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[GRAPHIC]
[GRAPHIC] Smith Barney
Fundamental
Value Fund Inc.
-------------------------
A N N U A L R E P O R T
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September 30, 1998
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.(R)
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Smith Barney Fundamental
Value Fund Inc.
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The Smith Barney Fundamental Value Fund Inc. ("Fund") seeks long-term growth of
capital, with current income as a secondary objective. The Fund invests
primarily in the stocks of companies believed to be attractively priced relative
to the true value of their assets or business prospects.
Smith Barney Fundamental Value Fund Inc.
Average Annual Total Returns
September 30, 1998
Without Sales Charges(1)
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Class A Class B Class L(2)
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One-Year (6.04)% (6.79)% (6.70)%
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Five-Year 11.93 11.13 11.17
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Ten-Year 13.20 N/A N/A
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Since Inception++ 13.35 13.23 11.42
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With Sales Charges(3)
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Class A Class B Class L(2)
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One-Year (10.75)% (11.22)% (8.47)%
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Five-Year 10.80 11.00 10.96
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Ten-Year 12.62 N/A N/A
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Since Inception++ 13.01 13.23 11.21
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(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) On June 12, 1998, Class C shares were renamed Class L shares.
(3) 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 charges 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. Thereafter,
the CDSC declines by 1.00% per year until no CDSC is incurred. Class L
shares reflect the deduction of a 1.00% CDSC, which applies if shares are
redeemed within the first year of purchase.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost.
++ Inception dates for Class A, B and L shares are November 12, 1981,
November 6, 1992 and August 10, 1993, respectively.
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FUND HIGHLIGHT
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One of the major market forces that affected the performance of the Fundamental
Value Fund last year was the concentrated market in which the 15 to 25 largest
capitalization companies in the S&P 500 contributed disproportionately to the
performance of the overall index. As value managers, we believe that these
companies were overpriced and had reached levels that made them extremely
vulnerable to any form of bad news.
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NASDAQ SYMBOL
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Class A SHFVX
Class B SFVBX
Class L SFVCX
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WHAT'S INSIDE
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Shareholder Letter........................................................... 1
Historical Performance....................................................... 4
Smith Barney Fundamental Value Fund Inc.
at a Glance.................................................................. 6
Schedule of Investments...................................................... 7
Statement of Assets and Liabilities.......................................... 10
Statement of Operations...................................................... 11
Statements of Changes in Net Assets.......................................... 12
Notes to Financial Statements................................................ 13
Financial Highlights......................................................... 18
Independent Auditors' Report................................................. 20
Tax Information.............................................................. 21
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Shareholder Letter
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[PHOTO] [PHOTO]
HEATH B. JOHN G.
MCLENDON GOODE
Chairman Vice President and
Investment Officer
Dear Shareholder:
This is the annual report for the Smith Barney Fundamental Value Fund Inc.
("Fund") for the year ended September 30, 1998. In this report we have
summarized the period's prevailing economic and market conditions and outlined
our portfolio strategy. We hope you find it to be useful and informative.
Performance Update
For the year ended September 30, 1998, the Class A, B and L shares of the Fund
generated negative total returns of 6.04%, 6.79% and 6.70%, respectively. In
comparison, the Standard & Poor's 500 Composite Index ("S&P 500") had a total
return of 9.08% during the same 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.)
We are disappointed in the Fund's recent performance. However, we remain
committed to our value investing style, and we believe that the Fund's
performance should improve. (Value investing means investing in stocks that are
selling for less than our estimate of their long-term true intrinsic value.) In
the following sections, we will provide more details as to why the Fund
underperformed during the period.
A Classic Series Fund
The Fundamental Value Fund is part of the Classic Series of Smith Barney Mutual
Funds. The Classic Series funds are mutual funds whose investment decisions are
determined by experienced portfolio managers based on each fund's investment
objectives and guidelines. Funds in the Smith Barney Classic Series invest
across asset classes and sectors, utilizing a range of strategies in order to
achieve their objectives.
Market Overview
One of the major market forces that affected the performance of the Fund last
year was the concentrated market in which the 15 to 25 largest capitalization
companies in the S&P 500 contributed disproportionately to the performance of
the overall index. As value managers, we believe that these companies were
overpriced and had reached levels that made them extremely vulnerable to any
form of bad news. These "icon stocks," historical descendants of the "nifty
fifty" of 25 years ago, until recently resisted market corrections and led any
recoveries. As a result, the S&P 500 was an extremely difficult index for active
portfolio managers to beat for most of last year.
The problems in Asia and Russia were another, very important factor affecting
the Fund's performance. The currency and economic problems in these areas caused
many investors to become extremely risk averse. This made the largest companies,
regardless of their valuations, more attractive and made investors shun smaller
companies and those perceived to be sensitive to the global economy. As a
result, the differences in valuations between large and small companies widened
to a degree not seen in several decades.
Many smaller companies continued to show substantial earnings growth in the last
year much like many larger-sized companies. However, given world circumstances,
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Smith Barney Fundamental Value Fund Inc. 1
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the P/E ratio of smaller companies contracted in many cases whereas those of the
larger companies, especially those that dominate the S&P 500, actually saw their
P/E ratios expand. (A P/E ratio is the price of a company's stock divided by its
earnings per share.)
Investment Strategies
The principal investment strategies used by the Fund in the last year are
detailed below.
o A cash position of about 20% was maintained in the Fund for much of the
last year because we believed that there were limited investment
opportunities. It was our judgment that prudent investors should not have
all of their money in a stock market that had reached lofty valuation
extremes. Our cash position penalized performance through July 1998
because the stock market, at least as measured by the S&P 500, marched
relentlessly higher. However, since July, cash has acted as a buffer and
the Fund has declined only about 65% as much as the overall market.
o Early in 1998, we decided that financial services stocks, after a bull
market of seven to eight years, were fully priced and did not reflect
possible earnings problems that might develop as a result of Asia's
problems or a slowing U.S. economy. As a result, the Fund's financial
services weighting was only about 50% of the weighting given by the S&P
500. Our weighting hampered Fund performance through the early summer but
has enhanced its performance since July.
o In the last few months, we have begun to increase the number of issues in
the portfolio that can be defined as small- or mid-cap. Small-cap includes
companies with a market capitalization of up to $1 billion and mid-cap
includes companies with market capitalizations of between $1 and $5
billion. We think that these areas of the market are where the best values
exist. The Fund has always been an all-cap portfolio and the smaller
company component of its portfolio penalized performance for the fiscal
year ended September 30, 1998.
Portfolio Changes
The most significant changes in the Fund's portfolio occurred in financial
services, energy, and basic industries. In energy, we added a large position in
Chevron and smaller ones in several oil services companies in the last month.
Many oil services companies have declined 50%-70% from their highs. We believe
many basic industry or natural resources companies represent attractive
long-term investment opportunities. For example, Aluminum Co. of America is one
of our largest positions.
Market Outlook
In our opinion, the next six months will feature volatile markets and a
transition to new market leadership. The S&P 500 saw its P/E ratio nearly double
in the last four and half years. It would take a heroic set of assumptions to
justify a similar circumstance in the next five years. In addition, many
larger-sized companies probably have exhausted the easy gains from cost cutting
and restructuring, and a number may have trouble growing more earnings in the
next three to five years. As a result, we believe that some P/E contraction
could occur for a number of leading S&P 500 companies in the next few years,
which stands in sharp contrast to the experience from 1994 to 1998. We also
believe the annual returns for the S&P 500 could likely decline to the 6%-8%
range during this period.
The next six months will lay the basis for better performance by many companies
that have underperformed in recent years. The recent comments of Federal Reserve
Board ("Fed") Chairman Alan Greenspan suggest that our 20-year preoccupation
with containing inflation has given way to new Fed policies to sustain economic
growth. In other words, we now may be fighting deflation rather than inflation.
In our view, the sectors of greatest opportunity in the next five years include
technology, basic industry and resource companies, energy and energy services,
and
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2 1998 Annual Report to Shareholders
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financial services companies. The stocks of many financial services companies
have fallen 50% or more since July 1998 and have reached prices that are
becoming attractive. Although it may be early, we also believe many capital
goods companies represent good opportunities. In addition, our research suggests
that some larger capitalization companies in foreign markets are once again more
attractive than many larger domestic ones.
In the next six months and beyond, we believe the following events may occur:
. Returns for most asset classes, including stocks, should regress to lower
levels. Historically, the average annual total return of stocks, including
dividends, has been about 11%.
. Small- and mid-cap stocks should provide returns that are in excess of the
returns for the S&P 500 stocks.
. The world will be fighting deflation. Money supply growth worldwide should
be high in the coming months and years. Inflation eventually will recover
to 3%-4% and many may welcome its return, at least initially.
. Every portfolio will need to have increased representation in companies
perceived to be beneficiaries of renewed inflation. Even though 3%-4%
inflation is considered modest by many, at the margin, this will be enough
to shift investment preferences rather significantly.
Companies in the basic industries such as aluminum, forest products, and
energy production and services are representative of the type of companies
that might benefit should inflation move up even modestly in the coming
years. The limited amount of new capacity additions in many of these areas
suggests substantial pricing power could develop once aggregate demand
recovers, a condition which we think is likely in the next 12-24 months.
Conclusion
At the risk of stating the obvious, we believe that the next five years will
differ substantially from the last five, and that the best future investment
opportunities will be in previously neglected areas or ones that have produced
below-average returns in recent years. High returns will be earned in some
surprising places whereas the "popular merchandise" of recent years may
disappoint.
Thank you for investing in the Smith Barney Fundamental Value Fund. We look
forward to continuing to help you pursue your financial goals.
Sincerely,
/s/ Heath B. McLendon /s/ John G. Goode
Heath B. McLendon John G. Goode
Chairman Vice President and
Investment Officer
October 16, 1998
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Top Ten Holdings* As of September 30, 1998
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1. Wal-Mart Stores, Inc. 5.6%
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2. Tele-Communications, Inc., Class A Shares 4.4
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3. American International Group, Inc. 4.3
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4. Time Warner, Inc. 4.1
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5. Cox Communications, Inc. 4.1
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6. Aluminum Co. of America 4.0
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7. Adobe Systems, Inc. 3.9
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8. Johnson & Johnson 3.7
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9. American Express Co. 3.6
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10. International Business Machines Corp. 3.6
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* As a percentage of total common stock.
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Smith Barney Fundamental Value Fund Inc. 3
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Historical Performance -- Class A Shares
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Net Asset Value
----------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================
9/30/98 $11.37 $10.07 $0.11 $0.52 (6.04)%
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9/30/97 9.31 11.37 0.13 0.44 29.53
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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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Total $1.35 $4.32
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Historical Performance -- Class B Shares
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Net Asset Value
----------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
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9/30/98 $11.31 $10.01 $0.03 $0.52 (6.79)%
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9/30/97 9.26 11.31 0.06 0.44 28.62
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9/30/96 8.62 9.26 0.13 0.37 13.82
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9/30/95 8.16 8.62 0.08 0.81 19.19
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9/30/94 8.37 8.16 0.02 0.53 4.21
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Inception*
-- 9/30/93 7.31 8.37 0.05 0.46 22.82+
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Total $0.37 $3.13
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Historical Performance -- Class L Shares
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Net Asset Value
----------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
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9/30/98 $11.30 $10.01 $0.03 $0.52 (6.70)%
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9/30/97 9.26 11.30 0.06 0.44 28.52
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9/30/96 8.62 9.26 0.13 0.37 13.82
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9/30/95 8.16 8.62 0.09 0.81 19.33
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9/30/94 8.37 8.16 0.02 0.53 4.24
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Inception*
-- 9/30/93 8.15 8.37 0.00 0.00 2.70+
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Total $0.33 $2.67
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4 1998 Annual Report to Shareholders
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Historical Performance -- Class Y Shares
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Net Asset Value
----------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
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9/30/98 $11.40 $10.10 $0.16 $0.52 (6.78)%
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9/30/97 9.32 11.40 0.16 0.44 30.06
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Inception*
-- 9/30/96 8.54 9.32 0.00 0.00 9.13+ ++
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Total $0.32 $0.96
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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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Without Sales Charge(1)
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Class A Class B Class L Class Y
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Year Ended 9/30/98 (6.04)% (6.79)% (6.70)% (6.78)%
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Five Years Ended 9/30/98 11.93 11.13 11.17 N/A
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Ten Years Ended 9/30/98 13.20 N/A N/A N/A
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Inception* through 9/30/98 13.35 13.23 11.42 11.06++
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Without Sales Charge(2)
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Class A Class B Class L Class Y
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Year Ended 9/30/98 (10.75)% (11.22)% (8.47)% (6.78)%
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Five Years Ended 9/30/98 10.80 11.00 10.96 N/A
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Ten Years Ended 9/30/98 12.62 N/A N/A N/A
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Inception* through 9/30/98 13.01 13.23 11.21 11.06++
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Cumulative Total Return
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Without Sales Charge(1)
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Class A (9/30/88 through 9/30/98) 245.61%
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Class B (Inception* through 9/30/98) 108.17
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Class L (Inception* through 9/30/98) 74.36
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Class Y (Inception* through 9/30/98) 32.32++
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(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 charges of 5.00% and 1.00%,
respectively; and Class B shares reflect the deduction of a 5.00% CDSC,
which applies if shares are redeemed within one year from purchase.
Thereafter, the CDSC declines by 1.00% per year until no CDSC is incurred.
Class L 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, L and Y shares are November 12, 1981,
November 6, 1992, August 10, 1993 and October 13, 1995, respectively.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
++ During November 1995 Class Y shares were fully redeemed, therefore
performance for Class Y shares represents performance for the period
beginning January 31, 1996, which represents the date new share purchases
were made into this class.
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Smith Barney Fundamental Value Fund Inc. 5
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Smith Barney Fundamental Value Fund Inc. at a Glance (unaudited)
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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 1988--September 1998
[THE FOLLOWING TABLE WAS DEPICTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
Smith Barney Standard & Poor's
Fundamental Value Fund 500 Index
Sep 88 9,497 10,000
Sep 89 11,706 13,296
Sep 90 9,804 12,067
Sep 91 13,085 15,819
Sep 92 14,917 17,565
Sep 93 18,681 19,844
Sep 94 19,599 20,573
Sep 95 23,507 26,686
Sep 96 26,969 32,106
Sep 97 34,932 45,086
Sep 98 32,821 49,183
+ Hypothetical illustration of $10,000 invested in Class A shares on
September 30, 1988, 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, 1998, 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 as a mutual fund. The
performance of the Fund's other classes may be greater or less than the
Class A shares' performance indicated on this chart, depending on whether
greater or 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 values may be more or less than the original cost. No
adjustment has been made for shareholder tax liability on dividends or
capital gains.
Industry Diversification of Common Stock*
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[THE FOLLOWING TABLE WAS DEPICTED AS A BAR CHART IN THE PRINTED MATERIAL.]
Financial Services 8.0%
Energy 14.8%
Healthcare 8.2%
Insurance 4.3%
Aluminum 4.0%
Real Estate 8.0%
Retail 5.6%
Technology and Computers 14.5%
Telecommunications 16.2%
Transportation 4.1%
Other 12.3%
* As a percentage of total common stock.
Investment Breakdown
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[THE FOLLOWING TABLE WAS DEPICTED AS A PIE CHART IN THE PRINTED MATERIAL.]
Options Purchased 1.8%
Cash Equivalents 19.8%
Common Stock 78.4%
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6 1998 Annual Report to Shareholders
<PAGE>
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Schedule of Investments September 30, 1998
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SHARES SECURITY VALUE
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COMMON STOCK -- 78.4%
Aluminum -- 3.1%
600,000 Aluminum Co. of America+ $ 42,600,000
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Basic Materials -- 0.1%
98,400 Wolverine Tube, Inc.++ 2,072,550
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Chemicals -- 1.6%
400,000 E.I. du Pont de Nemours & Co.+ 22,450,000
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Energy -- 11.6%
8,390,000 Abacan Resource Corp.++ 1,835,313
500,000 Baker Hughes, Inc. 10,468,750
400,000 Chevron Corp. 33,625,000
100,000 Cooper Cameron Corp.+ ++ 2,812,500
500,000 Enron Corp. 26,406,250
800,000 Halliburton Co. 22,850,000
637,316 Louis Dreyfus Natural Gas Corp.++ 9,241,082
321,000 Ocean Energy, Inc.++ 4,213,125
800,000 Oryx Energy Co. 10,350,000
700,000 Royal Dutch Petroleum Co.+ 33,337,500
100,000 Smith International, Inc. 2,743,750
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157,883,270
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Entertainment -- 3.2%
500,000 Time Warner, Inc.+ 43,781,250
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Financial Services -- 6.3%
500,000 American Express Co. 38,812,500
500,000 Bank of New York Co., Inc. 13,687,500
550,000 BankAmerica Corp.@ 33,068,750
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85,568,750
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Foods and Beverages -- 1.7%
398,900 Fleming Cos., Inc. 4,886,525
600,000 PepsiCo, Inc. 17,662,500
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22,549,025
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Healthcare -- 6.4%
1,000,000 Advanced Polymer Systems, Inc.++ 5,437,500
1,634,664 Aphton Corp.++ 19,207,302
109,600 C.R. Bard, Inc. 4,041,500
500,000 Johnson & Johnson 39,125,000
150,000 Merck & Co., Inc.+ 19,434,375
266 Molecular Biosystems, Inc.++ 1,131
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87,246,808
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Hotels -- 0.5%
274,600 Hilton Hotels Corp. 4,685,363
1,000,000 MeriStar Hotels & Resorts, Inc.++ 2,750,000
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7,435,363
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Insurance -- 3.4%
600,000 American International Group, Inc.+ 46,200,000
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See Notes to Financial Statements
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Smith Barney Fundamental Value Fund Inc. 7
<PAGE>
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Schedule of Investments (continued) September 30, 1998
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Manufacturing -- 1.2%
800,000 RMI Titanium Co.+ $ 16,100,000
- --------------------------------------------------------------------------------
Paper Products -- 1.3%
1,425,000 Asia Pulp & Paper Co., Ltd.+ 7,570,313
33,400 Champion International Corp. 1,045,838
345,000 Jefferson Smurfit Corp.+ ++ 3,967,500
70,000 The Mead Corp. 2,060,625
55,000 Union Camp Corp. 2,165,625
35,400 Willamette Industries, Inc. 1,015,538
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17,825,439
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Real Estate -- 6.3%
1,300,000 Del E. Webb Corp. 27,381,250
822,300 Spieker Properties, Inc. 30,219,525
1,042,800 The Rouse Co.+ 28,090,425
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85,691,200
- --------------------------------------------------------------------------------
Retail -- 4.4%
1,100,000 Wal-Mart Stores, Inc.+@ 60,087,500
- --------------------------------------------------------------------------------
Technology and Computers -- 11.4%
1,200,000 Adobe Systems, Inc. 41,625,000
1,000,000 Cypress Semiconductor Corp.++ 8,750,000
200,000 Inprise Corp.+ ++ 1,237,500
300,000 Intel Corp. 25,725,000
300,000 International Business Machines Corp. 38,400,000
73,500 International Microcomputer Software, Inc.++ 500,719
300,000 Motorola, Inc.+ 12,806,250
500,000 Texas Instruments, Inc. 26,375,000
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155,419,469
- --------------------------------------------------------------------------------
Telecommunications -- 12.7%
600,000 American Telephone & Telegraph Corp.+ 35,062,500
750,000 COMSAT Corp. 26,437,500
800,000 Cox Communications, Inc.+ ++ 43,700,000
6,500 Grupo Televisa S.A. 125,531
120,000 Hitachi Ltd. 528,945
154,719 Hong Kong Telecommunications Ltd.+ 2,959,001
25,000 Loral Space & Communications Ltd.++ 368,750
75,000 NEC Corp. 487,621
774,500 Scientific-Atlanta, Inc. 16,361,312
1,200,000 Tele-Communications, Inc., Class A Shares+ ++ 46,950,000
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172,981,160
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Transportation -- 3.2%
400,000 AMR Corp. 22,175,000
400,000 General Motors Corp. 21,875,000
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44,050,000
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TOTAL COMMON STOCK
(Cost -- $749,383,579) 1,069,941,784
================================================================================
See Notes to Financial Statements
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8 1998 Annual Report to Shareholders
<PAGE>
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Schedule of Investments (continued) September 30, 1998
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
OPTIONS PURCHASED -- 1.8%
73,800 S&P 500 Index Put @ 1030.608, Expire 12/31/98 $ 5,242,014
57,500 S&P 500 Index Put @ 1050.000, Expire 3/19/99 5,405,000
106,500 S&P 500 Index Put @ 1100.000, Expire 3/19/99 13,259,250
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TOTAL OPTIONS PURCHASED
(Cost -- $13,392,067) 23,906,264
================================================================================
SUB-TOTAL INVESTMENTS
(Cost -- $762,775,646) 1,093,848,048
================================================================================
FACE
AMOUNT SECURITY VALUE
================================================================================
REPURCHASE AGREEMENTS -- 19.8%
$ 93,217,000 Goldman, Sachs & Co., 5.250% due 10/1/98;
Proceeds at maturity -- $93,230,594;
(Fully collateralized by U.S. Treasury Notes,
5.375% due 7/31/00; U.S. Treasury Notes,
5.625% due 10/31/99; U.S. Treasury Bonds,
11.750% due 2/15/10; U.S. Treasury Bonds,
11.750% due 8/15/03; Total market value
-- $95,081,318) 93,217,000
176,950,000 Warburg, Dillon Read LLC, 5.495% due 10/1/98;
Proceeds at maturity -- $176,977,011;
(Fully collateralized by U.S. Treasury Notes,
5.750% due 10/31/02; Market value
-- $180,492,374) 176,950,000
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TOTAL REPURCHASE AGREEMENTS
(Cost-- $270,167,000) 270,167,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost-- $1,032,942,646*) $1,364,015,048
================================================================================
+ A portion of this security is on loan.
++ Non-income producing security.
@ Security segregated by Custodian to cover written call options.
* Aggregate cost for Federal income tax purposes is $1,068,545,317 (See Note
4).
See Notes to Financial Statements
- --------------------------------------------------------------------------------
Smith Barney Fundamental Value Fund Inc. 9
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities September 30, 1998
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $762,775,646+) $1,093,848,048
Repurchase agreements (Cost -- $270,167,000) 270,167,000
Collateral for securities on loan (Note 6) 139,334,024
Receivable for securities sold 1,908,203
Dividends and interest receivable 986,583
Receivable for Fund shares sold 669,269
- --------------------------------------------------------------------------------
Total Assets 1,506,913,127
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for securities on loan (Note 6) 139,334,024
Options written (Note 5) 7,257,726
Payable for Fund shares purchased 1,781,793
Investment advisory fees payable 581,952
Distribution fees payable 252,777
Administration fees payable 248,107
Payable for securities purchased 198,813
Payable to bank 3,509
Accrued expenses 470,399
- --------------------------------------------------------------------------------
Total Liabilities 150,129,100
- --------------------------------------------------------------------------------
Total Net Assets $1,356,784,027
================================================================================
NET ASSETS:
Par value of capital shares $ 135,152
Capital paid in excess of par value 983,120,910
Undistributed net investment income 3,061,641
Accumulated net realized gain from security
transactions and options 32,571,601
Net unrealized appreciation of investments
and options 337,894,723
- --------------------------------------------------------------------------------
Total Net Assets $1,356,784,027
================================================================================
Shares Outstanding:
Class A 51,675,411
------------------------------------------------------------------------------
Class B 71,551,792
------------------------------------------------------------------------------
Class L 5,733,033
------------------------------------------------------------------------------
Class Y 6,191,519
------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $10.07
------------------------------------------------------------------------------
Class B* $10.01
------------------------------------------------------------------------------
Class L** $10.01
------------------------------------------------------------------------------
Class Y (and redemption price) $10.10
------------------------------------------------------------------------------
Maximum Public Offering Price Per Share:
Class A (net asset value plus 5.26% of net asset
value per share) $10.60
------------------------------------------------------------------------------
Class L (net asset value plus 1.01% of net asset
value per share) $10.11
================================================================================
+ Aggregate cost for Federal income tax purposes is $798,378,317.
* Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if
shares are redeemed within one year from purchase (See Note 3).
** Redemption price is NAV of Class L shares reduced by a 1.00% CDSC if
shares are redeemed within the first year of purchase.
See Notes to Financial Statements
- --------------------------------------------------------------------------------
10 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended September 30, 1998
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 17,569,623
Interest 13,289,287
Less: Foreign withholding tax (183,381)
- --------------------------------------------------------------------------------
Total Investment Income 30,675,529
- --------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 3) 10,683,029
Investment advisory fees (Note 3) 8,577,966
Administration fees (Note 3) 3,134,642
Shareholder and system servicing fees 1,713,252
Shareholder communications 388,183
Registration fees 102,786
Directors' fees 85,001
Audit and legal 66,964
Custody 57,861
Other 89,153
- --------------------------------------------------------------------------------
Total Expenses 24,898,837
- --------------------------------------------------------------------------------
Net Investment Income 5,776,692
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND OPTIONS (NOTES 4 AND 5):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities): 70,136,543
Options purchased (4,939,862)
Options written (2,951,075)
- --------------------------------------------------------------------------------
Net Realized Gain 62,245,606
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation
of Investments and Options:
Beginning of year 501,216,420
End of year 337,894,723
- --------------------------------------------------------------------------------
Decrease in Net Unrealized Appreciation (163,321,697)
- --------------------------------------------------------------------------------
Net Loss on Investments and Options (101,076,091)
- --------------------------------------------------------------------------------
Decrease in Net Assets From Operations $ (95,299,399)
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Fundamental Value Fund Inc. 11
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended September 30,
- --------------------------------------------------------------------------------
1998 1997
================================================================================
OPERATIONS:
Net investment income $ 5,776,692 $ 10,530,839
Net realized gain 62,245,606 45,614,564
Increase (decrease) in net unrealized
appreciation (163,321,697) 324,560,554
- --------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From
Operations (95,299,399) 380,705,957
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (10,249,004) (13,542,817)
Net realized gains (75,151,678) (59,901,401)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (85,400,682) (73,444,218)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 7):
Net proceeds from sale of shares 212,118,825 344,615,197
Net asset value of shares issued for
reinvestment of dividends 79,452,277 67,806,116
Cost of shares reacquired (471,028,743) (253,681,008)
- --------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From
Fund Share Transactions (179,457,641) 158,740,305
- --------------------------------------------------------------------------------
Increase (Decrease) in Net Assets (360,157,722) 466,002,044
NET ASSETS:
Beginning of year 1,716,941,749 1,250,939,705
- --------------------------------------------------------------------------------
End of year* $1,356,784,027 $1,716,941,749
================================================================================
* Includes undistributed net investment
income of: $ 3,061,641 $ 9,200,627
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
12 1998 Annual Report to Shareholders
<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, which approximates value; (d) dividend income is recorded on
the ex-dividend date; foreign dividends are recorded on the earlier of the
ex-dividend date or as soon as practical after the Fund determines the existence
of a dividend declaration after exercising reasonable due diligence; 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 by class; (g)
dividends and distributions to shareholders are recorded by the Fund on the
ex-dividend date; (h) the character of income and gains to be distributed are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. At September 30, 1998,
reclassifications were made to the Fund's capital accounts to reflect permanent
book/tax differences and income and gains available for distributions under
income tax regulations. Net investment income, net realized gains and net assets
were not affected by this adjustment; (i) 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; (j) the Fund
intends to comply with the applicable provisions of the Internal Revenue Code of
1986, as amended, pertaining to regulated investment companies and to make
distributions of taxable income sufficient to relieve it from substantially all
Federal income and excise taxes; and (k) 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.
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
Mutual Management Corp. ("MMC"), a subsidiary of Salomon Smith Barney Holdings
Inc. ("SSBH"), acts as
- --------------------------------------------------------------------------------
Smith Barney Fundamental Value Fund Inc. 13
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
investment adviser of the Fund. The Fund pays MMC an advisory fee calculated at
an annual rate of 0.55% of the average daily net assets up to $1.5 billion and
0.50% of the average daily net assets in excess of $1.5 billion. This fee is
calculated daily and paid monthly.
MMC 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.
On October 8, 1998, CFBDS, Inc., became the Fund's distributor. Prior to that
date, Salomon Smith Barney Inc. ("SSB"), another subsidiary of SSBH, was the
Fund's distributor. SSB (as well as certain other broker-dealers) continues to
sell Fund shares to the public as a member of the selling group. For the year
ended September 30, 1998, SSB received brokerage commissions of $161,040.
On June 12, 1998, the Portfolio's existing Class C shares were renamed Class L
shares. Effective June 15, 1998, Class L shares are being sold at net asset
value plus a maximum initial sales charge of 1.00%. Class L shares also have a
1.00% contingent deferred sales charge ("CDSC"), which applies if redemption
occurs within the first year of purchase.
There is also a CDSC of 5.00% on Class B shares, which applies if redemption
occurs within one year from purchase and declines thereafter by 1.00% per year
until no CDSC is incurred.
For the year ended September 30, 1998, SSB received sales charges of $466,000
and $10,000 on sales of the Fund's Class A and L shares, respectively. In
addition, CDSCs paid to SSB were approximately:
Class A Class B Class L
================================================================================
CDSCs $14,000 $1,177,000 $11,000
================================================================================
Pursuant to a 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 for each respective class. The Fund also pays a distribution
fee with respect to its 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 September 30, 1998, total Distribution Plan fees incurred were:
Class A Class B Class L
================================================================================
Distribution Plan Fees $1,471,566 $8,536,323 $675,140
================================================================================
All officers and one Director of the Fund are employees of SSB.
4. Investments
During the year ended September 30, 1998, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $534,679,673
- --------------------------------------------------------------------------------
Sales 908,719,079
================================================================================
At September 30, 1998, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were as follows:
================================================================================
Gross unrealized appreciation $328,858,600
- --------------------------------------------------------------------------------
Gross unrealized depreciation (33,388,869)
- --------------------------------------------------------------------------------
Net unrealized appreciation $295,469,731
================================================================================
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
- --------------------------------------------------------------------------------
14 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
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.
At September 30, 1998, the Fund held three purchased put options with a total
cost of $13,392,067.
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 depending upon whether the cost of
the closing transaction is greater or less than the premium originally received
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 proceeds 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, 1998:
<TABLE>
<CAPTION>
Number of
Contracts Premiums
==========================================================================================
<S> <C> <C>
Options written, outstanding at September 30, 1997 13,950 $ 3,824,211
Options written during the year ended September 30, 1998 120,888 37,678,391
Options cancelled in closing purchase transactions (96,450) (24,827,834)
Options expired (21,150) (3,812,421)
- ------------------------------------------------------------------------------------------
Options written, outstanding at September 30, 1998 17,238 $ 12,862,347
==========================================================================================
</TABLE>
The following represents the covered call option written contracts open as of
September 30, 1998:
<TABLE>
<CAPTION>
Number of Strike
Contracts Expiration Price Value
==========================================================================================
<S> <C> <C> <C> <C>
5,500 BankAmerica Corp. 1/16/99 $ 110.00 $ 137,500
738 S&P 500 Index 12/18/98 1,217.20 317,340
11,000 Wal-Mart Stores, Inc. 1/16/00 75.00 4,812,500
- ------------------------------------------------------------------------------------------
Total Covered Call Options Written
(Premiums received-- $12,862,347) $5,267,340
==========================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney Fundamental Value Fund Inc. 15
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
The following covered put option transactions occurred during the year ended
September 30, 1998:
Number of
Contracts Premiums
================================================================================
Options written, outstanding at September 30, 1997 -- --
Options written during the year ended September 30, 1998 738 $1,217,700
Options cancelled in closing purchase transactions -- --
Options expired -- --
Options exercised -- --
- --------------------------------------------------------------------------------
Options written, outstanding at September 30, 1998 738 $1,217,700
================================================================================
The following represents the covered put option written contracts open as of
September 30, 1998:
Number of Strike
Contracts Expiration Price Value
================================================================================
738 S&P 500 Index
(Premiums received
-- $1,217,700) 12/18/98 $867.90 $1,990,386
================================================================================
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, and receives a lenders fee. Fees earned by the Fund on securities
lending are recorded as 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 securities loaned, 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.
At September 30, 1998, the Fund loaned common stocks having a value of
$130,162,332 and holds the following collateral for loaned securities:
Security Description Value
================================================================================
Time Deposits:
Bank Brussels Lambert, 5.875% due 10/1/98 $16,607,837
Banque of Paribus, 5.813% due 10/1/98 6,308,403
Caisse Des Depot Et Consignations, 5.875% due 10/1/98 16,607,837
Deutsche Bank, 5.875% due 10/1/98 12,515,141
Svenska, 5.875% due 10/1/98 6,308,403
Westdeutsche Landesbank, 5.875% due 10/1/98 6,308,403
Commercial Paper:
Riverwoods Funding Corp., 5.544% due 10/9/98 74,678,000
- --------------------------------------------------------------------------------
Total $139,334,024
================================================================================
7. Capital Shares
At September 30, 1998, 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.
Effective June 12, 1998, the Fund adopted the renaming of existing Class C
shares as Class L shares.
- --------------------------------------------------------------------------------
16 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
At September 30, 1998, total paid-in capital amounted to the following for each
class:
<TABLE>
<CAPTION>
Class A Class B Class L Class Y
============================================================================================
<S> <C> <C> <C> <C>
Total Paid-in Capital $386,182,263 $496,152,800 $47,968,062 $52,952,937
============================================================================================
</TABLE>
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
September 30, 1998 September 30, 1997
-------------------------------- -------------------------------
Shares Amount Shares Amount
=====================================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 7,551,987 $ 82,411,671 9,972,656 $ 99,959,293
Shares issued on reinvestment3,125,009 32,667,488 2,932,597 27,939,714
Shares redeemed (12,290,037) (132,952,544) (8,852,499) (89,440,037)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (1,613,041) $ (17,873,385) 4,052,754 $ 38,458,970
=====================================================================================================================
Class B
Shares sold 6,360,722 $ 68,425,785 17,327,879 $ 171,344,809
Shares issued on reinvestment 4,153,333 43,315,188 3,953,348 37,410,822
Shares redeemed (21,262,606) (228,805,770) (14,990,088) (150,758,176)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (10,748,551) $(117,064,797) 6,291,139 $ 57,997,455
=====================================================================================================================
Class L+
Shares sold 1,049,363 $ 11,275,499 2,633,362 $ 26,239,606
Shares issued on reinvestment332,717 3,469,601 259,478 2,455,580
Shares redeemed (2,007,609) (21,619,890) (1,345,937) (13,482,795)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (625,529) $ (6,874,790) 1,546,903 $ 15,212,391
=====================================================================================================================
Class Y
Shares sold 4,624,764 $ 50,005,870 4,733,074 $ 47,071,489
Shares issued on reinvestment -- -- -- --
Shares redeemed (7,955,204) (87,650,539) -- --
- ---------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (3,330,440) $ (37,644,669) 4,733,074 $ 47,071,489
=====================================================================================================================
</TABLE>
+ On June 12, 1998, Class C shares were renamed Class L shares.
- --------------------------------------------------------------------------------
Smith Barney Fundamental Value Fund Inc. 17
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended September 30:
<TABLE>
<CAPTION>
Class A Shares 1998(1) 1997 1996 1995 1994
=========================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 11.37 $ 9.31 $ 8.66 $ 8.20 $ 8.42
- ---------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.09 0.11 0.20 0.17 0.09
Net realized and unrealized gain (loss) (0.76) 2.52 1.01 1.23 0.30
- ---------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.67) 2.63 1.21 1.40 0.39
- ---------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.11) (0.13) (0.19) (0.13) (0.08)
Net realized gains (0.52) (0.44) (0.37) (0.81) (0.53)
- ---------------------------------------------------------------------------------------------------------
Total Distributions (0.63) (0.57) (0.56) (0.94) (0.61)
- ---------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 10.07 $ 11.37 $ 9.31 $ 8.66 $ 8.20
- ---------------------------------------------------------------------------------------------------------
Total Return (6.04)% 29.53% 14.73% 19.94% 4.92%
- ---------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $520,627 $606,054 $458,208 $386,297 $264,765
- ---------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.15% 1.14% 1.22% 1.34% 1.30%
Net investment income 0.81 1.14 2.32 2.19 1.90
- ---------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 41% 46% 57% 45% 108%
=========================================================================================================
<CAPTION>
Class B Shares 1998(1) 1997 1996 1995 1994
=========================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 11.31 $ 9.26 $ 8.62 $ 8.16 $ 8.37
- ---------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income -- 0.03 0.13 0.12 0.09
Net realized and unrealized gain (loss) (0.75) 2.52 1.01 1.23 0.25
- ---------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.75) 2.55 1.14 1.35 0.34
- ---------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.03) (0.06) (0.13) (0.08) (0.02)
Net realized gains (0.52) (0.44) (0.37) (0.81) (0.53)
- ---------------------------------------------------------------------------------------------------------
Total Distributions (0.55) (0.50) (0.50) (0.89) (0.55)
- ---------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 10.01 $ 11.31 $ 9.26 $ 8.62 $ 8.16
- ---------------------------------------------------------------------------------------------------------
Total Return (6.79)% 28.62% 13.82% 19.19% 4.21%
- ---------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $716,239 $930,436 $703,552 $538,759 $361,254
- ---------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.92% 1.90% 1.97% 2.09% 2.06%
Net investment income 0.04 0.38 1.56 1.44 1.13
- ---------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 41% 46% 57% 45% 108%
=========================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method,
because it more accurately reflects the per share data for the period.
- --------------------------------------------------------------------------------
18 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended September 30:
<TABLE>
<CAPTION>
Class L Shares(1) 1998(2) 1997 1996 1995 1994
=========================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 11.30 $ 9.26 $ 8.62 $ 8.16 $ 8.37
- ---------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income -- 0.03 0.14 0.12 0.05
Net realized and unrealized
gain (loss) (0.74) 2.51 1.00 1.24 0.29
- ---------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.74) 2.54 1.14 1.36 0.34
- ---------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.03) (0.06) (0.13) (0.09) (0.02)
Net realized gains (0.52) (0.44) (0.37) (0.81) (0.53)
- ---------------------------------------------------------------------------------------------------------
Total Distributions (0.55) (0.50) (0.50) (0.90) (0.55)
- ---------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 10.01 $ 11.30 $ 9.26 $ 8.62 $ 8.16
- ---------------------------------------------------------------------------------------------------------
Total Return (6.70)% 28.52% 13.82% 19.33% 4.24%
- ---------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $57,367 $71,874 $44,539 $21,812 $1,652
- ---------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.93% 1.92% 1.96% 2.09% 2.23%
Net investment income 0.03 0.36 1.52 1.44 0.96
- ---------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 41% 46% 57% 45% 108%
=========================================================================================================
<CAPTION>
Class Y Shares 1998(2) 1997 1996(3)
=========================================================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Year $ 11.40 $ 9.32 $ 8.54
Income (Loss) From Operations:
Net investment income 0.12 0.14 0.23
Net realized and unrealized
gain (loss) (0.74) 2.54 0.55
- ---------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.62) 2.68 0.78
- ---------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.16) (0.16) --
Net realized gains (0.52) (0.44) --
- ---------------------------------------------------------------------------------------------------------
Total Distributions (0.68) (0.60) --
- ---------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 10.10 $ 11.40 $ 9.32
- ---------------------------------------------------------------------------------------------------------
Total Return (6.78)% 30.06% 9.13%*++
- ---------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $62,551 $108,578 $44,641
- ---------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.79% 0.78% 0.75%+
Net investment income 1.15 1.48 2.58+
- ---------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 41% 46% 57%
=========================================================================================================
</TABLE>
(1) On June 12, 1998, Class C shares were renamed Class L shares.
(2) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method,
because it more accurately reflects the per share data for the period.
(3) For the period from October 13, 1995 (inception date) to September 30,
1996.
* During November 1995 Class Y shares were fully redeemed, therefore
performance for Class Y shares represents performance for the period
beginning January 31, 1996, which represents the date new share purchases
were made into this class.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney Fundamental Value Fund Inc. 19
<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, 1998, 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, 1998 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, 1998, 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.
Deloitte & Touche LLP
New York, New York
November 13, 1998
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20 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Tax Information (unaudited)
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The amount of long-term capital gains paid by the Fund for the fiscal year
ended September 30, 1998 was $69,312,723.
100% of ordinary income distribution is designated as qualifying for the
dividends received deduction available to corporate shareholders.
- --------------------------------------------------------------------------------
Smith Barney Fundamental Value Fund Inc. 21
<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
President and Chief Executive Officer
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
Investment Adviser and Administrator
Mutual Management Corp.
Distributor
CFBDS, 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 for the information of shareholders of Smith Barney Fundamental
Value Fund Inc. It is not authorized for distribution to prospective investors
unless accompanied by a current Prospectus for the Fund, which contains
information concerning the Fund's investment policies and expenses as well as
other pertinent information.
Salomon Smith Barney
- ----------------------------
A member of citigroup[LOGO]
Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
Smith Barney Fundamental
Value Fund Inc.
Smith Barney Mutual Funds
388 Greenwich Street
MF-2
New York, New York 10013
www.smithbarney.com
FD0283 11/98
