<PAGE>
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[GRAPHIC]
[GRAPHIC] Smith Barney
Appreciation
Fund Inc.
-------------
ANNUAL REPORT
-------------
December 31, 1997
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.(sm)
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<PAGE>
Smith Barney
Appreciation Fund Inc.
================================================================================
The Smith Barney Appreciation Fund Inc. ("Fund") is for investors who want
long-term appreciation of capital through investments primarily in equity
securities. It invests primarily in blue chip companies dominant in their
industries that offer possible appreciation opportunities. The Fund may hold
issues traded over-the-counter as well as those listed on one or more national
exchanges and may make investments in foreign securities, though management
intends to limit such investments to 10% of the Fund's assets. The Fund may also
hold securities of companies with prospects of sustained earnings growth and/or
companies with a cyclical earnings record if deemed attractive.
Smith Barney Appreciation Fund Inc.'s
Average Annual Total Returns Ended
December 31, 1997
<TABLE>
<CAPTION>
Without Sales Charge*
---------------------------------------
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
One-Year 26.29% 25.31% 25.31%
- --------------------------------------------------------------------------------
Five-Year 15.87 14.99 N/A
- --------------------------------------------------------------------------------
Ten-Year 15.23 N/A N/A
- --------------------------------------------------------------------------------
Since Inception+ 12.56 15.23 14.61
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<CAPTION>
With Sales Charge**
---------------------------------------
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
One-Year 19.95% 20.31% 24.31%
- --------------------------------------------------------------------------------
Five-Year 14.69 14.88 N/A
- --------------------------------------------------------------------------------
Ten-Year 14.64 N/A N/A
- --------------------------------------------------------------------------------
Since Inception+ 12.36 15.23 14.61
================================================================================
</TABLE>
* Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect 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.
** 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 sales charge of 5.00%; and Class B shares reflect the
deduction of a 5.00% CDSC, which applies if shares are redeemed within one
year from initial purchase. Thereafter, this CDSC declines 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. All figures represent past performance and are not a guarantee of
future results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost.
+ Inception dates for Class A, B and C shares are March 10, 1970, November 6,
1992 and February 4, 1993, respectively.
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FUND HIGHLIGHT
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The core of the equity portion of the Fund's portfolio consists of high-quality
growth stocks with dominant market positions, global franchises, seasoned and
respected management teams and excellent balance sheets.
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NASDAQ SYMBOL
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Class A SHAPX
Class B SAPBX
Class C SAPCX
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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 .................................................... 5
Schedule of Investments ................................................... 10
Statement of Assets and Liabilities ....................................... 14
Statement of Operations ................................................... 15
Statements of Changes in Net Assets ....................................... 16
Notes to Financial Statements ............................................. 17
Financial Highlights ...................................................... 21
Tax Information ........................................................... 24
Independent Auditor's Report .............................................. 25
<PAGE>
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Shareholder Letter
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[PHOTO] [PHOTO]
HEATH B. HARRY D.
MCLENDON COHEN
Chairman Vice President and
Investment Officer
Fellow Shareholder:
We are pleased to provide the annual report for the Smith Barney Appreciation
Fund Inc. ("Fund") for the year ended December 31, 1997. For your convenience,
we have summarized the Fund's investment strategy during this time and discussed
some of the Fund's holdings in greater detail. A more comprehensive summary of
performance and current holdings can be found in the appropriate sections that
follow.
Performance Update
For the year ended December 31, 1997, the Fund's Class A shares posted a total
return of 26.29% without sales charge, due to an outstanding first quarter
relative to the S&P 500 and a strong absolute return in the second half of the
year. However, the Fund's return trailed the S&P 500, which gained 33.35% during
the period. We continue to abide by our long-standing investment philosophy of
providing investors with a combination of upside potential coupled with some
downside protection. Therefore, while the holding of some cash reserves and the
sale of highly valued stocks may have restrained the Fund's returns in the short
run, we continue to view these actions as appropriate given current market
conditions where high valuations are exceeded only by high expectations.
The stock market continued its terrific climb in 1997. Large inflows of money
into mutual funds by domestic and international investors, strong corporate
profits and declining inflation produced another year of outsized returns.
However, investors found many potholes along the way, particularly the Asian
jolt. As might be expected in a stock market that has climbed relentlessly for a
while, buyers have been attracted whose conviction levels are not strong. Many
stocks are priced with investor expectations that they will continue their
current growth rates. As a result, any minor disappointment reported by a
company can result in an exaggerated and painful stock price decline.
Investment Strategy
The core of the equity portion of the Fund's portfolio consists of high-quality
growth stocks with dominant market positions, global franchises, seasoned and
respected management teams and excellent balance sheets. Because of their
steadiness, these high-quality growth stocks can be comforting in periods of
market excesses and their long term consistent growth in earnings is ultimately
translated into higher dividends and stock prices. Around this core, we continue
to look for special situations such as restructuring candidates or undervalued
companies that are more dependent on economic cycles.
The Fund's top-ten holdings have changed slightly. Allstate, a leading provider
of auto and home insurance, which we highlighted in last year's report, remains
the Fund's single-largest holding. The company continues to run its business for
the benefit of shareholders. Another industry, which has been well represented
in the Fund for some time, is pharmaceuticals. Strong volume growth driven by
new products made these companies significant contributors to overall returns in
1997. Johnson & Johnson, Bristol-Myers Squibb Co. and Merck remain top-ten
holdings of the fund. Unilever NV, a Dutch global consumer
- --------------------------------------------------------------------------------
Smith Barney Appreciation Fund Inc. 1
<PAGE>
products company, is the only new entrant to the Fund's top ten. Under the
leadership of a new CEO, the company is divesting low return businesses,
expanding in developing markets, and investing for future growth. Energy stocks
such as Mobil and Amoco, which we also highlighted last year, remain top
holdings. Their higher-than-market dividends, together with an emphasis on
earning adequate returns on capital, make them desirable holdings in a more
uncertain market environment.
Our biggest disappointment in the last year was Eastman Kodak, where despite a
huge restructuring, the company is facing heavy competition in its core film
business, while investing heavily for future growth in digital products.
Fortunately, we were able to reduce our position at higher levels as the company
began to experience problems. A large sale of stock by the CEO last spring
alerted us to the possibility of more severe problems.
Market Outlook
While the stock market continues to discount a near perfect economic
environment, we think there are some cracks appearing in the foundation that may
warrant a more conservative posture. Our largest concern is that valuation
levels are at or near record levels. While it is virtually impossible to time
when valuations will peak, we do believe that high levels signify a greater
level of market risk. Second, in our view, corporate profit expectations for
1998 are too high and will be adjusted downward. The U.S. economy is slowing due
to high consumer debt levels and the Asian crisis. On a more positive note,
interest rates should continue to trend lower as inflation remains dormant due
to productivity gains along with worldwide competition and excess capacity. The
key issue, it seems to us, is whether earnings disappointment occur, which seems
likely, and if lower interest rates can offset these shortfalls. We expect 1998
to be a very interesting and volatile year, with lots of opportunities in both
directions.
Thank you for investing in the Smith Barney Appreciation Fund Inc. We look
forward to continuing to help you pursue your financial goals.
Sincerely,
/s/ Heath B. McLendon /s/ Harry D. Cohen
Heath B. McLendon Harry D. Cohen
Chairman Vice President and
Investment Officer
January 21, 1998
<TABLE>
<CAPTION>
================================================================================
Top Ten Holdings* As of December 31, 1997
================================================================================
<S> <C>
1. Allstate Corp. 4.9%
- --------------------------------------------------------------------------------
2. General Electric Co. 2.7
- --------------------------------------------------------------------------------
3. Johnson & Johnson 2.7
- --------------------------------------------------------------------------------
4. Bristol-Meyers Squibb Co. 2.4
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5. Mobil Corp. 2.3
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6. Xerox Corp. 2.2
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7. E.I. du Pont De Nemours & Co. 2.0
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8. Unilever NV 2.0
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9. Minnesota Mining & Manufacturing Co. 1.9
- --------------------------------------------------------------------------------
10. Amoco Corp. 1.8
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</TABLE>
* As a percentage of common stocks.
- --------------------------------------------------------------------------------
2 1997 Annual Report to Shareholders
<PAGE>
================================================================================
An Interview with Portfolio Manager Harry D. Cohen
================================================================================
Harry "Hersh" Cohen, Portfolio Manager of the Smith Barney Appreciation Fund,
recently spoke with us and shared some of his thoughts about recent events in
the market and his investment style. Mr. Cohen has been a manager of the Smith
Barney Appreciation Fund since January 1979 and has been with Smith Barney and
its predecessor firm since 1969. He received a B.A. degree from Case Western
Reserve University and a Ph.D. in Psychology from Tufts University.
How has Asia's financial and currency crisis affected the Fund or how you manage
money?
Hersh: It has affected the Fund only to the extent it has affected the overall
market. We have a lot of multinational companies in the Fund and there are some
concerns about how the Asian fallout will affect profits for some of these
companies. For example, one of our largest holdings, 3M, was punished after it
reported earnings that were a little less than had been expected, partly because
of a slowdown in Asia. In my opinion, this market is priced for perfection and
treats any disappointment harshly. On a long-term basis, we prefer to own the
great multi-nationals whose managments have proven their ability to handle all
kinds of problems and opportunities.
Overall, we are suffering the effects that anyone would suffer from owning a
diversified portfolio of stocks and having something come along to upset the
apple cart. But I think that the bigger impact has been to lead investors and
money managers who thought that nothing could go wrong to realize that something
could go wrong.
We can almost certainly expect greater volatility in the stock market in the
coming months. What measures are you taking to minimize volatility in the Fund's
portfolio?
Hersh: I don't like volatility. I've always tried to minimize it. But it is
inherent in this business that there will always be some volatility; and yes,
Asia's financial and currency woes are creating even more volatility.
For most of the year, I thought the market was being richly appraised and as a
result, I have accumulated relatively large cash reserves. As stocks have
reached or exceeded our target levels, I have peeled back on some stocks. This
strategy is typical of the Appreciation Fund. When times are tough and there is
a lot of volatility, we will tend to do better than many other managers at
diminishing that volatility. Not that you can ever eliminate volatility, but we
like to keep it lower than average.
Do you feel that this strategy paid off in light of the market turmoil that
struck in the fall?
Hersh: The final word might not have been written yet but I certainly think it
helped in this current market. I'm having trouble finding a lot great values to
buy and when I get in that situation I keep some cash reserves for when good
values do come along. Now, if this market continues to react negatively to
problems in Asia, which I'm not sure it will, stocks could come into price
levels that I'm comfortable with.
How have low interest rates affected the Fund's performance?
Hersh: Again, the recent bond rally has affected the Fund to the extent that
uncertainty in the market has shifted investor attention away from stocks in
favor of bonds. We have been very bullish on the long bond for the past couple
of years. When the 30-year U.S. Treasury bond was yielding 6.50% in the third
quarter of 1997, I wrote that we should expect a fast rally in the bond market
that will help keep the stock market afloat as interest rates come down.
Moreover, this rally would attract momentum players to the bond market who would
then help take interest rates to 5.75% faster than a blink of the eye. This is
exactly what has happened. Although you can never underestimate how far momentum
is going to carry you, I believe the best news for the bond market is behind us.
- --------------------------------------------------------------------------------
Smith Barney Appreciation Fund Inc. 3
<PAGE>
But that said, there is an interesting effect occurring in the financial
markets. For the first time in a long time, stocks and bonds seemed to have
decoupled. For many years, if the bond market rallied (that is if interest rates
fell) then stocks would go up. What we have seen in the last several months is
that bond yields have declined but stocks have not gone up. I think the primary
reason is that there is a fear of weaker corporate earnings because of lower
demand in the Pacific Rim.
You mentioned the decoupling of the stock and bond markets. Some market
observers have remarked that the present disinflationary environment could
evolve into global deflation. Do you see that possibility developing?
Hersh: A little bit of deflation wouldn't be terrible. When people think of
deflation and all of its ills, what they are really thinking of is the Great
Depression. We're not going to have that. There are too many safeguards in place
to prevent a collapse on that scale. If there was going to be a depression, then
it would have happened in 1990 if the government had let the banks go when they
were having their problems. Under that scenario, you would have seen a real
deflation. I don't see global deflation developing into a major threat to U.S.
markets.
Have you been able to identify new opportunities in the current market weakness?
Hersh: I'm looking for stocks to buy. But I really want a big edge and all we've
been getting so far is a little edge. So I've taken money off the table on some
stocks that have been performing strongly and tried to redeploy some of those
assets into stocks that have been weak. At year end I'm always looking for good
companies that have been beaten down in price. For example, we added to our
natural gas holdings, an industry that was negatively impacted in the second
half of last year. We also put a little money in energy service stocks, another
group that has suffered in the recent downturn. Overall, however, I don't think
price levels have fallen far enough for us to make substantial purchases just
yet.
Given all the global financial instability, how do you plan to manage risk over
the coming months?
Hersh: The same way I've been doing it -- which is just being careful about the
prices I pay for things. When you buy stocks properly, it really makes your life
easier. If you don't pay too much for a stock, then the stock is less vulnerable
to negative news. Before the correction, if you bought recklessly, simply
following the trend up and buying after the stock had a big rise, then you are
very likely holding a loss right now with a decision to make.
I really try to buy at the appropriate time and that usually minimizes the
volatility and makes managing money that much simpler. The real risk is when
investors chase stocks just because they're up and they feel they have to own
them. We're very careful about how we buy stocks. We prefer solid companies on
sound financial footing but with an interesting story and unrecognized value in
its share price.
Hersh, thanks for spending some time with us.
- --------------------------------------------------------------------------------
4 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Historical Performance -- Class A Shares
====================================================================================================================================
Net Asset Value
-------------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
12/31/97 $12.85 $13.92 $0.20 $2.09 26.29%
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/96 11.90 12.85 0.19 1.14 19.25
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/95 10.15 11.90 0.20 1.00 29.26
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/94 11.01 10.15 0.18 0.60 (0.77)
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/93 10.66 11.01 0.16 0.36 8.13
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/92 10.26 10.66 0.15 0.09 6.29
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/91 8.30 10.26 0.20 0.07 26.94
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/90 8.66 8.30 0.25 0.08 (0.27)
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/89 7.04 8.66 0.24 0.22 29.55
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/88 6.49 7.04 0.19 0.13 13.45
====================================================================================================================================
Total $1.96 $5.78
====================================================================================================================================
<CAPTION>
====================================================================================================================================
Historical Performance -- Class B Shares
====================================================================================================================================
Net Asset Value
-------------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
12/31/97 $12.81 $13.88 $0.06 $2.09 25.31%
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/96 11.88 12.81 0.09 1.14 18.29
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/95 10.14 11.88 0.11 1.00 28.29
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/94 11.00 10.14 0.10 0.60 (1.53)
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/93 10.65 11.00 0.08 0.36 7.38
- ------------------------------------------------------------------------------------------------------------------------------------
Inception*-- 12/31/92 10.55 10.65 0.16 0.09 3.28+
====================================================================================================================================
Total $0.60 $5.28
====================================================================================================================================
<CAPTION>
====================================================================================================================================
Historical Performance -- Class C Shares
====================================================================================================================================
Net Asset Value
-------------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
12/31/97 $12.81 $13.88 $0.06 $2.09 25.31%
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/96 11.88 12.81 0.10 1.14 18.34
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/95 10.14 11.88 0.11 1.00 28.29
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/94 11.00 10.14 0.11 0.60 (1.41)
- ------------------------------------------------------------------------------------------------------------------------------------
Inception*-- 12/31/93 10.99 11.00 0.08 0.36 4.09+
====================================================================================================================================
Total $0.46 $5.19
====================================================================================================================================
</TABLE>
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Smith Barney Appreciation Fund Inc. 5
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Historical Performance -- Class Y Shares
====================================================================================================================================
Net Asset Value
-------------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
12/31/97 $12.86 $13.93 $0.25 $2.09 26.70%
- ------------------------------------------------------------------------------------------------------------------------------------
Inception*--12/31/96 12.10 12.86 0.22 1.14 17.65+
====================================================================================================================================
Total $0.47 $3.23
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<CAPTION>
====================================================================================================================================
Historical Performance -- Class Z Shares
====================================================================================================================================
Net Asset Value
-------------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
12/31/97 $12.87 $13.94 $0.26 $2.09 26.72%
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/96 11.91 12.87 0.23 1.14 19.66
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/95 10.16 11.91 0.23 1.00 29.52
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/94 11.02 10.16 0.22 0.60 (0.41)
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/93 10.66 11.02 0.18 0.36 8.47
- ------------------------------------------------------------------------------------------------------------------------------------
Inception*-- 12/31/92 10.55 10.66 0.16 0.09 3.38+
====================================================================================================================================
Total $1.28 $5.28
====================================================================================================================================
</TABLE>
IT IS THE FUND'S POLICY TO DISTRIBUTE DIVIDENDS AND CAPITAL GAINS, IF ANY,
ANNUALLY.
<TABLE>
<CAPTION>
====================================================================================================================================
Average Annual Total Return
====================================================================================================================================
Without Sales Charge(1)
-----------------------------------------------------------------------------
Class A Class B Class C Class Y Class Z
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Year Ended 12/31/97 26.29% 25.31% 25.31% 26.70% 26.72%
- ------------------------------------------------------------------------------------------------------------------------------------
Five Years Ended 12/31/97 15.87 14.99 N/A N/A 16.23
- ------------------------------------------------------------------------------------------------------------------------------------
Ten Years Ended 12/31/97 15.23 N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Inception* through 12/31/97 12.56 15.23 14.61 23.10 16.46
====================================================================================================================================
<CAPTION>
With Sales Charge(2)
-----------------------------------------------------------------------------
Class A Class B Class C Class Y Class Z
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Year Ended 12/31/97 19.95% 20.31% 24.31% 26.70% 26.72%
- ------------------------------------------------------------------------------------------------------------------------------------
Five Years Ended 12/31/97 14.69 14.88 N/A N/A 16.23
- ------------------------------------------------------------------------------------------------------------------------------------
Ten Years Ended 12/31/97 14.64 N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Inception* through 12/31/97 12.36 15.23 14.61 23.10 16.46
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
6 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Cumulative Total Return
================================================================================
Without Sales Charge(1)
================================================================================
<S> <C>
Class A (12/31/87 through 12/31/97) 312.79%
- --------------------------------------------------------------------------------
Class A (Inception* through 12/31/97) 2,592.69
- --------------------------------------------------------------------------------
Class B (Inception* through 12/31/97) 107.66
- --------------------------------------------------------------------------------
Class C (Inception* through 12/31/97) 95.23
- --------------------------------------------------------------------------------
Class Y (Inception* through 12/31/97) 49.06
- --------------------------------------------------------------------------------
Class Z (Inception* through 12/31/97) 119.33
================================================================================
</TABLE>
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the applicable
sales charges with respect to Class A shares or the applicable contingent
deferred sales charges ("CDSC") with respect to Class B and C shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A shares reflect the deduction
of the maximum initial sales charge of 5.00%; Class B shares reflect the
deduction of a 5.00% CDSC, which applies if shares are redeemed within one
year from 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.
- --------------------------------------------------------------------------------
Smith Barney Appreciation Fund Inc. 7
<PAGE>
Smith Barney
Appreciation Fund Inc.
Growth of $10,000 invested in Class A Shares
of the Smith Barney Appreciation Fund Inc.
vs. the Standard & Poor's 500 Stock Index*
(unaudited)
March 10, 1970 - December 31, 1997
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
PLOT POINTS
SMITH BARNEY
APPRECIATION
DATE FUND INC. S&P 500 INDEX
- ----------------------------------------------------------
3/10/70 9,503 10,000
6/70 8,233
12/70 10,995 10,629
6/71 11,678
12,71 12,840 12,148
6/72 12,933
12/72 12,722 14,457
6/73 12,956
12/73 9,164 12,333
6/74 11,079
12,74 6,902 9,069
6/75 12,864
12/75 8,196 12,445
6/76 14,662
12/76 9,875 15,423
6/77 14,747
12/77 9,519 14,320
6/78 14,772
12/78 11,577 15,261
6/79 16,789
12/79 16,786 18,098
6/80 19,693
12/80 22,781 23,980
6/81 23,752
12/81 23,207 22,800
6/82 21,015
12/82 28,710 27,712
6/83 33,872
12/83 35,309 33,964
6/84 32,299
12/84 35,957 36,095
6/85 42,299
12/85 48,332 47,544
6/86 57,448
12/86 57,915 56,420
6/87 71,901
12/87 61,986 59,383
6/88 66,925
12/88 70,270 69,220
6/89 80,656
12/89 91,035 91,117
6/90 93,923
12/90 90,792 88,288
6/91 100,851
12/91 115,250 115,131
6/92 107,418
12/92 122,499 116,376
6/93 122,032
12/93 132,462 128,073
6/94 123,744
12/94 131,442 129,758
6/95 155,956
12/95 169,895 178,460
6/96 196,467
12/96 202,803 219,414
6/97 236,501 264,614
12/31/97 255,872 292,610
NOTE: PLEASE USE HIGHLIGHTED ROWS ONLY.
* 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, 1997. The Standard & Poor's 500 Index
("S&P 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
- --------------------------------------------------------------------------------
8 1997 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 Index Since Cohen Became Manager
(Since January 31, 1979)
SB Appreciation Fund
(Class A Shares) S&P 500 Index
17.53%** 17.02%
- --------------------------------------------------------------
[CONTINUATION OF LINE CHART FROM PAGE 8 IN THE PRINTED MATERIAL.]
chart, depending on whether greater or 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.
- --------------------------------------------------------------------------------
Smith Barney Appreciation Fund Inc. 9
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Schedule of Investments December 31, 1997
====================================================================================================================================
SHARES SECURITY VALUE
====================================================================================================================================
<S> <C> <C> <C>
COMMON STOCK -- 83.0%
Aerospace -- 1.1%
375,000 Boeing Co. $ 18,351,563
300,000 Lockheed Martin Corp.+ 29,550,000
- ------------------------------------------------------------------------------------------------------------------------------------
47,901,563
- ------------------------------------------------------------------------------------------------------------------------------------
Airlines -- 0.9%
300,000 AMR Corp.++ 38,550,000
- ------------------------------------------------------------------------------------------------------------------------------------
Auto - Parts & Accessories -- 0.6%
400,000 Goodyear Tire & Rubber Co. 25,450,000
- ------------------------------------------------------------------------------------------------------------------------------------
Automobile -- 1.8%
500,000 Chrysler Corp. 17,593,750
1,000,000 General Motors Corp. 60,625,000
- ------------------------------------------------------------------------------------------------------------------------------------
78,218,750
- ------------------------------------------------------------------------------------------------------------------------------------
Banking -- 3.8%
350,000 Barnett Banks, Inc. 25,156,250
475,000 Chase Manhattan Bank Corp. 52,012,500
375,000 First Virginia Banks, Inc.+ 19,382,812
300,000 National City Corp.+ 19,725,000
130,000 Wells Fargo & Co. 44,126,876
- ------------------------------------------------------------------------------------------------------------------------------------
160,403,438
- ------------------------------------------------------------------------------------------------------------------------------------
Beverage, Food and Tobacco -- 3.0%
348,100 Best Foods+ 34,913,342
600,000 Conagra, Inc. 19,687,500
900,000 McDonald's Corp. 42,975,000
200,000 Pepsico Inc. 7,287,500
225,000 Ralston-Purina Group 20,910,937
- ------------------------------------------------------------------------------------------------------------------------------------
125,774,279
- ------------------------------------------------------------------------------------------------------------------------------------
Broadcasting -- 0.2%
375,000 Scandinavian Broadcasting Systems+++ 9,187,500
- ------------------------------------------------------------------------------------------------------------------------------------
Chemicals -- 3.9%
450,000 Dow Chemical Corp. 45,675,000
1,150,000 E.I. du Pont De Nemours & Co.+ 69,071,875
900,000 Olin Corp.+ 42,187,500
200,000 Raychem Corp. 8,612,500
- ------------------------------------------------------------------------------------------------------------------------------------
165,546,875
- ------------------------------------------------------------------------------------------------------------------------------------
Consumer Products -- 5.1%
300,000 American Greeting Co., Class A Shares 11,737,500
300,000 Dal Tile International, Inc.++ 3,675,000
250,000 Eastman Kodak Co.+ 15,203,125
150,000 Gillette Co.+ 15,065,625
875,000 Kimberly-Clark Corp. 43,148,437
700,000 Newell Co.+ 29,750,000
330,000 Procter & Gamble Co.+ 26,338,125
100,000 Stanley Works 4,718,750
1,110,000 Unilever NV+ 69,305,625
- ------------------------------------------------------------------------------------------------------------------------------------
218,942,187
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Schedule of Investments (continued) December 31, 1997
====================================================================================================================================
SHARES SECURITY VALUE
====================================================================================================================================
<S> <C> <C> <C>
Diversified/Conglomerate -- 6.6%
1,200,000 Allied Signal, Inc.+ $ 46,725,000
1,300,000 General Electric Co. 95,387,500
350,000 Hilton Hotels Corp. 10,412,500
540,000 Host Marriott Services Corp.++ 8,032,500
800,000 Minnesota Mining & Manufacturing Co.+ 65,650,000
500,000 Republic Industries Inc.++ 11,656,250
900,000 Tyco International Ltd.+ 40,556,250
- ------------------------------------------------------------------------------------------------------------------------------------
278,420,000
- ------------------------------------------------------------------------------------------------------------------------------------
Electrical Equipment -- 1.9%
400,000 Emerson Electric Co. 22,575,000
500,000 Honeywell, Inc.+ 34,250,000
500,000 Johnson Controls, Inc. 23,875,000
- ------------------------------------------------------------------------------------------------------------------------------------
80,700,000
- ------------------------------------------------------------------------------------------------------------------------------------
Entertainment & Leisure -- 1.9%
100,000 Dick Clark Productions, Inc.++ 1,475,000
300,000 Time-Warner, Inc.+ 18,600,000
600,000 Walt Disney Co. 59,437,500
- ------------------------------------------------------------------------------------------------------------------------------------
79,512,500
- ------------------------------------------------------------------------------------------------------------------------------------
Financial Services -- 4.8%
500,000 American Express Co. 44,625,000
506,400 Associated First Capital+ 36,017,700
1,050,000 Fannie Mae 59,915,625
500,000 Household International 63,781,250
- ------------------------------------------------------------------------------------------------------------------------------------
204,339,575
- ------------------------------------------------------------------------------------------------------------------------------------
Health Care/Drugs/Hospital Supplies -- 9.0%
700,000 Abbott Laboratories, Inc.+ 45,893,750
500,000 American Home Products Corp. 38,250,000
900,000 Bristol-Myers Squibb Co.+ 85,162,500
600,000 Chiron Corp.++ 10,200,000
1,450,000 Johnson & Johnson+ 95,518,750
600,000 Merck and Co., Inc. 63,750,000
375,000 Novartis Inc., ADR+ 30,445,313
175,000 Pfizer, Inc. 13,048,437
- ------------------------------------------------------------------------------------------------------------------------------------
382,268,750
- ------------------------------------------------------------------------------------------------------------------------------------
Insurance -- 10.0%
1,900,000 Allstate Corp.+ 172,662,500
575,000 American International Group, Inc. 62,531,250
700,000 Chubb Corp. 52,937,500
170,000 CNA Financial Corp.++ 21,717,500
25,000 ESG RE Ltd.++ 587,500
255,000 General RE Corp. 54,060,000
600,000 Leucadia National Corp. 20,700,000
475,000 St. Paul Cos. 38,979,688
- ------------------------------------------------------------------------------------------------------------------------------------
424,175,938
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Appreciation Fund Inc. 11
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Schedule of Investments (continued) December 31, 1997
====================================================================================================================================
SHARES SECURITY VALUE
====================================================================================================================================
<S> <C> <C> <C>
Office Equipment & Supplies -- 1.8%
1,050,000 Xerox Corp.+ $ 77,503,125
- ------------------------------------------------------------------------------------------------------------------------------------
Oil & Gas/Service/Drilling -- 3.1%
700,000 Halliburton Co. 36,356,250
233,600 Nabors Industries Inc. 7,343,800
300,000 Nobel Affiliates Inc. 10,575,000
350,000 Reading & Bates Corp.++ 14,656,250
200,000 Schlumberger Ltd.+ 16,100,000
600,000 Sonat, Inc.+ 27,450,000
850,000 Union Pacific Resources Group, Inc. 20,612,500
- ------------------------------------------------------------------------------------------------------------------------------------
133,093,800
- ------------------------------------------------------------------------------------------------------------------------------------
Oil - Domestic -- 1.5%
400,000 Amerada Hess Corp. 21,950,000
750,000 Ashland, Inc. 40,265,625
- ------------------------------------------------------------------------------------------------------------------------------------
62,215,625
- ------------------------------------------------------------------------------------------------------------------------------------
Oil - International -- 5.9%
750,000 Amoco Corp. 63,843,750
650,000 Exxon Corp. 39,771,875
1,100,000 Mobil Corp. 79,406,250
760,000 Royal Dutch Petroleum Co. ADR+ 41,182,500
450,000 Texaco+ 24,468,750
- ------------------------------------------------------------------------------------------------------------------------------------
248,673,125
- ------------------------------------------------------------------------------------------------------------------------------------
Paper and Paper Products -- 0.4%
600,000 Mead Corp. 16,800,000
- ------------------------------------------------------------------------------------------------------------------------------------
Publishing -- 2.3%
1,000,000 Gannett Co. 61,812,500
950,000 Meredith Corp. 33,903,125
79,000 Readers Digest 1,866,375
- ------------------------------------------------------------------------------------------------------------------------------------
97,582,000
- ------------------------------------------------------------------------------------------------------------------------------------
Real Estate -- 0.7%
42,600 Forest City Enterprises, Inc. 2,476,125
310,000 St. Joe Corp. 28,055,000
- ------------------------------------------------------------------------------------------------------------------------------------
30,531,125
- ------------------------------------------------------------------------------------------------------------------------------------
Retail -- 1.7%
500,000 J.C. Penney, Inc.+ 30,156,250
1,110,000 Wal-Mart Stores, Inc.+ 43,381,250
- ------------------------------------------------------------------------------------------------------------------------------------
73,537,500
- ------------------------------------------------------------------------------------------------------------------------------------
Technology -- 7.4%
500,000 CISCO Systems Inc.+++ 27,875,000
200,000 First Data, Inc. 5,850,000
750,000 Hewlett-Packard Co. 46,875,000
130,400 Imation Corp.++ 2,086,400
700,000 Intel Corp. 49,175,000
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
12 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Schedule of Investments (continued) December 31, 1997
====================================================================================================================================
SHARES SECURITY VALUE
====================================================================================================================================
<S> <C> <C> <C>
Technology -- 7.4% (continued)
400,000 International Business Machines Corp. $ 41,825,000
385,000 Lucent Technologies Inc.+ 30,751,875
125,000 Microsoft Corp.++ 16,156,250
1,000,000 Texas Instruments, Inc. 45,000,000
950,000 Thermo Electron Corp.+++ 42,275,000
150,000 Threecom Corp.++ 5,240,625
- ------------------------------------------------------------------------------------------------------------------------------------
313,110,150
- ------------------------------------------------------------------------------------------------------------------------------------
Telephone/Communications -- 3.4%
600,000 Ameritech Corp. 48,300,000
450,000 Bell Atlantic 40,950,000
200,000 Bellsouth Corp. 11,262,500
800,000 GTE Corp. 41,800,000
- ------------------------------------------------------------------------------------------------------------------------------------
142,312,500
- ------------------------------------------------------------------------------------------------------------------------------------
Transportation -- 0.2%
17,900 Florida East Coast Industries 1,720,637
300,000 Wisconsin Central Transmission, Inc.+++ 7,012,500
- ------------------------------------------------------------------------------------------------------------------------------------
8,733,137
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost -- $2,207,067,966) 3,523,483,442
====================================================================================================================================
<CAPTION>
FACE
AMOUNT SECURITY VALUE
====================================================================================================================================
<S> <C> <C>
REPURCHASE AGREEMENTS -- 17.0%
$141,531,000 Chase Securities Inc., 5.897% due 1/2/98;
Proceeds at maturity -- $141,577,367; (Fully
collateralized by U.S. Treasury Notes, 5.625% due 12/15/02;
Market value -- $144,362,689) 141,531,000
77,909,000 Goldman, Sachs & Co., 6.348% due 1/2/98;
Proceeds at maturity -- $77,936,476; (Fully
collateralized by U.S. Treasury Notes, 5.625% due 12/31/99;
Market value -- $79,501,489) 77,909,000
500,000,000 Union Bank of Switzerland, 6.494% due 1/2/98;
Proceeds at maturity -- $500,180,389; (Fully
collateralized by U.S. Treasury Notes, 8.500% due 11/15/00;
Market value -- $510,006,290) 500,000,000
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS
(Cost -- $719,440,000) 719,440,000
====================================================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $2,926,507,966*) $4,242,923,442
====================================================================================================================================
</TABLE>
+ A portion of the security is on loan (See Note 5).
++ Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Appreciation Fund Inc. 13
<PAGE>
================================================================================
Statement of Assets and Liabilities December 31, 1997
================================================================================
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $2,207,067,966) $3,523,483,442
Repurchase agreements, at value (Cost -- $719,440,000) 719,440,000
Cash 15,681
Collateral for securities loaned (Note 5) 339,005,308
Receivable for Fund shares sold 6,850,389
Receivable for securities sold 2,547,358
Dividends and interest receivable 5,543,693
- --------------------------------------------------------------------------------
Total Assets 4,596,885,871
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for securities loaned (Note 5) 339,005,308
Payable for securities purchased 14,266,445
Payable for Fund shares purchased 3,013,605
Dividends payable 2,759,710
Investment advisory fees payable 1,545,903
Distribution fees payable 607,079
Administration fees payable 547,316
Accrued expenses 361,765
- --------------------------------------------------------------------------------
Total Liabilities 362,107,131
- --------------------------------------------------------------------------------
Total Net Assets $4,234,778,740
================================================================================
NET ASSETS:
Par value of capital shares $ 304,467
Capital paid in excess of par value 2,842,131,351
Undistributed net investment income 1,962,348
Accumulated net realized gain on security transactions 73,965,098
Net unrealized appreciation of investments 1,316,415,476
- --------------------------------------------------------------------------------
Total Net Assets $4,234,778,740
================================================================================
Shares Outstanding:
Class A 181,451,832
- --------------------------------------------------------------------------------
Class B 101,607,793
- --------------------------------------------------------------------------------
Class C 3,449,192
- --------------------------------------------------------------------------------
Class Y 4,040,851
- --------------------------------------------------------------------------------
Class Z 13,917,395
- --------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $13.92
- --------------------------------------------------------------------------------
Class B* $13.88
- --------------------------------------------------------------------------------
Class C** $13.88
- --------------------------------------------------------------------------------
Class Y (and redemption price) $13.93
- --------------------------------------------------------------------------------
Class Z (and redemption price) $13.94
- --------------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 5.26% of net asset value per share) $14.65
================================================================================
</TABLE>
* Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if shares
are redeemed within one year from initial purchase (See Note 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.
- --------------------------------------------------------------------------------
14 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Statement of Operations For the Year Ended December 31, 1997
================================================================================
<S> <C>
INVESTMENT INCOME:
Dividends $ 62,311,249
Interest 33,623,647
Less: Foreign withholding tax (381,808)
- --------------------------------------------------------------------------------
Total Income 95,553,088
- --------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 2) 19,137,273
Investment advisory fees (Note 2) 16,921,518
Administration fees (Note 2) 6,212,415
Shareholder and system servicing fees 3,988,808
Shareholder communications 399,970
Custody 135,000
Registration fees 105,000
Audit and legal fees 50,000
Directors' fees 25,000
Insurance 30,000
Other 7,300
- --------------------------------------------------------------------------------
Total Expenses 47,012,284
- --------------------------------------------------------------------------------
Net Investment Income 48,540,804
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE 3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 2,268,393,643
Cost of securities sold 1,726,690,343
- --------------------------------------------------------------------------------
Net Realized Gain 541,703,300
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year 1,008,760,123
End of year 1,316,415,476
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 307,655,353
- --------------------------------------------------------------------------------
Net Gain on Investments 849,358,653
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 897,899,457
================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Appreciation Fund Inc. 15
<PAGE>
<TABLE>
<CAPTION>
========================================================================================================
Statements of Changes in Net Assets For the Years Ended December 31,
========================================================================================================
1997 1996
========================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 48,540,804 $ 41,854,488
Net realized gain on security transactions 541,703,300 272,194,030
Increase in net unrealized appreciation 307,655,353 254,549,008
- --------------------------------------------------------------------------------------------------------
Increase in Net Assets From Operations 897,899,457 568,597,526
- --------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (46,569,463) (42,986,059)
Net realized gains (549,467,979) (283,582,979)
- --------------------------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (596,037,442) (326,569,038)
- --------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 6):
Net proceeds from sales 604,826,555 394,471,394
Net asset value of shares issued for
reinvestment of dividends 566,537,646 308,650,791
Cost of shares reacquired (724,876,010) (525,373,906)
- --------------------------------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 446,488,191 177,748,279
- --------------------------------------------------------------------------------------------------------
Increase in Net Assets 748,350,206 419,776,767
NET ASSETS:
Beginning of year 3,486,428,534 3,066,651,767
- --------------------------------------------------------------------------------------------------------
End of year* $4,234,778,740 $3,486,428,534
========================================================================================================
* Includes undistributed (overdistributed) net investment income of: $1,962,348 $(6,493)
========================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
16 1997 Annual Report to Shareholders
<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 value; (d)
dividend income is recorded on the ex-dividend date; foreign dividends are
recorded on the earlier of the ex-dividend date or as soon as practical after
the Fund determines the existence of a dividend declaration after exercising
reasonable due diligence; (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, 1997, 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
Mutual Management Corp. ("MMC"), formerly known as Smith Barney Mutual Funds
Management Inc., a subsidiary of Salomon Smith Barney Holdings Inc. ("SSBH"),
acts as investment adviser of the Fund. The Fund pays MMC 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.
MMC 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
- --------------------------------------------------------------------------------
Smith Barney Appreciation Fund Inc. 17
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
$250 million; 0.187% on the next $250 million; 0.174% on the next $500 million;
0.161% on the next $1 billion; 0.148% on the next $1 billion and 0.135% on the
average daily net assets in excess of $3 billion. This fee is calculated daily
and paid monthly.
Smith Barney Inc. ("SB"), another subsidiary of SSBH, acts as distributor of
Fund shares and primary broker for its portfolio agency transactions. For the
year ended December 31, 1997, SB received brokerage commissions of $557,460 and
sales charges of approximately $2.0 million on sales of the Fund's Class A
shares.
There is a contingent deferred sales charge ("CDSC") of 5.00% on Class B shares,
which applies if redemption occurs within one year from initial purchase and
declines thereafter by 1.00% per year until no CDSC is incurred. Class C shares
have a 1.00% CDSC, which applies if redemption occurs within the first year of
purchase. In certain cases, Class A shares also 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, 1997, CDSCs
paid to SB were approximately:
<TABLE>
<CAPTION>
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
CDSCs $45,000 $1,305,000 $9,000
================================================================================
</TABLE>
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, 1997, total Distribution Plan fees were as follows:
<TABLE>
<CAPTION>
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
Distribution Plan Fees $5,849,540 $12,927,331 $360,402
================================================================================
</TABLE>
All officers and one Director of the Fund are employees of SB.
3. Investments
During the year ended December 31, 1997, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
<TABLE>
================================================================================
<S> <C>
Purchases $1,902,822,477
- --------------------------------------------------------------------------------
Sales 2,268,393,643
================================================================================
</TABLE>
At December 31, 1997, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
<TABLE>
================================================================================
<S> <C>
Gross unrealized appreciation $1,330,435,472
Gross unrealized depreciation (14,019,996)
- --------------------------------------------------------------------------------
Net unrealized appreciation $1,316,415,476
================================================================================
</TABLE>
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.
- --------------------------------------------------------------------------------
18 1997 Annual Report to Shareholders
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
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. Fees earned by the Fund on securities lending are recorded in
interest income. Loans of securities by the Fund are collateralized by cash,
U.S. government securities or high quality money market instruments that are
maintained at all times in an amount at least equal to the current market value
of the loaned securities, plus a margin which may vary depending on the type of
securities loaned. The custodian establishes and maintains the collateral in a
segregated account. The Fund maintains exposure for the risk of any losses in
the investment of amounts received as collateral.
At December 31, 1997, the Fund loaned common stocks having a value of
approximately $330,222,137 and holds the following collateral for loaned
securities:
<TABLE>
<CAPTION>
Security Description Value
================================================================================
<S> <C>
Time Deposits:
Bank of Tokyo, 10.000% due 1/2/98 $ 1,163,028
Instituto Bancario San Paolo, 7.000% due 1/2/98 3,256,479
Keycorp Bank, N.A., 4.000% due 1/2/98 3,474,929
Mercantile, 4.500% due 1/2/98 8,796,284
Certificates of Deposit:
Sumitomo Bank, 5.770% due 1/23/98 100,000,000
Bank of Montreal, 5.840% due 1/5/98 33,768,505
Sanwa Bank, 5.640% due 1/9/98 125,003,150
Commercial Paper:
Corporate Receivable, 5.900% due 1/15/98 49,762,361
Repurchase Agreements:
Goldman, Sachs & Co., 6.800% due 1/2/98 11,570,818
Merrill Lynch, 7.000% due 1/2/98 2,209,754
- --------------------------------------------------------------------------------
Total $339,005,308
================================================================================
</TABLE>
6. Capital Shares
At December 31, 1997, 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, 1997, total paid-in capital amounted to the following for each
class:
<TABLE>
<CAPTION>
Class A Class B Class C Class Y Class Z
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Total Paid-in Capital $1,564,464,078 $1,035,172,825 $44,473,634 $42,627,168 $155,698,113
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney Appreciation Fund Inc. 19
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1997 December 31, 1996*
---------------------------------- ----------------------------------
Shares Amount Shares Amount
====================================================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 17,513,526 $ 251,896,803 9,260,907 $ 117,695,953
Shares issued on reinvestment 24,941,341 348,520,671 15,028,456 194,134,793
Shares redeemed (24,395,501) (352,200,632) (23,277,287) (296,148,846)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase 18,059,366 $ 248,216,842 1,012,076 $ 15,681,900
====================================================================================================================================
Class B
Shares sold 16,098,504 $ 230,730,136 14,063,585 $ 177,522,362
Shares issued on reinvestment 13,277,335 183,519,170 7,590,786 97,239,506
Shares redeemed (16,311,962) (234,575,849) (16,308,833) (206,058,028)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase 13,063,877 $ 179,673,457 5,345,538 $ 68,703,840
====================================================================================================================================
Class C
Shares sold 1,806,438 $ 25,803,383 1,107,577 $ 14,081,521
Shares issued on reinvestment 430,602 5,951,814 170,128 2,180,889
Shares redeemed (778,806) (11,015,972) (520,423) (6,647,865)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase 1,458,234 $ 20,739,225 757,282 $ 9,614,545
====================================================================================================================================
Class Y
Shares sold 5,618,610 $ 83,534,538 5,690,452 $ 72,895,480
Shares issued on reinvestment -- -- -- --
Shares redeemed (7,268,211) (113,802,850) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (1,649,601) $ (30,268,312) 5,690,452 $ 72,895,480
====================================================================================================================================
Class Z
Shares sold 903,381 $ 12,861,695 982,703 $ 12,276,078
Shares issued on reinvestment 2,032,465 28,545,991 1,164,767 15,095,603
Shares redeemed (905,778) (13,280,707) (1,289,446) (16,519,167)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase 2,030,068 $ 28,126,979 858,024 $ 10,852,514
====================================================================================================================================
</TABLE>
* For Class Y shares, transactions are for the period from January 30, 1996
(inception date) to December 31, 1996.
- --------------------------------------------------------------------------------
20 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Financial Highlights
====================================================================================================================================
For a share of each class of capital stock outstanding throughout each year:
Class A Shares 1997 1996 1995(1) 1994 1993(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $12.85 $11.90 $10.15 $11.01 $10.66
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.19 0.19 0.20 0.16 1.15
Net realized and unrealized gain (loss) 3.17 2.09 2.75 (0.24) 0.72
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 3.36 2.28 2.95 (0.08) 0.87
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.20) (0.19) (0.20) (0.18) (0.16)
Net realized gains (2.09) (1.14) (1.00) (0.60) (0.36)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (2.29) (1.33) (1.20) (0.78) (0.52)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $13.92 $12.85 $11.90 $10.15 $11.01
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return 26.29% 19.25% 29.26% (0.77)% 8.13%
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $2,526 $2,100 $1,933 $1,690 $1,579
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.95% 1.00% 1.02% 1.02% 1.03%
Net investment income 1.47 1.52 1.71 1.61 1.35
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 57% 62% 57% 52% 52%
- ------------------------------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(2) $0.06 $0.06 $0.06 -- --
====================================================================================================================================
<CAPTION>
Class B Shares 1997 1996 1995(1) 1994 1993(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value Beginning of Year $12.81 $11.88 $10.14 $11.00 $10.65
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.07 0.08 0.11 0.13 0.06
Net realized and unrealized gain (loss) 3.15 2.08 2.74 (0.29) 0.73
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 3.22 2.16 2.85 (0.16) 0.79
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.06) (0.09) (0.11) (0.10) (0.08)
Net realized gains (2.09) (1.14) (1.00) (0.60) (0.36)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (2.15) (1.23) (1.11) (0.70) (0.44)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $13.88 $12.81 $11.88 $10.14 $11.00
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return 25.31% 18.29% 28.29% (1.53)% 7.38%
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $1,410 $1,134 $988 $761 $1,286
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.73% 1.78% 1.77% 1.80% 1.83%
Net investment income 0.68 0.74 0.96 0.83 0.56
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 57% 62% 57% 52% 52%
- ------------------------------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(2) $0.06 $0.06 $0.06 -- --
====================================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(2) As of September 1995, the SECinstituted new guidelines requiring the
disclosure of average commissions per share.
- --------------------------------------------------------------------------------
Smith Barney Appreciation Fund Inc. 21
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class C Shares 1997 1996 1995(1) 1994 1993(1)(2)
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $12.81 $11.88 $10.14 $11.00 $10.99
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.09 0.09 0.11 0.10 0.07
Net realized and unrealized gain (loss) 3.13 2.08 2.74 (0.25) 0.38
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 3.22 2.17 2.85 (0.15) 0.45
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.06) (0.10) (0.11) (0.11) (0.08)
Net realized gains (2.09) (1.14) (1.00) (0.60) (0.36)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (2.15) (1.24) (1.11) (0.71) (0.44)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $13.88 $12.81 $11.88 $10.14 $11.00
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return 25.31% 18.34% 28.29% (1.41)% 4.09%++
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $47,872 $25,505 $14,653 $5,040 $2,214
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.73% 1.77% 1.77% 1.66% 1.68%+
Net investment income 0.68 0.75 0.96 0.98 0.71+
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 57% 62% 57% 52% 52%
- ------------------------------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(3) $0.06 $0.06 $0.06 -- --
====================================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(2) For the period from February 4, 1993 (inception date) to December 31, 1993.
(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.
- --------------------------------------------------------------------------------
22 1997 Annual Report to Shareholders
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class Y Shares 1997(1) 1996(2)
====================================================================================================================================
<S> <C> <C>
Net Asset Value, Beginning of Year $12.86 $12.10
- ------------------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.27 0.23
Net realized and unrealized gain 3.14 1.89
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 3.41 2.12
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.25) (0.22)
Net realized gains (2.09) (1.14)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (2.34) (1.34)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $13.93 $12.86
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return 26.70% 17.65%++
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $56,302 $73,196
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.59% 0.66%+
Net investment income 1.79 2.06+
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 57% 24%
- ------------------------------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions $0.06 $0.06
====================================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(2) For the period from January 30, 1996 (inception date) to December 31, 1996.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney Appreciation Fund Inc. 23
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class Z Shares 1997 1996 1995(1) 1994 1993(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $12.87 $11.91 $10.16 $11.02 $10.66
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.24 0.24 0.23 0.20 0.19
Net realized and unrealized gain (loss) 3.18 2.09 2.75 (0.24) 0.71
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 3.42 2.33 2.98 (0.04) 0.90
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.26) (0.23) (0.23) (0.22) (0.18)
Net realized gains (2.09) (1.14) (1.00) (0.60) (0.36)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (2.35) (1.37) (1.23) (0.82) (0.54)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $13.94 $12.87 $11.91 $10.16 $11.02
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return 26.72% 19.66% 29.52% (0.41)% 8.47%
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $194,070 $153,034 $131,357 $101,532 $157,876
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.59% 0.64% 0.77% 0.64% 0.66%
Net investment income 1.82 1.88 1.96 1.99 1.73
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 57% 62% 57% 52% 52%
- ------------------------------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(2) $0.06 $0.06 $0.06 -- --
====================================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(2) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
================================================================================
Tax Information (unaudited)
================================================================================
For Federal tax purposes the Fund hereby designates for the fiscal year ended
December 31, 1997:
o 34.25% of the ordinary dividends paid as qualifying for the corporate
dividends received deduction.
o The Taxpayer Relief Act of 1997 enacted differing rates of tax on
various long-term capital gain transactions. As a result, the Fund
designates:
o Total long-term capital gain distributions paid of $460,080,844:
$325,072,632 are considered "28 percent rate gains".
$135,008,212 are considered "20 percent rate gains".
- --------------------------------------------------------------------------------
24 1997 Annual Report to Shareholders
<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, 1997, the related statement of operations for the year then ended,
and the statements of changes in net assets for each of the years in the
two-year period then ended and financial highlights for each of the years in the
three-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
two-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, 1997, by correspondence with the custodian. As to securities sold
or purchased but not yet delivered or 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, 1997, the results of its
operations for the year then ended, the changes in its net assets for each of
the years in the two-year period then ended and financial highlights for each of
the years in the three-year period then ended, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
February 10, 1998
- --------------------------------------------------------------------------------
Smith Barney Appreciation Fund Inc. 25
<PAGE>
Smith Barney
Appreciation Fund Inc.
Directors Investment Adviser
Herbert Barg Mutual Management Corp.
Alfred Bianchetti
Martin Brody
Dwight Crane Distributors
Burt N. Dorsett Smith Barney Inc.
Elliot S. Jaffe PFS Distributors, Inc.
Stephen Kaufman
Joseph McCann Custodian
Heath B. McLendon, Chairman PNC Bank, N.A.
Cornelius C. Rose, Jr.
Shareholder Servicing Agent
First Data Investor Services Group, Inc.
Officers P.O. Box 9134
Heath B. McLendon Boston, MA 02205-9134
President and Chief Executive Officer
This report is submitted for the general
information of the shareholders of Smith
Lewis E. Daidone Barney Appreciation Fund Inc. It is not
Senior Vice President and Treasurer for distribution to prospective
investors unless accompanied by an
effective Prospectus for the Fund, which
Harry D. Cohen contains information concerning the
Vice President and Investment Officer Fund's investment policies and expenses
as well as other pertinent information.
Thomas M. Reynolds SMITH BARNEY
Controller ------------
Christina T. Sydor A Member of TraverlersGroup[LOGO]
Secretary
Smith Barney Appreciation Fund Inc.
Smith Barney Mutual Funds
388 Greenwich Street
New York, New York 10013
www.smithbarney.com
FD0312 2/98
