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