Smith Barney
Appreciation Fund Inc.
388 Greenwich Street
New York, New York 10013
(800) 451-2010
Statement of Additional Information April 30, 1998
As amended June 18, 1998
This Statement of Additional Information expands upon and supplements the
information contained in the current Prospectus of Smith Barney
Appreciation Fund Inc. (the "Fund") dated April 30, 1998, as amended June
18, 1998 or supplemented from time to time, and should be read in
conjunction with the Fund's Prospectus. The Fund's Prospectus may be
obtained from any Smith Barney Financial Consultant, or by writing or
calling the Fund at the address or telephone number set forth above. This
Statement of Additional Information, although not in itself a prospectus,
is incorporated by reference into the Prospectus in its entirety.
CONTENTS
For ease of reference, the same section headings are used in both the
Prospectus and this Statement of Additional Information, except where
shown below:
Management of the Fund 1
Investment Objective and Management Policies 6
Purchase of Shares 12
IRA and Other Prototype Retirement Plans 13
Redemption of Shares 14
Distributors 15
Valuation of Shares 17
Exchange Privilege 18
Performance Data 18
Taxes (See in the Prospectus "Dividends, Distributions and Taxes") 21
Additional Information 23
Financial Statements 23
MANAGEMENT OF THE FUND
The executive officers of the Fund are employees of certain of the
organizations that provide services to the Fund. These organizations are
the following:
Name Service
Smith Barney Inc.
("Smith Barney")
PFS Distributors, Inc.
("PFS Distributors") Distributors
Mutual Management Corp.
("MMC") Investment Adviser and
Administrator
PNC Bank, National Association
("PNC") Custodian
First Data Investor Services Group, Inc.,
(the "Transfer Agent") Transfer Agent
These organizations and the functions they perform for the Fund are
discussed in the Prospectus and in this Statement of Additional
Information.
Directors and Executive Officers of the Fund
The names of the Directors and executive officers of the Fund, together
with information as to their principal business occupations during the
past five years, are shown below. Each Director who is an "interested
person'' of the Fund, as defined in the Investment Company Act of 1940, as
amended (the "1940 Act"), is indicated by an asterisk.
Herbert Barg, Director (Age 75). Private Investor. His address is 273
Montgomery Avenue, Bala Cynwyd, Pennsylvania 19004.
*Alfred J. Bianchetti, Director (Age 75). Retired; formerly Senior
Consultant to Dean Witter Reynolds Inc. His address is 19 Circle End
Drive, Ramsey, New Jersey 07466.
Martin Brody, Director (Age 76). Consultant, HMK Associates, a
financial consulting firm; retired Vice Chairman of the Board of
Restaurant Associates Corp. Director of Jaclyn, Inc., an apparel design
and manufacturing company. His address is HMK Associates, Three ADP
Boulevard, Roseland, New Jersey 07068.
Dwight B. Crane, Director (Age 60). Professor, Graduate School of
Business Administration, Harvard University; Business Consultant. His
address is Graduate School of Business Administration, Harvard University,
Boston, Massachusetts 02163.
Burt N. Dorsett, Director (Age 67). Managing Partner of Dorsett McCabe
Management, Inc., an investment counseling firm; Director of Research
Corporation Technologies, Inc., a non-profit patent-clearing and licensing
firm. His address is 201 East 62nd Street, New York, New York 10021.
Elliot S. Jaffe, Director (Age 71). Chairman of the Board and Chief
Executive Officer of The Dress Barn, Inc. His address is 30 Dunnigan
Drive, Suffern, New York 10901.
Stephen E. Kaufman, Director (Age 66). Attorney. His address is 277
Park Avenue, New York, New York 10172.
Joseph J. McCann, Director (Age 67). Financial Consultant. His address
is 200 Oak Park Place, Pittsburgh, Pennsylvania 15243.
*Heath B. McLendon, Chairman of the Board, President and Investment
Officer (Age 64). Managing Director of Smith Barney and Chairman of Smith
Barney Strategy Advisers Inc.; Director and President of MMC and Travelers
Investment Adviser, Inc. ("TIA"); prior to July 1993, Senior Executive Vice
President of Shearson Lehman Brothers Inc. ("Shearson Lehman Brothers"),
Vice Chairman of Shearson Asset Management. Mr. McLendon is Chairman of
the Board and Investment Officer of 42 Smith Barney Mutual Funds. His
address is 388 Greenwich Street, New York, New York 10013.
Cornelius C. Rose, Jr., Director (Age 64). President, Cornelius C. Rose
Associates, Inc., Financial Consultants, and Chairman and Director of
Performance Learning Systems, an educational consultant. His address is
P.O. Box 355, Fair Oaks, Enfield, New Hampshire 03748.
Lewis E. Daidone, Senior Vice President and Treasurer (Age 40).
Managing Director of Smith Barney; Director and Senior Vice President of
MMC and TIA. Mr. Daidone serves as Senior Vice President and Treasurer of
42 Smith Barney Mutual Funds. His address is 388 Greenwich Street, New
York, New York 10013.
Harry D. Cohen, Vice President and Investment Officer (Age 55).
Managing Director of Smith Barney; Executive Vice President of Smith
Barney; prior to July 1993, President of Asset Management Division of
Shearson Lehman Brothers and Executive Vice President of Shearson Lehman
Brothers. Mr. Cohen also serves as Vice President and Investment Officer
of 1 other of the Smith Barney Mutual Funds. His address is 388 Greenwich
Street, New York, New York 10013.
Christina T. Sydor, Secretary (Age 47). Managing Director of Smith
Barney; General Counsel and Secretary of MMC and TIA. Ms. Sydor serves as
Secretary of 42 Smith Barney Mutual Funds. Her address is 388 Greenwich
Street, New York, New York 10013.
Each Director also serves as a director, trustee and/or general partner of
certain other mutual funds for which Smith Barney serves as distributor.
As of April 3, 1998, the Directors and officers of the Fund, as a group,
owned less than 1.00% of the outstanding common stock of the Fund. As of
April 3, 1998, to the knowledge of the Fund and the Board of Directors, no
single shareholder or "group" (as that term is used in Section 13(d) of
the Securities Act of 1934) beneficially owned more than 5% of the
outstanding shares of the Fund with the exception of the following:
Shareholder
Class
Percent Ownership
Citibank NA Cust. Smith
Barney
Shearson 401K Savings Plan
Smith Barney Account
111 Wall Street
New York, New York 10043
Class Z
99.94%
Smith Barney Concert
Allocation Series Inc.
Balanced Portfolio
PNC Bank NA
200 Stevens Drive
Lester, PA 19113-1522
Class Y
65.67%
Smith Barney Concert
Allocation Series Inc.
Conservative Portfolio
PNC Bank NA
200 Stevens Drive
Lester, PA 19113-1522
Class Y
17.78%
Smith Barney Concert
Allocation Series Inc.
Select Balanced Portfolio
PNC Bank NA
200 Stevens Drive
Lester, PA 19113-1522
Class Y
8.88%
Smith Barney Concert
Allocation Series Inc.
Income Portfolio
PNC Bank NA
200 Stevens Drive
Lester, PA 19113-1522
Class Y
5.12%
No officer, director or employee of Smith Barney or any parent or
subsidiary receives any compensation from the Fund for serving as an
officer or Director of the Fund. The Fund pays each Director who is not
an officer, director or employee of Smith Barney or any of its affiliates
a fee of $3,000 per annum plus $500 per in-person meeting and $100 per
telephonic meeting. Upon attainment of age 80 Directors are required to
change to emeritus status. Directors Emeritus are entitled to serve in
emeritus status for a maximum of 10 years during which time they receive
$l,500 per annum plus $250 per in-person meeting and $50 per telephonic
meeting. All Directors are reimbursed for travel and out-of-pocket
expenses incurred in attending such meetings.
For the calendar year ended December 31, 1997, the Directors of the Fund
were paid the following compensation.
Total
Pension or Compensation Number of
Retirement from Fund Funds for
Aggregate Benefits Accrued and Fund Which
director
Compensation as part of Complex Serves Within
Name of Person from Fund Fund Expenses Paid to Directors Fund Complex
Herbert Barg $5,600 $0 $101,600 16
Alfred Bianchetti 5,600 0 49,600 11
Martin Brody 5,000 0 119,814 19
Dwight Crane 5,600 0 133,850 22
Burt Dorsett 5,600 0 49,600 11
Elliot Jaffe 5,500 0 48,500 11
Stephen Kaufman 5,600 0 91,964 13
Joseph McCann 5,600 0 49,600 11
Heath McLendon+ 0 0 0 42
Cornelius Rose 5,600 0 49,600 11
+ Designates an "interested" Director.
Investment Adviser and Administrator-MMC
MMC (formerly Smith Barney Mutual Funds Management Inc.) serves as
investment adviser to the Fund pursuant to a written agreement (the
"Advisory Agreement"), which was first approved by the Fund's Board of
Directors, including a majority of the Directors who are not interested
persons of the Fund or Smith Barney (the "Independent Directors"), on
April 1, 1993 and by shareholders on June 1, 1993. The services provided
by MMC under the Advisory Agreement are described in the Prospectus under
"Management of the Fund." MMC pays the salary of any officer and employee
who is employed by both it and the Fund. MMC bears all expenses in
connection with the performance of its services. MMC is a wholly owned
subsidiary of Salomon Smith Barney Holdings Inc. ("Holdings"), which in
turn is a wholly owned subsidiary of Travelers Group Inc. ("Travelers").
As compensation for MMC's investment advisory services rendered to the
Fund, the Fund pays a fee computed daily and paid monthly at the following
annual rates of the Fund's average daily net assets: 0.55%, up to $250
million; 0.513% of the next $250 million; 0.476% of the next $500 million;
0.439% of the next $1 billion, 0.402% of the next $l billion; and 0.365%
of the net assets in excess of $3 billion. For the fiscal years ended
December 31, 1997, 1996 and 1995, the Fund paid $16,921,518, $14,352,911
and $12,764,132, respectively, in investment advisory fees.
MMC also serves as administrator to the Fund pursuant to a written
agreement dated April 10, 1994 (the "Administration Agreement"), which was
most recently approved by the Fund's Board of Directors, including a
majority of the Independent Directors of the Fund or Smith Barney, on July
19, 1995. The services provided by MMC under the Administration Agreement
are described in the Prospectus under "Management of the Fund." MMC pays
the salary of any officer and employee who is employed by both it and the
Fund and bears all expenses in connection with the performance of its
services.
As compensation for administrative services rendered to the Fund, MMC
receives a fee computed daily and paid monthly at the following annual
rates: 0.20%, of the value of the Fund's average daily net assets up to
$250 million; 0.187% of the next $250 million; 0.174% of the next $500
million; 0.161% of the next $1 billion; 0.148% of the next $1 billion and
0.135% of the net assets in excess of $3 billion. For the fiscal years
ended December 31, 1997, 1996 and 1995, the Fund paid $6,212,415,
$5,262,374 and $4,675,818 in administration fees.
The Fund bears expenses incurred in its operation including: taxes,
interest, brokerage fees and commissions, if any; fees of Directors who
are not officers, directors, shareholders or employees of Smith Barney or
MMC; SEC fees and state Blue Sky qualification fees; charges of
custodians; transfer and dividend disbursing agent's fees; certain
insurance premiums; outside auditing and legal expenses; costs of
maintaining corporate existence; investor services (including allocated
telephone and personnel expenses); costs of preparation and printing of
prospectuses and statements of additional information for regulatory
purposes and for distribution to existing shareholders; costs of
shareholders' reports and shareholder meetings; and meetings of the
officers or Board of Directors of the Fund.
MMC and the Fund have agreed that it in any fiscal year the aggregate
expenses of the Fund (including fees paid pursuant to the Advisory and
Administration Agreements, but excluding interest, taxes, brokerage, fees
paid pursuant to the Fund's services and distribution plan, and, with the
prior written consent of the necessary state securities commissions,
extraordinary expenses) exceed the expense limitation of any state having
jurisdiction over the Fund, MMC will, to the extent required by state law,
reduce its management fees by such excess expense. Such a fee reduction,
if any, will be reconciled on a monthly basis. [The most restrictive
state expense limitation applicable to the Fund would require MMC to
reduce its fees in any year that such excess expenses exceed 2.50% of the
first $30 million of average net assets, 2.00% of the next $70 million of
average net assets and 1.50% of the remaining average assets. No fee
reduction was necessary for the 1997,1996 or 1995 fiscal years.
Counsel and Auditors
Willkie Farr & Gallagher serves as counsel to the Fund. The Independent
Directors of the Fund have selected Stroock & Stroock & Lavan, LLP to
serve as their legal counsel.
KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York 10154, has been
selected as the Fund's independent auditor to examine and report on the
Fund's financial statements and highlights for the fiscal year ending
December 31, 1998.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Prospectus discusses the Fund's investment objective and the policies
it employs to achieve its objective. This section contains supplemental
information concerning the types of securities and other instruments in
which the Fund may invest, the investment policies and portfolio
strategies that the Fund may utilize and certain risks attendant to such
investments, policies and strategies.
Money Market Instruments. As stated in the Prospectus, the Fund may invest
for temporary defensive purposes in corporate and government bonds and
notes and money market instruments. Money market instruments in which the
Fund may invest include: obligations issued or guaranteed by the United
States government, its agencies or instrumentalities ("U.S. government
securities"); certificates of deposit, time deposits and bankers'
acceptances issued by domestic banks (including their branches located
outside the United States and subsidiaries located in Canada), domestic
branches of foreign banks, savings and loan associations and similar
institutions; high grade commercial paper; and repurchase agreements with
respect to the foregoing types of instruments. The following is a more
detailed description of such money market instruments.
Certificates of deposit ("CDs") are short-term, negotiable obligations of
commercial banks. Time deposits ("TDs") are non-negotiable deposits
maintained in banking institutions for specified periods of time at stated
interest rates. Bankers' acceptances are time drafts drawn on commercial
banks by borrowers, usually in connection with international transactions.
Domestic commercial banks organized under Federal law are supervised and
examined by the Comptroller of the Currency and are required to be members
of the Federal Reserve System and to be insured by the Federal Deposit
Insurance Corporation the ("FDIC"). Domestic banks organized under state
law are supervised and examined by state banking authorities but are
members of the Federal Reserve System only it they elect to join. Most
state banks are insured by the FDIC (although such insurance may not be of
material benefit to the Fund, depending upon the principal amount of CDs
of each bank held by the Fund) and are subject to Federal examination and
to a substantial body of Federal law and regulation. As a result of
governmental regulations, domestic branches of domestic banks are, among
other things, generally required to maintain specialized levels of
reserves, and are subject to other supervision and regulation designed to
promote financial soundness.
Obligations of foreign branches of domestic banks, such as CDs and TDs,
may be general obligations of the parent bank in addition to the issuing
branch, or may be limited by the terms of a specific obligation and
governmental regulation. Such obligations are subject to different risks
than are those of domestic banks or domestic branches of foreign banks.
These risks include foreign economic and political developments, foreign
governmental restrictions that may adversely affect payment of principal
and interest on the obligations, foreign exchange controls and foreign
withholding and other taxes on interest income. Foreign branches of
domestic banks are not necessarily subject to the same or similar
regulatory requirements that apply to domestic banks, such as mandatory
reserve requirements, loan limitations, and accounting, auditing and
financial recordkeeping requirements. In addition, less information may
be publicly available about a foreign branch of a domestic bank than about
a domestic bank. CDs issued by wholly owned Canadian subsidiaries of
domestic banks are guaranteed as to repayment of principal and interest
(but not as to sovereign risk) by the domestic parent bank.
Obligations of domestic branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may
be limited by the terms of a specific obligation and by Federal and state
regulation as well as governmental action in the country in which the
foreign bank has its head office. A domestic branch of a foreign bank
with assets in excess of $1 billion may or may not be subject to reserve
requirements imposed by the Federal Reserve System or by the state in
which the branch is located if the branch is licensed in that state. In
addition, branches licensed by the Comptroller of the Currency and
branches licensed by certain states ("State Branches") may or may not be
required: (a) to pledge to the regulator by depositing assets with a
designated bank within the state, an amount of its assets equal to 5% of
its total liabilities; and (b) to maintain assets within the state in an
amount equal to a specified percentage of the aggregate amount of
liabilities of the foreign bank payable at or through all of its agencies
or branches within the state. The deposits of State Branches may not
necessarily be insured by the FDIC. In addition, there may be less
publicly available information about a domestic branch of a foreign bank
than about a domestic bank.
In view of the foregoing factors associated with the purchase of CDs and
TDs issued by foreign branches of domestic banks or by domestic branches
of foreign banks, MMC will carefully evaluate such investments on a case-
by-case basis. Savings and loans associations whose CDs may be purchased
by the Fund are supervised by the Office of Thrift Supervision and are
insured by the Savings Association Insurance Fund. As a result, such
savings and loan associations are subject to regulation and examination.
American, European and Continental Depositary Receipts. The Fund may
invest in the securities of foreign and domestic issuers in the form of
American Depositary Receipts ("ADRs") and European Depositary Receipts
("EDRs"). These securities may not necessarily be denominated in the same
currency as the securities into which they may be converted. ADRs are
receipts typically issued by a U.S. bank or trust company that evidence
ownership of underlying securities issued by a foreign corporation. EDRs,
which sometimes are referred to as Continental Depositary Receipts
("CDRs"), are receipts issued in Europe typically by foreign banks and
trust companies that evidence ownership of either foreign or domestic
securities. Generally, ADRs, in registered form, are designed for use in
U.S. securities markets and EDRs and CDRs, in bearer form, are designed
for use in European securities markets.
Lending of Portfolio Securities. Consistent with applicable regulatory
requirements, the Fund has the ability to lend securities from its
portfolio to brokers, dealers and other financial organizations. The Fund
may not lend its portfolio securities to Smith Barney or its affiliates
unless it has applied for and received specific authority from the SEC.
Loans of portfolio securities by the Fund will be collateralized by cash,
letters of credit or U S. government securities that are maintained at all
times in an amount equal to at least 100% of the current market value of
the loaned securities.
In lending its portfolio securities, the Fund can increase its income by
continuing to receive interest on the loaned securities as well as by
either investing the cash collateral in short-term instruments or
obtaining yield in the form of interest paid by the borrower when U S.
government securities are used as collateral. Requirements of the SEC,
which may be subject to future modifications, currently provide that the
following conditions must be met whenever the Fund's portfolio securities
are loaned: (a) the Fund must receive at least 100% cash collateral or
equivalent securities from the borrower; (b) the borrower must increase
such collateral whenever the market value of the securities rises above
the value of such collateral; (c) the Fund must be able to terminate the
loan at any time; (d) the Fund must receive reasonable interest on the
loan, as well as an amount equal to any dividends, interest or other
distributions on the loaned securities, and any increase in market value;
(e) the Fund may pay only reasonable custodian fees in .connection with
the loan; and ( f) voting rights on the loaned securities may pass to the
borrower; however, if a material event adversely affecting the investment
occurs, the Fund's Board of Directors must terminate the loan and regain
the right to vote the securities. The risks in lending portfolio
securities, as with other extensions of secured credit, consist of
possible delay in receiving additional collateral or in the recovery of
the securities or possible loss of rights in the collateral should the
borrower fail financially. Loans will be made to firms deemed by MMC to
be of good standing and will not be made unless, in the judgment of MMC,
the consideration to be earned from such loans would justify the risk.
From time to time, the Fund may return a part of the interest earned from
the investment of collateral received for securities loaned to: (a) the
borrower; and/or (b) a third party, which is unaffiliated with the Fund or
with Smith Barney and, which is acting as a "finder."
Convertible Securities. Convertible securities are fixed-income
securities that may be converted at either a stated price or stated rate
into underlying shares of common stock. Convertible securities have
general characteristics similar to both fixed-income and equity
securities. Although to a lesser extent than with fixed-income securities
generally, the market value of convertible securities tends to decline as
interest rates increase and, conversely, tends to increase as interest
rates decline. In addition, because of the conversion feature, the market
value of convertible securities tends to vary with fluctuations in the
market value of the underlying common stocks and, therefore, also will
react to variations in the general market for equity securities. A unique
feature of convertible securities is that as the market price of the
underlying common stock declines, convertible securities tend to trade
increasingly on a yield basis, and so may not experience market value
declines to the same extent as the underlying common stock. When the
market price of the underlying common stock increases, the prices of the
convertible securities tend to rise as a reflection of the value of the
underlying common stock. While no securities investments are without
risk, investments in convertible securities generally entail less risk
than investments in common stock of the same issuer.
As fixed-income securities, convertible securities are investments that
provide for a stable stream of income with generally higher yields than
common stocks. Of course, like all fixed-income securities, there can be
no assurance of current income because the issuers of the convertible
securities may default on their obligations. Convertible securities,
however, generally offer lower interest or dividend yields than non-
convertible securities of similar quality because of the potential for
capital appreciation. A convertible security, in addition to providing
fixed income, offers the potential for capital appreciation through the
conversion feature, which enables the holder to benefit from increases in
the market price of the underlying common stock. There can be no
assurance of capital appreciation, however, because securities prices
fluctuate.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds,
as corporate debt obligations, enjoy seniority in right of payment to all
equity securities, and convertible preferred stock is senior to common
stock, of the same issuer. Because of the subordination feature, however,
convertible securities typically have lower ratings than similar non-
convertible securities.
Warrants. Because a warrant does not carry with it the right to dividends
or voting rights with respect to the securities that the warrant holder is
entitled to purchase, and because it does not represent any rights to the
assets of the issuer, a warrant may be considered more speculative than
certain other types of investments. In addition, the value of a warrant
does not necessarily change with the value of the underlying securities
and a warrant ceases to have value if it is not exercised prior to its
expiration date. The investment in warrants, valued at the lower of cost
or market, may not exceed 5% of the value of the Fund's net assets.
Included within that amount, but not to exceed 2% of the value of the
Fund's net assets, may be warrants that are not listed on the New York
Stock Exchange, Inc. (the "NYSE") or the American Stock Exchange.
Warrants acquired by the Fund in units or attached to securities may be
deemed to be without value.
Preferred Stock. Preferred stocks, like debt obligations, are generally
fixed-income securities. Shareholders of preferred stocks normally have
the right to receive dividends at a fixed rate when and as declared by the
issuer's board of directors, but do not participate in other amounts
available for distribution by the issuing corporation. Dividends on the
preferred stock may be cumulative, and all cumulative dividends usually
must be paid prior to common shareholders receiving any dividends.
Preferred stock dividends must be paid before common stock dividends and,
for that reason, preferred stocks generally entail less risk than common
stocks. Upon liquidation, preferred stocks are entitled to a specified
liquidation preference, which is generally the same as the par or stated
value, and are senior in right of payment to common stock. Preferred
stocks are, however, equity securities in the sense that they do not
represent a liability of the issuer and, therefore, do not offer as great
a degree of protection of capital or assurance of continued income as
investments in corporate debt securities. In addition, preferred stocks
are subordinated in right of payment to all debt obligations and creditors
of the issuer, and convertible preferred stocks may be subordinated to
other preferred stock of the same issuer.
Futures Contracts and Related Options. Futures contracts and options
thereon may be undertaken for hedging and other risk management purposes
in an effort to reduce the impact of several kinds of anticipated price
fluctuation risks on the securities held by the Fund. For example, futures
contracts for the sale of foreign currency might be entered into to
protect against declines in the value of currencies in which portfolio
securities are denominated; and put options on interest rate futures might
be purchased to protect against declines in the market values of debt
securities occasioned by higher interest rates. If these transactions are
successful, the futures or options positions taken by the Fund will rise
in value by an amount which approximately offsets the decline in value of
the portion of the securities held by the Fund that is being hedged.
On other occasions, the Fund may enter into contracts to purchase
the underlying instrument. For example, futures contracts for the purchase
of debt securities might be entered into to protect against an anticipated
increase in the price of debt securities to be purchased in the future
resulting from decreased interest rates.
The Fund will incur brokerage costs whether or not its hedging is
successful and will be required to post and maintain "margin" as a good-
faith deposit against performance of its obligations under futures
contracts and under options written by the Fund. Futures and options
positions are marked to the market daily and the Fund may be required to
make subsequent "variation" margin payments depending upon whether its
positions increase or decrease in value. In this context margin payments
involve no borrowing on the part of the Fund.
Options on Securities. The Fund may purchase put and call options on
securities owned by the Fund and on securities which the Fund may acquire
in the future. The exercise price of the options may be below, equal to or
above the market values of the underlying securities at the times the
options are written.
An option position may be closed out only where there exists a
secondary market for an option of the same series on a recognized
securities exchange or in the over-the-counter market. In light of this
fact and current trading conditions, the Fund expect to purchase not only
call or put options issued by the Clearing Corporation, but also options
in the domestic and foreign over-the-counter markets. When the Fund has
purchased an option and engages in a closing sale transaction, whether the
Fund realizes a profit or loss will depend upon whether the amount
received in the closing sale transaction is more or less than the premium
that the Fund initially paid for the original option plus the related
transaction costs.
Although the Fund generally will purchase only those options for
which MMC believes there is an active secondary market so as to facilitate
closing transactions, there is no assurance that sufficient trading
interest to create a liquid secondary market on a securities exchange will
exist for any particular option or at any particular time, and for some
options no such secondary market may exist. A liquid secondary market in
an option may cease to exist for a variety of reasons. In the past, for
example, higher than anticipated trading activity or order flow or other
unforeseen events have at times rendered inadequate certain of the
facilities of the Clearing Corporation and securities exchanges and
resulted in the institution of special procedures, such as trading
rotations, restrictions on certain types of orders or trading halts or
suspensions in one or more options. There can be no assurance that
similar events, or events that may otherwise interfere with the timely
execution of customers' orders, will not recur. In such event, it might
not be possible to effect closing transactions in particular options.
Securities exchanges generally have established limitations
governing the maximum number of calls and puts of each class which may be
held or exercised within certain time periods, by an investor or group of
investors acting in concert (regardless of whether the options are written
on the same or different securities exchanges or are held, written or
exercised in one or more accounts or through one or more brokers). It is
possible that the Fund and other clients of MMC and certain of their
affiliates may be considered to be such a group. A securities exchange
may order the liquidation of positions found to be in violation of these
limits and it may impose certain other sanctions.
Stock Index Options. The Fund may purchase and write put and call
options on domestic and foreign stock indexes for the purpose of hedging
their portfolios. A stock index fluctuates with changes in the market
values of the stocks included in the index. Stock index options may be
based on a broad market index such as the New York Stock Exchange
Composite Index or a narrower market index such as the Standard & Poor's
Daily Price Index of 500 Common Stocks ("S&P 500"). Indexes also may be
based on an industry or market segment.
Options on stock indexes are generally similar to options on stock
except that the delivery requirements are different. Instead of giving
the right to take or make delivery of stock at a specified price, an
option on a stock index gives the holder the right to receive a cash
"exercise settlement amount" equal to (a) the amount, if any, by which the
fixed exercise price of the option exceeds (in the case of a put) or is
less than (in the case of a call) the closing value of the underlying
index on the date of exercise, multiplied by (b) a fixed "index
multiplier." Receipt of this cash amount will depend upon the closing
level of the stock index upon which the option is based being greater
than, in the case of a call, or less than, in the case of a put, the
exercise price of the option. The amount of cash received will be equal
to such difference between the closing price of the index and the exercise
price of the option, expressed in dollars, times a specified multiple.
The writer of the option is obligated, in return for the premium received,
to make delivery of this amount. The writer may offset its position in
stock index options prior to expiration by entering into a closing
transaction on an exchange, or it may let the option expire unexercised.
The effectiveness of purchasing stock index options as a hedging
technique will depend upon the extent to which price movements in the
portion of a securities portfolio being hedged correlate with price
movements of the stock index selected. Because the value of an index
option depends upon movements in the level of the index rather than the
price of a particular stock, whether the Fund will realize a gain or loss
from the purchase or writing of options on an index depends upon movements
in the level of stock prices in the stock market generally or, in the case
of certain indexes, in an industry or market segment, rather than
movements in the price of a particular stock. Accordingly, successful use
by the Fund of options on stock indexes will be subject to MMC's ability
to predict correctly movements in the direction of the stock market
generally or of a particular industry. This requires different skills and
techniques than predicting changes in the price of individual stocks.
The Fund will engage in stock index options transactions only when
determined by MMC to be consistent with the Fund's efforts to control
risk. There can be no assurance that such judgment will be accurate or
that the use of these portfolio strategies will be successful.
Investment Restrictions
The Fund has adopted the following investment restrictions for the
protection of shareholders. Restrictions l through 7 below cannot be
changed without approval by the holders of a majority of the outstanding
shares of the Fund, defined as the lesser of (a) 67% or more of the
Fund's shares present at a meeting, if the holders of more than 50% of the
outstanding shares are present in person or by proxy or (b) more than 50%
of the Fund's outstanding shares. The remaining restrictions may be
changed by the Fund's Board of Directors at any time. In accordance with
these restrictions, the Fund will not:
1. Invest in a manner that would cause it to fail to be a
"diversified company" under the 1940 Act and the rules, regulations
and orders thereunder.
2. Issue "senior securities" as defined in the 1940 Act and the rules,
regulations and orders thereunder, except as permitted under the 1940 Act
and the rules, regulations and orders thereunder.
3. Invest more than 25% of its total assets in securities, the issuers
of which are in the same industry. For purposes of this limitation,
U.S. government securities and securities of state or municipal
governments and their political subdivisions are not considered to
be issued by members of any industry.
4. Borrow money, except that (a) the Fund may borrow from banks for
temporary or emergency (not leveraging) purposes, including the
meeting of redemption requests which might otherwise require the
untimely disposition of securities, and (b) the Fund may, to the
extent consistent with its investment policies, enter into reverse
repurchase agreements, forward roll transactions and similar
investment strategies and techniques. To the extent that it engages
in transactions described in (a) and (b), the Fund will be limited so
that no more than 33 1/3% of the value of its total assets (including
the amount borrowed), valued at the lesser of cost or market, less
liabilities (not including the amount borrowed) valued at the time
the borrowing is made, is derived from such transactions.
5. Make loans. This restriction does not apply to: (a) the purchase of
debt obligations in which the Portfolio may invest consistent with its
investment objectives and policies; (b) repurchase agreements; and (c)
loans of its portfolio securities, to the fullest extent permitted
under the 1940 Act.
6. Engage in the business of underwriting securities issued by other
persons, except to the extent that the Fund may technically be
deemed to be an underwriter under the Securities Act of 1933, as
amended, in disposing of portfolio securities.
7. Purchase or sell real estate, real estate mortgages, commodities or
commodity contracts, but this restriction shall not prevent the Fund
from (a) investing in securities of issuers engaged in the real estate
business or the business of investing in real estate (including
interests in limited partnerships owning or otherwise engaging in the
real estate business or the business of investing in real estate) and
securities which are secured by real estate or interests therein; (b)
holding or selling real estate received in connection with securities
it holds or held; (c) trading in futures contracts and options on
futures contracts (including options on currencies to the extent
consistent with the Funds' investment objective and policies); or (d)
investing in real estate investment trust securities.
8. Purchase any securities on margin (except for such short-term credits
as are necessary for the clearance of purchases and sales of portfolio
securities) or sell any securities short (except "against the box").
For purposes of this restriction, the deposit or payment by the Fund
of underlying securities and other assets in escrow and collateral
agreements with respect to initial or maintenance margin in connection
with futures contracts and related options and options on securities,
indexes or similar items is not considered to be the purchase of a
security on margin.
9. Invest more than 5% of the value of its net assets in warrants,
included within that amount, but not to exceed 2% of the value of
the Fund's net assets, may be warrants that are not listed on the
New York Stock Exchange, Inc. (the "NYSE") or the American Stock
Exchange. Warrants acquired by the Fund in units or attached to
securities may be deemed to be without value.
10. Invest in mineral-type programs or leases.
11. Purchase or otherwise acquire any security if, as a result, more
than l5% of its net assets would be invested in securities that are
illiquid.
12. Invest for the purpose of exercising control of management.
13. Purchase securities of any company with a record of less than three
years' continuous operation if such purchase would cause its
investments in such companies to exceed 5% of the value of its total
assets. (For purposes of this limitation, issuers include
predecessors, sponsors, controlling persons, general partners,
guarantors and originators of underlying assets.)
If any percentage restriction described above is complied with at the time
of an investment, a later increase or decrease in percentage resulting
from a change in values or assets will not constitute a violation of such
restriction.
Certain of these restrictions were adopted as the result of undertakings
to state securities commissions and must be complied with only as long as
the Fund's shares are registered in the particular state. In order to
permit the sale of the Fund's shares in certain states, the Fund may make
commitments more restrictive than the investment restrictions described
above such as those regarding oil and mineral leases and real estate
limited partnerships.
Certain Investment Activities
While the Fund is authorized to borrow money from banks for purposes of
investment (leveraging) and to invest in securities of foreign issuers, it
has no current intention of engaging in these investment activities and
will do so only when the Fund's Board of Directors determines that either
or both of these activities are in the best interests of shareholders.
Portfolio Turnover
The Fund generally does not engage in short-term trading but intends to
purchase securities for long-term capital appreciation. While the Fund's
portfolio turnover rate has in the past exceeded 100%, the Fund's annual
portfolio turnover rate is not expected to exceed 100%. A portfolio
turnover rate of 100% would occur if all of the securities in the Fund's
portfolio were replaced once during a period of one year. The portfolio
turnover rate is calculated by dividing the lesser of purchases or sales
of portfolio securities for the year by the monthly average value of
portfolio securities. Securities with remaining maturities of one year or
less at the date of acquisition are excluded from the calculation. For
the fiscal years ended December 31, 1997 and 1996, the Fund's portfolio
turnover rate was 57% and 62%, respectively.
Future portfolio turnover rates may vary greatly from year to year as well
as within a particular year and may be affected by cash requirements for
redemptions of the Fund's shares as well as by requirements that enable
the Fund to receive favorable tax treatment. Portfolio turnover rates
will largely depend on the level of purchases and redemptions of Fund
shares. Higher portfolio turnover rates can result in corresponding
increases in brokerage commissions. In addition, to the extent that the
Fund realizes short-term gains as the result of more portfolio
transactions, such gains would be taxable to shareholders at ordinary
income tax rates.
Portfolio Transactions
Decisions to buy and sell securities for the Fund are made by MMC, subject
to the overall supervision and review of the Fund's Board of Directors.
Portfolio securities transactions for the Fund are effected by or under
the supervision of MMC.
Transactions on stock exchanges involve the payment of negotiated
brokerage commissions. There is generally no stated commission in the case
of securities traded in the over-the-counter market, but the price of
those securities includes an undisclosed commission or mark-up. Over-the-
counter purchases and sales are transacted directly with principal market
makers except in those cases in which better prices and executions may be
obtained elsewhere. The cost of securities purchased from underwriters
includes an underwriting commission or concession, and the prices at which
securities are purchased from and sold to dealers include a dealer's mark-
up or mark-down. For the fiscal years ended December 31, 1997, 1996 and
1995, the Fund paid total brokerage commissions of $4,113,439, $4,357,932
and $3,736,847, respectively.
In executing portfolio transactions and selecting brokers or dealers, it
is the Fund's policy to seek the best overall terms available. MMC, in
seeking the most favorable price and execution, considers all factors it
deems relevant, including, for example, the price, the size of the
transaction, the reputation, experience and financial stability of the
broker-dealer involved and the quality of service rendered by the broker-
dealer in other transactions. MMC receives research, statistical and
quotation services from several broker-dealers with which it places the
Fund's portfolio transactions. It is possible that certain of the
services received primarily will benefit one or more other accounts for
which MMC exercises investment discretion. Conversely, the Fund may be
the primary beneficiary of services received as a result of portfolio
transactions effected for other accounts. MMC's fee under the Advisory
Agreement is not reduced by reason of its receiving such brokerage and
research services. The Fund's Board of Directors, in its discretion, may
authorize MMC to cause the Fund to pay a broker that provides brokerage
and research services to MMC a commission in excess of that which another
qualified broker would have charged for effecting the same transaction.
Smith Barney will not participate in commissions from brokerage given by
the Fund to other brokers or dealers and will not receive any reciprocal
brokerage business resulting therefrom.
In accordance with Section 17(e) of the 1940 Act and Rule 17(e)
thereunder, the Fund's Board of Directors has determined that any
portfolio transaction for the Fund may be executed through Smith Barney or
an affiliate of Smith Barney if, in MMC's judgment, the use of Smith
Barney or an affiliate is likely to result in price and execution at least
as favorable as those of other qualified brokers and if, in the
transaction, Smith Barney or the affiliate charges the Fund a commission
rate consistent with those charged by Smith Barney or an affiliate to
comparable unaffiliated customers in similar transactions. In addition,
under rules recently adopted by the SEC, Smith Barney may directly execute
such transactions for the Fund on the floor of any national securities
exchange, provided: (a) the Board of Directors has expressly authorized
Smith Barney to effect such transactions; and (b) Smith Barney annually
advises the Fund of the aggregate compensation it earned on such
transactions. For the fiscal year ended December 31, 1997, the Fund paid
$593,460 in brokerage commissions to Smith Barney, or 14.40% of the total
brokerage commissions paid. Smith Barney secured 11.0% of the aggregate
dollar amount of transactions involving commissions during the 1997 fiscal
year. For the 1997, 1996 and 1995 fiscal years, the Fund paid $557,460,
$685,248 and $637,506, respectively, in brokerage commissions to Smith
Barney.
Even though investment decisions for the Fund are made independently from
those of the other accounts managed by MMC, investments of the kind made
by the Fund also may be made by those other accounts. When the Fund and
one or more accounts managed by MMC are prepared to invest in, or desire
to dispose of, the same security, available investments or opportunities
for sales will be allocated in a manner believed by MMC to be equitable.
In some cases, this procedure may adversely affect the price paid or
received by the Fund or the size of the position obtained for or disposed
of by the Fund.
PURCHASE OF SHARES
Volume Discounts
The schedule of sales charges on Class A shares described in the
Prospectus applies to purchases made by any "purchaser," which is defined
to include the following: (a) an individual; (b) an individual's spouse
and his or her children purchasing shares for their account; (c) a trustee
or other fiduciary purchasing shares for a single trust estate or single
fiduciary account; (d) a pension, profit-sharing or other employee benefit
plan qualified under Section 401(a) of the Internal Revenue Code of 1986,
as amended (the "Code"), and qualified employee benefit plans of employers
who are "affiliated persons" of each other within the meaning of the 1940
Act; (e) tax-exempt organizations enumerated in Section 501 (c)(3) or (13)
of the Code; and (f) a trustee or other professional fiduciary (including
a bank, or an investment adviser registered with the SEC under the
Investment Advisers Act of 1940, as amended) purchasing shares of the Fund
for one or more trust estates or fiduciary accounts. Purchasers who wish
to combine purchase orders to take advantage of volume discounts should
contact a Smith Barney Financial Consultant.
Combined Right of Accumulation
Reduced sales charges, in accordance with the schedule in the Prospectus,
apply to any purchase of Class A shares if the aggregate investment in
Class A shares of the Fund and in Class A shares of other Smith Barney
Mutual Funds that are offered with a sales charge, including the purchase
being made, of any purchaser is $25,000 or more. The reduced sales charge
is subject to confirmation of the shareholder's holdings through a check
of appropriate records. The Fund reserves the right to terminate or amend
the combined right of accumulation at any time after written notice to
shareholders. For further information regarding the combined right of
accumulation, shareholders should contact a Smith Barney Financial
Consultant.
Determination of Public Offering Price
The Fund offers its shares to the public on a continuous basis. The
public offering price for a Class A, Class Y and Class Z share of the Fund
is equal to the net asset value per share at the time of purchase, plus
for Class A shares, an initial sales charge based on the aggregate amount
of the investment. The public offering price for a Class B and Class C
share (and Class A share purchases, including applicable rights of
accumulation, equaling or exceeding $500,000) is equal to the net asset
value per share at the time of purchase and no sales charge is imposed at
the time of purchase. A contingent deferred sales charge ("CDSC"),
however, is imposed on certain redemptions of Class B and Class C shares,
and of Class A shares when purchased in amounts equaling or exceeding
$500,000. The method of computation of the public offering price is shown
in the Fund's financial statements incorporated by reference in their
entirety into this Statement of Additional Information.
IRA AND OTHER PROTOTYPE RETIREMENT PLANS
Copies of the following plans with custody or trust agreements have
been approved by the Internal Revenue Service and are available from the
Fund or Smith Barney; investors should consult with their own tax or
retirement planning advisors prior to the establishment of a plan.
IRA, Rollover IRA and Simplified Employee Pension - IRA
The Small Business Job Protection Act of 1996 changed the eligibility
requirements for participants in Individual Retirement Accounts ("IRAs").
Under these new provisions, if you or your spouse have earned income, each
of you may establish an IRA and make maximum annual contributions equal to
the lesser of earned income or $2,000. As a result of this legislation,
married couples where one spouse is non-working may now contribute a total
of $4,000 annually to their IRAs.
The Taxpayer Relief Act of 1997 has changed the requirements for
determining whether or not you are eligible to make a deductible IRA
contribution. Under the new rules effective beginning January 1, 1998, if
you are considered an active participant in an employer-sponsored retirement
plan, you may still be eligible for a full or partial deduction depending
upon your combined adjusted gross income ("AGI"). For married couples
filing jointly, a full deduction is permitted if your combined AGI is
$50,000 or less ($30,000 for unmarried individuals); a partial deduction
will be allowed when AGI is between $50,000-$60,000 ($30,000-$40,000 for an
unmarried individual); and no deduction when AGI is $60,000 ($40,000 for an
unmarried individual). However, if you are married and your spouse is
covered by a employer-sponsored retirement plan, but you are not, you will
be eligible for a full deduction if your combined AGI is $150,000 or less.
A partial deduction is permitted if your combined AGI is between $150,000-
$160,000 and no deduction is permitted after $160,000.
A Rollover IRA is available to defer taxes on lump sum payments and
other qualifying rollover amounts (no maximum) received from another
retirement plan.
An employer who has established a Simplified Employee Pension - IRA
("SEP-IRA") on behalf of eligible employees may make a maximum annual
contribution to each participant's account of 15% (up to $24,000) of each
participant's compensation. Compensation is capped at $160,000 for 1998.
Paired Defined Contribution Prototype
Corporations (including Subchapter S corporations) and non-corporate
entities may purchase shares of the Fund through the Smith Barney Prototype
Paired Defined Contribution Plan (the "Prototype"). The Prototype permits
adoption of profit-sharing provisions, money purchase pension provisions, or
both, to provide benefits for eligible employees and their beneficiaries.
The Prototype provides for a maximum annual tax deductible contribution on
behalf of each Participant of up to 25% of compensation, but not to exceed
$30,000 (provided that a money purchase pension plan or both a profit-
sharing plan and a money purchase pension plan are adopted thereunder).
REDEMPTION OF SHARES
The right of redemption may be suspended or the date of payment postponed
(a) for any period during which the NYSE is closed (other than for
customary weekend or holiday closings), (b) when trading in markets the
Fund normally utilizes is restricted, or an emergency, as determined by
the SEC, exists so that disposal of the Fund's investments or
determination of net asset value is not reasonably practicable or (c) for
such other periods as the SEC by order may permit for the protection of
the Fund's shareholders.
Distributions in Kind
If the Board of Directors of the Fund determines that it would be
detrimental to the best interests of the remaining shareholders to make a
redemption payment wholly in cash, the Fund may pay, in accordance with
SEC rules, any portion of a redemption in excess of the lesser of $250,000
or 1% of the Fund's net assets by distribution in kind of portfolio
securities in lieu of cash. Securities issued as a distribution in kind
may incur brokerage commissions when shareholders subsequently sell those
securities.
Automatic Cash Withdrawal Plan
An automatic cash withdrawal plan (the "Withdrawal Plan") is available to
shareholders who own shares with a value of at least $10,000 ($5,000 for
retirement plan accounts) and who wish to receive specific amounts of cash
monthly or quarterly. Withdrawals of at least $50 may be made under the
Withdrawal Plan by redeeming as many shares of the Fund as may be
necessary to cover the stipulated withdrawal payment. Any applicable CDSC
will not be waived on amounts withdrawn by shareholders that exceed 1.00%
per month of the value of a shareholder's shares at the time the
Withdrawal Plan commences. (With respect to Withdrawal Plans in effect
prior to November 7, 1994, any applicable CDSC will be waived on amounts
withdrawn that do not exceed 2.00% per month of the value of a
shareholder's shares at the time the Withdrawal Plan commenced.) To the
extent withdrawals exceed dividends, distributions and appreciation of a
shareholder's investment in the Fund, there will be a reduction in the
value of the shareholder's investment and continued withdrawal payments
will reduce the shareholder's investment and ultimately may exhaust it.
Withdrawal payments should not be considered as income from investment in
the Fund. Furthermore, as it generally would not be advantageous to a
shareholder to make additional investments in the Fund at the same time he
or she is participating in the Withdrawal Plan, purchases by such
shareholders in amounts of less than $5,000 ordinarily will not be
permitted.
Shareholders who wish to participate in the Withdrawal Plan and who hold
their shares in certificate form must deposit their share certificates
with the Transfer Agent as agent for Withdrawal Plan members. All
dividends and distributions on shares in the Withdrawal Plan are
reinvested automatically at net asset value in additional shares of the
Fund. Withdrawal Plans should be set up with a Smith Barney Financial
Consultant. A shareholder who purchases shares directly through the
Transfer Agent may continue to do so and applications for participation in
the Withdrawal Plan must be received by the Transfer Agent no later than
the eighth day of the month to be eligible for participation beginning
with that month's withdrawal. For additional information, shareholders
should contact a Smith Barney Financial Consultant.
DISTRIBUTORS
Smith Barney serves as the Fund's distributor on a best efforts basis
pursuant to a written agreement (the "Distribution Agreement") which was
most recently approved by the Fund's Board of Directors on July 17, 1997.
For the fiscal years ended December 31, 1997, 1996 and 1995, Smith Barney
received approximately $2.0 million, $1.8 million and $1.7 million,
respectively, in sales charges for the sale of Class A shares and did not
reallow any portion thereof to dealers. For the fiscal years ended
December 31, 1997, 1996 and 1995, Smith Barney received approximately
$1,305,000, $1,512,000 and $1,912,000, respectively, representing CDSC on
redemptions of the Fund's Class B shares. For the fiscal years ended
December 31, 1997, 1996, and 1995, Smith Barney received approximately
$9,000, $6,000 and $4000, respectively, representing CDSC on redemptions
of the Fund's Class C shares.
PFS Distributors, located at 3100 Breckinridge Blvd., Building 200, Duluth,
Georgia 30199-0062, also, serves as one of the Fund's distributors on a best
efforts basis requiring PFS Distributors to take and pay for only such
securities as may be sold to the public pursuant to a Distribution
Agreement dated July 1, 1995. The only classes of shares being offered for
sale through PFS Distributors are Class A shares and Class B shares.
When payment is made by the investor, unless otherwise noted by the
investor, the funds will be held as a free credit balance in the
investor's brokerage account and Smith Barney may benefit from the
temporary use of the funds. The investor may designate another use for
the funds prior to settlement date, such as an investment in a money
market fund (other than Smith Barney Exchange Reserve Fund) of the Smith
Barney Mutual Funds. If the investor instructs Smith Barney to invest the
funds in a Smith Barney money market fund, the amount of the investment
will be included as part of the average daily net assets of both the Fund
and the Smith Barney money market fund, and affiliates of Smith Barney
that serve the funds in an investment advisory or administrative capacity
will benefit from the fact they are receiving fees from both such
investment companies for managing these assets computed on the basis of
their average daily net assets. The Fund's Board of Directors has been
advised of the benefits to Smith Barney resulting from these settlement
procedures and will take such benefits into consideration when reviewing
the Advisory, Administration and Distribution Agreements for continuance.
For the fiscal year ended December 31, 1997, Smith Barney and/or PFS
Distributors incurred distribution expenses totaling approximately
$19,137,273 for advertising, printing and mailing of Prospectuses, support
services, to Smith Barney Financial Consultants, and in accruals for
interest on the excess of Smith Barney expenses incurred in distribution
of the Fund's shares over the sum of the distribution fees and CDSC
received by Smith Barney and/or PFS Distributors from the Fund.
Distributions Arrangements
To compensate Smith Barney for the services it provides and for the
expense it bears under the Distribution Agreement, the Fund has adopted a
services and distribution plan (the "Plan") pursuant to Rule 12b-1 under
the 1940 Act. Under the Plan, the Fund pays Smith Barney a service fee,
accrued daily and paid monthly, calculated at the annual rate of 0.25% of
the value of the Fund's average daily net assets attributable to the Class
A, Class B and Class C shares. In addition, the Fund pays Smith Barney a
distribution fee with respect to the Class B and Class C shares primarily
intended to compensate Smith Barney for its initial expense of paying
Financial Consultants a commission upon sales of those shares. The Class B
and Class C distribution fee is calculated at the annual rate of 0.75% of
the value of the Fund's average daily net assets attributable to the
shares of the respective Class.
The only Classes of shares being offered for sale through PFS Distributors
are Class A shares and Class B shares. Pursuant to the Plan (described
above), PFS Distributors is paid an annual service fee with respect to
Class A and Class B shares of the Fund sold through PFS Distributors at
the annual rate of 0.25% of the average daily net assets of the respective
Class. PFS Distributors is also paid an annual distribution fee with
respect to Class B shares at the annual rate of 0.75% of the average daily
net assets attributable to that Class. Class B shares that automatically
convert to Class A shares eight years after the date of original purchase
will no longer be subject to a distribution fee. The fees are paid to PFS
Distributors, which in turn, pays PFS Investments Inc. ("PFS Investments")
to pay its Investments Registered Representatives for servicing
shareholder accounts and, in the case of Class B shares, to cover expenses
primarily intended to result in the sale of those shares. These expenses
include: advertising expenses; the cost of printing and mailing
prospectuses to potential investors; payments to and expenses of
Investments Registered Representatives and other persons who provide
support services in connection with the distribution of shares; interest
and/or carrying charges; and indirect and overhead costs of PFS
Investments associated with the sale of Fund shares, including lease,
utility, communications and sales promotion expenses.
The payments to PFS Investments Registered Representatives for selling
shares of a Class include a commission or fee paid by the investor or PFS
at the time of sale and, with respect to Class A and Class B shares, a
continuing fee for servicing shareholder accounts for as long as a
shareholder remains a holder of that Class. PFS Investments Registered
Representatives may receive different levels of compensation for selling
different Classes of shares.
PFS Investments may be deemed to be an underwriter for purposes of the
Securities Act of 1933. From time to time, PFS or its affiliates may also
pay for certain non-cash sales incentives provided to PFS Investments
Registered Representatives. Such incentives do not have any effect on the
net amount invested. In addition to the reallowances from the applicable
public offering price described above, PFS may from time to time, pay or
allow additional reallowances or promotional incentives, in the form of
cash or other compensation to PFS Investments Registered Representatives
that sell shares of the Fund.
The following service and distribution fees were incurred during the
periods indicated:
DISTRIBUTION PLAN FEES
Fiscal Year
Ended
12/31/97
Fiscal
Year
Ended
12/31/96
Fiscal Year
Ended
12/31/95
CLASS A
$ 5,849,540
$
5,002,144
$4,551,117
CLASS B
12,927,331
10,505,436
8,770,866
CLASS C
360,402
203,764
87,811
Under its terms, the Plan continues from year to year, provided such
continuance is approved annually by vote of the Fund's Board of Directors,
including a majority of the Independent Directors. The Plan may not be
amended to increase the amount of the service and distribution fees
without shareholder approval, and all amendments of the Plan also must be
approved by the Directors and Independent Directors in the manner
described above. The Plan may be terminated with respect to a Class of
the Fund at any time, without penalty, by vote of a majority of the
Independent Directors or by vote of a majority (as defined in the 1940
Act) of the outstanding voting securities of the Class. Pursuant to the
Plan, Smith Barney and PFS Distributors will provide the Fund's Board of
Directors with periodic reports of amounts expended under the Plan and the
purpose for which such expenditures were made.
VALUATION OF SHARES
Each Class' net asset value per share is calculated on each day, Monday
through Friday, except days on which the NYSE is closed. The NYSE
currently is scheduled to be closed on New Year's Day, Martin Luther King,
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving and Christmas, and on the preceding Friday or
subsequent Monday when one of these holidays falls on a Saturday or
Sunday, respectively. Because of the differences in distribution fees and
Class-specific expenses, the per share net asset value of each Class may
differ. The following is a description of the procedures used by the Fund
in valuing its assets.
Securities listed on a national securities exchange will be valued on the
basis of the last sale on the date on which the valuation is made or, in
the absence of sales, at the mean between the closing bid and asked
prices. Over-the-counter securities will be valued at the mean between
the closing bid and asked prices on each day, or, if market quotations for
those securities are not readily available, at fair value, as determined
in good faith by the Fund's Board of Directors. Short-term obligations
with maturities of 60 days or less are valued at amortized cost, which
constitutes fair value as determined by the Fund's Board of Directors.
Amortized cost involves valuing an instrument at its original cost to the
Fund and thereafter assuming a constant amortization to maturity of any
discount or premium, regardless of the effect of fluctuating interest
rates on the market value of the instrument. All other securities and
other assets of the Fund will be valued at fair value as determined in
good faith by the Fund's Board of Directors.
EXCHANGE PRIVILEGE
Except as noted below, shareholders of any Smith Barney Mutual Fund may
exchange all or part of their shares for shares of the same Class of other
Smith Barney Mutual Funds, to the extent such shares are offered for sale
in the shareholder's state of residence, on the basis of relative net
asset value per share at the time of exchange as follows:
A. Class A shares of any fund purchased with a sales charge may
be exchanged for Class A shares of any of the other funds, and
the sales charge differential, if any, will be applied. Class
A shares of any fund may be exchanged without a sales charge
for shares of the funds that are offered without a sales
charge. Class A shares of any fund purchased without a sales
charge may be exchanged for shares sold with a sales charge,
and the appropriate sales charge differential will be applied.
B. Class A shares of any fund acquired by a previous exchange of
shares purchased with a sales charge may be exchanged for
Class A shares of any of the other funds, and the sales charge
differential, if any, will be applied.
C. Class B shares of any fund may be exchanged without a sales
charge. Class B shares of the Fund exchanged for Class B
shares of another fund will be subject to the higher
applicable CDSC of the two funds and, for purposes of
calculating CDSC rates and conversion periods, will be deemed
to have been held since the date the shares being exchanged
were deemed to be purchased.
Dealers other than Smith Barney must notify the Transfer Agent of the
investor's prior ownership of Class A shares of Smith Barney High Income
Fund and the account number in order to accomplish an exchange of shares
of Smith Barney High Income Fund under paragraph B above.
The exchange privilege enables shareholders to acquire shares of the same
Class in a fund with different investment objectives when they believe
that a shift between funds is an appropriate investment decision. This
privilege is available to shareholders residing in any state in which the
fund shares being acquired may legally be sold. Prior to any exchange,
the shareholder should obtain and review a copy of the current prospectus
of each fund into which an exchange is being considered. Prospectuses may
be obtained from a Smith Barney Financial Consultant.
Upon receipt of proper instructions and all necessary supporting
documents, shares submitted for exchange are redeemed at the then-current
net asset value and, subject to any applicable CDSC, the proceeds are
immediately invested, at a price as described above, in shares of the fund
being acquired. Smith Barney reserves the right to reject any exchange
request. The exchange privilege may be modified or terminated at any time
after written notice to shareholders.
PERFORMANCE DATA
From time to time, the Fund may quote total return of a Class in
advertisements or in reports and other communications to shareholders.
The Fund may include comparative performance information in advertising or
marketing the Fund's shares. Such performance information may include the
following industry and financial publications: Barron's, Business Week,
CDA Investment Technologies, Inc., Changing Times, Forbes, Fortune,
Institutional Investor, Investors Daily, Money, Morningstar Mutual Fund
Values, The New York Times, USA Today and The Wall Street Journal. To the
extent any advertisement or sales literature of the Fund describes the
expenses or performance of any Class it will also disclose such
information for the other Classes.
Average Annual Total Return
"Average annual total return" figures are computed according to a formula
prescribed by the SEC. The formula can be expressed as follows:
P(1 + T)n = ERV
Where P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical $1,000
investment
made at the beginning of a 1-, 5- or 10-year
period at the end
of the 1-, 5- or 10-year period (or fractional
portion thereof),
assuming reinvestment of all dividends and
distributions.
Class A's average annual total return was as follows for the periods
indicated:
19.95% for the one-year period beginning on January 1, 1997 through
December 31, 1997
14.69% per annum during the five-year period beginning on January 1, 1993
through December 31, 1997
14.64% per annum during the ten-year period beginning on January 1, 1988
through December 31, 1997
The average annual total return figures assume that the maximum 5.00%
sales charge has been deducted from the investment at the time of
purchase. If the maximum sales charge had not been deducted, Class A's
average annual total return for those same periods would have been 26.29%,
15.87% and 15.23%, respectively.
Class B's average annual total return was as follows for the periods
indicated:
20.31% for the one-year period beginning on January 1, 1997 through
December 31, 1997
14.88% per annum during the five-year period beginning on January 1, 1993
through December 31, 1997
15.23% for the period from inception (November 6, 1992) through December
31, 1997
The average annual total return figures assume that the maximum applicable
CDSC has been deducted from the investment at the time of redemption. If
the maximum CDSC had not been deducted, Class B's average annual total
return for those same periods would have been 25.31%, 14.99% and 15.23%,
respectively.
Class C's (formerly Class D's) average annual total return was as follows
for the periods indicated:
24.31% for the one-year period beginning on January 1, 1997 through
December 31,1997
14.61% for the period from inception (February 4, 1993) through December
31,1997
The average annual total return figures assume that the maximum applicable
CDSC has been deducted from the investment at the time of redemption. If
the maximum CDSC had not been deducted, Class C's average annual total
return for those same periods would have been 25.31% and 14.61%,
respectively.
Class Y's average annual total return was as follows for the period
indicated:
26.70% for the one-year period beginning on January 1, 1997 through
December 31,1997
23.10% for the period from inception (January 30, 1996) through December
31,1997
Class Y shares do not incur sales charges nor CDSCs.
Class Z's average annual total return was as follows for the periods
indicated:
26.72% for the one-year period beginning on January 1, 1997 through
December 31,1997
16.23% per annum during the five-year period beginning on January 1, 1993
through December 31, 1997
16.46% for the period from inception (November 6, 1992) through December
31, 1997
Class Z shares do not incur sales charges nor CDSCs.
Aggregate Total Return
"Aggregate total return" figures represent the cumulative change in the
value of an investment in the Class for the specified period and are
computed by the following formula:
ERV - P
P
Where: P = a hypothetical initial payment of $10,000
ERV = Ending Redeemable Value of a hypothetical $10,000
investment
made at the beginning of a 1-, 5- or 10-year
period at the end
of the 1-, 5- or 10-year period (or fractional
portion thereof),
assuming reinvestment of all dividends and
distributions.
Class A's aggregate total return was as follows for the periods indicated:
19.95% for the one-year period beginning on January 1, 1997 through
December 31, 1997
98.45% for the five-year period beginning on January 1, 1993 through
December 31, 1997
292.24% for the ten-year period beginning on January 1, 1988 through
December 31, 1997
These aggregate total return figures assume the maximum 5.00% sales charge
has been deducted from the investment at the time of purchase. If the
maximum sales charge had not been deducted, Class A's aggregate total
return for those same periods would have been 26.29%, 108.88% and 312.79%
respectively.
Class B's aggregate total return was as follows for the periods indicated:
20.31% for the one-year period beginning on January 1, 1997 through
December 31, 1997
100.07% for the five-year period beginning on January 1, 1993 through
December 31, 1997
107.66% for the period from inception (November 6, 1992) through December
31, 1997.
These aggregate total return figures assume that the maximum applicable
CDSC has been deducted from the investment at the time of redemption. If
the maximum applicable CDSC had not been deducted, Class B's aggregate
total return for those same periods would have been 25.31%, 101.07% and
107.66%, respectively.
Class C's aggregate total return was as follows for the periods indicated:
24.31% for the one-year period beginning on January 1, 1997 through
December 31, 1997
95.23% for the period from inception (February 4, 1993) through December
31, 1997
These aggregate total return figures assume that the maximum applicable
CDSC has been deducted from the investment at the time of redemption. If
the maximum applicable CDSC had not been deducted, Class C's aggregate
total return for those same periods would have been 25.31% and 95.23%,
respectively.
Class Y's average annual total return was as follows for the period
indicated:
26.70% for the one-year period beginning on January 1, 1997 through
December 31, 1997
49.06% for the period from inception (January 30, 1996) through December
31,1997
Class Y shares do not incur sales charges nor CDSCs.
Class Z's average annual total return was as follows for the periods
indicated:
26.72% for the one-year period beginning on January 1, 1997 through
December 31,1997
112.16% for the five-year period beginning on January 1, 1993 through
December 31, 1997
119.33% for the period from inception (November 6, 1992) through December
31, 1997
Class Z shares do not incur sales charges nor CDSCs.
Performance will vary from time to time depending on market conditions,
the composition of the Fund's portfolio, operating expenses and the
expenses exclusively attributable to the Class. Consequently, any given
performance quotation should not be considered representative of the
Class' performance for any specified period in the future. Because
performance will vary, it may not provide a basis for comparing an
investment in the Class with certain bank deposits or other investments
that pay a fixed yield for a stated period of time. Investors comparing
the Class' performance with that of other mutual funds should give
consideration to the quality and maturity of the respective investment
companies' portfolio securities.
It is important to note that the total return figures set forth above are
based on historical earnings and are not intended to indicate future
performance.
TAXES
The following is a summary of certain Federal income tax considerations
that may affect the Fund and its shareholders. The summary is not
intended as a substitute for individual tax advice and investors are urged
to consult their own tax advisors as to the tax consequences of an
investment in the Fund.
The Fund has qualified and intends to continue to qualify each year as a
regulated investment company under the Code. If the Fund (a) qualifies as
a regulated investment company and (b) distributes to its shareholders at
least 90% of its net investment income (including, for this purpose, its
net realized short-term capital gains), the Fund will not be liable for
Federal income taxes to the extent that its net investment income and its
net realized long- and short-term capital gains, if any, are distributed
to its shareholders.
Gains or losses on the sales of stock or securities by the Fund generally
will be long-term capital gains or losses if the Fund has held the stock
or securities for more than one year. Gains or losses on sales of stock
or securities held for not more than one year generally will be short-term
capital gains or losses.
Any net long-term capital gains realized by the Fund will be distributed
annually as described in the Prospectus. Such distributions ("capital
gain dividends") will be taxable to shareholders as long-term capital
gains, regardless of how long a shareholder has held Fund shares, and will
be designated as capital gain dividends in a written notice mailed by the
Fund to shareholders after the close of the Fund's prior taxable year. If
a shareholder receives a capital gain dividend with respect to any share
and if the share has been held by the shareholder for six months or less,
then any loss on the sale or exchange of such share will be treated as a
long-term capital loss to the extent of the capital gain dividend.
The portion of the dividends received from the Fund that qualifies for the
dividends-received deduction for corporations will be reduced to the
extent that the Fund holds dividend-paying stock for less than 46 days (91
for certain preferred stocks). The Fund's holding period will not include
any period during which the Fund has reduced its risk of loss from holding
the stock by purchasing an option to sell or entering into a short sale of
substantially identical stock or securities convertible into the stock.
The holding period for stock may also be reduced if the Fund diminishes
its risk of loss by holding one or more other positions with respect to
substantially similar or related properties. Dividends-received
deductions will be allowed only with respect to shares that a corporate
shareholder has held for at least 46 days within the meaning of the same
holding period rules applicable to the Fund.
If the Fund is the holder of record of any stock on the record date for
any dividends payable with respect to such stock, such dividends shall be
included in the Fund's gross income as of the later of (a) the date that
such stock became ex-dividend with respect to such dividends (that is, the
date on which a buyer of the stock would not be entitled to receive the
declared but unpaid, dividends) or (b) the date that the Fund acquired
such stock. Accordingly, in order to satisfy its income distribution
requirements, the Fund may be required to pay dividends based on
anticipated earnings and shareholders may receive dividends in an earlier
year than would otherwise be the case.
If a shareholder incurs a sales charge in acquiring shares of the Fund,
disposes of those shares within 90 days and then acquires shares in a
mutual fund for which the otherwise applicable sales charge is reduced by
reason of a reinvestment right (that is exchange privilege), the original
sales charge will not be taken into account in computing gain/loss on the
original shares to the extent the subsequent sales charge is reduced.
Instead, it will he added to the tax basis in the newly acquired shares.
Furthermore, the same rule also applies to a disposition of the newly
acquired or redeemed shares made within 90 days of the second acquisition.
This provision prevents a shareholder from immediately deducting the sales
charge by shifting his or her investment in a family of mutual funds.
Investors considering buying shares of the Fund on or just prior to a
record date for a taxable dividend or capital gain distribution should be
aware that, regardless of whether the price of the Fund shares to be
purchased reflects the amount of the forthcoming dividend or distribution
payment, any such payment will be a taxable dividend or distribution
payment.
If a shareholder fails to furnish a correct taxpayer identification
number, fails fully to report dividend and interest income, or fails to
certify that he or she has provided a correct taxpayer identification
number and that he or she is not subject to "backup withholding," then the
shareholder may be subject to a 31% backup withholding tax with respect to
(a) any taxable dividends and distributions and (b) the proceeds of any
redemptions of Fund shares. An individual's taxpayer identification
number is his or her social security number. The backup withholding tax
is not an additional tax and may be credited against a shareholder's
regular Federal income tax liability.
The foregoing is only a summary of certain tax considerations generally
affecting the Fund and its shareholders and is not intended as a
substitute for careful tax planning. Shareholders are urged to consult
their tax advisors with specific reference to their own tax situations,
including their state and local tax liabilities.
ADDITIONAL INFORMATION
The Fund was incorporated on September 2, 1969 under the name The Shearson
Appreciation Fund, Inc. On October 28, 1987, November 5, 1995, July 30,
1993 and October 14, 1994, the Fund changed its name to Shearson Lehman
Appreciation Fund Inc., Shearson Lehman Brothers Appreciation Fund Inc.,
Smith Barney Shearson Appreciation Fund Inc. and Smith Barney Appreciation
Fund Inc., respectively.
PNC, located at 17th and Chestnut Streets, Philadelphia, Pennsylvania
19103, serves as the custodian of the Fund. Under its agreement with the
Fund, PNC holds the Fund's portfolio securities and keeps all necessary
accounts and records. For its services, PNC receives a monthly fee based
upon the month-end market value of securities held in custody and also
receives securities transaction charges. The assets of the Fund are held
under bank custodianship in compliance with the 1940 Act.
First Data Investor Services Group, Inc., located at Exchange Place,
Boston, Massachusetts 02109, serves as the Fund's transfer agent. Under
the transfer agency agreement, the Transfer Agent maintains the
shareholder account records for the Fund, handles certain communications
between shareholders and the Fund and distributes dividends and
distributions payable by the Fund. For these services, the Transfer Agent
receives a monthly fee computed on the basis of the number of shareholder
accounts it maintains for the Fund during the month and is reimbursed for
out-of-pocket expenses.
FINANCIAL STATEMENTS
The Fund's Annual Report for the fiscal year ended December 31, 1997 is
incorporated herein by reference in its entirety.
Smith
Barney
Appreciati
on
Fund Inc.
Statement of
Additional Information
April 30, 1998
Smith Barney
Appreciation Fund Inc.
388 Greenwich Street
New York, New York 10013
10
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