-----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, T9kBXBQqC3bMvW7oVEe9BFR1bGiWTMaDof6Mh6+BJTPPN45yRFln7yLrHT8tYsGw fqR8ccQgu6IJAxxZGsVpwQ== 0001193125-04-036446.txt : 20040308 0001193125-04-036446.hdr.sgml : 20040308 20040308171421 ACCESSION NUMBER: 0001193125-04-036446 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040308 EFFECTIVENESS DATE: 20040308 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SMITH BARNEY APPRECIATION FUND INC CENTRAL INDEX KEY: 0000089558 IRS NUMBER: 132653031 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-01940 FILM NUMBER: 04655391 BUSINESS ADDRESS: STREET 1: 125 BROAD STREET STREET 2: 10TH FLOOR, MF-2 CITY: NEW YORK STATE: NY ZIP: 10004 BUSINESS PHONE: 800-451-2010 MAIL ADDRESS: STREET 1: 125 BROAD STREET STREET 2: 10TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10004 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-CSR 1 dncsr.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) Robert I. Frenkel, Esq. Smith Barney Fund Management LLC 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: December 31, 2003 ITEM 1. REPORT TO STOCKHOLDERS. The Annual Report to Stockholders is filed herewith. SMITH BARNEY APPRECIATION FUND INC. CLASSIC SERIES | ANNUAL REPORT | DECEMBER 31, 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 Annual Report . December 31, 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 11 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) 11 Years (Scott K. Glasser) What's Inside Letter from the Chairman.............................................. 1 Fund Performance...................................................... 4 Historical Performance................................................ 5 Schedule of Investments............................................... 6 Statement of Assets and Liabilities................................... 11 Statement of Operations............................................... 12 Statements of Changes in Net Assets................................... 13 Notes to Financial Statements......................................... 14 Financial Highlights.................................................. 20 Independent Auditors' Report.......................................... 22 Additional Information................................................ 23 Tax Information....................................................... 26
LETTER FROM THE CHAIRMAN [PHOTO] R. Jay Gerken R. JAY GERKEN, CFA Chairman, President and Chief Executive Officer Dear Shareholder, This year marks Hersh Cohen's 25th anniversary at the helm of the Smith Barney Appreciation Fund Inc. And while the stock market has indeed fluctuated over the last quarter century, sometimes violently so, Hersh's steady hand has steered the fund to a long-term record of distinction. As Morningstar said last year, "Conservative investors will appreciate this long-term winner."/i/ There are not many mutual fund managers who can boast this longevity. In fact, the average tenure of large-cap fund managers is about five years, according to Morningstar. I have worked alongside Hersh for some 15 years and I have always marveled at his steadfast investment principles and consistent investment approach. As he put it recently, "I came to Wall Street in 1969 with a philosophy that I wanted to own great companies bought at a fair price. Over the course of my career, there has been nothing to deter me from that philosophy." I can think of no better or more succinct summary of the philosophy of the Appreciation Fund. Under Hersh's leadership, the fund has garnered many honors over the years, including being named eight times to the Forbes Honor Roll. Just last year, the fund was named to the "Money 100" list in 2003 by Money magazine./ii/ But I suspect that Hersh's proudest achievement is that he has always done what is right for clients, striving to make money for them in good markets and protect their assets in down markets. I'm sure he's looking forward to another 25 years at the helm with his younger co-manager Scott Glasser. PERFORMANCE SNAPSHOT AS OF DECEMBER 31, 2003 (excluding sales charges)
6 Months 12 Months Class A Shares 13.39% 24.70% S&P 500 Index 15.14% 28.67% Lipper Large-Cap Core Funds Category Average 13.73% 25.59%
All figures represent past performance and are not a guarantee of future results. Principal value and investment returns will fluctuate and investors' shares, when redeemed may be worth more or less than their original cost. Class A share returns assume the reinvestment of income dividends and capital gains distributions at net asset value and the deduction of all fund expenses. Returns have not been adjusted to include sales charges that may apply when shares are purchased or the deduction of taxes that a shareholder would pay on fund distributions. Excluding sales charges, Class B shares returned 12.93%, Class L shares returned 12.92% and Class Y shares returned 13.60% over the six months ended December 31, 2003. Excluding sales charges, Class B shares returned 23.65%, Class L shares returned 23.63% and Class Y shares returned 25.11% over the 12 months ended December 31, 2003. All index performance reflects no deduction for fees, expenses or taxes. The S&P 500 Index is a market capitalization-weighted index of 500 widely held common stocks. Please note that an investor cannot invest directly in an index. Lipper, Inc. is a major independent mutual-fund tracking organization. Returns are based on the period ended December 31, 2003, calculated among the 1,062 funds for the six-month period and among the 1,034 funds for the 12-month period, in the fund's Lipper category including the reinvestment of dividends and capital gains, if any, and excluding sales charges. 1 Smith Barney Appreciation Fund Inc. | 2003 Annual Report Performance Update Despite positive performance, Class A shares of the Smith Barney Appreciation Fund Inc. underperformed both the fund's benchmark, the unmanaged S&P 500 Index ("S&P 500")/iii/, and the fund's Lipper large-cap core funds category average during the year ended December 31, 2003. Over this period, Class A shares returned 24.70%, whereas the S&P 500 returned 28.67% and the fund's Lipper category average was 25.59%./1/ Market Overview At the start of the fund's fiscal year in January 2003, the domestic economy and stock market were dominated by uncertainty stemming from growing geopolitical tensions, especially the run-up to the war in Iraq. By March of 2003, business and economic fundamentals began to show signs that the bear market for stocks that had dominated the previous three years was finally nearing an end. As the year progressed, new federal tax legislation provided a significant near-term tax cut for consumers, businesses and investors while key interest rates continued to hover near record lows. These factors, among others, contributed to a broad stock market rally that produced significant gains for many sectors of the economy. Portfolio Update The largest single contributor to the fund's positive performance for the period, on an absolute basis, was the fund's financial sector holding in Berkshire Hathaway Inc., the operating company of famed investor Warren Buffett. While the fund's largest positive contributors to performance spanned several sectors, a number of the stocks that performed best in the second half of 2003 benefited from their leverage to the ongoing economic rebound. One such holding, 3M Co., a diversified producer of industrial and health care products and one of the fund's largest holdings, continued to post strong results as innovative new products, a strong presence in many Asian markets, and leverage to the improving U.S. economy, combined to drive strong volume gains. Leading semiconductor producer Intel Corp. was another top contributor to fund performance. The primary reason that the fund lagged its benchmark was its underweight position in the technology sector. Detractors from fund performance for the period were led by holdings of Standard & Poor's Depositary Receipts ("SPDRs"), exchange-traded securities designed to track the fluctuations of the S&P 500. Other major detractors from fund performance during the period include shares of SBC Communications Inc., a provider of local, long-distance and Internet access telecommunications services, and shares of Lockheed Martin Corp., a leading defense contractor and producer of the Joint Strike Fighter. Special Shareholder Notice It is with great sadness that we bring to your attention the passing of Alfred J. Bianchetti, Director Emeritus, and James J. Crisona, Director Emeritus, of the fund. Messrs. Bianchetti and Crisona, who both passed away on September 4th, 2003, lived accomplished lives to the ages of 80 and 97, respectively. We will sorely miss their presence and will remember the dedicated service they provided to the fund's shareholders through their outstanding contributions as long-term members of the Board. /1/Lipper, Inc. is a major independent mutual-fund tracking organization. Returns are based on the 12-month period ended December 31, 2003, calculated among the 1,034 funds in the fund's Lipper category including the reinvestment of dividends and capital gains, if any, and excluding sales charges. 2 Smith Barney Appreciation Fund Inc. | 2003 Annual Report Information About Your Fund In recent months several issues in the mutual fund industry have come under the scrutiny of federal and state regulators. The fund's Adviser and some of its affiliates have received requests for information from various government regulators regarding market timing, late trading, fees and other mutual fund issues in connection with various investigations. The regulators appear to be examining, among other things, the fund's response to market timing and shareholder exchange activity, including compliance with prospectus disclosure related to these subjects. The fund has been informed that the Adviser and its affiliates are responding to those information requests, but are not in a position to predict the outcome of these requests and investigations. As always, thank you for your confidence in our stewardship of your assets. 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 January 13, 2004 The information provided is not intended to be a forecast of future events, a guarantee of future results or investment advice. Views expressed may differ from those of the firm as a whole. Portfolio holdings and breakdowns are as of December 31, 2003 and are subject to change and may not be representative of the portfolio manager's current or future investments. The fund's top ten holdings as of this date were: Berkshire Hathaway Inc., Class A Shares (6.85%); Microsoft Corp. (3.12%); Pfizer Inc. (2.67%); General Electric Co. (2.52%); The St. Paul Cos., Inc. (2.25%); EnCana Corp. (2.13%); 3M Co. (2.09%); Exxon Mobil Corp. (1.94%); Time Warner Inc. (1.70%); American International Group, Inc. (1.63%). Please refer to pages 6 through 10 for a list and percentage breakdown of the fund's holdings. All index performance reflects no deduction for fees, expenses or taxes. RISK: The fund may invest in small- and mid-cap companies that may involve a higher degree of risk and volatility than investments in large-cap companies. The fund may invest in derivatives, such as options and futures, which can be illiquid and harder to value, especially in declining markets. A small investment in certain derivatives may have a potentially large impact on the fund's performance. Derivatives can disproportionately increase losses as stated in the prospectus. /i/ Source: Morningstar June 6, 2003. /ii/ Money is an independent publication. In creating the "Money 100" list, Money began with an entire universe of approximately 6,000 funds. They then divided the fund universe into five basic types: "core" large-cap U.S. equity funds; "secondary" mid-cap and small-cap funds; specialty offerings, such as sector funds; international funds; and bonds. Smith Barney Appreciation Fund was one of the approximately 1,000 funds to be categorized as "core" funds. The core equity fund universe was then divided into conservative, moderate and aggressive camps using standard deviation (standard deviation measures how much the fund's returns have fluctuated over time) as a rough guide. Money also considered such risk factors as how many stocks the fund tends to own. Once all the funds were categorized, their performance was tested against one another. For conservative funds, capital preservation was rewarded first, giving top scores to funds that outperformed their peers in down markets like 2001 and 2002. For moderate and aggressive funds, on the other hand, Money assumed negative performance during bear markets, so greater weight was given to three- and five-year performance in these groups. These quantitative tests were not the only tests employed. Manager expertise, expense ratios and issues such as a fund's company's record of responsible financial stewardship were considered. Fund companies with a history of closing funds before assets become unwieldy also won extra points, as did those that communicate better with shareholders. Finally managers who have been around for a few market cycles were preferred, as well as those with big ownership in their funds. In all, there were 35 core fund picks -- nine conservative, 14 moderate and 12 aggressive -- which in the opinion of Money should appear on the Money 100 list. /iii/ The S&P 500 Index is a market capitalization-weighted index of 500 widely held common stocks. Please note that an investor cannot invest directly in an index. 3 Smith Barney Appreciation Fund Inc. | 2003 Annual Report AVERAGE ANNUAL TOTAL RETURNS+ (UNAUDITED)
Without Sales Charges/(1)/ ------------------------------ Class A Class B Class L Class Y - ------------------------------------------------------------ Twelve Months Ended 12/31/03 24.70% 23.65% 23.63% 25.11% - ------------------------------------------------------------ Five Years Ended 12/31/03 2.99 2.14 2.16 3.33 - ------------------------------------------------------------ Ten Years Ended 12/31/03 10.42 9.54 9.57 N/A - ------------------------------------------------------------ Inception* through 12/31/03 11.32 9.53 9.14 9.98 - ------------------------------------------------------------ With Sales Charges/(2)/ ------------------------------ Class A Class B Class L Class Y - ------------------------------------------------------------ Twelve Months Ended 12/31/03 18.42% 18.65% 21.41% 25.11% - ------------------------------------------------------------ Five Years Ended 12/31/03 1.93 1.98 1.96 3.33 - ------------------------------------------------------------ Ten Years Ended 12/31/03 9.86 9.54 9.46 N/A - ------------------------------------------------------------ Inception* through 12/31/03 11.15 9.53 9.04 9.98 - ------------------------------------------------------------
CUMULATIVE TOTAL RETURNS+ (UNAUDITED)
Without Sales Charges/(1)/ - ------------------------------------------------------------------- Class A (12/31/93 through 12/31/03) 169.56% - ----------------------------------------------------------------- Class B (12/31/93 through 12/31/03) 148.84 - ----------------------------------------------------------------- Class L (12/31/93 through 12/31/03) 149.42 - ----------------------------------------------------------------- Class Y (Inception* through 12/31/03) 112.36 - -----------------------------------------------------------------
+ The returns shown do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. (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 and L shares or the applicable contingent deferred sales charges ("CDSC") with respect to Class B and L shares. (2) Assumes reinvestment of all dividends and capital gain distributions, if any, at net asset value. In addition, Class A and L shares reflect the deduction of the maximum initial sales charge of 5.00% and 1.00%, respectively; Class B shares reflect the deduction of a 5.00% CDSC, which applies if shares are redeemed within one year from purchase payment. Thereafter, this CDSC declines by 1.00% per year until no CDSC is incurred. Class L shares also reflect the deduction of a 1.00% CDSC, which applies if shares are redeemed within one year from purchase payment. * The inception dates for Class A, B, L and Y shares are March 10, 1970, November 6, 1992, February 4, 1993 and January 30, 1996, respectively. 4 Smith Barney Appreciation Fund Inc. | 2003 Annual Report HISTORICAL PERFORMANCE (UNAUDITED) Value of $10,000 Invested in Class A Shares of the Smith Barney Appreciation Fund Inc. vs. the S&P 500 Index+ - -------------------------------------------------------------------------------- December 1993 -- December 2003 [CHART] Smith Barney Appreciation Fund Inc. - Class A Shares S & P 500 Index ---------------------- ----------------- 12/93 $ 9,500 $10,000 12/94 9,426 10,132 12/95 12,184 13,934 12/96 14,530 17,132 12/97 18,350 22,847 12/98 22,102 29,413 12/99 25,434 35,600 12/00 25,620 32,359 12/01 24,740 28,516 12/02 21,616 22,215 12/03 25,607 28,584 + Hypothetical illustration of $10,000 invested in Class A shares on December 31, 1993, assuming deduction of the maximum 5.00% sales charge and reinvestment of dividends and capital gains, if any, at net asset value through December 31, 2003. The S&P 500 Index is composed of 500 widely held common stocks listed on the New York Stock Exchange, American Stock Exchange and over-the-counter markets. 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. Please note that an investor cannot invest directly in an index. 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 lesser sales charges and fees were incurred by shareholders investing in the other classes. All figures represent past performance and are not a guarantee of future results. The performance data represents past performance including the investment return and principal value of an investment, which will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The returns shown do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. 5 Smith Barney Appreciation Fund Inc. | 2003 Annual Report SCHEDULE OF INVESTMENTS DECEMBER 31, 2003
SHARES SECURITY VALUE - ------------------------------------------------------- COMMON STOCK -- 92.4% Aerospace & Defense -- 1.3% 300,000 The Boeing Co. $ 12,642,000 500,000 Lockheed Martin Corp. 25,700,000 1,000,000 Raytheon Co. 30,040,000 - ------------------------------------------------------- 68,382,000 - ------------------------------------------------------- Banks -- 5.2% 1,200,000 Bank One Corp. 54,708,000 500,000 Comerica Inc. 28,030,000 700,000 Fifth Third Bancorp 41,370,000 300,000 M&T Bank Corp. 29,490,000 1,000,000 U.S. Bancorp 29,780,000 800,000 Washington Mutual, Inc. 32,096,000 1,000,000 Wells Fargo & Co. 58,890,000 - ------------------------------------------------------- 274,364,000 - ------------------------------------------------------- Beverages -- 2.1% 600,000 The Coca-Cola Co. 30,450,000 1,700,000 PepsiCo, Inc. 79,254,000 - ------------------------------------------------------- 109,704,000 - ------------------------------------------------------- Biotechnology -- 1.7% 700,000 Amgen Inc.+ 43,260,000 100,000 AtheroGenics, Inc.+ 1,495,000 1,175,000 Biogen Idec Inc.+ 43,216,500 100,000 Encysive Pharmaceuticals Inc.+ 895,000 200,000 Vicuron Pharmaceuticals, Inc.+ 3,730,000 - ------------------------------------------------------- 92,596,500 - ------------------------------------------------------- Building Products -- 0.7% 1,300,000 Masco Corp. 35,633,000 - ------------------------------------------------------- Chemicals -- 3.4% 1,100,000 The Dow Chemical Co. 45,727,000 1,500,000 E.I. du Pont de Nemours & Co. 68,835,000 1,000,000 PPG Industries, Inc. 64,020,000 - ------------------------------------------------------- 178,582,000 - ------------------------------------------------------- Commercial Services & Supplies -- 2.2% 600,000 Automatic Data Processing Inc. 23,766,000 300,000 Avery Dennison Corp. 16,806,000 300,000 First Data Corp. 12,327,000 300,000 Hudson Highland Group, Inc.+ 7,155,000 2,000,000 Waste Management, Inc. 59,200,000 - ------------------------------------------------------- 119,254,000 - ------------------------------------------------------- Commingled Fund -- 0.9% 5,000,000 iShares MSCI Japan Index Fund 48,200,000 - -------------------------------------------------------
See Notes to Financial Statements. 6 Smith Barney Appreciation Fund Inc. | 2003 Annual Report SCHEDULE OF INVESTMENTS (CONTINUED) DECEMBER 31, 2003
SHARES SECURITY VALUE - ------------------------------------------------------------------- Communications Equipment -- 1.5% 1,300,000 Cisco Systems, Inc.+ $ 31,577,000 6,000,000 Lucent Technologies Inc.+ 17,040,000 2,000,000 Motorola, Inc. 28,140,000 500,000 MRV Communications, Inc.+ 1,880,000 - -------------------------------------------------------------- 78,637,000 - -------------------------------------------------------------- Computers & Peripherals -- 1.4% 700,000 International Business Machines Corp. 64,876,000 800,000 Maxtor Corp.+ 8,880,000 - -------------------------------------------------------------- 73,756,000 - -------------------------------------------------------------- Diversified Telecommunication Services -- 1.0% 1,000,000 SBC Communications Inc. 26,070,000 800,000 Verizon Communications Inc. 28,064,000 - -------------------------------------------------------------- 54,134,000 - -------------------------------------------------------------- Electric Utilities -- 1.4% 1,000,000 Cinergy Corp. 38,810,000 400,000 Public Service Enterprise Group Inc. 17,520,000 500,000 The Southern Co. 15,125,000 - -------------------------------------------------------------- 71,455,000 - -------------------------------------------------------------- Electrical Equipment -- 1.1% 1,500,000 American Power Conversion Corp.+ 36,675,000 750,000 Molex Inc., Class A Shares 22,020,000 - -------------------------------------------------------------- 58,695,000 - -------------------------------------------------------------- Electronic Equipment & Instruments -- 1.4% 800,000 AVX Corp. 13,296,000 640,000 Mettler-Toledo International Inc.+ 27,014,400 3,000,000 Solectron Corp.+ 17,730,000 800,000 Vishay Intertechnology, Inc.+ 18,320,000 - -------------------------------------------------------------- 76,360,400 - -------------------------------------------------------------- Energy Equipment & Services -- 1.3% 600,000 GlobalSantaFe Corp. 14,898,000 1,000,000 Schlumberger Ltd. 54,720,000 - -------------------------------------------------------------- 69,618,000 - -------------------------------------------------------------- Food & Drug Retailing -- 0.8% 1,200,000 Walgreen Co. 43,656,000 - -------------------------------------------------------------- Food Products -- 3.4% 750,000 General Mills, Inc. 33,975,000 1,100,000 H.J. Heinz Co. 40,073,000 450,000 Hershey Foods Corp. 34,645,500 800,000 Kraft Foods, Inc. 25,776,000 800,000 Wm. Wrigley Jr. Co. 44,968,000 - -------------------------------------------------------------- 179,437,500 - -------------------------------------------------------------- Gas Utilities -- 0.6% 800,000 KeySpan Corp. 29,440,000 - --------------------------------------------------------------
See Notes to Financial Statements. 7 Smith Barney Appreciation Fund Inc. | 2003 Annual Report SCHEDULE OF INVESTMENTS (CONTINUED) DECEMBER 31, 2003
SHARES SECURITY VALUE - ----------------------------------------------------------------------- Healthcare Equipment & Supplies -- 0.5% 200,000 Advanced Medical Optics, Inc.+ $ 3,930,000 300,000 C.R. Bard, Inc. 24,375,000 - ----------------------------------------------------------------------- 28,305,000 - ----------------------------------------------------------------------- Hotels, Restaurants & Leisure -- 0.6% 1,208,700 Fairmont Hotels & Resorts Inc. 32,804,118 - ----------------------------------------------------------------------- Household Products -- 2.3% 900,000 Kimberly-Clark Corp. 53,181,000 700,000 The Procter & Gamble Co. 69,916,000 - ----------------------------------------------------------------------- 123,097,000 - ----------------------------------------------------------------------- Industrial Conglomerates -- 6.1% 1,300,000 3M Co. 110,539,000 4,300,000 General Electric Co. 133,214,000 316,700 Honeywell International Inc. 10,587,281 1,100,000 Tyco International Ltd. 29,150,000 400,000 United Technologies Corp. 37,908,000 - ----------------------------------------------------------------------- 321,398,281 - ----------------------------------------------------------------------- Insurance -- 11.9% 1,300,000 American International Group, Inc. 86,164,000 4,300 Berkshire Hathaway Inc., Class A Shares+ 362,275,000 63,700 China Life Insurance Co., Ltd., Sponsored ADR+ 2,100,189 400,000 The Chubb Corp. 27,240,000 1,200,000 Old Republic International Corp. 30,432,000 3,000,000 The St. Paul Cos., Inc. 118,950,000 - ----------------------------------------------------------------------- 627,161,189 - ----------------------------------------------------------------------- Internet & Catalog Retail -- 0.7% 1,150,000 InterActiveCorp+ 39,019,500 - ----------------------------------------------------------------------- Machinery -- 0.5% 400,000 Deere & Co. 26,020,000 - ----------------------------------------------------------------------- Media -- 10.3% 2,300,000 Comcast Corp., Special Class A Shares+ 71,944,000 800,000 Gannett Co., Inc. 71,328,000 500,000 The Interpublic Group Cos., Inc. 7,800,000 3,000,000 Liberty Media Corp., Class A Shares+ 35,670,000 800,000 Meredith Corp. 39,048,000 1,250,000 SBS Broadcasting SA+ 40,750,000 1,200,000 Shaw Communications Inc., Class B Shares 18,624,000 5,000,000 Time Warner Inc.+ 89,950,000 700,000 Tribune Co. 36,120,000 1,200,000 Viacom Inc., Class B Shares 53,256,000 3,500,000 The Walt Disney Co. 81,655,000 - ----------------------------------------------------------------------- 546,145,000 - ----------------------------------------------------------------------- Metals & Mining -- 2.0% 700,000 Alcoa Inc. 26,600,000 300,000 Freeport-McMoRan Copper & Gold, Inc. 12,639,000 164,800 International Steel Group, Inc.+ 6,418,960 400,000 Newmont Mining Corp. 19,444,000
See Notes to Financial Statements. 8 Smith Barney Appreciation Fund Inc. | 2003 Annual Report SCHEDULE OF INVESTMENTS (CONTINUED) DECEMBER 31, 2003
SHARES SECURITY VALUE - ------------------------------------------------------------ Metals & Mining -- 2.0% (continued) 219,300 Nucor Corp. $ 12,280,800 250,000 Rio Tinto plc, Sponsored ADR 27,827,500 - ------------------------------------------------------------ 105,210,260 - ------------------------------------------------------------ Multi-Line Retail -- 2.6% 1,500,000 Costco Wholesale Corp.+ 55,770,000 1,500,000 Wal-Mart Stores, Inc. 79,575,000 - ------------------------------------------------------------ 135,345,000 - ------------------------------------------------------------ Oil & Gas -- 5.7% 1,300,000 BP plc, Sponsored ADR 64,155,000 300,000 Canadian Natural Resources Ltd. 15,132,000 2,850,000 EnCana Corp. 112,404,000 2,500,000 Exxon Mobil Corp. 102,500,000 400,000 Suncor Energy, Inc. 10,024,000 - ------------------------------------------------------------ 304,215,000 - ------------------------------------------------------------ Paper & Forest Products -- 1.0% 300,000 International Paper Co. 12,933,000 600,000 Weyerhaeuser Co. 38,400,000 - ------------------------------------------------------------ 51,333,000 - ------------------------------------------------------------ Personal Products -- 1.6% 2,300,000 The Gillette Co. 84,479,000 - ------------------------------------------------------------ Pharmaceuticals -- 5.8% 250,000 AstraZeneca plc, Sponsored ADR 12,095,000 400,000 Eli Lilly & Co. 28,132,000 1,600,000 Johnson & Johnson 82,656,000 950,000 Merck & Co. Inc. 43,890,000 4,000,000 Pfizer Inc. 141,320,000 - ------------------------------------------------------------ 308,093,000 - ------------------------------------------------------------ Real Estate -- 2.1% 1,300,000 Forest City Enterprises, Inc. 61,763,000 1,100,000 The St. Joe Co. 41,019,000 200,000 Tejon Ranch Co.+ 8,202,000 - ------------------------------------------------------------ 110,984,000 - ------------------------------------------------------------ Road & Rail -- 1.7% 1,150,000 Burlington Northern Santa Fe Corp. 37,202,500 400,000 CP Railway Ltd. 11,260,000 1,231,033 Florida East Coast Industries, Inc. 40,747,192 - ------------------------------------------------------------ 89,209,692 - ------------------------------------------------------------ Semiconductor Equipment & Products -- 1.9% 6,000,000 Agere Systems Inc., Class A Shares+ 18,300,000 1,500,000 Cirrus Logic, Inc.+ 11,505,000 1,700,000 Intel Corp. 54,740,000 600,000 Texas Instruments Inc. 17,628,000 - ------------------------------------------------------------ 102,173,000 - ------------------------------------------------------------
See Notes to Financial Statements. 9 Smith Barney Appreciation Fund Inc. | 2003 Annual Report SCHEDULE OF INVESTMENTS (CONTINUED) DECEMBER 31, 2003
SHARES SECURITY VALUE - -------------------------------------------------------------------------------------------------------------- Software -- 3.7% 6,000,000 Microsoft Corp. $ 165,240,000 700,000 ScanSoft, Inc.+ 3,724,000 1,200,000 Sybase, Inc.+ 24,696,000 - -------------------------------------------------------------------------------------------------------------- 193,660,000 - -------------------------------------------------------------------------------------------------------------- TOTAL COMMON STOCK (Cost -- $3,589,627,518) 4,890,556,440 - -------------------------------------------------------------------------------------------------------------- FACE AMOUNT SECURITY VALUE - -------------------------------------------------------------------------------------------------------------- REPURCHASE AGREEMENT -- 7.6% $401,846,000 Morgan Stanley, 0.820% due 1/2/03; Proceeds at maturity -- $401,864,306; (Fully collateralized by U.S. Treasury Inflation Indexed Notes, 3.500% to 3.875% due 1/15/08 to 1/15/11; Market value -- $409,883,347) (Cost -- $401,846,000) 401,846,000 - -------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS -- 100.0% (Cost -- $3,991,473,518*) $5,292,402,440 - --------------------------------------------------------------------------------------------------------------
+ Non-income producing security. * Aggregate cost for Federal income tax purposes is $3,996,379,393. Abbreviaiton used in this schedule: ADR -- American Depositary Receipt See Notes to Financial Statements. 10 Smith Barney Appreciation Fund Inc. | 2003 Annual Report STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2003 ASSETS: Investments, at value (Cost -- $3,991,473,518) $5,292,402,440 Cash 592 Receivable for Fund shares sold 11,343,888 Dividends and interest receivable 7,115,779 Receivable for securities sold 4,527,403 - --------------------------------------------------------------------------- Total Assets 5,315,390,102 - --------------------------------------------------------------------------- LIABILITIES: Payable for securities purchased 18,563,420 Payable for Fund shares reacquired 2,439,179 Investment advisory fee payable 1,806,735 Distribution plan fees payable 845,311 Administration fee payable 664,318 Accrued expenses 1,607,569 - --------------------------------------------------------------------------- Total Liabilities 25,926,532 - --------------------------------------------------------------------------- Total Net Assets $5,289,463,570 - --------------------------------------------------------------------------- NET ASSETS: Par value of capital shares $ 385,727 Capital paid in excess of par value 4,008,952,286 Undistributed net investment income 2,101,767 Accumulated net realized loss on investment transactions and futures contracts (22,908,641) Net unrealized appreciation of investments and foreign currencies 1,300,932,431 - --------------------------------------------------------------------------- Total Net Assets $5,289,463,570 - --------------------------------------------------------------------------- Shares Outstanding: Class A 232,751,416 - ---------------------------------------------------------------------------- Class B 79,375,186 - ---------------------------------------------------------------------------- Class L 39,160,295 - ---------------------------------------------------------------------------- Class Y 34,439,673 - ---------------------------------------------------------------------------- Net Asset Value: Class A (and redemption price) $13.79 - ---------------------------------------------------------------------------- Class B * $13.54 - ---------------------------------------------------------------------------- Class L * $13.55 - ---------------------------------------------------------------------------- Class Y (and redemption price) $13.76 - ---------------------------------------------------------------------------- Maximum Public Offering Price Per Share: Class A (net asset value plus 5.26% of net asset value per share) $14.52 - ---------------------------------------------------------------------------- Class L (net asset value plus 1.01% of net asset value per share) $13.69 - ---------------------------------------------------------------------------
* 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. 11 Smith Barney Appreciation Fund Inc. | 2003 Annual Report STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2003 INVESTMENT INCOME: Dividends $ 63,870,171 Interest 4,355,383 Less: Foreign withholding tax (486,252) - --------------------------------------------------------------------------- Total Investment Income 67,739,302 - --------------------------------------------------------------------------- EXPENSES: Distribution plan fees (Note 7) 20,333,663 Investment advisory fee (Note 2) 18,911,513 Administration fee (Note 2) 6,948,436 Shareholder servicing fees (Note 7) 5,697,091 Custody 187,853 Shareholder communications (Note 7) 177,096 Registration fees 149,526 Audit and legal fees 82,800 Directors' fees 57,214 Other 73,246 - --------------------------------------------------------------------------- Total Expenses 52,618,438 - --------------------------------------------------------------------------- Net Investment Income 15,120,864 - --------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, FUTURES CONTRACTS AND FOREIGN CURRENCIES (NOTES 3 AND 5): Realized Gain (Loss) From: Investment transactions 81,934,114 Futures contracts (4,856,196) Foreign currency transactions (2,269) - --------------------------------------------------------------------------- Net Realized Gain 77,075,649 - --------------------------------------------------------------------------- Change in Net Unrealized Appreciation From: Investments 918,999,369 Foreign currencies 8,361 - --------------------------------------------------------------------------- Increase in Net Unrealized Appreciation 919,007,730 - --------------------------------------------------------------------------- Net Gain on Investments, Futures Contracts and Foreign Currencies 996,083,379 - --------------------------------------------------------------------------- Increase in Assets From Operations $1,011,204,243 - ---------------------------------------------------------------------------
See Notes to Financial Statements. 12 Smith Barney Appreciation Fund Inc. | 2003 Annual Report STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED DECEMBER 31,
2003 2002 - ---------------------------------------------------------------------------------- OPERATIONS: Net investment income $ 15,120,864 $ 12,443,816 Net realized gain (loss) 77,075,649 (83,390,774) Increase (decrease) in net unrealized appreciation 919,007,730 (784,394,229) - ---------------------------------------------------------------------------------- Increase (Decrease) in Net Assets From Operations 1,011,204,243 (855,341,187) - ---------------------------------------------------------------------------------- DISTRIBUTION TO SHAREHOLDERS FROM (NOTE 8): Net investment income (25,412,632) (1,600,870) Net realized gains -- (78,435,627) - ---------------------------------------------------------------------------------- Decrease in Net Assets From Distributions to Shareholders (25,412,632) (80,036,497) - ---------------------------------------------------------------------------------- FUND SHARE TRANSACTIONS (NOTE 9): Net proceeds from sales of shares 1,176,362,357 740,110,388 Net asset value of shares issued for reinvestment of dividends 23,023,182 74,953,797 Cost of shares reacquired (936,585,023) (787,285,503) - ---------------------------------------------------------------------------------- Increase in Net Assets From Fund Share Transactions 262,800,516 27,778,682 - ---------------------------------------------------------------------------------- Increase (Decrease) in Net Assets 1,248,592,127 (907,599,002) NET ASSETS: Beginning of year 4,040,871,443 4,948,470,445 - ---------------------------------------------------------------------------------- End of year* $5,289,463,570 $4,040,871,443 - ---------------------------------------------------------------------------------- * Includes undistributed net investment income of: $2,101,767 $12,395,804 - ----------------------------------------------------------------------------------
See Notes to Financial Statements. 13 Smith Barney Appreciation Fund Inc. | 2003 Annual Report 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 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 dividend income is recorded on the ex-dividend date or as soon as practical after the Fund determines the existence of a dividend declaration after exercising reasonable due diligence; ( f ) 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) class specific expenses are charged to each class; management fees and general fund expenses are allocated on the basis of relative net assets of each class or on another reasonable basis; (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; (k) the character of income and gains distributed is determined in accordance with income tax regulations which may differ from accounting principles generally accepted in the United States of America; (l) the Fund intends to comply with the applicable provisions of the Internal Revenue Code of 1986, as amended, pertaining to regulated investment companies and to make distributions of taxable income sufficient to relieve it from substantially all Federal income and excise taxes; and (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 the Fund's 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 the Fund's average daily net assets in excess of $3 billion. This fee is calculated daily and paid monthly. 14 Smith Barney Appreciation Fund Inc. | 2003 Annual Report NOTES TO FINANCIAL STATEMENTS (CONTINUED) Citicorp Trust Bank, fsb. ("CTB"), another subsidiary of Citigroup, acts as the Fund's transfer agent. PFPC Inc. ("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 and are paid by CTB. For the year ended December 31, 2003, the Fund paid transfer agent fees of $3,586,426 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. 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 and declines 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 year ended December 31, 2003, CGM and its affiliates received sales charges of approximately $6,602,000 and $1,286,000 on sales of the Fund's Class A and L shares, respectively. In addition, for the year ended December 31, 2003, CDSCs paid to CGM and its affiliates were approximately:
Class A Class B Class L - -------------------------------------------------------------- CDSCs $6,000 $1,451,000 $65,000 - --------------------------------------------------------------
For the year ended December 31, 2003, CGM and its affiliates received brokerage commissions of $242,331. All officers and one Director of the Fund are employees of Citigroup or its affiliates. 3. Investments During the year ended December 31, 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 $1,967,682,214 - -------------------------------------------------- Sales 1,722,379,329 - --------------------------------------------------
At December 31, 2003, the aggregate gross unrealized appreciation and depreciation of investments for Federal income tax purposes were as follows: - -------------------------------------------------- Gross unrealized appreciation $1,311,938,512 Gross unrealized depreciation (15,915,465) - -------------------------------------------------- Net unrealized appreciation $1,296,023,047 - --------------------------------------------------
15 Smith Barney Appreciation Fund Inc. | 2003 Annual Report NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. Repurchase Agreements The Fund purchases (and the custodian takes possession of ) U.S. government securities from 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 December 31, 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 year ended December 31, 2003 was $130,918. At December 31, 2003, the Fund did not have any securities on loan. 16 Smith Barney Appreciation Fund Inc. | 2003 Annual Report NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. Class Specific Expenses Pursuant to a Rule 12b-1 Distribution Plan, the Fund pays a service fee with respect to its Class A, B and L shares calculated at an annual rate of 0.25% of the average daily net assets of each class, respectively. The Fund also pays a distribution fee with respect to Class B and L shares calculated at an annual rate of 0.75% of the average daily net assets of each class, respectively. For the year ended December 31, 2003, total Rule 12b-1 Distribution Plan fees incurred, which are accrued daily and paid monthly, were as follows:
Class A Class B Class L - -------------------------------------------------------------------- Rule 12b-1 Distribution Plan Fees $6,831,064 $9,460,509 $4,042,090 - -------------------------------------------------------------------
For the year ended December 31, 2003, total Shareholder Servicing fees were as follows:
Class A Class B Class L Class Y Class Z - ---------------------------------------------------------------------------------- Shareholder Servicing Fees $3,275,318 $1,598,289 $822,411 $1,040 $33 - ---------------------------------------------------------------------------------
For the year ended December 31, 2003, total Shareholder Communication expenses were as follows:
Class A Class B Class L Class Y Class Z - --------------------------------------------------------------------------- Shareholder Communication Expenses $88,468 $65,728 $21,100 $150 $1,650 - --------------------------------------------------------------------------
8. Distributions Paid to Shareholders by Class
Year Ended Year Ended December 31, 2003 December 31, 2002 - -------------------------------------------------------- Class A Net investment income $19,269,683 $ 1,316,593 Net realized gains -- 48,907,997 - ------------------------------------------------------- Total $19,269,683 $50,224,590 - ------------------------------------------------------- Class B 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 $ 6,142,949 $ 53,585 Net realized gains -- 1,418,794 - ------------------------------------------------------- Total $ 6,142,949 $ 1,472,379 - ------------------------------------------------------- Class Z Net investment income -- $ 221,849 Net realized gains -- 5,876,280 - ------------------------------------------------------- Total -- $ 6,098,129 - -------------------------------------------------------
*As of April 21, 2003, Class Z shares were fully exchanged into Class Y shares. 17 Smith Barney Appreciation Fund Inc. | 2003 Annual Report NOTES TO FINANCIAL STATEMENTS (CONTINUED) 9. Capital Shares At December 31, 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:
Year Ended Year Ended December 31, 2003 December 31, 2002 -------------------------- -------------------------- Shares Amount Shares Amount - ---------------------------------------------------------------------------- Class A Shares sold 35,326,517 $ 433,034,096 23,322,712 $ 288,859,068 Shares issued on reinvestment 1,384,598 18,071,724 4,425,878 47,578,185 Shares reacquired (26,353,600) (317,863,939) (34,691,639) (420,120,972) - --------------------------------------------------------------------------- Net Increase (Decrease) 10,357,515 $ 133,241,881 (6,943,049) $ (83,683,719) - --------------------------------------------------------------------------- Class B Shares sold 18,265,663 $ 216,093,603 18,924,345 $ 229,607,053 Shares issued on reinvestment -- -- 1,536,921 16,306,724 Shares reacquired (18,386,441) (217,188,666) (20,591,363) (248,581,737) - --------------------------------------------------------------------------- Net Decrease (120,778) $ (1,095,063) (130,097) $ (2,667,960) - --------------------------------------------------------------------------- Class L Shares sold 15,867,917 $ 189,244,812 13,584,475 $ 163,337,685 Shares issued on reinvestment -- -- 468,056 4,970,758 Shares reacquired (5,716,208) (66,867,882) (4,658,899) (54,604,420) - --------------------------------------------------------------------------- Net Increase 10,151,709 $ 122,376,930 9,393,632 $ 113,704,023 - --------------------------------------------------------------------------- Class Y Shares sold 28,255,831 $ 326,434,172 1,554,484 $ 18,265,106 Shares issued on reinvestment 379,634 4,951,458 -- -- Shares reacquired (1,811,607) (22,659,694) (292,227) (3,482,676) - --------------------------------------------------------------------------- Net Increase 26,823,858 $ 308,725,936 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. 10.Capital Loss Carryforward At December 31, 2003, the Fund had, for Federal income tax purposes, approximately $18,003,000 of unused capital loss carryforwards available to offset future capital gains, expiring on December 31, 2010. To the extent that these capital carryforward losses are used to offset capital gains, it is probable that the gains so offset will not be distributed. 18 Smith Barney Appreciation Fund Inc. | 2003 Annual Report NOTES TO FINANCIAL STATEMENTS (CONTINUED) 11.Income Tax Information and Distributions to Shareholders The tax basis components of distributable earnings at December 31 were: 2003 2002 - ----------------------------------------------------------------- Undistributed ordinary income $ 2,110,417 $ 12,406,599 - ---------------------------------------------------------------- Accumulated capital losses (18,002,765) (67,380,606) - ---------------------------------------------------------------- Unrealized appreciation 1,296,026,556 358,263,845 - ---------------------------------------------------------------- At December 31, 2003 and 2002, the difference between book basis and tax basis unrealized appreciation is attributable primarily to wash sale loss deferrals. The tax character of distributions paid during the year ended December 31 was: 2003 2002 - ----------------------------------------------------------- Ordinary income $25,412,632 $ 1,600,870 Capital -- 78,435,627 - ---------------------------------------------------------- Total $25,412,632 $80,036,497 - ---------------------------------------------------------- 12.Additional Information The Fund has received the following information from Citigroup Asset Management ("CAM"), the Citigroup business unit which includes the Fund's Investment Manager and other investment advisory companies, all of which are indirect, wholly-owned subsidiaries of Citigroup. CAM is reviewing its entry, through an affiliate, into the transfer agent business in the period 1997-1999. As CAM currently understands the facts, at the time CAM decided to enter the transfer agent business, CAM sub-contracted for a period of five years certain of the transfer agency services to a third party and also concluded a revenue guarantee agreement with this sub-contractor providing that the sub-contractor would guarantee certain benefits to CAM or its affiliates (the "Revenue Guarantee Agreement"). In connection with the subsequent purchase of the sub-contractor's business by an affiliate of the current sub-transfer agent (PFPC Inc.) used by CAM on many of the funds it manages, this Revenue Guarantee Agreement was amended eliminating those benefits in exchange for arrangements that included a one-time payment from the sub-contractor. The Boards of CAM-managed funds (the "Boards") were not informed of the Revenue Guarantee Agreement with the sub-contractor at the time the Boards considered and approved the transfer agent arrangements. Nor were the Boards informed of the subsequent amendment to the Revenue Guarantee Agreement when that occurred. CAM has begun to take corrective actions. CAM will pay to the applicable funds approximately $17 million (plus interest) that CAM and its affiliates received from the Revenue Guarantee Agreement and its amendment. CAM also plans an independent review to verify that the transfer agency fees charged by CAM were fairly priced as compared to competitive alternatives. CAM is instituting new procedures and making changes designed to ensure no similar arrangements are entered into in the future. CAM has briefed the SEC, the New York State Attorney General and other regulators with respect to this matter, as well as the U.S. Attorney who is investigating the matter. CAM is cooperating with governmental authorities on this matter, the ultimate outcome of which is not yet determinable. 13.Subsequent Event Effective February 2, 2004, the 1.00% initial sales charge on Class L shares will no longer be imposed. 19 Smith Barney Appreciation Fund Inc. | 2003 Annual Report 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)/ 2002/(1)/ 2001/(1)/ 2000/(1)/ 1999/(1)/ - ------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Year $11.13 $13.69 $14.55 $15.73 $15.31 - ------------------------------------------------------------------------------------------------- Income (Loss) From Operations: Net investment income 0.07 0.06 0.10 0.16 0.15 Net realized and unrealized gain (loss) 2.67 (2.39) (0.59) (0.04) 2.08 - ------------------------------------------------------------------------------------------------- Total Income (Loss) From Operations 2.74 (2.33) (0.49) 0.12 2.23 - ------------------------------------------------------------------------------------------------- Less Distributions From: Net investment income (0.08) (0.01) (0.08) (0.15) (0.14) Net realized gains -- (0.22) (0.29) (1.15) (1.67) - ------------------------------------------------------------------------------------------------- Total Distributions (0.08) (0.23) (0.37) (1.30) (1.81) - ------------------------------------------------------------------------------------------------- Net Asset Value, End of Year $13.79 $11.13 $13.69 $14.55 $15.73 - ------------------------------------------------------------------------------------------------- Total Return 24.70% (17.00)% (3.44)% 0.73% 15.08% - ------------------------------------------------------------------------------------------------- Net Assets, End of Year (millions) $3,210 $2,476 $3,140 $3,212 $3,326 - ------------------------------------------------------------------------------------------------- Ratios to Average Net Assets: Expenses 0.96% 0.95% 0.92% 0.90% 0.92% Net investment income 0.55 0.48 0.68 1.02 0.96 - ------------------------------------------------------------------------------------------------- Portfolio Turnover Rate 42% 74% 62% 61% 71% - -------------------------------------------------------------------------------------------------
Class B Shares 2003/(1)/ 2002/(1)/ 2001/(1)/ 2000/(1)/ 1999/(1)/ - ------------------------------------------------------------------------------------------------------ Net Asset Value, Beginning of Year $10.95 $13.58 $14.47 $15.66 $15.26 - ------------------------------------------------------------------------------------------------------ Income (Loss) From Operations: Net investment income (loss) (0.03) (0.05) (0.02) 0.03 0.03 Net realized and unrealized gain (loss) 2.62 (2.36) (0.58) (0.04) 2.06 - ------------------------------------------------------------------------------------------------------ Total Income (Loss) From Operations 2.59 (2.41) (0.60) (0.01) 2.09 - ------------------------------------------------------------------------------------------------------ Less Distributions From: Net investment income -- -- -- (0.03) (0.02) Net realized gains -- (0.22) (0.29) (1.15) (1.67) - ------------------------------------------------------------------------------------------------------ Total Distributions -- (0.22) (0.29) (1.18) (1.69) - ------------------------------------------------------------------------------------------------------ Net Asset Value, End of Year $13.54 $10.95 $13.58 $14.47 $15.66 - ------------------------------------------------------------------------------------------------------ Total Return 23.65% (17.70)% (4.20)% (0.12)% 14.19% - ------------------------------------------------------------------------------------------------------ Net Assets, End of Year (millions) $1,075 $871 $1,081 $1,305 $1,755 - ------------------------------------------------------------------------------------------------------ Ratios to Average Net Assets: Expenses 1.76% 1.82% 1.76% 1.69% 1.70% Net investment income (loss) (0.26) (0.38) (0.17) 0.23 0.17 - ------------------------------------------------------------------------------------------------------ Portfolio Turnover Rate 42% 74% 62% 61% 71% - ------------------------------------------------------------------------------------------------------
(1) Per share amounts have been calculated using the monthly average shares method. 20 Smith Barney Appreciation Fund Inc. | 2003 Annual Report 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)/ 2002/(1)/ 2001/(1)/ 2000/(1)/ 1999/(1)/ - ------------------------------------------------------------------------------------------ Net Asset Value, Beginning of Year $10.96 $ 13.58 $14.47 $15.65 $15.26 - ---------------------------------------------------------------------------------------- Income (Loss) From Operations: Net investment income (loss) (0.03) (0.04) (0.02) 0.03 0.03 Net realized and unrealized gain (loss) 2.62 (2.36) (0.58) (0.03) 2.05 - ---------------------------------------------------------------------------------------- Total Income (Loss) From Operations 2.59 (2.40) (0.60) -- 2.08 - ---------------------------------------------------------------------------------------- Less Distributions From: Net investment income -- (0.00)* -- (0.03) (0.02) Net realized gains -- (0.22) (0.29) (1.15) (1.67) - ---------------------------------------------------------------------------------------- Total Distributions -- (0.22) (0.29) (1.18) (1.69) - ---------------------------------------------------------------------------------------- Net Asset Value, End of Year $13.55 $ 10.96 $13.58 $14.47 $15.65 - ---------------------------------------------------------------------------------------- Total Return 23.63% (17.62)% (4.20)% (0.07)% 14.12% - ---------------------------------------------------------------------------------------- Net Assets, End of Year (millions) $531 $318 $266 $190 $161 - ---------------------------------------------------------------------------------------- Ratios to Average Net Assets: Expenses 1.80% 1.75% 1.72% 1.72% 1.71% Net investment income (loss) (0.28) (0.30) (0.13) 0.20 0.18 - ---------------------------------------------------------------------------------------- Portfolio Turnover Rate 42% 74% 62% 61% 71% - ----------------------------------------------------------------------------------------
Class Y Shares 2003/(1)/ 2002/(1)/ 2001/(1)/ 2000/(1)/ 1999/(1)/ - ------------------------------------------------------------------------------------------ Net Asset Value, Beginning of Year $11.15 $ 13.67 $14.52 $ 15.69 $ 15.28 - ----------------------------------------------------------------------------------------- Income (Loss) From Operations: Net investment income 0.12 0.10 0.14 0.20 0.21 Net realized and unrealized gain (loss) 2.67 (2.39) (0.58) (0.02) 2.07 - ----------------------------------------------------------------------------------------- Total Income (Loss) From Operations 2.79 (2.29) (0.44) 0.18 2.28 - ----------------------------------------------------------------------------------------- Less Distributions From: Net investment income (0.18) (0.01) (0.12) (0.20) (0.20) Net realized gains -- (0.22) (0.29) (1.15) (1.67) - ----------------------------------------------------------------------------------------- Total Distributions (0.18) (0.23) (0.41) (1.35) (1.87) - ----------------------------------------------------------------------------------------- Net Asset Value, End of Year $13.76 $ 11.15 $13.67 $ 14.52 $ 15.69 - ----------------------------------------------------------------------------------------- Total Return 25.11% (16.71)% (3.07)% 1.07% 15.40% - ----------------------------------------------------------------------------------------- Net Assets, End of Year (millions) $474 $85 $87 $89 $99 - ----------------------------------------------------------------------------------------- Ratios to Average Net Assets: Expenses 0.59% 0.59% 0.58% 0.58% 0.57% Net investment income 0.96 0.85 1.02 1.34 1.30 - ----------------------------------------------------------------------------------------- Portfolio Turnover Rate 42% 74% 62% 61% 71% - -----------------------------------------------------------------------------------------
(1) Per share amounts have been calculated using the monthly average shares method. * Amount represents less than $0.01 per share. 21 Smith Barney Appreciation Fund Inc. | 2003 Annual Report INDEPENDENT AUDITORS' REPORT The Shareholders and Board of Directors of the Smith Barney Appreciation Fund Inc.: We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of the Smith Barney Appreciation Fund Inc. ("Fund") as of December 31, 2003, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, 2003, by correspondence with the custodian and broker. As to securities purchased or sold but not yet received or delivered, 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 Fund as of December 31, 2003, and the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP New York, New York February 13, 2004 22 Smith Barney Appreciation Fund Inc. | 2003 Annual Report ADDITIONAL INFORMATION (UNAUDITED) Information about Directors and Officers The business and affairs of the Smith Barney Appreciation Fund Inc. ("Fund") are managed under the direction of the Board of Directors. Information pertaining to the Directors and Officers of the Fund is set forth below. The Statement of Additional Information includes additional information about the Fund's and is available, without charge, upon request by calling the Fund's transfer agent (Citicorp Trust Bank, fsb. at 1-800-451-2010) or the Fund's sub-transfer agent (Primerica Shareholder Services at 1-800-544-5445).
Number of Term of Portfolios in Office* and Fund Complex Other Board Position(s) Held Length of Principal Occupation(s) Overseen by Memberships Held Name, Address, and Age with Fund Time Served During Past 5 Years Director by Director - -------------------------------------------------------------------------------------------------------------------------------- Non-Interested Directors: Herbert Barg** Director Since Retired 42 None 1460 Drayton Lane 1995 Wynnewood, PA 19096 Age 80 Dwight B. Crane Director Since Professor, Harvard Business School 49 None Harvard Business School 1995 Soldiers Field Morgan Hall #375 Boston, MA 02163 Age 66 Burt N. Dorsett Director Since President of Dorsett McCabe 27 None 201 East 62nd Street 1991 Capital Management Inc.; New York, NY 10021 Chief Investment Officer of Leeb Age 73 Capital Management, Inc. (since 1999) Elliot S. Jaffe Director Since Chairman of the Board 27 The Dress Barn Inc.; The Dress Barn Inc. 1991 of The Dress Barn Inc. Zweig Total Return Executive Office Fund; Zweig Fund, Inc. 30 Dunnigan Drive Suffern, NY 10901 Age 77 Stephen E. Kaufman Director Since Attorney 55 None Stephen E. Kaufman PC 1995 277 Park Avenue, 47th Floor New York, NY 10172 Age 71 Joseph J. McCann Director Since Retired 27 None 200 Oak Park Place 1995 Suite One Pittsburgh, PA 15243 Age 74 Cornelius C. Rose, Jr. Director Since Chief Executive Officer -- 27 None P.O. Box 5388 1991 Performance Learning Systems West Lebanon, NH 03784 Age 71
23 Smith Barney Appreciation Fund Inc. | 2003 Annual Report ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
Number of Term of Portfolios in Office* and Fund Complex Other Board Position(s) Held Length of Principal Occupation(s) Overseen by Memberships Held Name, Address, and Age with Fund Time Served During Past 5 Years Director by Director - ------------------------------------------------------------------------------------------------------------------------------ Interested Director: R. Jay Gerken, CFA*** Chairman, Since Managing Director of Citigroup 221 None Citigroup Asset Management President 2002 Global Markets Inc. ("CGM"); ("CAM") and Chief Chairman, President and Chief 399 Park Avenue, 4th Floor Executive Officer Executive Officer of Smith Barney New York, NY 10022 Fund Management LLC ("SBFM"), Age 52 Travelers Investment Adviser, Inc. ("TIA") and Citi Fund Management Inc. ("CFM"); President and Chief Executive Officer of certain mutual funds associated with Citigroup Inc. ("Citigroup"); Formerly Portfolio Manager of Smith Barney Allocation Series Inc. (from 1996 to 2001) and Smith Barney Growth and Income Fund (from 1996 to 2000) Officers: Andrew B. Shoup Senior Vice Since Director of CAM; Senior Vice N/A N/A CAM President and 2003 President and Chief Administrative 125 Broad Street, 10th Floor Chief Officer of mutual funds associated New York, NY 10004 Administrative with Citigroup; Treasurer of certain Age 47 Officer mutual funds associated with Citigroup; Head of International Funds Administration of CAM (from 2001 to 2003); Director of Global Funds Administration of CAM (from 2000 to 2001); Head of U.S. Citibank Funds Administration of CAM (from 1998 to 2000) Richard L. Peteka Chief Financial Since Director of CGM; Chief Financial N/A N/A CAM Officer and 2002 Officer and Treasurer of certain 125 Broad Street, 11th Floor Treasurer mutual funds affiliated with New York, NY 10004 Citigroup; Director and Head of Age 42 Internal Control for CAM U.S. Mutual Fund Administration (from 1999 to 2002); Vice President, Head of Mutual Fund Administration and Treasurer at Oppenheimer Capital (from 1996 to 1999) Harry D. Cohen Vice President Since Managing Director of CGM; N/A N/A CAM and Investment 1980 Investment Officer of SBFM 399 Park Avenue Officer New York, NY 10022 Age 63 Scott K. Glasser Vice President Since Managing Director of CGM; N/A N/A CAM and Investment 1996 Investment Officer of SBFM 399 Park Avenue Officer New York, NY 10022 Age 38
24 Smith Barney Appreciation Fund Inc. | 2003 Annual Report ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
Number of Term of Portfolios in Office* and Fund Complex Other Board Position(s) Held Length of Principal Occupation(s) Overseen by Memberships Held Name, Address, and Age with Fund Time Served During Past 5 Years Director by Director - ---------------------------------------------------------------------------------------------------------------------------- Andrew Beagley Chief Anti-Money Since Director of CGM (since 2000); N/A N/A CAM Laundering 2002 Director of Compliance, North 399 Park Avenue, 4th Floor Compliance America, CAM (since 2000); Chief New York, NY 10022 Officer Anti-Money Laundering Age 40 Compliance Officer and Vice President of certain mutual funds associated with Citigroup; Director of Compliance, Europe, the Middle East and Africa, Citigroup Asset Management (from 1999 to 2000); Compliance Officer, Salomon Brothers Asset Management Limited, Smith Barney Global Capital Management Inc., Salomon Brothers Asset Management Asia Pacific Limited (from 1997 to 1999) Kaprel Ozsolak Controller Since Vice President of CGM; Controller N/A N/A CAM 2002 of certain mutual funds associated 125 Broad Street, 11th Floor with Citigroup New York, NY 10004 Age 38 Robert I. Frenkel Secretary and Since Managing Director and General N/A N/A CAM Chief Legal 2003 Counsel of Global Mutual Funds 300 First Stamford Place Officer for CAM and its predecessor (since 4th Floor 1994); Secretary of CFM; Secretary Stamford, CT 06902 and Chief Legal Officer of mutual Age 48 funds associated with Citigroup
- -------- * Each Director and Officer serves until his or her successor has been duly elected and qualified. ** Mr. Barg became Director Emeritus on December 31, 2003. ***Mr. Gerken is an "interested person" of the Fund as defined in the Investment Company Act of 1940, as amended, because Mr. Gerken is an officer of SBFM and certain of its affiliates. 25 Smith Barney Appreciation Fund Inc. | 2003 Annual Report TAX INFORMATION (UNAUDITED) For Federal tax purposes, the Fund hereby designates for the fiscal year ended December 31, 2003: . For corporate shareholders, the percentage of ordinary dividends that qualify for the dividends received deduction is 100.00%. . For individual shareholders, the maximum amount allowable of qualifying dividends for the reduced tax rate under The Jobs and Growth Tax Relief Reconciliation Act of 2003. 26 Smith Barney Appreciation Fund Inc. | 2003 Annual Report (This page intentionally left blank.) SMITH BARNEY APPRECIATION FUND INC. DIRECTORS OFFICERS (continued) Herbert Barg* Kaprel Ozsolak Dwight B. Crane Controller Burt N. Dorsett R. Jay Gerken, CFA Robert I. Frenkel Chairman Secretary and Elliot S. Jaffe Chief Legal Officer Stephen E. Kaufman Joseph J. McCann INVESTMENT ADVISER Cornelius C. Rose, Jr. AND ADMINISTRATOR Smith Barney Fund OFFICERS Management LLC R. Jay Gerken, CFA President and Chief DISTRIBUTORS Executive Officer Citigroup Global Markets Inc. PFS Distributors, Inc. Andrew B. Shoup Senior Vice President and CUSTODIAN Chief Administrative Officer State Street Bank and Trust Company Richard L. Peteka Chief Financial Officer TRANSFER AGENT and Treasurer Citicorp Trust Bank, fsb. 125 Broad Street, 11th Floor Harry D. Cohen New York, New York 10004 Vice President and Investment Officer SUB-TRANSFER AGENTS PFPC Inc. Scott K. Glasser P.O. Box 9699 Vice President and Providence, Rhode Island Investment Officer 02940-9699 Andrew Beagley Primerica Shareholder Services Chief Anti-Money P.O. Box 9662 Laundering Compliance Officer Providence, Rhode Island 02940-9662
* Mr. Barg became Director Emeritus on December 31, 2003. 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 March 31, 2004 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 FD0312 2/04 04-6109 ITEM 2. CODE OF ETHICS. The registrant has adopted a code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. The Board of Directors of the registrant has determined that Dwight B. Crane, the Chairman of the Board's Audit Committee, possesses the technical attributes identified in Instruction 2(b) of Item 3 to Form N-CSR to qualify as an "audit committee financial expert," and has designated Mr. Crane as the Audit Committee's financial expert. Mr. Crane is an "independent" Director pursuant to paragraph (a)(2) of Item 3 to Form N-CSR. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. (a) Audit Fees for Smith Barney Appreciation Fund Inc. of $36,500 and $33,000 for the years ended 12/31/03 and 12/31/02. (b) Audit-Related Fees for Smith Barney Appreciation Fund Inc. of $0 and $0 for the years ended 12/31/03 and 12/31/02. (c) Tax Fees for Smith Barney Appreciation Fund Inc. of $3,400 and $3,400 for the years ended 12/31/03 and 12/31/02. These amounts represent aggregate fees paid for tax compliance, tax advice and tax planning services, which include (the filing and amendment of federal, state and local income tax returns, timely RIC qualification review and tax distribution and analysis planning) rendered by the Accountant to Smith Barney Appreciation Fund Inc. (d) There were no all other fees for Smith Barney Appreciation Fund Inc. for the years ended 12/31/03 and 12/31/02. (e) (1) Audit Committee's pre-approval policies and procedures described in paragraph (c) (7) of Rule 2-01 of Regulation S-X. The Charter for the Audit Committee (the "Committee") of the Board of each registered investment company (the "Fund") advised by Smith Barney Fund Management LLC or Salomon Brothers Asset Management Inc. or one of their affiliates (each, an "Adviser") requires that the Committee shall approve (a) all audit and permissible non-audit services to be provided to the Fund and (b) all permissible non-audit services to be provided by the Fund's independent auditors to the Adviser and any Covered Service Providers if the engagement relates directly to the operations and financial reporting of the Fund. The Committee may implement policies and procedures by which such services are approved other than by the full Committee. The Committee shall not approve non-audit services that the Committee believes may impair the independence of the auditors. As of the date of the approval of this Audit Committee Charter, permissible non-audit services include any professional services (including tax services), that are not prohibited services as described below, provided to the Fund by the independent auditors, other than those provided to the Fund in connection with an audit or a review of the financial statements of the Fund. Permissible non-audit services may not include: (i) bookkeeping or other services related to the accounting records or financial statements of the Fund; (ii) financial information systems design and implementation; (iii) appraisal or valuation services, fairness opinions or contribution-in-kind reports; (iv) actuarial services; (v) internal audit outsourcing services; (vi) management functions or human resources; (vii) broker or dealer, investment adviser or investment banking services; (viii) legal services and expert services unrelated to the audit; and (ix) any other service the Public Company Accounting Oversight Board determines, by regulation, is impermissible. Pre-approval by the Committee of any permissible non-audit services is not required so long as: (i) the aggregate amount of all such permissible non-audit services provided to the Fund, the Adviser and any service providers controlling, controlled by or under common control with the Adviser that provide ongoing services to the Fund ("Covered Service Providers") constitutes not more than 5% of the total amount of revenues paid to the independent auditors during the fiscal year in which the permissible non-audit services are provided to (a) the Fund, (b) the Adviser and (c) any entity controlling, controlled by or under common control with the Adviser that provides ongoing services to the Fund during the fiscal year in which the services are provided that would have to be approved by the Committee; (ii) the permissible non-audit services were not recognized by the Fund at the time of the engagement to be non-audit services; and (iii) such services are promptly brought to the attention of the Committee and approved by the Committee (or its delegate(s)) prior to the completion of the audit. (2) (f) N/A (g) Non-audit fees billed - $100,000 and $1.2 million for the years ended 12/31/2003 and 12/31/2002. (h) Yes. The Smith Barney Appreciation Fund Inc.'s Audit Committee has considered whether the provision of non-audit services that were rendered to Service Affiliates which were not pre-approved (not requiring pre-approval) is compatible with maintaining the Accountant's independence. All services provided by the Accountant to the Smith Barney Appreciation Fund Inc. or to Service Affiliates which were required to be pre-approved were pre- approved as required. 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- 3(c) under the Investment Company Act of 1940, as amended (the "1940 Act")) are effective as of a date within 90 days of the filing date of this report that includes the disclosure required by this paragraph, based on their evaluation of the disclosure controls and procedures required by Rule 30a-3(b) under the 1940 Act and 15d-15(b) under the Securities Exchange Act of 1934. (b) There were no changes in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during the registrant's last fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that have materially affected, or are likely to materially affect the registrant's internal control over financial reporting. ITEM 10. EXHIBITS. (a) Code of Ethics attached hereto. Exhibit 99.CODE ETH (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: March 5, 2004 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: March 5, 2004 By: /s/ Richard L. Peteka Richard L. Peteka Chief Financial Officer of Smith Barney Appreciation Fund Inc. Date: March 5, 2004 EX-99.CODE ETH 3 dex99codeeth.txt CODE OF ETHICS June, 2003 EX 99.CODE ETH Sarbanes-oxley act CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS OF CAM/U.S. REGISTERED INVESTMENT COMPANIES I. Covered Officers/Purpose of the Code This code of ethics (the "Code") for Citigroup Asset Management's "CAM's") U. S. registered proprietary investment companies (collectively, "Funds" and each a, "Company") applies to each Company's Chief Executive Officer, Chief Administrative Officer, Chief Financial Officer and Controller (the "Covered Officers") for the purpose of promoting: . honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; . full, fair, accurate, timely and understandable disclosure in reports and documents that the Company files with, or submits to, the Securities and Exchange Commission ("SEC") and in other public communications made by the Company; . compliance with applicable laws and governmental rules and regulations; . the prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and . accountability for adherence to the Code. Each Covered Officer should adhere to a high standard of business ethics and should be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. II. Administration of Code The Regional Director of CAM Compliance, North America ("Compliance Officer") is responsible for administration of this Code, including granting pre-approvals (see Section III below) and waivers (as described in Section VI below), applying this Code in specific situations in which questions are presented under it and interpreting this Code in any particular situation. III. Covered Officers Should Ethically Handle Actual and Apparent Conflicts of Interest Overview. A "conflict of interest" occurs when a Covered Officer's private interest interferes with the interests of, or his service to, the Company. For example, a conflict of interest would arise if a Covered Officer, or a member of his family, receives improper personal benefits as a result of his position with the Company. Certain conflicts of interest arise out of the relationships between Covered Officers and the Company and already are subject to conflict of interest provisions in the Investment Company Act of 1940 ("Investment Company Act") and the Investment Advisers Act of 1940 ("Investment Advisers Act"). For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with the Company because of their status as "affiliated persons" of the Company. The compliance programs and procedures of the Company and its investment adviser are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside of the parameters of this Code (see Section VII below). Although typically not presenting an opportunity for improper personal benefit, conflicts arise from, or as a result of, the contractual relationship between a Company and the investment adviser of which the Covered Officers are also officers or employees. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties (whether formally for a Company or for the adviser, or for both), be involved in establishing policies and implementing decisions that will have different effects on the adviser and a Company. The participation of the Covered Officers in such activities is inherent in the contractual relationship between the Company and the adviser and is consistent with the performance by the Covered Officers of their duties as officers of a Company. Thus, if performed in conformity with the provisions of the Investment Company Act and the Investment Advisers Act, such activities will be deemed to have been handled ethically. In addition, it is recognized by the Funds' Boards of Directors\Trustees ("Boards") that the Covered Officers may also be officers or employees of one or more other investment companies covered by this or other codes. Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of the Company. * * * * Each Covered Officer must: . not use his personal influence or personal relationships improperly to influence investment decisions or financial reporting ( e.g. through fraudulent accounting practices) by the Company whereby the Covered Officer/1/ would benefit personally to the detriment of the Company; or . not cause the Company to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than for the benefit of the Company; and . not use material non-public knowledge of portfolio transactions made or contemplated for the Company to trade personally or cause others to trade personally in contemplation of the market affect of such transactions. . There are some potential conflict of interest situations that should always be discussed with the Compliance Officer, if material. Examples are as follows: (1) service as a director on the board of any public or private company; (2) any ownership interest in, or any consulting or employment relationship with, any of the Company's service providers, other than its investment adviser, (3) a direct or indirect financial interest in commissions, transaction charges or spreads paid by the Company for effecting portfolio transactions or for selling or redeeming shares other than an interest arising from the Covered Officer's employment, such as compensation or equity ownership; and 4) the receipt of any gifts or the conveyance of any value (including entertainment) from any company with which the Company has current or prospective business dealings, except: (a) any non-cash gifts of nominal value (nominal value is less than $100); and (b) customary and reasonable meals and entertainment at which the giver is present, such as the occasional business meal or sporting event. IV. Disclosure and Compliance Each Covered Officer: . should be familiar with his or her responsibilities in connection with the disclosure requirements generally applicable to the Company; ___________ /1/ Any activity or relationship that would present a conflict for a Covered Officer would also present a conflict for the Covered Officer if a member of a Covered Officer's family (spouse, minor children and any account over which a Covered Officer is deemed to have beneficial interest) engages in such an activity or has such a relationship. . should not knowingly misrepresent, or knowingly cause others to misrepresent, facts about the Company to others, whether within or outside the Company, including to the Company's directors and auditors, and to governmental regulators and self-regulatory organizations; . should, to the extent appropriate within his or her area of responsibility, consult with other officers and employees of the Funds and the investment adviser with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the Funds file with, or submit to, the SEC and in other public communications made by the Funds; and . is responsible to promote compliance with the standards and restrictions imposed by applicable laws, rules and regulations. V. Reporting and Accountability Each Covered Officer must: . upon adoption of the Code (or thereafter as applicable, upon becoming a Covered Officer), affirm in writing to the Board that the Covered Officer has received, read, and understands the Code; . annually thereafter affirm to the Board that he or she has complied with the requirements of the Code; . annually disclose affiliations and other relationships related to conflicts of interest; . not retaliate against any other Covered Officer or any employee of the Funds or their affiliated persons for reports of potential violations that are made in good faith; and . notify the Compliance Officer promptly if he knows of any violation of this Code (failure to do so is itself a violation of this Code). In rendering decisions and interpretations and in conducting investigations of potential violations under the Code, the Compliance Officer may, at his discretion, consult with such persons as he determines to be appropriate, including, but not limited to, a senior legal officer of the Company or its investment adviser or its affiliates, independent auditors or other consultants, subject to any requirement to seek pre-approval from the Company's audit committee for the retention of independent auditors to perform permissible non-audit services. The Funds will follow these procedures in investigating and enforcing the Code: . the compliance Officer will take all appropriate action to investigate any potential violation of which he becomes aware; . if, after investigation the Compliance Officer believes that no violation has occurred, the Compliance Officer is not required to take any further action; . any matter that the Compliance Officer believes is a violation will be reported to the Directors of the Fund who are not "interested persons" as defined in the Investment Company Act the ("Non-interested Directors") . if the Non-interested Directors of the Board concur that a violation has occurred, it will consider appropriate action, which may include review of, and appropriate modifications to, applicable policies and procedures; notification to appropriate personnel of the investment adviser or its board; or a recommendation to dismiss the Covered Officer; and . any changes to or waivers of this Code will, to the extent required, be disclosed as provided by SEC rules The Compliance Officer shall submit an annual report to the Board describing any waivers granted. VI. Waivers/2/ A Covered Officer may request a waiver of any of the provisions of the Code by submitting a written request for such waiver to the Compliance Officer, setting forth the basis of such request and explaining how the waiver would be consistent with the standards of conduct described herein. The Compliance Officer shall review such request and make a determination thereon in writing, which shall be binding. In determining whether to waive any provisions of this Code, the Compliance Officer shall consider whether the proposed waiver is consistent with honest and ethical conduct and other purposes of this Code. VII. Other Policies and Procedures This Code shall be the sole code of ethics adopted by the Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder. Insofar as other policies or procedures of the Funds, the Funds' investment advisers, principal underwriters, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code. The codes of ethics of the funds and the investment advisers and principal underwriters under Rule 17j-1 of the Investment Company Act and the Citigroup Code of Conduct and Citigroup Statement of Business Practices as well as other policies of the Fund's investment advisers or their affiliates are separate requirements applying to the Covered Officers and others, and are not part of this Code. __________ /2/ For purposes of this Code, Item 2 of Form N-CSR defines "waiver" as "the approval by a Company of a material departure from a provision of the Code" and includes an"implicit waiver," which means a Company's failure to take action within a reasonable period of time regarding a material departure from a provision of the Code that has been made known to an executive officer of the Company. VIII. Amendments Any amendments to this Code, other than amendments to Exhibits A, B and C must be approved or ratified by a majority vote of the Board, including a majority of Non-interested Directors. IX. Confidentiality All reports and records prepared or maintained pursuant to this Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than the appropriate Board and Company and their respective counsel, counsel to the non-Interested Directors or independent auditors or other consultants referred to in Section V above. X. Internal Use The Code is intended solely for the internal use by the Funds and does not constitute an admission, by or on behalf of any Company, as to any fact, circumstance, or legal conclusion. EX-99.CERT 4 dex99cert.txt CERTIFICATION PURSUANT TO SECTION 302 CERTIFICATIONS PURSUANT TO SECTION 302 EX-99.CERT CERTIFICATIONS I, R. Jay Gerken, certify that: 1. I have reviewed this report on Form N-CSR of Smith Barney Appreciation Fund Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial data; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 5, 2004 /s/ R. Jay Gerken ---------------------------------- R. Jay Gerken Chief Executive Officer I, Richard L. Peteka, certify that: 1. I have reviewed this report on Form N-CSR of Smith Barney Appreciation Fund Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial information included in this report, and the financial statements on which the financial information is based, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in rule 30a-3(c) under the Investment Company Act) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial data; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 5, 2004 /s/ Richard L. Peteka ---------------------------------- Richard L. Peteka Chief Financial Officer EX-99.906CERT 5 dex99906cert.txt CERTIFICATION PURSUANT TO SECTION 906 CERTIFICATIONS PURSUANT TO SECTION 906 EX-99.906CERT CERTIFICATION R. Jay Gerken, Chief Executive Officer, and Richard L. Peteka, Chief Financial Officer of Smith Barney Appreciation Fund Inc. (the "Registrant"), each certify to the best of his knowledge that: 1. The Registrant's periodic report on Form N-CSR for the period ended December 31, 2003 (the "Form N-CSR") fully complies with the requirements of section 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Chief Executive Officer Chief Financial Officer Smith Barney Appreciation Fund Inc. Smith Barney Appreciation Fund Inc. /s/ R. Jay Gerken /s/ Richard L. Peteka - --------------------------- --------------------------- R. Jay Gerken Richard L. Peteka Date: March 5, 2004 Date: March 5, 2004 This certification is being furnished to the Securities and Exchange Commission solely pursuant to 18 U.S.C. (S) 1350 and is not being filed as part of the Form N-CSR with the Commission. -----END PRIVACY-ENHANCED MESSAGE-----