ANNUAL REPORT
1996
1996
1996
1996
1996
[GRAPHIC]
SMITH BARNEY
FUNDAMENTAL VALUE
FUND INC.
- ------------------
September 30, 1996
[LOGO] SMITH BARNEY MUTUAL FUNDS
Investing for your future.
Every day.
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SMITH BARNEY FUNDAMENTAL VALUE FUND INC.
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Dear Shareholder:
We are pleased to provide you with the annual report for the Smith Barney
Fundamental Value Fund Inc. for the year ended September 30, 1996. In this
report, we have summarized the period's prevailing economic and market
conditions and outlined our portfolio strategy. A detailed summary of the Fund's
performance can be found in the appropriate sections that follow in the annual
report.
Fund Performance Update
For the year ended September 30, 1996, the Class A shares of the Smith Barney
Fundamental Value Fund generated a total return of 14.73%. In comparison, the
Standard & Poor's 500 Composite Stock Index ("S&P 500") had a total return of
20.32% over the same time period. (The S&P 500 is a capitalization-weighted
measure of 500 widely held common stocks listed on the New York Stock Exchange,
American Stock Exchange and over-the-counter market.)
The Smith Barney Fundamental Value Fund concluded the nine-month period ended
September 30, 1996, with an increase in net asset value of 10.83% compared to
13.50% for the S&P 500. During this period, the largest 25 S&P 500 stocks
advanced in excess of 20% whereas the next 475 issues were up 10%-11%.
Great Expectations
With apologies to Charles Dickens, the current stock market can be characterized
as one of "Great Expectations." Double-digit annual returns are now considered
almost a birthright and a sure antidote to a future time when entitlements such
as Social Security may become less important. Households now have the highest
percentage of their financial assets invested in stocks than they have had in
the last 30 years. In addition, dividend yields are the lowest in history as
investors signal that capital gains rather than current income is the object of
their primary affection.*
Good Offense - Good Defense
Given the present market conditions, the Smith Barney Fundamental Value Fund
continues to look for the best relative values, ones that provide good upside
potential but which also have less downside should the market environment become
more turbulent. For example, energy (13% of assets) and real estate investment
trusts ("REITS" -- 8% of assets) meet the twin tests of
*Source: Standard & Poor's Rating Service
1
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providing good substantial upside potential while, at the same time, being
historically less vulnerable to market corrections. In July, when stocks
declined substantially in price, our holdings of REITs actually increased
slightly in value.
1997 - 2000: Time to Own "Hard Assets"
We maintain an indicator that traces the value of houses versus common stocks
since 1890, 106 years ago. In this period, this indicator has given four buy
signals for houses and four for common stocks. A buy signal has been given
approximately every 13 years. We believe housing prices are a proxy for real
estate in general but also for natural resource and inflation hedge investments,
so-called "hard assets." In 1996, our houses/stock indicator is signaling that
it is time to focus attention again on real estate and natural resource
investments. In our view, the best news on inflation is probably behind us and
consumer prices will move up moderately 3 1/2% to 4% over the next 18-24 months.
Financial Services -- Attracted to Companies
with International Franchises
The Smith Barney Fundamental Value Fund maintains approximately 15% of its
assets invested in insurance, banking and other financial services companies.
Near term, inflation appears to be under control and many of our holdings are
reporting excellent earnings and their shares are available at P/E ratios which
are well below the market multiple.
In the future, we may be trimming this sector of the Fund's portfolio because
many issues have been market leaders in the last five years and are no longer
compelling as relative values. We continue to be enthusiastic, however, for
financial services companies with international franchises. Many investors have
focused on multi-national food, beverage and technology companies as a way to
benefit from world growth but it seems clear that many financial services
companies are equally good plays on international business trends and have
similar growth rates. In many cases, their shares are available at much lower
P/E ratios.
Retailing -- Unloved, But Attractive
We have identified other areas which we believe have favorable risk/reward
ratios. Many retailing stocks had their peaks in late 1992 or early 1993 and
since then have dramatically underperformed the market. Some of the great
retailing franchises have been available recently at prices which we believe
were too good to ignore. Inventories for many are at low levels whether one
looks back 12 months or 12 years. In addition, it is likely that the upcoming
Christmas selling season will be substantially better than 1995, which was one
of the worst on record.
2
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Entertainment -- Karl Marx Was Wrong
Karl Marx was wrong; religion is not the opiate of the people, but entertainment
is! A number of entertainment companies and selected CATV (cable television)
stocks have reached prices which we thought were attractive. We have been adding
to our positions in these areas over the last few months. As our population ages
and technology dramatically transforms many homes into entertainment centers, we
believe motion picture and other entertainment companies are well positioned to
grow at above-average rates. Barriers to entry are high and the libraries of
films represent an annuity stream of future income. As of September 30, 1996,
entertainment and CATV represented about 7% of the Fund's assets.
Technology: High Volatility (Risk), High Growth
It is clear that technology is an important area of representation in most
portfolios. Many technology stocks are not growth issues because year-to-year
results are affected by their capital expenditure cycles and the fact that
selling prices exhibit secular declines such as in the semiconductor industry.
These factors can produce highly volatile stock prices. The Smith Barney
Fundamental Value Fund has increased its holdings of technology issues in 1996
to about 7% of assets. We particularly like leading franchises which are
temporarily (we hope) out of favor and available at attractive prices.
Health Care -- A Beneficiary of Compelling Demographics
An aging population suggests that health care is another very important sector
for representation in the Smith Barney Fundamental Value Fund. In recent months,
we have added to our holdings in the HMO (Health Maintenance Organization)
sector when these stocks fell 30% to 40% in many cases due to near term
unfavorable news. It is our belief that these companies represent sound long-
term values at current prices and that downside risk is low.
A Four-Letter Word -- "Cash"
Currently, we maintain a cash and cash equivalents position of about 21% which
reflects the fact that it has been more difficult to identify good relative
values for the portfolio and our belief that market risks are high. Our
discipline will continue to focus on those companies which offer shareholders
solid upside potential with reasonable downside risk.
3
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In closing, thank you for investing in the Smith Barney Fundamental Value Fund.
We look forward to continuing to help you achieve your financial goals.
Sincerely,
/s/ Heath B. McLendon /s/ John G. Goode
Heath B. McLendon John G. Goode
Chairman and Vice President and
Chief Executive Officer Investment Officer
October 22, 1996
Announcing a New Systematic Investment
Program Monthly Minimum
If you are a shareholder purchasing shares of the Smith Barney Fundamental Value
Fund through Smith Barney's Systematic Investment Program on a monthly basis or
if you plan to do so in the future, the minimum initial investment for Class A,
Class B and Class C shares is now $25. If you are purchasing shares on a
quarterly basis, the minimum initial investment for Class A, Class B and Class C
shares is $50. Please contact your Smith Barney Financial Consultant for more
information about the Systematic Investment Program. However, please note that
participating in the Systematic Investment Program does not ensure a profit or
protect you against a loss in declining markets.
4
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Historical Performance -- Class A Shares
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<TABLE>
<CAPTION>
Net Asset Value
-------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================
<S> <C> <C> <C> <C> <C>
9/30/96 $ 8.66 $ 9.31 $ 0.19 $ 0.37 14.73%
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9/30/95 8.20 8.66 0.13 0.81 19.94
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9/30/94 8.42 8.20 0.08 0.53 4.92
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9/30/93 7.22 8.42 0.06 0.46 25.23
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9/30/92 6.47 7.22 0.14 0.00 14.01
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9/30/91 5.34 6.47 0.23 0.29 33.47
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9/30/90 7.15 5.34 0.18 0.57 (16.25)
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9/30/89 6.23 7.15 0.10 0.33 23.26
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9/30/88 8.36 6.23 0.26 1.03 (6.92)
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9/30/87 7.24 8.36 0.32 0.74 34.39
================================================================================
Total $1.69 $5.13
================================================================================
</TABLE>
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Historical Performance -- Class B Shares
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<TABLE>
<CAPTION>
Net Asset Value
-------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================
<S> <C> <C> <C> <C> <C>
9/30/96 $8.62 $9.26 $0.13 $0.37 13.82%
9/30/95 8.16 8.62 0.08 0.81 19.19
9/30/94 8.37 8.16 0.02 0.53 4.21
Inception*- 9/30/93 7.31 8.37 0.05 0.46 22.82+
================================================================================
Total $0.28 $2.17
================================================================================
</TABLE>
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Historical Performance-- Class C Shares
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<TABLE>
<CAPTION>
Net Asset Value
-------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================
<S> <C> <C> <C> <C> <C>
9/30/96 $8.62 $9.26 $0.13 $0.37 13.82%
9/30/95 8.16 8.62 0.09 0.81 19.33
9/30/94 8.37 8.16 0.02 0.53 4.24
Inception*- 9/30/93 8.15 8.37 0.00 0.00 2.70+
================================================================================
Total $0.24 $1.71
================================================================================
</TABLE>
5
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Historical Performance -- Class Y Shares
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<TABLE>
<CAPTION>
Net Asset Value
-------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================
<S> <C> <C> <C> <C> <C>
Inception*- 9/30/96 $8.78 $9.32 $0.00 $0.00 6.15%+
================================================================================
</TABLE>
IT IS THE FUND'S POLICY TO DISTRIBUTE DIVIDENDS AND CAPITAL GAINS, IF ANY,
ANNUALLY.
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Average Annual Total Return
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<TABLE>
<CAPTION>
Without Sales Charge(1)
----------------------------------------
Class A Class B Class C Class Y
===============================================================================
<S> <C> <C> <C> <C>
Year Ended 9/30/96 14.73% 13.82% 13.82% N/A
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Five Years Ended 9/30/96 15.56 N/A N/A N/A
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Ten Years Ended 9/30/96 13.51 N/A N/A N/A
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Inception* through 9/30/96 13.77 15.19 12.65 6.15%+
================================================================================
With Sales Charge(2)
-----------------------------------------
Class A Class B Class C Class Y
================================================================================
Year Ended 9/30/96 8.94% 8.82% 12.82% N/A
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Five Years Ended 9/30/96 14.39 N/A N/A N/A
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Ten Years Ended 9/30/96 12.94 N/A N/A N/A
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Inception* through 9/30/96 13.38 14.85 12.65 6.15%+
================================================================================
</TABLE>
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Cumulative Total Return
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<TABLE>
<CAPTION>
Without Sales Charge(1)
================================================================================
<S> <C>
Class A (9/30/86 through 9/30/96) 255.24%
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Class B (Inception* through 9/30/96) 73.64
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Class C (Inception* through 9/30/96) 45.40
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Class Y (Inception* through 9/30/96) 6.15+
================================================================================
</TABLE>
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A shares or the applicable
contingent deferred sales charges ("CDSC") with respect to Class B and C
shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A shares reflect the deduction
of the maximum initial sales charge of 5.00%; Class B shares reflect the
deduction of a 5.00% CDSC, which applies if shares are redeemed within one
year from initial purchase and declines thereafter by 1.00% per year until
no CDSC is incurred. Class C shares reflect the deduction of a 1.00% CDSC,
which applies if shares are redeemed within the first year of purchase.
* Inception dates for Class A, B, C and Y shares are November 12, 1981,
November 6, 1992, August 10, 1993 and January 27, 1996, respectively.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
6
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Historical Performance
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Growth of $10,000 Invested in Class A Shares of the
Smith Barney Fundamental Value Fund Inc.
vs. Standard & Poor's 500 Index+
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September 1986 - September 1996
[GRAPHIC]
Smith Barney
Fundamental Standard & Poor's
Value Fund Inc. 500 Index
--------------- -----------------
9/86 $10,000 $ 9,501
9/87 14,343 12,769
9/88 12,566 11,886
9/89 16,708 14,650
9/90 15,163 12,269
9/91 19,877 16,376
9/92 22,071 18,669
9/93 24,935 23,379
9/94 25,852 24,528
9/95 33,533 29,419
9/96 40,344 33,752
+ Hypothetical illustration of $10,000 invested in Class A shares on September
30, 1986, assuming deduction of the maximum 5.00% sales charge at the time of
investment and reinvestment of dividends and capital gains, if any, at net
asset value through September 30, 1996, compared to the Standard & Poor's 500
Index. The index is composed of 500 widely held common stocks listed on the
New York Stock Exchange, American Stock Exchange and over-the-counter market.
The index is unmanaged and is not subject to the same management and trading
expenses of a mutual fund. The performance of the Fund's other classes may be
greater or less than the Class A shares' performance indicated on this chart,
depending on whether greater or 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. Investment returns and principal value will fluctuate, and
redemption value may be more or less than original cost. No adjustment has
been made for shareholder tax liability on dividends or capital gains.
7
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Portfolio Highlights September 30, 1996
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Portfolio Breakdown
[GRAPHIC]
Banking and Finance 9.7%
Energy & Energy Services 13.0%
Healthcare 5.7%
Manufacturing 2.4%
Natural Resources 4.4%
Real Estate 7.9%
Retail 5.9%
Entertainment 4.0%
Technology-Computers 6.6%
Telecommunications 3.7%
Transportation 4.6%
Insurance 5.8%
Foreign Common Stocks 0.8%
Repurchase Agreements 21.4%
Other Common Stocks 4.1%
Top Ten Holdings
Percentage of
Total Investments
================================================================================
American International Group Inc. 2.5%
Amoco Corp. 2.4
TriNet Corporate Realty Trust Inc. 2.2
Royal Dutch Petroleum Co. 2.2
Citicorp 2.2
Dresser Industries Inc. 2.1
Oryx Energy Co. 2.1
American Express Co. 2.1
Wal-Mart Stores, Inc. 2.1
Tele-Communications, Inc., Class A Shares 2.0
8
<PAGE>
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Schedule of Investments September 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
COMMON STOCKS -- 77.0%
Banking and Finance -- 9.7%
<S> <C> <C>
575,000 American Express Co. $ 26,593,750
300,000 BankAmerica Corp. 24,637,500
300,000 Citicorp 27,187,500
750,000 Great Western Financial Corp. 19,875,000
350,000 H & R Block, Inc. 10,412,500
448,000 Signet Banking Corp. 11,984,000
- --------------------------------------------------------------------------------
120,690,250
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Beverages -- 2.2%
286,800 Anheuser-Busch Cos. Inc. 10,790,850
600,000 PepsiCo., Inc. 17,025,000
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27,815,850
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Chemicals -- 1.8%
250,000 E.I. du Pont de Nemours & Co. 22,062,500
- --------------------------------------------------------------------------------
Energy and Energy Services -- 13.0%
250,000 Amerada Hess Corp. 13,218,750
425,000 Amoco Corp. 29,962,500
900,000 Dresser Industries Inc. 26,775,000
169,600 FINA Inc., Class A Shares 8,904,000
484,400 Mitchell Energy & Development Corp., Class A Shares 9,143,050
642,000 Mitchell Energy & Development Corp., Class B Shares 12,599,250
1,500,000 Oryx Energy Co.+ 26,625,000
175,000 Royal Dutch Petroleum Co. 27,321,875
90,000 Schlumberger Ltd.@ 7,605,000
- --------------------------------------------------------------------------------
162,154,425
- --------------------------------------------------------------------------------
Entertainment -- 4.0%
300,000 Liberty Media Corp., Class A Shares+ 8,587,500
525,000 Time Warner Inc. 20,278,125
600,000 Viacom Inc., Class B Shares+ 21,300,000
- --------------------------------------------------------------------------------
50,165,625
- --------------------------------------------------------------------------------
Healthcare -- 5.7%
658,000 Advanced Polymer Systems Inc.+ 5,428,500
200,000 ALZA Corp.+ 5,375,000
210,000 Aphton Corp.+ 4,042,500
800,000 Calgene Inc.+@ 4,000,000
150,000 Merck & Co. Inc. 10,556,250
266 Molecular Biosystems Inc.+ 2,261
100,000 Tri-point Medical Group+ 800,000
500,000 United Healthcare Corp. 20,812,500
1,100,000 Value Health Inc.+ 20,625,000
- --------------------------------------------------------------------------------
71,642,011
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</TABLE>
See Notes to Financial Statements.
9
<PAGE>
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Schedule of Investments (continued) September 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
Insurance -- 5.8%
<S> <C> <C>
250,000 Aetna Inc. $ 17,593,750
312,500 American International Group Inc. 31,484,375
200,000 Cigna Corp. 23,975,000
- --------------------------------------------------------------------------------
73,053,125
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Manufacturing -- 2.0%
357,000 Minnesota Mining and Manufacturing 24,945,375
46,000 Metra Biosystems, Inc.+ 276,000
- --------------------------------------------------------------------------------
25,221,375
- --------------------------------------------------------------------------------
Natural Resources -- 4.1%
1,250,000 Asia Pacific Resource International, Class A Shares+ 6,250,000
450,000 Burlington Resources, Inc.@ 19,968,750
300,000 Cyprus Amax Minerals Co. 6,450,000
100,000 Hecla Mining Co. 662,500
500,000 Homestake Mining Co. 7,312,500
804,400 Santa Fe Pacific Gold Corp. 10,055,000
- --------------------------------------------------------------------------------
50,698,750
- --------------------------------------------------------------------------------
Real Estate -- 7.9%
915,000 Del Webb Corp. 15,898,125
703,200 Irvine Apartment Communities Inc. 15,558,300
588,235 Rouse Co. 15,294,110
829,200 Spieker Properties Inc. 24,357,750
875,000 TriNet Corporate Realty Trust Inc. 27,781,250
- --------------------------------------------------------------------------------
98,889,535
- --------------------------------------------------------------------------------
Retail -- 5.9%
300,000 Nordstrom, Inc. 11,400,000
400,000 Sears Roebuck & Co. 17,900,000
602,000 Toys `R' Us Inc.+ 17,533,250
1,000,000 Wal-Mart Stores, Inc. 26,375,000
- --------------------------------------------------------------------------------
73,208,250
- --------------------------------------------------------------------------------
Technology - Computers -- 6.6%
600,000 Adobe Systems Inc 22,350,000
125,000 Intel Corp. 11,929,688
200,000 International Business Machines Corp.@ 24,900,000
200,000 Motorola, Inc. 10,325,000
225,000 Texas Instruments, Inc. 12,403,125
- --------------------------------------------------------------------------------
81,907,813
- --------------------------------------------------------------------------------
Telecommunications -- 3.7%
1,000 Advanced Fibre Communications 25,000
664,900 Comsat Corp. 15,043,362
213,600 General DataComm Industries, Inc.+ 2,403,000
200,000 Nextel Communications, Inc.@ 3,700,000
1,700,000 Tele-Communications, Inc., Class A Shares+ 25,393,750
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46,565,112
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</TABLE>
See Notes to Financial Statements.
10
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) September 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
Transportation -- 4.6%
<S> <C> <C>
275,000 AMR Corp.+ $ 21,896,875
1,000,000 Fritz Cos., Inc.@ 14,500,000
2,500,000 Fruehauf Trailer Corp.+ 781,250
425,000 General Motors Corp.@ 20,400,000
- --------------------------------------------------------------------------------
57,578,125
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost -- $784,084,345) 961,652,746
================================================================================
CONVERTIBLE PREFERRED STOCKS -- 0.7%
Manufacturing -- 0.4%
4,000 Optical Coating Laboratory, Inc., Exchange 8.00%++ 4,619,048
- --------------------------------------------------------------------------------
Natural Resources-- 0.3%
128,000 American Exploration Co., Series C, Exchange 9.00% 3,744,000
- --------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost -- $7,200,000) 8,363,048
================================================================================
FOREIGN COMMON STOCKS -- 0.8%
545,000 Pan African Resources Corp. 441,450
7,290,157 Normandy Mining Limited ADR 9,922,190
- --------------------------------------------------------------------------------
TOTAL FOREIGN COMMON STOCKS
(Cost -- $11,920,889) 10,363,640
================================================================================
WARRANTS -- 0.0%
571,429 UnionFed Financial Corp., Expire 12/29/98+++ 0
44 York Research Corp., Class B Shares, Expire 5/1/97 0
- --------------------------------------------------------------------------------
TOTAL WARRANTS
(Cost -- $0) 0
================================================================================
PUT OPTIONS -- 0.1%
875,000 Fritz Cos. Put @ 12.50, Expire 11/16/96 519,531
54,000 S & P 500 Index Put @ 600, Expire 3/22/97 351,000
250,000 Value Health Inc. Put @ 15, Expire 12/21/96 132,813
50,000 Value Health Inc. Put @ 15, Expire 3/22/97 34,375
- --------------------------------------------------------------------------------
TOTAL PUT OPTIONS
(Cost -- $2,216,555) 1,037,719
================================================================================
SUB-TOTAL INVESTMENTS
(Cost -- $805,421,789) 981,417,153
================================================================================
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) September 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
============================================================================================
<S> <C> <C>
$30,000,000 Morgan Stanley, 5.687% due 10/1/96;
Proceeds at maturity -- $30,004,674; (Fully
collateralized by U.S. Treasury Bills due 11/30/99;
Market value -- $30,606,132) $ 30,000,000
12,837,000 Chase Manhattan Bank, 5.622% due 10/1/96;
Proceeds at maturity -- $12,838,977; (Fully
collateralized by U.S. Treasury Notes,
6.00% due 9/30/98;
Market value -- $13,095,944) 12,837,000
225,000,000 Citibank, 5.769% due 10/1/96;
Proceeds at maturity -- $225,035,564; (Fully
collateralized by U.S. Treasury Notes, 5.00% due
1/31/98; Market value -- $229,502,430) 225,000,000
--------------------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS
(Cost -- $267,837,000) 267,837,000
- ---------------------------------------------------------------------------------------------
TOTAL INVESTMENTS AND
REPURCHASE AGREEMENTS -- 100%
(Cost -- $1,073,258,789*) $1,249,254,153
=============================================================================================
</TABLE>
+ Non-income producing security.
@ Security segregated by Custodian to cover written call options.
++ Illiquid security valued by the Fund's Board of Directors (See Note 9).
+++ Restricted security (See Note 8).
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
12
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities September 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments, at value (Cost -- $805,421,789) $ 981,417,153
Repurchase agreements (Cost -- $267,837,000) 267,837,000
Cash 635
Receivable for securities sold 4,535,963
Receivable for Fund shares sold 3,973,112
Dividends and interest receivable 2,196,375
- -----------------------------------------------------------------------------------------------
Total Assets 1,259,960,238
- -----------------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 5,657,800
Options written (Note 5) 1,457,031
Payable for Fund shares purchased 551,744
Investment advisory fees payable 460,529
Distribution fees payable 272,285
Administration fees payable 200,540
Accrued expenses and other liabilities 420,604
- -----------------------------------------------------------------------------------------------
Total Liabilities 9,020,533
- -----------------------------------------------------------------------------------------------
Total Net Assets $1,250,939,705
===============================================================================================
NET ASSETS:
Par value of capital shares $ 134,845
Capital paid in excess of par value 1,003,838,553
Undistributed net investment income 13,747,541
Accumulated net realized gain from security transactions and options 56,562,900
Net unrealized appreciation of investments and options 176,655,866
- -----------------------------------------------------------------------------------------------
Total Net Assets $1,250,939,705
===============================================================================================
Shares Outstanding:
Class A 49,235,698
- -----------------------------------------------------------------------------------------------
Class B 76,009,204
- -----------------------------------------------------------------------------------------------
Class C 4,811,659
- -----------------------------------------------------------------------------------------------
Class Y 4,788,885
- -----------------------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $9.31
- -----------------------------------------------------------------------------------------------
Class B* $9.26
- -----------------------------------------------------------------------------------------------
Class C** $9.26
- -----------------------------------------------------------------------------------------------
Class Y (and redemption price) $9.32
- -----------------------------------------------------------------------------------------------
Class A Maximium Public Offering Price Per Share
(net asset value plus 5.26% of net asset value per share) $9.80
===============================================================================================
</TABLE>
* Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if shares
are redeemed within one year from initial purchase (See Note 3).
** Redemption price is NAV of Class C shares reduced by a 1.00% CDSC if shares
are redeemed within the first year of purchase.
See Notes to Financial Statements.
13
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended September 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME:
Dividends $ 21,108,441
Interest 11,764,850
Less: Foreign withholding tax (171,408)
- ------------------------------------------------------------------------------------------------------
Total Investment Income 32,701,883
- ------------------------------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 3) 7,627,397
Investment advisory fees (Note 3) 6,015,090
Administration fees (Note 3) 2,187,305
Shareholder and system servicing fees 1,303,814
Shareholder communications 378,687
Registration fees 192,372
Audit and legal 100,620
Custody 94,129
Directors' fees 48,688
Other 66,017
- -----------------------------------------------------------------------------------------------------
Total Expenses 18,014,119
- -----------------------------------------------------------------------------------------------------
Net Investment Income 14,687,764
- -----------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS,
OPTIONS AND FOREIGN CURRENCIES (NOTES 4 AND 5):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) 68,290,711
Options purchased (1,083,237)
Options written 1,126,786
Foreign currency transactions 5,693,939
- -----------------------------------------------------------------------------------------------------
Net Realized Gain 74,028,199
- -----------------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments
and Options:
Beginning of year 124,058,138
End of year 176,655,866
- -----------------------------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 52,597,728
- -----------------------------------------------------------------------------------------------------
Net Gain on Investments, Options and Foreign Currencies 126,625,927
- -----------------------------------------------------------------------------------------------------
Increase in Net Assets From Operations $141,313,691
=====================================================================================================
</TABLE>
See Notes to Financial Statements.
14
<PAGE>
- ---------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended September 30,
- ---------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
=======================================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 14,687,764 $ 13,250,072
Net realized gain 74,028,199 30,805,367
Increase in net unrealized appreciation 52,597,728 103,644,618
- ------------------------------------------------------------------------------------------------------------------------
Increase in Net Assets From Operations 141,313,691 147,700,057
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (18,028,339) (7,661,803)
Net realized gains (41,415,528) (30,805,367)
Overdistribution of net realized gains -- (32,962,521)
- ------------------------------------------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (59,443,867) (71,429,691)
- ------------------------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 6):
Net proceeds from sale of shares 360,705,847 275,253,479
Net asset value of shares issued in connection with
the transfer of The Advisors Fund L.P. net assets -- 46,719,996
Net asset value of shares issued for reinvestment
of dividends 57,520,992 69,267,663
Cost of shares reacquired (196,026,058) (148,313,554)
- ------------------------------------------------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 222,200,781 242,927,584
- ------------------------------------------------------------------------------------------------------------------------
Increase in Net Assets 304,070,605 319,197,950
NET ASSETS:
Beginning of year 946,869,100 627,671,150
- ------------------------------------------------------------------------------------------------------------------------
End of year* $1,250,939,705 $ 946,869,100
========================================================================================================================
* Includes undistributed net investment income of: $ 13,747,541 $ 11,394,177
========================================================================================================================
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
- -------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
Smith Barney Fundamental Value Fund Inc. ("Fund"), a Maryland corporation,
is registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company.
The significant accounting policies consistently followed by the Fund
are: (a) security transactions are accounted for on trade date; (b) securities
traded on national securities markets are valued at the closing prices on such
markets; securities for which no sales price was reported and U.S. Government
and Agency obligations are valued at the mean between bid and ask price; (c)
securities maturing within 60 days are valued at cost plus accreted discount, or
minus amortized premium, as applicable; (d) dividend income is recorded on the
ex-dividend date except that certain dividends from foreign securities are
recorded as soon as the Fund is informed of the ex-dividend date and interest
income is recorded on the accrual basis; (e) realized gains or losses on the
sale of securities are calculated based on the specific identification method;
(f) direct expenses are charged to each class; management fees and general fund
expenses are allocated on the basis of relative net assets; (g) dividends and
distributions to shareholders are recorded by the Fund on the ex-dividend date;
(h) the accounting records of the Fund are maintained in U.S. dollars. All
assets and liabilities denominated in foreign currencies are translated into
U.S. dollars based on the rate of exchange of such currencies against U.S.
dollars on the date of valuation. Purchases and sales of securities, and income
and expenses are translated at the rate of exchange quoted on the respective
date that such transactions are recorded. Differences between income and expense
amounts recorded and collected or paid are adjusted when reported by the
custodian bank; (i) 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 (j)
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.
In addition, the Fund may enter into forward foreign currency contracts in
order to hedge against foreign currency risk. These contracts are marked-to-
market daily, by recognizing the difference between the contract exchange rate
and the current market rate as an unrealized gain or loss. Realized gains or
losses are recognized when contracts are settled.
16
<PAGE>
- -------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- -------------------------------------------------------------------------------
2. Repurchase Agreements
The Fund purchases, and its custodian takes possession of, U.S. Government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day),
at an agreed-upon higher repurchase price. The Fund requires continual
maintenance of the market value of the collateral in amounts at least equal to
the repurchase price.
3. Investment Advisory Agreement and Other Transactions
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as investment adviser of the Fund. The Fund
pays SBMFM an advisory fee calculated at annual rate of 0.55% of the average
daily net assets. This fee is calculated daily and paid monthly.
SBMFM also serves as administrator for the Fund and is paid a fee
calculated at an annual rate of 0.20% of the average daily net assets. This fee
is calculated daily and paid monthly.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of
Fund shares. For the year ended September 30, 1996, SB received brokerage
commissions of $80,904 and sales charges of approximately $1.0 million on sales
of the Fund's Class A shares.
There is a contingent deferred sales charge ("CDSC") of 5.00% on Class B
shares, which applies if redemption occurs within one year from initial purchase
and declines thereafter by 1.00% per year until no CDSC is incurred. Class C
shares have a 1.00% CDSC, which applies if redemption occurs within the first
year of purchase. In addition, Class A shares have a 1.00% CDSC, which applies
if redemption occurs within the first year of purchase. This CDSC only applies
to those purchases of Class A shares which, when combined with current holdings
of Class A shares, equal or exceed $500,000 in the aggregate. These purchases do
not incur an initial sales charge. For the year ended September 30, 1996, CDSCs
paid to SB were:
Class A Class B Class C
================================================================================
CDSCs $2,000 $844,000 $10,000
================================================================================
Pursuant to a Distribution Plan, the Fund pays a service fee with respect
to its Class A, B and C shares calculated at an annual rate of 0.25% of the
average daily net assets for each respective class. The Fund also pays a
distribution fee with respect to its Class B and C shares calculated at an
17
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
annual rate of 0.75% of the average daily net assets of each class,
respectively. For the year ended September 30, 1996, total Distribution Plan
fees incurred were:
Class A Class B Class C
================================================================================
Distribution Plan Fees $1,058,779 $6,229,990 $338,628
================================================================================
All officers and one Director of the Fund are employees of SB.
4. Investments
During the year ended September 30, 1996, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $562,110,872
- --------------------------------------------------------------------------------
Sales 501,950,790
================================================================================
At September 30, 1996, the gross unrealized appreciation and depreciation
of investments were as follows:
================================================================================
Gross unrealized appreciation $199,548,237*
Gross unrealized depreciation (23,552,873)*
- --------------------------------------------------------------------------------
Net unrealized appreciation $175,995,364*
================================================================================
* Substantially the same for Federal income tax purposes.
5. Option Contracts
Premiums paid when put or call options are purchased by the Fund represent
investments which are marked-to-market daily. When a purchased option expires,
the Fund will realize a loss in the amount of the premium paid. When the Fund
enters into a closing sales transaction, the Fund will realize a gain or loss
depending on whether the proceeds from the closing sales transaction are greater
or less than the premium paid for the option. When the Fund exercises a put
option, it will realize a gain or loss from the sale of the underlying security
and the proceeds from such sale will be decreased by the premium originally
paid. When the Fund exercises a call option, the cost of the security which the
Fund purchases upon exercise will be increased by the premium originally paid.
As of September 30, 1996, the Fund held four purchase put options with a
total cost of $2,216,555.
18
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
When a Fund writes a call or put option, an amount equal to the premium
received by the Fund is recorded as a liability, the value of which is marked-
to-market daily. When a written option expires, the Fund realizes a gain equal
to the amount of the premium received. When the Fund enters into a closing
purchase transaction, the Fund realizes a gain (or loss if the cost of the
closing purchase transaction exceeds the premium received when the option was
written) without regard to any unrealized gain or loss on the underlying
security, and the liability related to such option is eliminated. When a call
option is exercised the cost of the security sold will be increased by the
premium originally received. When a put option is exercised, the amount of the
premium originally received will reduce the cost of the security which the Fund
purchased upon exercise. When written index options are exercised, settlement is
made in cash. The risk associated with purchasing options is limited to the
premium originally paid. The Fund enters into options for hedging purposes. The
risk in writing a call option is that the Fund gives up the opportunity to
participate in any increase in the price of the underlying security beyond the
exercise price. The risk in writing a put option is that the Fund is exposed to
the risk of loss if the market price of the underlying security declines.
The following covered call option transactions occurred during the year
ended September 30, 1996:
<TABLE>
<CAPTION>
Number of
Premium Contracts
=====================================================================================================================
<S> <C> <C>
Options written, outstanding at September 30, 1995 $ 0 0
Options written during the year ended September 30, 1996 5,373,819 33,950
Options cancelled in closing purchase transactions (3,021,433) (14,250)
Options expired (234,853) (3,550)
- ---------------------------------------------------------------------------------------------------------------------
Options written, outstanding at September 30, 1996 $2,117,533 16,150
=====================================================================================================================
<CAPTION>
The following represents the covered call option written contracts open as
of September 30, 1996:
Number of Strike
Contracts Expiration Price Value
=======================================================================================================
Covered Call Options Written
<S> <C> <C> <C>
500 S&P 500 Index 3/22/97 $ 600 $ (768,750)
4,500 Burlington Resources, Inc 10/1/96 45 (281,250)
500 Calgene Inc. 1/18/97 5 (28,125)
8,750 Fritz Cos., Inc. 11/16/96 17.50 (300,781)
1,000 Nextel Communications, Inc. 1/18/97 25 (50,000)
900 Schlumberger Ltd. 10/19/96 90 (28,125)
- -------------------------------------------------------------------------------------------------------
Total Covered Call Options Written
(Premiums received--$2,117,533) $(1,457,031)
=======================================================================================================
</TABLE>
19
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
6. Capital Shares
At September 30, 1996, the Fund had one billion shares of capital stock
authorized with a par value of $0.001 per share. The Fund has the ability to
issue multiple classes of shares. Each share of a class represents an identical
interest in the Fund and has the same rights, except that each class bears
certain expenses specifically related to the distribution of its shares.
At September 30, 1996, total paid-in capital amounted to the following for
each class:
<TABLE>
<CAPTION>
Class A Class B Class C Class Y
====================================================================================================================
<S> <C> <C> <C> <C>
Total Paid-in Capital $365,596,678 $555,220,142 $39,630,461 $43,526,117
====================================================================================================================
</TABLE>
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
September 30, 1996 September 30, 1995
------------------------ --------------------------
Shares Amount Shares Amount
=====================================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 10,423,305 $ 93,133,169 8,923,632 $ 69,815,825
Net asset value of shares
issued in connection with
the transfer of Advisors
Fund L.P. net assets (Note 7) -- -- 6,431,222 44,760,999
Shares issued on reinvestment 2,934,418 24,876,739 4,305,816 29,667,069
Shares redeemed (8,696,068) (75,368,489) (7,371,519) (57,261,926)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase 4,661,655 $ 42,641,419 12,289,151 $ 86,981,967
=====================================================================================================================
Class B
Shares sold 21,765,620 $ 192,072,988 23,751,080 $ 185,650,163
Net asset value of shares
issued in connection with
the transfer of Advisors
Fund L.P. net assets (Note 7) -- -- 281,465 1,958,997
Shares issued on reinvestment 3,695,941 31,218,519 5,698,862 39,265,165
Shares redeemed (11,904,915) (107,172,303) (11,543,825) (88,999,697)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase 13,556,646 $ 116,119,204 18,187,582 $ 137,874,628
=====================================================================================================================
Class C
Shares sold 2,925,320 $ 25,823,035 2,540,546 $ 19,787,491
Shares issued on reinvestment 168,804 1,425,734 48,683 335,429
Shares redeemed (811,710) (7,334,728) (262,289) (2,051,931)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase 2,282,414 $ 19,914,041 2,326,940 $ 18,070,989
=====================================================================================================================
</TABLE>
20
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
September 30, 1996* September 30, 1995
-------------------------- ---------------------
Shares Amount Shares Amount
=====================================================================================================================
<S> <C> <C> <C> <C>
Class Y
Shares sold 5,505,522 $ 49,676,655 -- --
Shares issued on reinvestment -- -- -- --
Shares redeemed (716,637) (6,150,538) -- --
- ---------------------------------------------------------------------------------------------------------------------
Net Increase 4,788,885 $ 43,526,117 -- --
=====================================================================================================================
</TABLE>
* For Class Y shares, transactions are for the period from January 27, 1996
(inception date) to September 30, 1996.
7. Transfer of Net Assets
On December 16, 1994, the Fund acquired the assets and certain liabilities
of The Advisors Fund, L.P. ("Advisors Fund"), pursuant to a taxable Plan of Sale
and Liquidation approved by the Advisors Fund shareholders on November 29, 1994.
Total shares issued by the Fund and the total net assets of the Advisors Fund on
the date of the transfer were as follows:
<TABLE>
<CAPTION>
Total Net
Shares Assets of Total Net
Issued by Acquired Assets of
Acquired Fund the Fund Fund the Fund
=====================================================================================================================
<S> <C> <C> <C>
Advisors Fund 6,712,687 $46,719,996 $622,030,355
=====================================================================================================================
</TABLE>
The total net assets of the Fund immediately after the acquisition of the
Advisors Fund was $668,750,351.
8. Restricted Security
The following security held by the Fund on September 30, 1996, is a
restricted security under the Federal securities laws and is valued at fair
value in good faith by, or under the direction of, the Fund's Board of Directors
taking into consideration the appropriate economic, financial and other
pertinent available information pertaining to this security.
<TABLE>
<CAPTION>
Value Percentage
Acquisition Per Fair of Total
Security Date Shares Unit Value Net Assets Cost
====================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
UnionFed Financial
Corp., Warrants,
Expire 12/29/98 10/13/93 571,429 $0.00 $0 0.00% $0
====================================================================================================================
</TABLE>
21
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
The Fund may purchase securities which are subject to legal or contractual
restrictions on resale if not more than 15% of the value of the Fund's total
assets would be invested in such securities or in securities for which there is
no readily available market. In purchasing securities which could not be sold by
the Fund without registration under the Securities Act of 1933, as amended, the
Fund will endeavor to obtain the right to registration at the expense of the
issuer. There generally will be a lapse of time between the decision by the Fund
to sell any such security and the registration of the security permitting sale.
During any such period, the security will be subject to market fluctuations.
9. Illiquid Security Valued by the Board of Directors
The following security held by the Fund on September 30, 1996, is
illiquid and valued at fair value in good faith by, or under the direction of,
the Fund's Board of Directors taking into consideration the appropriate
economic, financial and other pertinent available information pertaining to this
security.
<TABLE>
<CAPTION>
Value Percentage
Acquisition Per Fair of Total
Security Date Shares Unit Value Net Assets Cost
=====================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Optical Coating
Laboratory Inc.,
Convertible
Preferred Stock 5/1/95 4,000 $1,154.76 $4,619,048 0.37% $4,000,000
=====================================================================================================================
</TABLE>
22
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For a share of each class of capital stock outstanding throughout each year:
Class A Shares 1996 1995 1994 1993 1992
==========================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $8.66 $8.20 $8.42 $7.22 $6.47
Income From Operations:
Net investment income 0.20 0.17 0.09 0.07 0.11
Net realized and unrealized gain 1.01 1.23 0.30 1.65 0.78
- ------------------------------------------------------------------------------------------
Total Income From Operations 1.21 1.40 0.39 1.72 0.89
- ------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.19) (0.13) (0.08) (0.06) (0.14)
Net realized gains (0.37) (0.39) (0.53) (0.46) --
Overdistribution of net realized gains -- (0.42) -- -- --
- ------------------------------------------------------------------------------------------
Total Distributions (0.56) (0.94) (0.61) (0.52) (0.14)
- ------------------------------------------------------------------------------------------
Net Asset Value, End of Year $9.31 $8.66 $8.20 $8.42 $7.22
- ------------------------------------------------------------------------------------------
Total Return 14.73% 19.94% 4.92% 25.23% 14.01%
- ------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $458,208 $386,297 $264,765 $123,118 $77,842
- ------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.22% 1.34% 1.30% 1.45% 1.28%
Net investment income 2.32 2.19 1.90 1.00 1.57
- ------------------------------------------------------------------------------------------
Portfolio Turnover Rate 57% 45% 108% 111% 142%
- ------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(1) $0.05 $0.05 -- -- --
==========================================================================================
</TABLE>
(1) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
23
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For a share of each class of capital stock outstanding throughout each year:
Class B Shares 1996 1995 1994 1993(1)
===================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $8.62 $8.16 $8.37 $7.31
- ---------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.13 0.12 0.09 0.05
Net realized and unrealized gain 1.01 1.23 0.25 1.52
- ---------------------------------------------------------------------------------------------------
Total Income From Operations 1.14 1.35 0.34 1.57
- ---------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.13) (0.08) (0.02) (0.05)
Net realized gains (0.37) (0.39) (0.53) (0.46)
Overdistribution of net realized gains -- (0.42) -- --
- ---------------------------------------------------------------------------------------------------
Total Distributions (0.50) (0.89) (0.55) (0.51)
- ---------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $9.26 $8.62 $8.16 $8.37
- ---------------------------------------------------------------------------------------------------
Total Return 13.82% 19.19% 4.21% 22.82%+++
- --------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $703,552 $538,759 $361,254 $114,146
==================================================================================================
Ratios to Average Net Assets:
Expenses 1.97% 2.09% 2.06% 2.26%+
Net investment income 1.56 1.44 1.13 0.19+
- --------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 57% 45% 108% 111%
- --------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions (2) $0.05 $0.05 -- --
===================================================================================================
</TABLE>
(1) For the period from November 6, 1992 (inception date) to September 30,
1993.
(2) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
+++ Total return is not annualized, as the result may not be representative
of the total return for the year.
+ Annualized.
24
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class C Shares 1996 1995 1994 1993(1)
==============================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $8.62 $8.16 $8.37 $8.15
- --------------------------------------------------------------------------------------------------------------
Income From Operations
Net investment income 0.14 0.12 0.05 0.00
Net realized and unrealized gain 1.00 1.24 0.29 0.22
- --------------------------------------------------------------------------------------------------------------
Total Income From Operations 1.14 1.36 0.34 0.22
- --------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.13) (0.09) (0.02) --
Net realized gains (0.37) (0.39) (0.53) --
Overdistribution of net realized gains -- (0.42) -- --
- --------------------------------------------------------------------------------------------------------------
Total Distributions (0.50) (0.90) (0.55) --
- --------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $9.26 $8.62 $8.16 $8.37
- --------------------------------------------------------------------------------------------------------------
Total Return 13.82% 19.33% 4.24% 2.70%+++
- --------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $44,539 $21,812 $1,652 $ 308
- --------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.96% 2.09% 2.23% 2.25%+
Net investment income 1.52 1.44 0.96 0.20+
- --------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 57% 45% 108% 111%
- --------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions (2) $0.05 $0.05 -- --
==============================================================================================================
</TABLE>
(1) For the period from August 10, 1993 (inception date) to September 30, 1993.
(2) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
+++ Total return is not annualized, as the result may not be representative of
the total return for the year.
+ Annualized.
25
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
Class Y Shares 1996(1)
================================================================================
<S> <C>
Net Asset Value, Beginning of Year $8.78
- --------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.23
Net realized and unrealized gain 0.31
- --------------------------------------------------------------------------------
Total Income From Operations 0.54
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income --
- --------------------------------------------------------------------------------
Total Distributions --
- --------------------------------------------------------------------------------
Net Asset Value, End of Year $9.32
- --------------------------------------------------------------------------------
Total Return+++ 6.15%
- --------------------------------------------------------------------------------
Net Assets, End of Year (000s) $44,641
- --------------------------------------------------------------------------------
Ratios to Average Net Assets+:
Expenses 0.75%
Net investment income 2.58
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 57%
- --------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions (2) $0.05
================================================================================
</TABLE>
(1) For the period from January 27, 1996 (inception date) to September 30, 1996.
(2) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
+++ Total return is not annualized, as the result may not be representative of
the total return for the year.
+ Annualized.
26
<PAGE>
- -------------------------------------------------------------------------------
Independent Auditors' Report
- -------------------------------------------------------------------------------
To the Shareholders and Board of Directors of Smith
Barney Fundamental Value Fund Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Smith Barney Fundamental Value Fund Inc. as of
September 30, 1996, the related statement of operations for the year then ended
and statements of changes in net assets for each of the years in the two-year
period then ended, and the financial highlights for the periods presented. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at
September 30, 1996 by correspondence with the Fund's custodian and brokers:
where replies were not received from brokers we performed other 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, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Smith Barney
Fundamental Value Fund Inc. as of September 30, 1996, the results of its
operations, the changes in its net assets, and the financial highlights for the
respective stated periods, in conformity with generally accepted accounting
principles.
/s/Deloitte & Touche LLP
New York, New York
November 1, 1996
27
<PAGE>
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
The amount of long-term capital gains paid by the Fund to its shareholders for
the fiscal year ended September 30, 1996 was $20,108,432.
28
<PAGE>
SMITH BARNEY
FUNDAMENTAL
VALUE
FUND INC.
DIRECTORS
Lloyd J. Andrews
Robert M. Frayn, Jr.
Leon P. Gardner
Howard J. Johnson
David E. Maryatt
Heath B. McLendon, Chairman
Frederick O. Paulsell
Jerry A. Viscione
Julie W. Weston
OFFICERS
Heath B. McLendon
Chief Executive Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President
and Treasurer
John G. Goode
Vice President and
Investment Officer
Peter Hable
Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
SMITH BARNEY
- --------------------------------
A Member of TravelersGroup[LOGO]
INVESTMENT ADVISER AND ADMINISTRATOR
Smith Barney Mutual
Funds Management Inc.
DISTRIBUTOR
Smith Barney Inc.
CUSTODIAN
PNC Bank, N.A.
SHAREHOLDER
SERVICING AGENT
First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of the shareholders of
Smith Barney Fundamental Value Fund Inc. It is not authorized for distribution
to prospective investors unless accompanied or preceded by an effective
Prospectus for the Fund, which contains information concerning the Fund's
investment policies and expenses as well as other pertinent information.
SMITH BARNEY FUNDAMENTAL
VALUE FUND INC.
388 Greenwich Street
New York, New York 10013
FD0283 11/96
