000 300,000 Southern Co. 9,348,000 ------------------------------------------------------------------ 47,230,000 ------------------------------------------------------------------ Electrical Equipment -- 1.1% 1,400,000 American Power Conversion Corp.+ 21,826,000 1,264,100 Molex Inc., Class A Shares 29,300,574 ------------------------------------------------------------------ 51,126,574 ------------------------------------------------------------------ Electronic Equipment and Instruments -- 1.7% 1,800,000 AVX Corp. 19,782,000 640,000 Mettler-Toledo International Inc.+ 23,456,000 3,500,000 Solectron Corp.+ 13,090,000 1,500,000 Vishay Intertechnology, Inc.+ 19,800,000 ------------------------------------------------------------------ 76,128,000 ------------------------------------------------------------------ Energy Equipment and Services -- 1.4% 600,000 GlobalSantaFe Corp. 14,004,000 1,000,000 Schlumberger Ltd. 47,570,000 ------------------------------------------------------------------ 61,574,000 ------------------------------------------------------------------ Food and Drug Retailing -- 0.8% 1,200,000 Walgreen Co. 36,120,000 ------------------------------------------------------------------ Food Products -- 4.0% 750,000 General Mills, Inc. 35,557,500 1,200,000 H.J. Heinz Co. 39,576,000 500,000 Hershey Foods Corp. 34,830,000 700,000 Kraft Foods, Inc. 22,785,000 183,500 Tejon Ranch Co.+ 5,523,350 800,000 Wm. Wrigley Jr. Co. 44,984,000 ------------------------------------------------------------------ 183,255,850 ------------------------------------------------------------------ Gas Utilities -- 0.2% 300,000 KeySpan Corp. 10,635,000 ------------------------------------------------------------------ Healthcare Equipment and Supplies -- 0.3% 100,000 C.R. Bard, Inc. 7,131,000 300,000 Dade Behring Holdings Inc.+ 6,891,000 ------------------------------------------------------------------ 14,022,000 ------------------------------------------------------------------
See Notes to Financial Statements. 3 Smith Barney Appreciation Fund Inc. | 2003 Semi-Annual Report to Shareholders SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 2003
SHARES SECURITY VALUE --------------------------------------------------------------------------------- Hotels, Restaurants and Leisure -- 0.6% 1,208,700 Fairmont Hotels & Resorts Inc. $ 28,283,580 ------------------------------------------------------------------------------ Household Products -- 3.1% 1,800,000 Kimberly-Clark Corp. 93,852,000 500,000 The Procter & Gamble Co. 44,590,000 ------------------------------------------------------------------------------ 138,442,000 ------------------------------------------------------------------------------ Industrial Conglomerates -- 5.0% 881,900 3M Co. 113,747,462 900,000 Canadian Pacific Ltd. 20,340,000 3,200,000 General Electric Co. 91,776,000 ------------------------------------------------------------------------------ 225,863,462 ------------------------------------------------------------------------------ Insurance -- 11.2% 600,000 American International Group, Inc. 33,108,000 4,300 Berkshire Hathaway Inc., Class A Shares+ 311,750,000 500,000 The Chubb Corp. 30,000,000 1,000,000 Old Republic International Corp. 34,270,000 2,800,000 The St. Paul Cos., Inc. 102,228,000 ------------------------------------------------------------------------------ 511,356,000 ------------------------------------------------------------------------------ Media -- 8.6% 2,300,000 AOL Time Warner, Inc.+ 37,007,000 1,300,000 Cablevision Systems -- NY Group, Class A Shares+ 26,988,000 2,000,000 Comcast Corp., Special Class A Shares+ 57,660,000 650,000 Gannett Co., Inc. 49,926,500 800,000 InterActiveCorp.+ 31,656,000 3,000,000 Liberty Media Corp., Class A Shares+ 34,680,000 700,000 Meredith Corp. 30,800,000 1,160,000 SBS Broadcasting S.A.+ 20,706,000 1,000,000 Shaw Communications Inc., Class B Shares 13,450,000 600,000 Viacom Inc., Class B Shares+ 26,196,000 3,000,000 The Walt Disney Co. 59,250,000 ------------------------------------------------------------------------------ 388,319,500 ------------------------------------------------------------------------------ Metals and Mining -- 1.7% 800,000 Alcoa Inc. 20,400,000 900,000 Newmont Mining Corp. 29,214,000 600,000 Nucor Corp. 29,310,000 ------------------------------------------------------------------------------ 78,924,000 ------------------------------------------------------------------------------ Multiline Retail -- 3.1% 1,700,000 Costco Wholesale Corp.+ 62,220,000 300,000 Kohl's Corp.+ 15,414,000 1,200,000 Wal-Mart Stores Inc. 64,404,000 ------------------------------------------------------------------------------ 142,038,000 ------------------------------------------------------------------------------ Oil and Gas -- 5.9% 1,100,000 BP Amoco PLC 46,222,000 300,000 Canadian Natural Resources Ltd. 11,973,000 2,850,000 Encana Corp. 109,354,500 2,500,000 Exxon Mobil Corp. 89,775,000
See Notes to Financial Statements. 4 Smith Barney Appreciation Fund Inc. | 2003 Semi-Annual Report to Shareholders SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 2003
SHARES SECURITY VALUE ---------------------------------------------------------------------------- Oil and Gas -- 5.9% (continued) 600,000 Suncor Energy, Inc. $ 11,250,000 ---------------------------------------------------------------------------- 268,574,500 ---------------------------------------------------------------------------- Paper and Forest Products -- 1.0% 300,000 International Paper Co. 10,719,000 600,000 Weyerhaeuser Co. 32,400,000 ---------------------------------------------------------------------------- 43,119,000 ---------------------------------------------------------------------------- Personal Products -- 1.8% 2,600,000 The Gillette Co. 82,836,000 ---------------------------------------------------------------------------- Pharmaceuticals -- 6.7% 100,000 AtheroGenics, Inc.+ 1,493,000 250,000 Eli Lilly & Co. 17,242,500 1,600,000 Johnson & Johnson 82,720,000 875,000 Merck & Co. Inc. 52,981,250 3,900,000 Pfizer Inc. 133,185,000 400,000 Wyeth 18,220,000 ---------------------------------------------------------------------------- 305,841,750 ---------------------------------------------------------------------------- Real Estate -- 1.9% 1,300,000 Forest City Enterprises, Inc. 53,885,000 1,100,000 The St. Joe Corp. 34,320,000 ---------------------------------------------------------------------------- 88,205,000 ---------------------------------------------------------------------------- Road and Rail -- 1.4% 1,150,000 Burlington Northern Santa Fe Corp. 32,706,000 1,000,000 Florida East Coast Industries, Inc. 25,550,000 231,033 Florida East Coast Industries, Inc., Class B Shares 5,752,722 ---------------------------------------------------------------------------- 64,008,722 ---------------------------------------------------------------------------- Semiconductor Equipment and Products -- 1.9% 6,150,000 Agere Systems Inc., Class A Shares+ 14,329,500 1,000,000 Cirrus Logic, Inc.+ 4,020,000 2,000,000 Intel Corp. 41,568,000 1,500,000 Texas Instruments Inc. 26,400,000 ---------------------------------------------------------------------------- 86,317,500 ---------------------------------------------------------------------------- Software -- 3.9% 6,000,000 Microsoft Corp. 153,660,000 700,000 ScanSoft, Inc.+ 3,801,000 1,500,000 Sybase, Inc.+ 20,865,000 ---------------------------------------------------------------------------- 178,326,000 ---------------------------------------------------------------------------- Specialty Retail -- 0.3% 100,000 The Home Depot, Inc. 3,312,000 600,000 The TJX Cos., Inc. 11,304,000 ---------------------------------------------------------------------------- 14,616,000 ---------------------------------------------------------------------------- TOTAL COMMON STOCK (Cost -- $3,194,427,111) 3,972,466,938 ----------------------------------------------------------------------------
See Notes to Financial Statements. 5 Smith Barney Appreciation Fund Inc. | 2003 Semi-Annual Report to Shareholders SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 2003
FACE AMOUNT SECURITY VALUE --------------------------------------------------------------------------------------------------------- REPURCHASE AGREEMENT -- 12.7% $577,992,000 UBS PaineWebber Inc., 1.09% due 7/1/03; Proceeds at maturity -- $578,009,500; (Fully collateralized by various U.S. government agency obligations, 1.300% to 3.250% due 6/30/05 to 3/27/18; Market value -- $589,553,740) (Cost -- $577,992,000) $ 577,992,000 --------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS -- 100.0% (Cost -- $3,772,419,111*) $4,550,458,938 ---------------------------------------------------------------------------------------------------------
+Non-income producing security. *Aggregate cost for Federal income tax purposes is substantially the same. See Notes to Financial Statements. 6 Smith Barney Appreciation Fund Inc. | 2003 Semi-Annual Report to Shareholders STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) JUNE 30, 2003 ASSETS: Investments, at value (Cost -- $3,194,427,111) $3,972,466,938 Repurchase agreement, at value (Cost -- $577,992,000) 577,992,000 Cash 470 Receivable for Fund shares sold 7,681,843 Dividends and interest receivable 4,985,562 Receivable for securities sold 840,668 --------------------------------------------------------------------------- Total Assets 4,563,967,481 --------------------------------------------------------------------------- LIABILITIES: Payable for securities purchased 30,377,286 Payable for Fund shares purchased 2,262,467 Investment advisory fee payable 1,587,146 Administration fee payable 582,879 Distribution plan fees payable 421,524 Accrued expenses 1,416,126 --------------------------------------------------------------------------- Total Liabilities 36,647,428 --------------------------------------------------------------------------- Total Net Assets $4,527,320,053 --------------------------------------------------------------------------- NET ASSETS: Par value of capital shares $ 372,093 Capital paid in excess of par value 3,835,596,908 Undistributed net investment income 17,730,578 Accumulated net realized loss from investment transactions, futures contracts and foreign currencies (104,418,162) Net unrealized appreciation of investments and foreign currencies 778,038,636 --------------------------------------------------------------------------- Total Net Assets $4,527,320,053 --------------------------------------------------------------------------- Shares Outstanding: Class A 223,900,708 ---------------------------------------------------------------------------- Class B 80,149,345 ---------------------------------------------------------------------------- Class L 33,766,566 ---------------------------------------------------------------------------- Class Y 34,276,876 ---------------------------------------------------------------------------- Net Asset Value: Class A (and redemption price) $12.24 ---------------------------------------------------------------------------- Class B * $11.99 ---------------------------------------------------------------------------- Class L * $12.00 ---------------------------------------------------------------------------- Class Y (and redemption price) $12.28 ---------------------------------------------------------------------------- Maximum Public Offering Price Per Share: Class A (net asset value plus 5.26% of net asset value per share) $12.88 ---------------------------------------------------------------------------- Class L (net asset value plus 1.01% of net asset value per share) $12.12 ---------------------------------------------------------------------------
* Redemption price is NAV of Class B and L shares reduced by a 5.00% and 1.00% CDSC, respectively, if shares are redeemed within one year from purchase payment (See Note 2). See Notes to Financial Statements. 7 Smith Barney Appreciation Fund Inc. | 2003 Semi-Annual Report to Shareholders STATEMENT OF OPERATIONS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, 2003 INVESTMENT INCOME: Dividends $ 27,356,004 Interest 2,564,505 Less: Foreign withholding tax (259,618) ------------------------------------------------------------------------- Total Investment Income 29,660,891 ------------------------------------------------------------------------- EXPENSES: Distribution plan fees (Note 7) 9,270,778 Investment advisory fee (Note 2) 8,772,617 Administration fee (Note 2) 3,221,740 Shareholder servicing fees (Note 7) 2,493,094 Shareholder communications (Note 7) 302,444 Custody 99,001 Registration fees 73,988 Audit and legal 39,378 Directors' fees 32,228 Other 19,923 ------------------------------------------------------------------------- Total Expenses 24,325,191 ------------------------------------------------------------------------- Net Investment Income 5,335,700 ------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, FUTURES CONTRACTS AND FOREIGN CURRENCIES (NOTES 3 AND 5): Realized Loss From: Investment transactions (1,423,283) Futures contracts (3,008,320) Foreign currency transactions (926) ------------------------------------------------------------------------- Net Realized Loss (4,432,529) ------------------------------------------------------------------------- Change in Net Unrealized Appreciation From: Investment transactions 396,110,274 Foreign currency transactions 3,661 ------------------------------------------------------------------------- Increase in Net Unrealized Appreciation 396,113,935 ------------------------------------------------------------------------- Net Gain on Investments, Futures Contracts and Foreign Currencies 391,681,406 ------------------------------------------------------------------------- Increase in Net Assets From Operations $397,017,106 -------------------------------------------------------------------------
See Notes to Financial Statements. 8 Smith Barney Appreciation Fund Inc. | 2003 Semi-Annual Report to Shareholders STATEMENTS OF CHANGES IN NET ASSETS For the Six Months Ended June 30, 2003 (unaudited) and the Year Ended December 31, 2002
2003 2002 ---------------------------------------------------------------------------------- OPERATIONS: Net investment income $ 5,335,700 $ 12,443,816 Net realized loss (4,432,529) (83,390,774) Increase (decrease) in net unrealized appreciation 396,113,935 (784,394,229) ---------------------------------------------------------------------------------- Increase (Decrease) in Net Assets From Operations 397,017,106 (855,341,187) ---------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS FROM (NOTE 8): Net investment income -- (1,600,870) Net realized gains -- (78,435,627) ---------------------------------------------------------------------------------- Decrease in Net Assets From Distributions to Shareholders -- (80,036,497) ---------------------------------------------------------------------------------- FUND SHARE TRANSACTIONS (NOTE 9): Net proceeds from sale of shares 702,836,991 740,110,388 Net asset value of shares issued for reinvestment of dividends -- 74,953,797 Cost of shares reacquired (613,405,487) (787,285,503) ---------------------------------------------------------------------------------- Increase in Net Assets From Fund Share Transactions 89,431,504 27,778,682 ---------------------------------------------------------------------------------- Increase (Decrease) in Net Assets 486,448,610 (907,599,002) NET ASSETS: Beginning of period 4,040,871,443 4,948,470,445 ---------------------------------------------------------------------------------- End of period* $4,527,320,053 $4,040,871,443 ---------------------------------------------------------------------------------- * Includes undistributed net investment income of: $17,730,578 $12,395,804 ----------------------------------------------------------------------------------
See Notes to Financial Statements. 9 Smith Barney Appreciation Fund Inc. | 2003 Semi-Annual Report to Shareholders NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 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 listed on a national securities exchange will be valued on the basis of the last sale on the date on which the valuation is made or, in the absence of sales, at the mean between the closing bid and asked prices; securities listed on the NASDAQ National Market System for which market quotations are available are valued at the official closing price or, if there is no official closing price on that day, at the last sale price; Over-the-counter securities will be valued at the mean between the closing bid and asked prices on each day; (c) securities for which market quotations are not available will be valued in good faith at fair value by or under the direction of the Board of Directors; (d) securities maturing within 60 days are valued at cost plus accreted discount, or minus amortized premium, which approximates value; (e) 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 exercising reasonable due diligence; ( f ) interest income is recorded on an accrual basis; (g) dividends and distributions to shareholders are recorded on the ex-dividend date; the Fund distributes dividends and capital gains, if any, at least annually; (h) gains or losses on the sale of securities are calculated by using the specific identification method; (i) direct expenses are charged to each class; management fees and general fund expenses are allocated on the basis of relative net assets; (j) 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; (k) 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; (l) the character of income and gains distributed are determined in accordance with income tax regulations which may differ from accounting principles generally accepted in the United States of America; and (m) estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ. 2. Investment Advisory Agreement and Other Transactions Smith Barney Fund Management LLC ("SBFM"), an indirect wholly-owned subsidiary of Citigroup Inc. ("Citigroup"), acts as investment adviser of the Fund. The Fund pays SBFM 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. SBFM 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% on the average daily net assets in excess of $3 billion. This fee is calculated daily and paid monthly. 10 Smith Barney Appreciation Fund Inc. | 2003 Semi-Annual Report to Shareholders NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) Citicorp Trust Bank, fsb. ("CTB"), another subsidiary of Citigroup, acts as the Fund's transfer agent. PFPC Global Fund Services ("PFPC") and Primerica Shareholder Services ("PSS"), another subsidiary of Citigroup, act as the Fund's sub-transfer agents. CTB receives account fees and asset-based fees that vary according to size and type of account. PFPC and PSS are responsible for shareholder recordkeeping and financial processing for all shareholder accounts. For the six months ended June 30, 2003, the Fund paid transfer agent fees of $4,990,617 to CTB. Citigroup Global Markets Inc. ("CGM"), formerly known as Salomon Smith Barney Inc. and PFS Distributors, Inc., both of which are subsidiaries of Citigroup, act as the Fund's distributors. For the six months ended June 30, 2003, CGM and its affiliates received brokerage commissions of $108,286. There are maximum initial sales charges of 5.00% and 1.00% for Class A and L shares, respectively. There is a contingent deferred sales charge ("CDSC") of 5.00% on Class B shares, which applies if redemption occurs within one year from purchase payment. This CDSC declines by 1.00% the first year after purchase payment and thereafter by 1.00% per year until no CDSC is incurred. Class L shares also have a 1.00% CDSC, which applies if redemption occurs within one year from purchase payment. In certain cases, Class A shares also have a 1.00% CDSC, which applies if redemption occurs within one year from purchase payment. This CDSC only applies to those purchases of Class A shares, which when combined with current holdings of Class A shares, equal or exceed $1,000,000 in the aggregate. These purchases do not incur an initial sales charge. For the six months ended June 30, 2003, CGM and its affiliates received sales charges of approximately $986,000 and $601,000 on sales of the Fund's Class A and L shares, respectively. In addition, for the six months ended June 30, 2003, CDSCs paid to CGM and its affiliates were approximately: Class A Class B Class L ---------------------------------------------------------------------- CDSCs $1,000 $379,000 $37,000 --------------------------------------------------------------------- All officers and one Director of the Fund are employees of Citigroup or its affiliates. 3. Investments During the six months ended June 30, 2003, the aggregate cost of purchases and proceeds from sales of investments (including maturities of long-term investments, but excluding short-term investments) were as follows: ------------------------------------------------------ Purchases $ 988,573,849 ------------------------------------------------------ Sales 1,055,645,350 ------------------------------------------------------ At June 30, 2003, the aggregate gross unrealized appreciation and depreciation of investments for Federal income tax purposes were substantially as follows: ------------------------------------------------ Gross unrealized appreciation $877,478,930 Gross unrealized depreciation (99,439,103) ------------------------------------------------ Net unrealized appreciation $778,039,827 ------------------------------------------------
11 Smith Barney Appreciation Fund Inc. | 2003 Semi-Annual Report to Shareholders NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 4. Repurchase Agreements The Fund purchases, and the custodian takes possession of, U.S. government securities from banks and securities dealers subject to agreements to resell the securities to the sellers at a future date (generally, the next business day) at an agreed-upon higher repurchase price. The Fund requires continual maintenance of the market value (plus accrued interest) of the collateral in amounts at least equal to the repurchase price. 5. Futures Contracts Securities or cash equal to the initial margin amount are either deposited with the broker or segregated by the custodian upon entering into the futures contract. Additional securities are also segregated up to the current market value of the futures contract. During the period the futures contract is open, changes in the value of the contract are recognized as unrealized gains or losses by "marking-to-market" on a daily basis to reflect the market value of the contract at the end of each day's trading. Variation margin payments are received or made and recognized as assets due from or liabilities due to broker, depending upon whether unrealized gains or losses are incurred. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the proceeds from (or cost of ) the closing transactions and the Fund's basis in the contract. The Fund enters into such contracts typically to hedge a portion of its portfolio. The Fund bears the market risk that arises from changes in the value of the financial instruments and securities indices. At June 30, 2003, the Fund did not hold any futures contracts. 6. 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. 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 depending on the type of securities loaned. The custodian establishes and maintains the collateral in a segregated account. The Fund maintains exposure for the risk of any losses in the investment of amounts received as collateral. Income earned by the Fund from securities lending for the six months ended June 30, 2003 was $130,918. At June 30, 2003, the Fund did not have any securities on loan. 12 Smith Barney Appreciation Fund Inc. | 2003 Semi-Annual Report to Shareholders NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 7. Class Specific Expenses Pursuant to a Distribution Plan, the Fund pays a service fee with respect to its Class A, B and L shares calculated at the annual rate of 0.25% of the average daily net assets of each respective class. The Fund also pays a distribution fee with respect to Class B and L shares calculated at the annual rate of 0.75% of the average daily net assets of each class. For the six months ended June 30, 2003, total Distribution Plan fees incurred, which are accrued daily and paid monthly, were as follows:
Class A Class B Class L -------------------------------------------------------------------- Distribution Plan Fees $3,146,524 $4,399,864 $1,724,390 -------------------------------------------------------------------
For the six months ended June 30, 2003, total Shareholder Servicing fees were as follows:
Class A Class B Class L Class Y Class Z -------------------------------------------------------------------------------- Shareholder Servicing Fees $1,391,114 $849,504 $252,380 $63 $33 -------------------------------------------------------------------------------
For the six months ended June 30, 2003, total Shareholder Communication expenses were as follows:
Class A Class B Class L Class Y Class Z ----------------------------------------------------------------------------- Shareholder Communication Expenses $173,914 $105,659 $20,859 $362 $1,650 ----------------------------------------------------------------------------
8. Distributions Paid to Shareholders by Class
Six Months Ended Year Ended June 30, 2003 December 31, 2002 ------------------------------------------------------- Class A Net investment income -- $ 1,316,593 Net realized gains -- 48,907,997 ------------------------------------------------------ Total -- $50,224,590 ------------------------------------------------------ Class B Net investment income -- -- Net realized gains -- $17,023,453 ------------------------------------------------------ Total -- $17,023,453 ------------------------------------------------------ Class L Net investment income -- $ 8,843 Net realized gains -- 5,209,103 ------------------------------------------------------ Total -- $ 5,217,946 ------------------------------------------------------ Class Y Net investment income -- $ 53,585 Net realized gains -- 1,418,794 ------------------------------------------------------ Total -- $ 1,472,379 ------------------------------------------------------ Class Z Net investment income -- $ 221,849 Net realized gains -- 5,876,280 ------------------------------------------------------ Total -- $ 6,098,129 ------------------------------------------------------
13 Smith Barney Appreciation Fund Inc. | 2003 Semi-Annual Report to Shareholders NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 9. Capital Shares At June 30, 2003, 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. Transactions in shares of each class were as follows:
Six Months Ended Year Ended June 30, 2003 December 31, 2002 -------------------------- -------------------------- Shares Amount Shares Amount ---------------------------------------------------------------------------- Class A Shares sold 15,133,587 $ 174,164,600 23,322,712 $ 288,859,068 Shares issued on reinvestment -- -- 4,425,878 47,578,185 Shares reacquired (13,626,780) (154,518,132) (34,691,639) (420,120,972) --------------------------------------------------------------------------- Net Increase (Decrease) 1,506,807 $ 19,646,468 (6,943,049) $ (83,683,719) --------------------------------------------------------------------------- Class B Shares sold 9,983,703 $ 112,477,618 18,924,345 $ 229,607,053 Shares issued on reinvestment -- -- 1,536,921 16,306,724 Shares reacquired (9,330,322) (103,444,844) (20,591,363) (248,581,737) --------------------------------------------------------------------------- Net Increase (Decrease) 653,381 $ 9,032,774 (130,097) $ (2,667,960) --------------------------------------------------------------------------- Class L Shares sold 8,162,109 $ 92,430,281 13,584,475 $ 163,337,685 Shares issued on reinvestment -- -- 468,056 4,970,758 Shares reacquired (3,404,129) (37,648,945) (4,658,899) (54,604,420) --------------------------------------------------------------------------- Net Increase 4,757,980 $ 54,781,336 9,393,632 $ 113,704,023 --------------------------------------------------------------------------- Class Y Shares sold 27,153,094 $ 312,208,818 1,554,484 $ 18,265,106 Shares issued on reinvestment -- -- -- -- Shares reacquired (492,033) (5,788,724) (292,227) (3,482,676) --------------------------------------------------------------------------- Net Increase 26,661,061 $ 306,420,094 1,262,257 $ 14,782,430 --------------------------------------------------------------------------- Class Z* Shares sold 1,047,437 $ 11,555,674 3,219,131 $ 40,041,476 Shares issued on reinvestment -- -- 566,741 6,098,130 Shares reacquired (27,146,580) (312,004,842) (5,041,538) (60,495,698) --------------------------------------------------------------------------- Net Decrease (26,099,143) $(300,449,168) (1,255,666) $ (14,356,092) ---------------------------------------------------------------------------
*As of April 21, 2003, Class Z shares were fully exchanged into Class Y shares. 14 Smith Barney Appreciation Fund Inc. | 2003 Semi-Annual Report to Shareholders FINANCIAL HIGHLIGHTS For a share of each class of capital stock outstanding throughout each year ended December 31, unless otherwise noted:
Class A Shares 2003/(1)(2)/ 2002/(2)/ 2001/(2)/ 2000/(2)/ 1999/(2)/ 1998/(2)/ --------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $11.13 $13.69 $14.55 $15.73 $15.31 $13.92 --------------------------------------------------------------------------------------------------------- Income (Loss) From Operations: Net investment income 0.03 0.06 0.10 0.16 0.15 0.18 Net realized and unrealized gain (loss) 1.08 (2.39) (0.59) (0.04) 2.08 2.62 --------------------------------------------------------------------------------------------------------- Total Income (Loss) From Operations 1.11 (2.33) (0.49) 0.12 2.23 2.80 --------------------------------------------------------------------------------------------------------- Less Distributions From: Net investment income -- (0.01) (0.08) (0.15) (0.14) (0.18) Net realized gains -- (0.22) (0.29) (1.15) (1.67) (1.23) --------------------------------------------------------------------------------------------------------- Total Distributions -- (0.23) (0.37) (1.30) (1.81) (1.41) --------------------------------------------------------------------------------------------------------- Net Asset Value, End of Period $12.24 $11.13 $13.69 $14.55 $15.73 $15.31 --------------------------------------------------------------------------------------------------------- Total Return 9.97%++ (17.00)% (3.44)% 0.73% 15.08% 20.45% --------------------------------------------------------------------------------------------------------- Net Assets, End of Period (millions) $2,741 $2,476 $3,140 $3,212 $3,326 $2,959 --------------------------------------------------------------------------------------------------------- Ratios to Average Net Assets: Expenses 0.97%+ 0.95% 0.92% 0.90% 0.92% 0.95% Net investment income 0.47+ 0.48 0.68 1.02 0.96 1.23 --------------------------------------------------------------------------------------------------------- Portfolio Turnover Rate 26% 74% 62% 61% 71% 63% ---------------------------------------------------------------------------------------------------------
Class B Shares 2003/(1)(2)/ 2002/(2)/ 2001/(2)/ 2000/(2)/ 1999/(2)/ 1998/(2)/ ---------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $10.95 $13.58 $14.47 $15.66 $15.26 $13.88 ------------------------------------------------------------------------------------------------------------ Income (Loss) From Operations: Net investment income (loss) (0.02) (0.05) (0.02) 0.03 0.03 0.06 Net realized and unrealized gain (loss) 1.06 (2.36) (0.58) (0.04) 2.06 2.61 ------------------------------------------------------------------------------------------------------------ Total Income (Loss) From Operations 1.04 (2.41) (0.60) (0.01) 2.09 2.67 ------------------------------------------------------------------------------------------------------------ Less Distributions From: Net investment income -- -- -- (0.03) (0.02) (0.06) Net realized gains -- (0.22) (0.29) (1.15) (1.67) (1.23) ------------------------------------------------------------------------------------------------------------ Total Distributions -- (0.22) (0.29) (1.18) (1.69) (1.29) ------------------------------------------------------------------------------------------------------------ Net Asset Value, End of Period $11.99 $10.95 $13.58 $14.47 $15.66 $15.26 ------------------------------------------------------------------------------------------------------------ Total Return 9.50%++ (17.70)% (4.20)% (0.12)% 14.19% 19.52% ------------------------------------------------------------------------------------------------------------ Net Assets, End of Period (millions) $961 $871 $1,081 $1,305 $1,755 $1,553 ------------------------------------------------------------------------------------------------------------ Ratios to Average Net Assets: Expenses 1.81%+ 1.82% 1.76% 1.69% 1.70% 1.73% Net investment income (loss) (0.38)+ (0.38) (0.17) 0.23 0.17 0.44 ------------------------------------------------------------------------------------------------------------ Portfolio Turnover Rate 26% 74% 62% 61% 71% 63% ------------------------------------------------------------------------------------------------------------
(1) For the six months ended June 30, 2003 (unaudited). (2) Per share amounts have been calculated using the monthly average shares method. ++ Total return is not annualized, as it may not be representative of the total return for the year. + Annualized. 15 Smith Barney Appreciation Fund Inc. | 2003 Semi-Annual Report to Shareholders FINANCIAL HIGHLIGHTS (CONTINUED) For a share of each class of capital stock outstanding throughout each year ended December 31, unless otherwise noted:
Class L Shares 2003/(1)(2)/ 2002/(2)/ 2001/(2)/ 2000/(2)/ 1999/(2)/ 1998/(2)(3)/ -------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 10.96 $ 13.58 $ 14.47 $ 15.65 $ 15.26 $ 13.88 ------------------------------------------------------------------------------------------------------------------- Income (Loss) From Operations: Net investment income (loss) (0.02) (0.04) (0.02) 0.03 0.03 0.06 Net realized and unrealized gain (loss) 1.06 (2.36) (0.58) (0.03) 2.05 2.61 ------------------------------------------------------------------------------------------------------------------- Total Income (Loss) From Operations 1.04 (2.40) (0.60) -- 2.08 2.67 ------------------------------------------------------------------------------------------------------------------- Less Distributions From: Net investment income -- (0.00)* -- (0.03) (0.02) (0.06) Net realized gains -- (0.22) (0.29) (1.15) (1.67) (1.23) ------------------------------------------------------------------------------------------------------------------- Total Distributions -- (0.22) (0.29) (1.18) (1.69) (1.29) ------------------------------------------------------------------------------------------------------------------- Net Asset Value, End of Period $ 12.00 $ 10.96 $ 13.58 $ 14.47 $ 15.65 $ 15.26 ------------------------------------------------------------------------------------------------------------------- Total Return 9.49%++ (17.62)% (4.20)% (0.07)% 14.12% 19.52% ------------------------------------------------------------------------------------------------------------------- Net Assets, End of Period (000s) $405,280 $317,946 $266,394 $189,725 $161,491 $83,215 ------------------------------------------------------------------------------------------------------------------- Ratios to Average Net Assets: Expenses 1.75%+ 1.75% 1.72% 1.72% 1.71% 1.73% Net investment income (loss) (0.31)+ (0.30) (0.13) 0.20 0.18 0.44 ------------------------------------------------------------------------------------------------------------------- Portfolio Turnover Rate 26% 74% 62% 61% 71% 63% -------------------------------------------------------------------------------------------------------------------
Class Y Shares 2003/(1)(2)/ 2002/(2)/ 2001/(2)/ 2000/(2)/ 1999/(2)/ 1998/(2)/ ---------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 11.15 $ 13.67 $ 14.52 $ 15.69 $ 15.28 $ 13.93 ---------------------------------------------------------------------------------------------------------- Income (Loss) From Operations: Net investment income 0.05 0.10 0.14 0.20 0.21 0.24 Net realized and unrealized gain (loss) 1.08 (2.39) (0.58) (0.02) 2.07 2.63 ---------------------------------------------------------------------------------------------------------- Total Income (Loss) From Operations 1.13 (2.29) (0.44) 0.18 2.28 2.87 ---------------------------------------------------------------------------------------------------------- Less Distributions From: Net investment income -- (0.01) (0.12) (0.20) (0.20) (0.29) Net realized gains -- (0.22) (0.29) (1.15) (1.67) (1.23) ---------------------------------------------------------------------------------------------------------- Total Distributions -- (0.23) (0.41) (1.35) (1.87) (1.52) ---------------------------------------------------------------------------------------------------------- Net Asset Value, End of Period $ 12.28 $ 11.15 $ 13.67 $ 14.52 $ 15.69 $ 15.28 ---------------------------------------------------------------------------------------------------------- Total Return 10.13%++ (16.71)% (3.07)% 1.07% 15.40% 20.93% ---------------------------------------------------------------------------------------------------------- Net Assets, End of Period (000s) $420,801 $84,930 $86,823 $88,870 $98,920 $87,041 ---------------------------------------------------------------------------------------------------------- Ratios to Average Net Assets: Expenses 0.60%+ 0.59% 0.58% 0.58% 0.57% 0.59% Net investment income 0.92+ 0.85 1.02 1.34 1.30 1.59 ---------------------------------------------------------------------------------------------------------- Portfolio Turnover Rate 26% 74% 62% 61% 71% 63% ----------------------------------------------------------------------------------------------------------
(1) For the six months ended June 30, 2003 (unaudited). (2) Per share amounts have been calculated using the monthly average shares method. (3) On June 12, 1998, Class C shares were renamed Class L shares. * Amount represents less than $0.01 per share. ++ Total return is not annualized, as it may not be representative of the total return for the year. + Annualized. 16 Smith Barney Appreciation Fund Inc. | 2003 Semi-Annual Report to Shareholders SMITH BARNEY APPRECIATION FUND INC. DIRECTORS INVESTMENT ADVISER Herbert Barg AND ADMINISTRATOR Dwight B. Crane Smith Barney Fund Burt N. Dorsett Management LLC R. Jay Gerken, CFA Chairman DISTRIBUTORS Elliot S. Jaffe Citigroup Global Markets Inc. Stephen E. Kaufman PFS Distributors, Inc. Joseph J. McCann Cornelius C. Rose, Jr. CUSTODIAN State Street Bank and OFFICERS Trust Company R. Jay Gerken, CFA President and Chief TRANSFER AGENT Executive Officer Citicorp Trust Bank, fsb. 125 Broad Street, 11th Floor Lewis E. Daidone New York, New York 10004 Senior Vice President and Chief Administrative Officer SUB-TRANSFER AGENTS PFPC Global Fund Services Richard L. Peteka P.O. Box 9699 Chief Financial Officer Providence, Rhode Island and Treasurer 02940-9699 Harry D. Cohen Primerica Shareholder Services Vice President and P.O. Box 9662 Investment Officer Providence, Rhode Island 02940-9662 Scott K. Glasser Vice President and Investment Officer Kaprel Ozsolak Controller Christina T. Sydor Secretary
Smith Barney Appreciation Fund Inc. This report is submitted for the general information of the shareholders of Smith Barney Appreciation Fund Inc., but it also may be used as sales literature when preceded or accompanied by the current Prospectus, which gives details about charges, expenses, investment objectives and operating policies of the Fund. If used as sales material after September 30, 2003 this report must be accompanied by performance information for the most recently completed calendar quarter. SMITH BARNEY APPRECIATION FUND INC. Smith Barney Mutual Funds 125 Broad Street 10th Floor, MF-2 New York, New York 10004 For complete information on any Smith Barney Mutual Funds, including management fees and expenses, call or write your financial professional for a free prospectus. Read it carefully before you invest or send money. www.smithbarneymutualfunds.com (C)2003 Citigroup Global Markets Inc. Member NASD, SIPC FD0404 8/03 03-4964 ITEM 2. CODE OF ETHICS. Not applicable. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. Not applicable. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Not applicable. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable. ITEM 6. [RESERVED] ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 8. [RESERVED] ITEM 9. CONTROLS AND PROCEDURES. (a) The registrant's principal executive officer and principal financial officer have concluded that the registrant's disclosure controls and procedures (as defined in Rule 30a-2(c) under the Investment Company Act of 1940, as amended) are effective based on their evaluation of the disclosure controls and procedures as of a date within 90 days of the filing date of this document. (b) In the last 90 days, there have been no significant changes in the registrant's internal controls or in other factors that could significantly affect these controls. ITEM 10. EXHIBITS. (a) Not applicable. (b) Attached hereto. Exhibit 99.CERT Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 99.906CERT Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this Report to be signed on its behalf by the undersigned, there unto duly authorized. Smith Barney Appreciation Fund Inc. By: /s/ R. Jay Gerken R. Jay Gerken Chief Executive Officer of Smith Barney Appreciation Fund Inc. Date: August 28, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ R. Jay Gerken (R. Jay Gerken) Chief Executive Officer of Smith Barney Appreciation Fund Inc. Date: August 28, 2003 By: /s/ Richard Peteka (Richard Peteka) Chief Financial Officer of Smith Barney Appreciation Fund Inc. Date: August 28, 2003