Smith Barney
Appreciation Fund Inc.
388 Greenwich Street
New York, New York 10013
(800) 451-2010
Statement of Additional Information April 29, 1997
Amended as of March 20, 1998
This Statement of Additional Information expands upon and supplements
the information contained in the current Prospectus of Smith Barney
Appreciation Fund Inc. (the "Fund") dated April 29, 1997, as amended or
supplemented from time to time, and should be read in conjunction with
the Fund's Prospectus. The Fund's Prospectus may be obtained from any
Smith Barney Financial Consultant, or by writing or calling the Fund at
the address or telephone number set forth above. This Statement of
Additional Information, although not in itself a prospectus, is
incorporated by reference into the Prospectus in its entirety.
CONTENTS
For ease of reference, the same section headings are used in both the
Prospectus and this Statement of Additional Information, except where
shown below:
Management of the Fund 1
Investment Objective and Management Policies 6
Purchase of Shares 12
IRA and Other Prototype Retirement Plans 13
Redemption of Shares 14
Distributors 15
Valuation of Shares 17
Exchange Privilege 18
Performance Data 18
Taxes (See in the Prospectus "Dividends, Distributions and Taxes") 21
Additional Information 23
Financial Statements 23
MANAGEMENT OF THE FUND
The executive officers of the Fund are employees of certain of the
organizations that provide services to the Fund. These organizations
are the following:
Name Service
Smith Barney Inc.
("Smith Barney")
PFS Distributors, Inc.
("PFS Distributors") Distributors
Smith Barney Mutual Funds Management Inc.
("SBMFM") Investment Adviser and
Administrator
PNC Bank, National Association
("PNC") Custodian
First Data Investor Services Group, Inc.,
(the "Transfer Agent") Transfer Agent
These organizations and the functions they perform for the Fund are
discussed in the Prospectus and in this Statement of Additional
Information.
Directors and Executive Officers of the Fund
The names of the Directors and executive officers of the Fund, together
with information as to their principal business occupations during the
past five years, are shown below. Each Director who is an "interested
person'' of the Fund, as defined in the Investment Company Act of 1940,
as amended (the "1940 Act"), is indicated by an asterisk.
Herbert Barg, Director (Age 73). Private Investor. His address is
273 Montgomery Avenue, Bala Cynwyd, Pennsylvania 19004.
*Alfred J. Bianchetti, Director (Age 74). Retired; formerly Senior
Consultant to Dean Witter Reynolds Inc. His address is 19 Circle End
Drive, Ramsey, New Jersey 07466.
Martin Brody, Director (Age 75). Vice Chairman of the Board of
Restaurant Associates Corp. His address is HMK Associates, Three ADP
Boulevard, Roseland, New Jersey 07068.
Dwight B. Crane, Director (Age 59). Professor, Graduate School of
Business Administration, Harvard University; Business Consultant. His
address is Graduate School of Business Administration, Harvard
University, Boston, Massachusetts 02163.
Burt N. Dorsett, Director (Age 66). Managing Partner of Dorsett
McCabe Management, Inc., an investment counseling firm; Director of
Research Corporation Technologies, Inc., a non-profit patent-clearing
and licensing firm. His address is 201 East 62nd Street, New York, New
York 10021.
Elliot S. Jaffe, Director (Age 70). Chairman of the Board and Chief
Executive Officer of The Dress Barn, Inc. His address is 30 Dunnigan
Drive, Suffern, New York 10901.
Stephen E. Kaufman, Director (Age 64). Attorney. His address is 277
Park Avenue, New York, New York 10172.
Joseph J. McCann, Director (Age 66). Financial Consultant. His
address is 200 Oak Park Place, Pittsburgh, Pennsylvania 15243.
*Heath B. McLendon, Chairman of the Board and Investment Officer (Age
63). Managing Director of Smith Barney and Chairman of Smith Barney
Strategy Advisers Inc.; prior to July 1993, Senior Executive Vice
President of Shearson Lehman Brothers Inc. ("Shearson Lehman Brothers"),
Vice Chairman of Shearson Asset Management. Mr. McLendon is Chairman of
the Board and Investment Officer of 41 Smith Barney Mutual Funds. His
address is 388 Greenwich Street, New York, New York 10013.
Cornelius C. Rose, Jr., Director (Age 63). President, Cornelius C.
Rose Associates, Inc., Financial Consultants, and Chairman and Director
of Performance Learning Systems, an educational consultant. His address
is P.O. Box 355, Fair Oaks, Enfield, New Hampshire 03748.
Jessica M. Bibliowicz, President (Age 37). Executive Vice President
of Smith Barney; prior to 1994, Director of Sales and Marketing for
Prudential Mutual Funds; prior to 1990, First Vice President, Asset
Management Division of Shearson Lehman Brothers. Ms. Bibliowicz serves
as President of 39 Smith Barney Mutual Funds. Her address is 388
Greenwich Street, New York, New York 10013.
Lewis E. Daidone, Senior Vice President and Treasurer (Age 38).
Managing Director of Smith Barney; Director and Senior Vice President of
SBMFM. Mr. Daidone serves as Senior Vice President and Treasurer of 41
Smith Barney Mutual Funds. His address is 388 Greenwich Street, New
York, New York 10013.
Harry D. Cohen, Vice President and Investment Officer (Age 55).
President and Director of Smith Barney Investment Advisors, a division
of SBMFM; Executive Vice President of Smith Barney; prior to July 1993,
President of Asset Management Division of Shearson Lehman Brothers and
Executive Vice President of Shearson Lehman Brothers. Mr. Cohen also
serves as Vice President and Investment Officer of 1 other of the Smith
Barney Mutual Funds. His address is 388 Greenwich Street, New York, New
York 10013.
Christina T. Sydor, Secretary (Age 46). Managing Director of Smith
Barney; General Counsel and Secretary of SBMFM. Ms. Sydor serves as
Secretary of 41 Smith Barney Mutual Funds. Her address is 388 Greenwich
Street, New York, New York 10013.
Each Director also serves as a director, trustee and/or general partner
of certain other mutual funds for which Smith Barney serves as
distributor. As of April 11, 1997, the Directors and officers of the
Fund, as a group, owned less than 1.00% of the outstanding common stock
of the Fund. As of April 11, 1997, to the knowledge of the Fund and the
Board of Directors, no single shareholder or "group" (as that term is
used in Section 13(d) of the Securities Act of 1934) beneficially owned
more than 5% of the outstanding shares of the Fund with the exception of
the following:
Shareholder
Class
Percent Ownership
Citibank NA Cust. Smith
Barney
Shearson 401K Savings Plan
Smith Barney Account
111 Wall Street
New York, New York 10043
Class Z
99.92%
Smith Barney Concert
Allocation Series Inc.
Growth Portfolio
PNC Bank NA
200 Stevens Drive
Lester, PA 19113-1522
Class Y
48.59%
Smith Barney Concert
Allocation Series Inc.
High Growth Portfolio
PNC Bank NA
200 Stevens Drive
Lester, PA 19113-1522
Class Y
37.18%
Smith Barney Concert
Allocation Series Inc.
Balanced Portfolio
PNC Bank NA
200 Stevens Drive
Lester, PA 19113-1522
Class Y
14.08%
No officer, director or employee of Smith Barney or any parent or
subsidiary receives any compensation from the Fund for serving as an
officer or Director of the Fund. The Fund pays each Director who is not
an officer, director or employee of Smith Barney or any of its
affiliates a fee of $3,000 per annum plus $500 per in-person meeting and
$100 per telephonic meeting. Upon attainment of age 80 Directors are
required to change to emeritus status. Directors Emeritus are entitled
to serve in emeritus status for a maximum of 10 years during which time
they receive $l,500 per annum plus $250 per in-person meeting and $50
per telephonic meeting. All Directors are reimbursed for travel and
out-of-pocket expenses incurred in attending such meetings.
For the calendar year ended December 31, 1996, the Directors of the Fund
were paid the following compensation.
Pension or
Aggregate
Compensation
Retirement
Aggregate
Compensation
from the Smith
Barney
Director (*)
Benefits
Accrued as
part of Fund
Expenses
from the Fund
Mutual Funds
Herbert Barg
(16)
$0
$5,700
$105,175
Alfred
Bianchetti
(11)
0
5,600
51,500
Martin Brody
(19)
0
5,600
124,285
Dwight B.
Crane (22)
0
5,600
140,675
Burt N.
Dorsett (11)+
0
5,200
47,400
Elliot S.
Jaffe (11)
0
5,700
51,100
Stephen E.
Kaufman (13)
0
5,700
92,335
Joseph J.
McCann (11)
0
5,700
52,700
Heath B.
McLendon
(41)++
0
0
0
Cornelius C.
Rose (11)
0
5,700
51,400
* Indicates number of funds within the Smith Barney Mutual Fund
complex for which each Director serves as Director/Trustee.
+ Pursuant to Fund's deferred compensation plan, the indicated
Director had elected to defer the following payment of some or all of
their compensation: Burt N. Dorsett - $5,200. As of January 1, 1997,
Mr. Dorsett has elected not to defer his future compensation.
++ Designates an "interested director".
Investment Adviser and Administrator -SBMFM
SBMFM serves as investment adviser to the Fund pursuant to a written
agreement (the "Advisory Agreement"), which was first approved by the
Fund's Board of Directors, including a majority of the Directors who are
not interested persons of the Fund or Smith Barney (the "Independent
Directors"), on April 1, 1993 and by shareholders on June 1, 1993. The
services provided by SBMFM under the Advisory Agreement are described in
the Prospectus under "Management of the Fund." SBMFM pays the salary of
any officer and employee who is employed by both it and the Fund. SBMFM
bears all expenses in connection with the performance of its services.
SBMFM is a wholly owned subsidiary of Smith Barney Holdings Inc.
("Holdings"), which in turn is a wholly owned subsidiary of Travelers
Group Inc. ("Travelers").
As compensation for SBMFM's investment advisory services rendered to the
Fund, the Fund pays a fee computed daily and paid monthly at the
following annual rates of the Fund's average daily net assets: 0.55%, up
to $250 million; 0.513% of the next $250 million; 0.476% of the next
$500 million; 0.439% of the next $1 billion, 0.402% of the next $l
billion; and 0.365% of the net assets in excess of $3 billion. For the
fiscal years ended December 31, 1996, 1995 and 1994, the Fund paid
$14,352,911, $12,764,132, and $l2,564,785, respectively, in investment
advisory fees.
SBMFM also serves as administrator to the Fund pursuant to a written
agreement dated April 10, 1994 (the "Administration Agreement"), which
was most recently approved by the Fund's Board of Directors, including a
majority of the Independent Directors of the Fund or Smith Barney, on
July 19, 1995. The services provided by SBMFM under the Administration
Agreement are described in the Prospectus under "Management of the
Fund." SBMFM pays the salary of any officer and employee who is
employed by both it and the Fund and bears all expenses in connection
with the performance of its services.
As compensation for administrative services rendered to the Fund, SBMFM
receives a fee computed daily and paid monthly at the following annual
rates: 0.20%, of the value of the Fund's average daily net assets up to
$250 million; 0.187% of the next $250 million; 0.174% of the next $500
million; 0.161% of the next $1 billion; 0.148% of the next $1 billion
and 0.135% of the net assets in excess of $3 billion. For the fiscal
years ended December 31, 1996 and 1995, the Fund paid $5,262,374 and
$4,675,818 in administration fees. For the fiscal period from April 20,
1994 through December 31, 1994, the Fund paid $3,228,079 in
administration fees. Prior to April 20, 1994, The Boston Company
Advisors, Inc. ("The Boston Company") served as the Fund's
administrator. For the fiscal period from January 1, l994 through April
19, 1994, the Fund paid $1,374,456 to The Boston Company in
administration fees.
The Fund bears expenses incurred in its operation including: taxes,
interest, brokerage fees and commissions, if any; fees of Directors who
are not officers, directors, shareholders or employees of Smith Barney
or SBMFM; SEC fees and state Blue Sky qualification fees; charges of
custodians; transfer and dividend disbursing agent's fees; certain
insurance premiums; outside auditing and legal expenses; costs of
maintaining corporate existence; investor services (including allocated
telephone and personnel expenses); costs of preparation and printing of
prospectuses and statements of additional information for regulatory
purposes and for distribution to existing shareholders; costs of
shareholders' reports and shareholder meetings; and meetings of the
officers or Board of Directors of the Fund.
SBMFM and the Fund have agreed that it in any fiscal year the aggregate
expenses of the Fund (including fees paid pursuant to the Advisory and
Administration Agreements, but excluding interest, taxes, brokerage,
fees paid pursuant to the Fund's services and distribution plan, and,
with the prior written consent of the necessary state securities
commissions, extraordinary expenses) exceed the expense limitation of
any state having jurisdiction over the Fund, SBMFM will, to the extent
required by state law, reduce its management fees by such excess
expense. Such a fee reduction, if any, will be reconciled on a monthly
basis. The most restrictive state expense limitation applicable to the
Fund would require SBMFM to reduce its fees in any year that such excess
expenses exceed 2.50% of the first $30 million of average net assets,
2.00% of the next $70 million of average net assets and 1.50% of the
remaining average assets. No fee reduction was necessary for the
1996,1995 or 1994 fiscal years.
Counsel and Auditors
Willkie Farr & Gallagher serves as counsel to the Fund. The Independent
Directors of the Fund have selected Stroock & Stroock & Lavan to serve
as their legal counsel.
KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York 10154, has
been selected as the Fund's independent auditor to examine and report on
the Fund's financial statements and highlights for the fiscal year
ending December 31, 1997.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Prospectus discusses the Fund's investment objective and the
policies it employs to achieve its objective. This section contains
supplemental information concerning the types of securities and other
instruments in which the Fund may invest, the investment policies and
portfolio strategies that the Fund may utilize and certain risks
attendant to such investments, policies and strategies.
Money Market Instruments. As stated in the Prospectus, the Fund may
invest for temporary defensive purposes in corporate and government
bonds and notes and money market instruments. Money market instruments
in which the Fund may invest include: obligations issued or guaranteed
by the United States government, its agencies or instrumentalities
("U.S. government securities"); certificates of deposit, time deposits
and bankers' acceptances issued by domestic banks (including their
branches located outside the United States and subsidiaries located in
Canada), domestic branches of foreign banks, savings and loan
associations and similar institutions; high grade commercial paper; and
repurchase agreements with respect to the foregoing types of
instruments. The following is a more detailed description of such money
market instruments.
Certificates of deposit ("CDs") are short-term, negotiable obligations
of commercial banks. Time deposits ("TDs") are non-negotiable deposits
maintained in banking institutions for specified periods of time at
stated interest rates. Bankers' acceptances are time drafts drawn on
commercial banks by borrowers, usually in connection with international
transactions.
Domestic commercial banks organized under Federal law are supervised and
examined by the Comptroller of the Currency and are required to be
members of the Federal Reserve System and to be insured by the Federal
Deposit Insurance Corporation the ("FDIC"). Domestic banks organized
under state law are supervised and examined by state banking authorities
but are members of the Federal Reserve System only it they elect to
join. Most state banks are insured by the FDIC (although such insurance
may not be of material benefit to the Fund, depending upon the principal
amount of CDs of each bank held by the Fund) and are subject to Federal
examination and to a substantial body of Federal law and regulation. As
a result of governmental regulations, domestic branches of domestic
banks are, among other things, generally required to maintain
specialized levels of reserves, and are subject to other supervision and
regulation designed to promote financial soundness.
Obligations of foreign branches of domestic banks, such as CDs and TDs,
may be general obligations of the parent bank in addition to the issuing
branch, or may be limited by the terms of a specific obligation and
governmental regulation. Such obligations are subject to different
risks than are those of domestic banks or domestic branches of foreign
banks. These risks include foreign economic and political developments,
foreign governmental restrictions that may adversely affect payment of
principal and interest on the obligations, foreign exchange controls and
foreign withholding and other taxes on interest income. Foreign
branches of domestic banks are not necessarily subject to the same or
similar regulatory requirements that apply to domestic banks, such as
mandatory reserve requirements, loan limitations, and accounting,
auditing and financial recordkeeping requirements. In addition, less
information may be publicly available about a foreign branch of a
domestic bank than about a domestic bank. CDs issued by wholly owned
Canadian subsidiaries of domestic banks are guaranteed as to repayment
of principal and interest (but not as to sovereign risk) by the domestic
parent bank.
Obligations of domestic branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may
be limited by the terms of a specific obligation and by Federal and
state regulation as well as governmental action in the country in which
the foreign bank has its head office. A domestic branch of a foreign
bank with assets in excess of $1 billion may or may not be subject to
reserve requirements imposed by the Federal Reserve System or by the
state in which the branch is located if the branch is licensed in that
state. In addition, branches licensed by the Comptroller of the
Currency and branches licensed by certain states ("State Branches") may
or may not be required: (a) to pledge to the regulator by depositing
assets with a designated bank within the state, an amount of its assets
equal to 5% of its total liabilities; and (b) to maintain assets within
the state in an amount equal to a specified percentage of the aggregate
amount of liabilities of the foreign bank payable at or through all of
its agencies or branches within the state. The deposits of State
Branches may not necessarily be insured by the FDIC. In addition, there
may be less publicly available information about a domestic branch of a
foreign bank than about a domestic bank.
In view of the foregoing factors associated with the purchase of CDs and
TDs issued by foreign branches of domestic banks or by domestic branches
of foreign banks, SBMFM will carefully evaluate such investments on a
case-by-case basis. Savings and loans associations whose CDs may be
purchased by the Fund are supervised by the Office of Thrift Supervision
and are insured by the Savings Association Insurance Fund. As a
result, such savings and loan associations are subject to regulation and
examination.
American, European and Continental Depositary Receipts. The Fund may
invest in the securities of foreign and domestic issuers in the form of
American Depositary Receipts ("ADRs") and European Depositary Receipts
("EDRs"). These securities may not necessarily be denominated in the
same currency as the securities into which they may be converted. ADRs
are receipts typically issued by a U.S. bank or trust company that
evidence ownership of underlying securities issued by a foreign
corporation. EDRs, which sometimes are referred to as Continental
Depositary Receipts ("CDRs"), are receipts issued in Europe typically by
foreign banks and trust companies that evidence ownership of either
foreign or domestic securities. Generally, ADRs, in registered form,
are designed for use in U.S. securities markets and EDRs and CDRs, in
bearer form, are designed for use in European securities markets.
Lending of Portfolio Securities. As stated in the Prospectus, the Fund
has the ability to lend securities from its portfolio to brokers,
dealers and other financial organizations. Such loans, if and when
made, may not exceed 33 1/3% of the Fund's total assets taken at value.
The Fund may not lend its portfolio securities to Smith Barney or its
affiliates unless it has applied for and received specific authority
from the SEC. Loans of portfolio securities by the Fund will be
collateralized by cash, letters of credit or U S. government securities
that are maintained at all times in an amount equal to at least 100% of
the current market value of the loaned securities.
In lending its portfolio securities, the Fund can increase its income by
continuing to receive interest on the loaned securities as well as by
either investing the cash collateral in short-term instruments or
obtaining yield in the form of interest paid by the borrower when U S.
government securities are used as collateral. Requirements of the SEC,
which may be subject to future modifications, currently provide that the
following conditions must be met whenever the Fund's portfolio
securities are loaned: (a) the Fund must receive at least 100% cash
collateral or equivalent securities from the borrower; (b) the borrower
must increase such collateral whenever the market value of the
securities rises above the value of such collateral; (c) the Fund must
be able to terminate the loan at any time; (d) the Fund must receive
reasonable interest on the loan, as well as an amount equal to any
dividends, interest or other distributions on the loaned securities, and
any increase in market value; (e) the Fund may pay only reasonable
custodian fees in .connection with the loan; and ( f) voting rights on
the loaned securities may pass to the borrower; however, if a material
event adversely affecting the investment occurs, the Fund's Board of
Directors must terminate the loan and regain the right to vote the
securities. The risks in lending portfolio securities, as with other
extensions of secured credit, consist of possible delay in receiving
additional collateral or in the recovery of the securities or possible
loss of rights in the collateral should the borrower fail financially.
Loans will be made to firms deemed by SBMFM to be of good standing and
will not be made unless, in the judgment of SBMFM, the consideration to
be earned from such loans would justify the risk. From time to time,
the Fund may return a part of the interest earned from the investment of
collateral received for securities loaned to: (a) the borrower; and/or
(b) a third party, which is unaffiliated with the Fund or with Smith
Barney and, which is acting as a "finder."
Convertible Securities. Convertible securities are fixed-income
securities that may be converted at either a stated price or stated rate
into underlying shares of common stock. Convertible securities have
general characteristics similar to both fixed-income and equity
securities. Although to a lesser extent than with fixed-income
securities generally, the market value of convertible securities tends
to decline as interest rates increase and, conversely, tends to increase
as interest rates decline. In addition, because of the conversion
feature, the market value of convertible securities tends to vary with
fluctuations in the market value of the underlying common stocks and,
therefore, also will react to variations in the general market for
equity securities. A unique feature of convertible securities is that
as the market price of the underlying common stock declines, convertible
securities tend to trade increasingly on a yield basis, and so may not
experience market value declines to the same extent as the underlying
common stock. When the market price of the underlying common stock
increases, the prices of the convertible securities tend to rise as a
reflection of the value of the underlying common stock. While no
securities investments are without risk, investments in convertible
securities generally entail less risk than investments in common stock
of the same issuer.
As fixed-income securities, convertible securities are investments that
provide for a stable stream of income with generally higher yields than
common stocks. Of course, like all fixed-income securities, there can
be no assurance of current income because the issuers of the convertible
securities may default on their obligations. Convertible securities,
however, generally offer lower interest or dividend yields than non-
convertible securities of similar quality because of the potential for
capital appreciation. A convertible security, in addition to providing
fixed income, offers the potential for capital appreciation through the
conversion feature, which enables the holder to benefit from increases
in the market price of the underlying common stock. There can be no
assurance of capital appreciation, however, because securities prices
fluctuate.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible
bonds, as corporate debt obligations, enjoy seniority in right of
payment to all equity securities, and convertible preferred stock is
senior to common stock, of the same issuer. Because of the
subordination feature, however, convertible securities typically have
lower ratings than similar non-convertible securities.
Warrants. Because a warrant does not carry with it the right to
dividends or voting rights with respect to the securities that the
warrant holder is entitled to purchase, and because it does not
represent any rights to the assets of the issuer, a warrant may be
considered more speculative than certain other types of investments. In
addition, the value of a warrant does not necessarily change with the
value of the underlying securities and a warrant ceases to have value if
it is not exercised prior to its expiration date. The investment in
warrants, valued at the lower of cost or market, may not exceed 5% of
the value of the Fund's net assets. Included within that amount, but
not to exceed 2% of the value of the Fund's net assets, may be warrants
that are not listed on the New York Stock Exchange, Inc. (the "NYSE") or
the American Stock Exchange. Warrants acquired by the Fund in units or
attached to securities may be deemed to be without value.
Preferred Stock. Preferred stocks, like debt obligations, are generally
fixed-income securities. Shareholders of preferred stocks normally have
the right to receive dividends at a fixed rate when and as declared by
the issuer's board of directors, but do not participate in other amounts
available for distribution by the issuing corporation. Dividends on the
preferred stock may be cumulative, and all cumulative dividends usually
must be paid prior to common shareholders receiving any dividends.
Preferred stock dividends must be paid before common stock dividends
and, for that reason, preferred stocks generally entail less risk than
common stocks. Upon liquidation, preferred stocks are entitled to a
specified liquidation preference, which is generally the same as the par
or stated value, and are senior in right of payment to common stock.
Preferred stocks are, however, equity securities in the sense that they
do not represent a liability of the issuer and, therefore, do not offer
as great a degree of protection of capital or assurance of continued
income as investments in corporate debt securities. In addition,
preferred stocks are subordinated in right of payment to all debt
obligations and creditors of the issuer, and convertible preferred
stocks may be subordinated to other preferred stock of the same issuer.
Futures Contracts and Related Options. Futures contracts and options
thereon may be undertaken for hedging and other risk management purposes
in an effort to reduce the impact of several kinds of anticipated price
fluctuation risks on the securities held by the Fund. For example,
futures contracts for the sale of foreign currency might be entered into
to protect against declines in the value of currencies in which
portfolio securities are denominated; and put options on interest rate
futures might be purchased to protect against declines in the market
values of debt securities occasioned by higher interest rates. If these
transactions are successful, the futures or options positions taken by
the Fund will rise in value by an amount which approximately offsets the
decline in value of the portion of the securities held by the Fund that
is being hedged.
On other occasions, the Fund may enter into contracts to purchase
the underlying instrument. For example, futures contracts for the
purchase of debt securities might be entered into to protect against an
anticipated increase in the price of debt securities to be purchased in
the future resulting from decreased interest rates.
The Fund will incur brokerage costs whether or not its hedging is
successful and will be required to post and maintain "margin" as a good-
faith deposit against performance of its obligations under futures
contracts and under options written by the Fund. Futures and options
positions are marked to the market daily and the Fund may be required to
make subsequent "variation" margin payments depending upon whether its
positions increase or decrease in value. In this context margin payments
involve no borrowing on the part of the Fund.
Options on Securities. The Fund may purchase put and call options on
securities owned by the Fund and on securities which the Fund may
acquire in the future. The exercise price of the options may be below,
equal to or above the market values of the underlying securities at the
times the options are written.
An option position may be closed out only where there exists a
secondary market for an option of the same series on a recognized
securities exchange or in the over-the-counter market. In light of this
fact and current trading conditions, the Fund expect to purchase not
only call or put options issued by the Clearing Corporation, but also
options in the domestic and foreign over-the-counter markets. When the
Fund has purchased an option and engages in a closing sale transaction,
whether the Fund realizes a profit or loss will depend upon whether the
amount received in the closing sale transaction is more or less than the
premium that the Fund initially paid for the original option plus the
related transaction costs.
Although the Fund generally will purchase only those options for
which SBMFM believes there is an active secondary market so as to
facilitate closing transactions, there is no assurance that sufficient
trading interest to create a liquid secondary market on a securities
exchange will exist for any particular option or at any particular time,
and for some options no such secondary market may exist. A liquid
secondary market in an option may cease to exist for a variety of
reasons. In the past, for example, higher than anticipated trading
activity or order flow or other unforeseen events have at times rendered
inadequate certain of the facilities of the Clearing Corporation and
securities exchanges and resulted in the institution of special
procedures, such as trading rotations, restrictions on certain types of
orders or trading halts or suspensions in one or more options. There
can be no assurance that similar events, or events that may otherwise
interfere with the timely execution of customers' orders, will not
recur. In such event, it might not be possible to effect closing
transactions in particular options.
Securities exchanges generally have established limitations
governing the maximum number of calls and puts of each class which may
be held or exercised within certain time periods, by an investor or
group of investors acting in concert (regardless of whether the options
are written on the same or different securities exchanges or are held,
written or exercised in one or more accounts or through one or more
brokers). It is possible that the Fund and other clients of SBMFM and
certain of their affiliates may be considered to be such a group. A
securities exchange may order the liquidation of positions found to be
in violation of these limits and it may impose certain other sanctions.
Stock Index Options. The Fund may purchase and write put and call
options on domestic and foreign stock indexes for the purpose of hedging
their portfolios. A stock index fluctuates with changes in the market
values of the stocks included in the index. Stock index options may be
based on a broad market index such as the New York Stock Exchange
Composite Index or a narrower market index such as the Standard & Poor's
Daily Price Index of 500 Common Stocks ("S&P 500"). Indexes also may be
based on an industry or market segment.
Options on stock indexes are generally similar to options on stock
except that the delivery requirements are different. Instead of giving
the right to take or make delivery of stock at a specified price, an
option on a stock index gives the holder the right to receive a cash
"exercise settlement amount" equal to (a) the amount, if any, by which
the fixed exercise price of the option exceeds (in the case of a put) or
is less than (in the case of a call) the closing value of the underlying
index on the date of exercise, multiplied by (b) a fixed "index
multiplier." Receipt of this cash amount will depend upon the closing
level of the stock index upon which the option is based being greater
than, in the case of a call, or less than, in the case of a put, the
exercise price of the option. The amount of cash received will be equal
to such difference between the closing price of the index and the
exercise price of the option, expressed in dollars, times a specified
multiple. The writer of the option is obligated, in return for the
premium received, to make delivery of this amount. The writer may
offset its position in stock index options prior to expiration by
entering into a closing transaction on an exchange, or it may let the
option expire unexercised.
The effectiveness of purchasing stock index options as a hedging
technique will depend upon the extent to which price movements in the
portion of a securities portfolio being hedged correlate with price
movements of the stock index selected. Because the value of an index
option depends upon movements in the level of the index rather than the
price of a particular stock, whether the Fund will realize a gain or
loss from the purchase or writing of options on an index depends upon
movements in the level of stock prices in the stock market generally or,
in the case of certain indexes, in an industry or market segment, rather
than movements in the price of a particular stock. Accordingly,
successful use by the Fund of options on stock indexes will be subject
to SBMFM's ability to predict correctly movements in the direction of
the stock market generally or of a particular industry. This requires
different skills and techniques than predicting changes in the price of
individual stocks.
The Fund will engage in stock index options transactions only when
determined by SBMFM to be consistent with the Fund's efforts to control
risk. There can be no assurance that such judgment will be accurate or
that the use of these portfolio strategies will be successful.
Investment Restrictions
The Fund has adopted the following investment restrictions for the
protection of shareholders. Restrictions l through 7 below cannot be
changed without approval by the holders of a majority of the outstanding
shares of the Fund, defined as the lesser of (a) 67% or more of the
Fund's shares present at a meeting, if the holders of more than 50% of
the outstanding shares are present in person or by proxy or (b) more
than 50% of the Fund's outstanding shares. The remaining restrictions
may be changed by the Fund's Board of Directors at any time. In
accordance with these restrictions, the Fund will not:
1. Invest in a manner that would cause it to fail to be a
"diversified company" under the 1940 Act and the rules,
regulations and orders thereunder.
2. Issue "senior securities" as defined in the 1940 Act and the
rules, regulations and orders thereunder, except as permitted under the
1940 Act and the rules, regulations and orders thereunder.
3. Invest more than 25% of its total assets in securities, the
issuers of which are in the same industry. For purposes of this
limitation, U.S. government securities and securities of state or
municipal governments and their political subdivisions are not
considered to be issued by members of any industry.
4. Borrow money, except that (a) the Fund may borrow from banks for
temporary or emergency (not leveraging) purposes, including the
meeting of redemption requests which might otherwise require the
untimely disposition of securities, and (b) the Fund may, to the
extent consistent with its investment policies, enter into
reverse repurchase agreements, forward roll transactions and
similar investment strategies and techniques. To the extent that
it engages in transactions described in (a) and (b), the Fund
will be limited so that no more than 33 1/3% of the value of its
total assets (including the amount borrowed), valued at the
lesser of cost or market, less liabilities (not including the
amount borrowed) valued at the time the borrowing is made, is
derived from such transactions.
5. Make loans. This restriction does not apply to: (a) the purchase
of debt obligations in which the Portfolio may invest consistent
with its investment objectives and policies; (b) repurchase
agreements; and (c) loans of its portfolio securities, to the
fullest extent permitted under the 1940 Act.
6. Engage in the business of underwriting securities issued by other
persons, except to the extent that the Fund may technically be
deemed to be an underwriter under the Securities Act of 1933, as
amended, in disposing of portfolio securities.
7. Purchase or sell real estate, real estate mortgages, commodities
or commodity contracts, but this restriction shall not prevent the
Fund from (a) investing in securities of issuers engaged in the
real estate business or the business of investing in real estate
(including interests in limited partnerships owning or otherwise
engaging in the real estate business or the business of investing
in real estate) and securities which are secured by real estate or
interests therein; (b) holding or selling real estate received in
connection with securities it holds or held; (c) trading in
futures contracts and options on futures contracts (including
options on currencies to the extent consistent with the Funds'
investment objective and policies); or (d) investing in real
estate investment trust securities.
8. Purchase any securities on margin (except for such short-term
credits as are necessary for the clearance of purchases and sales
of portfolio securities) or sell any securities short (except
"against the box"). For purposes of this restriction, the
deposit or payment by the Fund of underlying securities and other
assets in escrow and collateral agreements with respect to initial
or maintenance margin in connection with futures contracts and
related options and options on securities, indexes or similar
items is not considered to be the purchase of a security on
margin.
9. Invest more than 5% of the value of its net assets in warrants,
included within that amount, but not to exceed 2% of the value of
the Fund's net assets, may be warrants that are not listed on the
New York Stock Exchange, Inc. (the "NYSE") or the American Stock
Exchange. Warrants acquired by the Fund in units or attached to
securities may be deemed to be without value.
10. Invest in mineral-type programs or leases.
11. Purchase or otherwise acquire any security if, as a result, more
than l5% of its net assets would be invested in securities that
are illiquid.
12. Purchase the securities of any other open-end investment company,
except through a purchase on the open market involving no
commission or profit to a sponsor or dealer (other than the
customary stock exchange or over-the-counter brokerage commission)
and except as part of a merger, consolidation or acquisition of
assets.
13. Invest for the purpose of exercising control of management.
14. Purchase securities of any company with a record of less than
three years' continuous operation if such purchase would cause its
investments in such companies to exceed 5% of the value of its
total assets. (For purposes of this limitation, issuers include
predecessors, sponsors, controlling persons, general partners,
guarantors and originators of underlying assets.)
If any percentage restriction described above is complied with at the
time of an investment, a later increase or decrease in percentage
resulting from a change in values or assets will not constitute a
violation of such restriction.
Certain of these restrictions were adopted as the result of undertakings
to state securities commissions and must be complied with only as long
as the Fund's shares are registered in the particular state. In order
to permit the sale of the Fund's shares in certain states, the Fund may
make commitments more restrictive than the investment restrictions
described above such as those regarding oil and mineral leases and real
estate limited partnerships.
Certain Investment Activities
While the Fund is authorized to borrow money from banks for purposes of
investment (leveraging) and to invest in securities of foreign issuers,
it has no current intention of engaging in these investment activities
and will do so only when the Fund's Board of Directors determines that
either or both of these activities are in the best interests of
shareholders.
Portfolio Turnover
The Fund generally does not engage in short-term trading but intends to
purchase securities for long-term capital appreciation. While the
Fund's portfolio turnover rate has in the past exceeded 100%, the Fund's
annual portfolio turnover rate is not expected to exceed 100%. A
portfolio turnover rate of 100% would occur if all of the securities in
the Fund's portfolio were replaced once during a period of one year.
The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the year by the monthly
average value of portfolio securities. Securities with remaining
maturities of one year or less at the date of acquisition are excluded
from the calculation. For the fiscal years ended December 31, 1996 and
1995, the Fund's portfolio turnover rate was 62% and 57%, respectively.
Future portfolio turnover rates may vary greatly from year to year as
well as within a particular year and may be affected by cash
requirements for redemptions of the Fund's shares as well as by
requirements that enable the Fund to receive favorable tax treatment.
Portfolio turnover rates will largely depend on the level of purchases
and redemptions of Fund shares. Higher portfolio turnover rates can
result in corresponding increases in brokerage commissions. In
addition, to the extent that the Fund realizes short-term gains as the
result of more portfolio transactions, such gains would be taxable to
shareholders at ordinary income tax rates.
Portfolio Transactions
Decisions to buy and sell securities for the Fund are made by SBMFM,
subject to the overall supervision and review of the Fund's Board of
Directors. Portfolio securities transactions for the Fund are effected
by or under the supervision of SBMFM.
Transactions on stock exchanges involve the payment of negotiated
brokerage commissions. There is generally no stated commission in the
case of securities traded in the over-the-counter market, but the price
of those securities includes an undisclosed commission or mark-up.
Over-the-counter purchases and sales are transacted directly with
principal market makers except in those cases in which better prices and
executions may be obtained elsewhere. The cost of securities purchased
from underwriters includes an underwriting commission or concession, and
the prices at which securities are purchased from and sold to dealers
include a dealer's mark-up or mark-down. For the fiscal years ended
December 31, 1996, 1995 and 1994, the Fund paid total brokerage
commissions of $4,357,932, $3,736,847 and $3,433,551, respectively.
In executing portfolio transactions and selecting brokers or dealers, it
is the Fund's policy to seek the best overall terms available. SBMFM,
in seeking the most favorable price and execution, considers all factors
it deems relevant, including, for example, the price, the size of the
transaction, the reputation, experience and financial stability of the
broker-dealer involved and the quality of service rendered by the
broker-dealer in other transactions. SBMFM receives research,
statistical and quotation services from several broker-dealers with
which it places the Fund's portfolio transactions. It is possible that
certain of the services received primarily will benefit one or more
other accounts for which SBMFM exercises investment discretion.
Conversely, the Fund may be the primary beneficiary of services received
as a result of portfolio transactions effected for other accounts.
SBMFM's fee under the Advisory Agreement is not reduced by reason of its
receiving such brokerage and research services. The Fund's Board of
Directors, in its discretion, may authorize SBMFM to cause the Fund to
pay a broker that provides brokerage and research services to SBMFM a
commission in excess of that which another qualified broker would have
charged for effecting the same transaction. Smith Barney will not
participate in commissions from brokerage given by the Fund to other
brokers or dealers and will not receive any reciprocal brokerage
business resulting therefrom.
In accordance with Section 17(e) of the 1940 Act and Rule 17(e)
thereunder, the Fund's Board of Directors has determined that any
portfolio transaction for the Fund may be executed through Smith Barney
or an affiliate of Smith Barney if, in SBMFM's judgment, the use of
Smith Barney or an affiliate is likely to result in price and execution
at least as favorable as those of other qualified brokers and if, in the
transaction, Smith Barney or the affiliate charges the Fund a commission
rate consistent with those charged by Smith Barney or an affiliate to
comparable unaffiliated customers in similar transactions. In addition,
under rules recently adopted by the SEC, Smith Barney may directly
execute such transactions for the Fund on the floor of any national
securities exchange, provided: (a) the Board of Directors has expressly
authorized Smith Barney to effect such transactions; and (b) Smith
Barney annually advises the Fund of the aggregate compensation it earned
on such transactions. For the fiscal year ended December 31, 1996, the
Fund paid $685,248 in brokerage commissions to Smith Barney, or 15.7% of
the total brokerage commissions paid. Smith Barney secured 13.2% of the
aggregate dollar amount of transactions involving commissions during the
1996 fiscal year. For the 1996, 1995 and 1994 fiscal years, the Fund
paid $685,248, $637,506 and $487,203, respectively, in brokerage
commissions to Smith Barney and/or Shearson Lehman Brothers, the Fund's
distributor prior to Smith Barney.
Even though investment decisions for the Fund are made independently
from those of the other accounts managed by SBMFM, investments of the
kind made by the Fund also may be made by those other accounts. When
the Fund and one or more accounts managed by SBMFM are prepared to
invest in, or desire to dispose of, the same security, available
investments or opportunities for sales will be allocated in a manner
believed by SBMFM to be equitable. In some cases, this procedure may
adversely affect the price paid or received by the Fund or the size of
the position obtained for or disposed of by the Fund.
PURCHASE OF SHARES
Volume Discounts
The schedule of sales charges on Class A shares described in the
Prospectus applies to purchases made by any "purchaser," which is
defined to include the following: (a) an individual; (b) an individual's
spouse and his or her children purchasing shares for their account; (c)
a trustee or other fiduciary purchasing shares for a single trust estate
or single fiduciary account; (d) a pension, profit-sharing or other
employee benefit plan qualified under Section 401(a) of the Internal
Revenue Code of 1986, as amended (the "Code"), and qualified employee
benefit plans of employers who are "affiliated persons" of each other
within the meaning of the 1940 Act; (e) tax-exempt organizations
enumerated in Section 501 (c)(3) or (13) of the Code; and (f) a trustee
or other professional fiduciary (including a bank, or an investment
adviser registered with the SEC under the Investment Advisers Act of
1940, as amended) purchasing shares of the Fund for one or more trust
estates or fiduciary accounts. Purchasers who wish to combine purchase
orders to take advantage of volume discounts should contact a Smith
Barney Financial Consultant.
Combined Right of Accumulation
Reduced sales charges, in accordance with the schedule in the
Prospectus, apply to any purchase of Class A shares if the aggregate
investment in Class A shares of the Fund and in Class A shares of other
Smith Barney Mutual Funds that are offered with a sales charge,
including the purchase being made, of any purchaser is $25,000 or more.
The reduced sales charge is subject to confirmation of the shareholder's
holdings through a check of appropriate records. The Fund reserves the
right to terminate or amend the combined right of accumulation at any
time after written notice to shareholders. For further information
regarding the combined right of accumulation, shareholders should
contact a Smith Barney Financial Consultant.
Determination of Public Offering Price
The Fund offers its shares to the public on a continuous basis. The
public offering price for a Class A, Class Y and Class Z share of the
Fund is equal to the net asset value per share at the time of purchase,
plus for Class A shares, an initial sales charge based on the aggregate
amount of the investment. The public offering price for a Class B and
Class C share (and Class A share purchases, including applicable rights
of accumulation, equaling or exceeding $500,000) is equal to the net
asset value per share at the time of purchase and no sales charge is
imposed at the time of purchase. A contingent deferred sales charge
("CDSC"), however, is imposed on certain redemptions of Class B and
Class C shares, and of Class A shares when purchased in amounts equaling
or exceeding $500,000. The method of computation of the public offering
price is shown in the Fund's financial statements incorporated by
reference in their entirety into this Statement of Additional
Information.
IRA AND OTHER PROTOTYPE RETIREMENT PLANS
Copies of the following plans with custody or trust agreements
have been approved by the Internal Revenue Service and are available
from the Fund or Smith Barney; investors should consult with their own
tax or retirement planning advisors prior to the establishment of a
plan.
IRA, Rollover IRA and Simplified Employee Pension - IRA
The Small Business Job Protection Act of 1996 changed the
eligibility requirements for participants in Individual Retirement
Accounts ("IRAs"). Under these new provisions, if you or your spouse
have earned income, each of you may establish an IRA and make maximum
annual contributions equal to the lesser of earned income or $2,000. As
a result of this legislation, married couples where one spouse is non-
working may now contribute a total of $4,000 annually to their IRAs.
If you or your spouse is an active participant in an employer-
sponsored retirement plan, a deduction for contributions to an IRA might
still be allowed in full or in part, depending on your combined adjusted
gross income. For married couples filing jointly, a full deduction for
contributions to an IRA will be allowed where the couples' adjusted
gross income is below $40,001 ($25,001 for an unmarried individual); a
partial deduction will be allowed when adjusted gross income is between
$40,001 - $50,000 ($25,001-$35,000 for an unmarried individual); and no
deduction when adjusted gross income is $50,000 ($35,000 for an
unmarried individual).
A Rollover IRA is available to defer taxes on lump sum payments
and other qualifying rollover amounts (no maximum) received from another
retirement plan.
An employer who has established a Simplified Employee Pension -
IRA ("SEP-IRA") on behalf of eligible employees may make a maximum
annual contribution to each participant's account of 15% (up to $24,000)
of each participant's compensation. Compensation is capped at $160,000
for 1997.
Paired Defined Contribution Prototype
Corporations (including Subchapter S corporations) and non-
corporate entities may purchase shares of the Fund through the Smith
Barney Prototype Paired Defined Contribution Plan (the "Prototype").
The Prototype permits adoption of profit-sharing provisions, money
purchase pension provisions, or both, to provide benefits for eligible
employees and their beneficiaries. The Prototype provides for a maximum
annual tax deductible contribution on behalf of each Participant of up
to 25% of compensation, but not to exceed $30,000 (provided that a money
purchase pension plan or both a profit-sharing plan and a money purchase
pension plan are adopted thereunder).
REDEMPTION OF SHARES
The right of redemption may be suspended or the date of payment
postponed (a) for any period during which the NYSE is closed (other than
for customary weekend or holiday closings), (b) when trading in markets
the Fund normally utilizes is restricted, or an emergency, as determined
by the SEC, exists so that disposal of the Fund's investments or
determination of net asset value is not reasonably practicable or (c)
for such other periods as the SEC by order may permit for the protection
of the Fund's shareholders.
Distributions in Kind
If the Board of Directors of the Fund determines that it would be
detrimental to the best interests of the remaining shareholders to make
a redemption payment wholly in cash, the Fund may pay, in accordance
with SEC rules, any portion of a redemption in excess of the lesser of
$250,000 or 1% of the Fund's net assets by distribution in kind of
portfolio securities in lieu of cash. Securities issued as a
distribution in kind may incur brokerage commissions when shareholders
subsequently sell those securities.
Automatic Cash Withdrawal Plan
An automatic cash withdrawal plan (the "Withdrawal Plan") is available
to shareholders who own shares with a value of at least $10,000 ($5,000
for retirement plan accounts) and who wish to receive specific amounts
of cash monthly or quarterly. Withdrawals of at least $50 may be made
under the Withdrawal Plan by redeeming as many shares of the Fund as may
be necessary to cover the stipulated withdrawal payment. Any applicable
CDSC will not be waived on amounts withdrawn by shareholders that exceed
1.00% per month of the value of a shareholder's shares at the time the
Withdrawal Plan commences. (With respect to Withdrawal Plans in effect
prior to November 7, 1994, any applicable CDSC will be waived on amounts
withdrawn that do not exceed 2.00% per month of the value of a
shareholder's shares at the time the Withdrawal Plan commenced.) To the
extent withdrawals exceed dividends, distributions and appreciation of a
shareholder's investment in the Fund, there will be a reduction in the
value of the shareholder's investment and continued withdrawal payments
will reduce the shareholder's investment and ultimately may exhaust it.
Withdrawal payments should not be considered as income from investment
in the Fund. Furthermore, as it generally would not be advantageous to
a shareholder to make additional investments in the Fund at the same
time he or she is participating in the Withdrawal Plan, purchases by
such shareholders in amounts of less than $5,000 ordinarily will not be
permitted.
Shareholders who wish to participate in the Withdrawal Plan and who hold
their shares in certificate form must deposit their share certificates
with the Transfer Agent as agent for Withdrawal Plan members. All
dividends and distributions on shares in the Withdrawal Plan are
reinvested automatically at net asset value in additional shares of the
Fund. Withdrawal Plans should be set up with a Smith Barney Financial
Consultant. A shareholder who purchases shares directly through the
Transfer Agent may continue to do so and applications for participation
in the Withdrawal Plan must be received by the Transfer Agent no later
than the eighth day of the month to be eligible for participation
beginning with that month's withdrawal. For additional information,
shareholders should contact a Smith Barney Financial Consultant.
DISTRIBUTORS
Smith Barney serves as the Fund's distributor on a best efforts basis
pursuant to a written agreement (the "Distribution Agreement") which was
most recently approved by the Fund's Board of Directors on July 17,
1996. For the fiscal years ended December 31, 1996, 1995 and 1994,
Smith Barney and/or its predecessor, Shearson Lehman Brothers, received
approximately $1.8 million, $1.7 million and $1.4 million respectively,
in sales charges for the sale of Class A shares and did not reallow any
portion thereof to dealers. For the fiscal years ended December 31,
1996, 1995 and 1994, Smith Barney or Shearson Lehman Brothers received
approximately $1,512,000, $1,912,000 and $2,313,000, respectively,
representing CDSC on redemptions of the Fund's Class B shares. For the
fiscal years ended December 31, 1996, 1995, and 1994, Smith Barney
received approximately $6,000, $4000 and $1, respectively,
representing CDSC on redemptions of the Fund's Class C shares.
PFS Distributors, located at 3100 Breckinridge Blvd., Building
200, Duluth, Georgia 30199-0062, also, serves as one of the Fund's
distributors on a best efforts basis requiring PFS Distributors to take
and pay for only such securities as may be sold to the public pursuant
to a Distribution Agreement dated July 1, 1995. The only classes of
shares being offered for sale through PFS Distributors are Class A
shares and Class B shares.
When payment is made by the investor, unless otherwise noted by the
investor, the funds will be held as a free credit balance in the
investor's brokerage account and Smith Barney may benefit from the
temporary use of the funds. The investor may designate another use for
the funds prior to settlement date, such as an investment in a money
market fund (other than Smith Barney Exchange Reserve Fund) of the Smith
Barney Mutual Funds. If the investor instructs Smith Barney to invest
the funds in a Smith Barney money market fund, the amount of the
investment will be included as part of the average daily net assets of
both the Fund and the Smith Barney money market fund, and affiliates of
Smith Barney that serve the funds in an investment advisory or
administrative capacity will benefit from the fact they are receiving
fees from both such investment companies for managing these assets
computed on the basis of their average daily net assets. The Fund's
Board of Directors has been advised of the benefits to Smith Barney
resulting from these settlement procedures and will take such benefits
into consideration when reviewing the Advisory, Administration and
Distribution Agreements for continuance.
For the fiscal year ended December 31, 1996, Smith Barney and/or PFS
Distributors incurred distribution expenses totaling approximately
$15,711,344, consisting of approximately $732,273 for advertising,
$108,000 for printing and mailing of Prospectuses, $5,771,362 for
support services, $8,062,780 to Smith Barney Financial Consultants, and
$698,000 in accruals for interest on the excess of Smith Barney expenses
incurred in distribution of the Fund's shares over the sum of the
distribution fees and CDSC received by Smith Barney and/or PFS
Distributors from the Fund.
Distributions Arrangements
To compensate Smith Barney for the services it provides and for the
expense it bears under the Distribution Agreement, the Fund has adopted
a services and distribution plan (the "Plan") pursuant to Rule 12b-1
under the 1940 Act. Under the Plan, the Fund pays Smith Barney a
service fee, accrued daily and paid monthly, calculated at the annual
rate of 0.25% of the value of the Fund's average daily net assets
attributable to the Class A, Class B and Class C shares. In addition,
the Fund pays Smith Barney a distribution fee with respect to the Class
B and Class C shares primarily intended to compensate Smith Barney for
its initial expense of paying Financial Consultants a commission upon
sales of those shares. The Class B and Class C distribution fee is
calculated at the annual rate of 0.75% of the value of the Fund's
average daily net assets attributable to the shares of the respective
Class.
The only Classes of shares being offered for sale through PFS
Distributors are Class A shares and Class B shares. Pursuant to the
Plan (described above), PFS Distributors is paid an annual service fee
with respect to Class A and Class B shares of the Fund sold through PFS
Distributors at the annual rate of 0.25% of the average daily net assets
of the respective Class. PFS Distributors is also paid an annual
distribution fee with respect to Class B shares at the annual rate of
0.75% of the average daily net assets attributable to that Class. Class
B shares that automatically convert to Class A shares eight years after
the date of original purchase will no longer be subject to a
distribution fee. The fees are paid to PFS Distributors, which in turn,
pays PFS Investments Inc. ("PFS Investments") to pay its Investments
Registered Representatives for servicing shareholder accounts and, in
the case of Class B shares, to cover expenses primarily intended to
result in the sale of those shares. These expenses include: advertising
expenses; the cost of printing and mailing prospectuses to potential
investors; payments to and expenses of Investments Registered
Representatives and other persons who provide support services in
connection with the distribution of shares; interest and/or carrying
charges; and indirect and overhead costs of PFS Investments associated
with the sale of Fund shares, including lease, utility, communications
and sales promotion expenses.
The payments to PFS Investments Registered Representatives for selling
shares of a Class include a commission or fee paid by the investor or
PFS at the time of sale and, with respect to Class A and Class B shares,
a continuing fee for servicing shareholder accounts for as long as a
shareholder remains a holder of that Class. PFS Investments Registered
Representatives may receive different levels of compensation for selling
different Classes of shares.
PFS Investments may be deemed to be an underwriter for purposes of the
Securities Act of 1933. From time to time, PFS or its affiliates may
also pay for certain non-cash sales incentives provided to PFS
Investments Registered Representatives. Such incentives do not have any
effect on the net amount invested. In addition to the reallowances from
the applicable public offering price described above, PFS may from time
to time, pay or allow additional reallowances or promotional incentives,
in the form of cash or other compensation to PFS Investments Registered
Representatives that sell shares of the Fund.
The following service and distribution fees were incurred during the
periods indicated:
SERVICE FEES
Fiscal Year
Ended 12/31/96
Fiscal Year
Ended
12/31/95
Fiscal
Year
Ended
12/31/94
Fiscal Year
Ended
12/31/93
For Period
From 2/4/93
Through
12/31/93*
Class A $5,002,144
$4,551,117
$3,818,714
$4,143,053
nil
Class B 2,626,359
2,192,717
2,832,127
3,054,126
nil
Class C
50,941
21,953
9,200
nil
$1,600
DISTRIBUTION FEES
Fiscal Year
Ended 12/31/96
Fiscal Year
Ended
12/31/95
Fiscal
Year
Ended
12/31/94
Fiscal Year
Ended
12/31/93
For Period
From 2/4/93
Through
12/31/93*
Class B $7,879,077
$6,578,149
$8,496,382
$9,162,378
nil
Class C 152,823
65,858
27,602
nil
$4,800
* The Fund commenced selling Class C shares on February 4, 1993.
Under its terms, the Plan continues from year to year, provided such
continuance is approved annually by vote of the Fund's Board of
Directors, including a majority of the Independent Directors. The Plan
may not be amended to increase the amount of the service and
distribution fees without shareholder approval, and all amendments of
the Plan also must be approved by the Directors and Independent
Directors in the manner described above. The Plan may be terminated
with respect to a Class of the Fund at any time, without penalty, by
vote of a majority of the Independent Directors or by vote of a majority
(as defined in the 1940 Act) of the outstanding voting securities of the
Class. Pursuant to the Plan, Smith Barney and PFS Distributors will
provide the Fund's Board of Directors with periodic reports of amounts
expended under the Plan and the purpose for which such expenditures were
made.
VALUATION OF SHARES
Each Class' net asset value per share is calculated on each day, Monday
through Friday, except days on which the NYSE is closed. The NYSE
currently is scheduled to be closed on New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas, and on the preceding Friday or subsequent Monday when one of
these holidays falls on a Saturday or Sunday, respectively. Because of
the differences in distribution fees and Class-specific expenses, the
per share net asset value of each Class may differ. The following is a
description of the procedures used by the Fund in valuing its assets.
Securities listed on a national securities exchange will be valued on
the basis of the last sale on the date on which the valuation is made
or, in the absence of sales, at the mean between the closing bid and
asked prices. Over-the-counter securities will be valued at the mean
between the closing bid and asked prices on each day, or, if market
quotations for those securities are not readily available, at fair
value, as determined in good faith by the Fund's Board of Directors.
Short-term obligations with maturities of 60 days or less are valued at
amortized cost, which constitutes fair value as determined by the Fund's
Board of Directors. Amortized cost involves valuing an instrument at
its original cost to the Fund and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the
effect of fluctuating interest rates on the market value of the
instrument. All other securities and other assets of the Fund will be
valued at fair value as determined in good faith by the Fund's Board of
Directors.
EXCHANGE PRIVILEGE
Except as noted below, shareholders of any Smith Barney Mutual Fund may
exchange all or part of their shares for shares of the same Class of
other Smith Barney Mutual Funds, to the extent such shares are offered
for sale in the shareholder's state of residence, on the basis of
relative net asset value per share at the time of exchange as follows:
A. Class A shares of any fund purchased with a sales charge may
be exchanged for Class A shares of any of the other funds,
and the sales charge differential, if any, will be applied.
Class A shares of any fund may be exchanged without a sales
charge for shares of the funds that are offered without a
sales charge. Class A shares of any fund purchased without
a sales charge may be exchanged for shares sold with a sales
charge, and the appropriate sales charge differential will
be applied.
B. Class A shares of any fund acquired by a previous exchange
of shares purchased with a sales charge may be exchanged for
Class A shares of any of the other funds, and the sales
charge differential, if any, will be applied.
C. Class B shares of any fund may be exchanged without a sales
charge. Class B shares of the Fund exchanged for Class B
shares of another fund will be subject to the higher
applicable CDSC of the two funds and, for purposes of
calculating CDSC rates and conversion periods, will be
deemed to have been held since the date the shares being
exchanged were deemed to be purchased.
Dealers other than Smith Barney must notify the Transfer Agent of the
investor's prior ownership of Class A shares of Smith Barney High Income
Fund and the account number in order to accomplish an exchange of shares
of Smith Barney High Income Fund under paragraph B above.
The exchange privilege enables shareholders to acquire shares of the
same Class in a fund with different investment objectives when they
believe that a shift between funds is an appropriate investment
decision. This privilege is available to shareholders residing in any
state in which the fund shares being acquired may legally be sold.
Prior to any exchange, the shareholder should obtain and review a copy
of the current prospectus of each fund into which an exchange is being
considered. Prospectuses may be obtained from a Smith Barney Financial
Consultant.
Upon receipt of proper instructions and all necessary supporting
documents, shares submitted for exchange are redeemed at the then-
current net asset value and, subject to any applicable CDSC, the
proceeds are immediately invested, at a price as described above, in
shares of the fund being acquired. Smith Barney reserves the right to
reject any exchange request. The exchange privilege may be modified or
terminated at any time after written notice to shareholders.
PERFORMANCE DATA
From time to time, the Fund may quote total return of a Class in
advertisements or in reports and other communications to shareholders.
The Fund may include comparative performance information in advertising
or marketing the Fund's shares. Such performance information may
include the following industry and financial publications: Barron's,
Business Week, CDA Investment Technologies, Inc., Changing Times,
Forbes, Fortune, Institutional Investor, Investors Daily, Money,
Morningstar Mutual Fund Values, The New York Times, USA Today and The
Wall Street Journal. To the extent any advertisement or sales literature
of the Fund describes the expenses or performance of any Class it will
also disclose such information for the other Classes.
Average Annual Total Return
"Average annual total return" figures are computed according to a
formula prescribed by the SEC. The formula can be expressed as follows:
P(1 + T)n = ERV
Where P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical $1,000
investment
made at the beginning of a 1-, 5- or 10-year
period at the end
of the 1-, 5- or 10-year period (or fractional
portion thereof),
assuming reinvestment of all dividends and
distributions.
Class A's average annual total return was as follows for the periods
indicated:
13.26% for the one-year period beginning on January 1, 1996 through
December 31, 1996
10.80% per annum during the five-year period beginning on January 1,
1992 through December 31, 1996
12.77% per annum during the ten-year period beginning on January 1, 1987
through December 31, 1996
The average annual total return figures assume that the maximum 5.00%
sales charge has been deducted from the investment at the time of
purchase. If the maximum sales charge had not been deducted, Class A's
average annual total return for those same periods would have been
19.25%, 11.94% and 13.34%, respectively.
Class B's average annual total return was as follows for the periods
indicated:
13.29% for the one-year period beginning on January 1, 1996 through
December 31, 1996
12.77% for the period from inception (November 6, 1992) through December
31, 1996
The average annual total return figures assume that the maximum
applicable CDSC has been deducted from the investment at the time of
redemption. If the maximum CDSC had not been deducted, Class B's
average annual total return for those same periods would have been
28.29% and 12.93%, respectively.
Class C's (formerly Class D's) average annual total return was as
follows for the periods indicated:
17.34% for the one-year period beginning on January 1, 1996 through
December 31,1996
12.02% for the period from inception (February 4, 1993) through December
31,1996
The average annual total return figures assume that the maximum
applicable CDSC has been deducted from the investment at the time of
redemption. If the maximum CDSC had not been deducted, Class C's
average annual total return for those same periods would have been
18.34% and 12.02%, respectively.
Class Y's average annual total return was as follows for the period
indicated:
17.65% for the period from inception (January 30, 1996) through December
31,1996
Class Y shares do not incur sales charges nor CDSCs.
Class Z's average annual total return was as follows for the periods
indicated:
19.66% for the one-year period beginning on January 1, 1996 through
December 31,1996
14.12% for the period from inception (November 6, 1992) through December
31, 1996
Class Z shares do not incur sales charges nor CDSCs.
Aggregate Total Return
"Aggregate total return" figures represent the cumulative change in the
value of an investment in the Class for the specified period and are
computed by the following formula:
ERV - P
P
Where: P = a hypothetical initial payment of $10,000
ERV = Ending Redeemable Value of a hypothetical
$10,000 investment
made at the beginning of a 1-, 5- or 10-year
period at the end
of the 1-, 5- or 10-year period (or fractional
portion thereof),
assuming reinvestment of all dividends and
distributions.
Class A's aggregate total return was as follows for the periods
indicated:
13.26% for the one-year period beginning on January 1, 1996 through
December 31, 1996
67.00% for the five-year period beginning on January 1, 1992 through
December 31, 1996
232.54% for the ten-year period beginning on January 1, 1987 through
December 31, 1996
These aggregate total return figures assume the maximum 5.00% sales
charge has been deducted from the investment at the time of purchase. If
the maximum sales charge had not been deducted, Class A's aggregate
total return for those same periods would have been 19.25%, 75.79% and
249.82%, respectively.
Class B's aggregate total return was as follows for the periods
indicated:
13.29% for the one-year period beginning on January 1, 1996 through
December 31, 1996
64.72% for the period from inception (November 6, 1992) through December
31, 1996.
These aggregate total return figures assume that the maximum applicable
CDSC has been deducted from the investment at the time of redemption.
If the maximum applicable CDSC had not been deducted, Class B's
aggregate total return for those same periods would have been 18.29% and
65.72%, respectively.
Class C's aggregate total return was as follows for the periods
indicated:
17.34% for the one-year period beginning on January 1, 1996 through
December 31, 1996
55.80% for the period from inception (February 4, 1993) through December
31, 1996
Class Y's average annual total return was as follows for the period
indicated:
17.65% for the period from inception (January 30, 1996) through December
31,1996
Class Y shares do not incur sales charges nor CDSCs.
Class Z's average annual total return was as follows for the periods
indicated:
19.66% for the one-year period beginning on January 1, 1996 through
December 31,1996
73.09% for the period from inception (November 6, 1992) through December
31, 1996
Class Z shares do not incur sales charges nor CDSCs.
These aggregate total return figures assume that the maximum applicable
CDSC has been deducted from the investment at the time of redemption.
If the maximum CDSC had not been deducted, Class C's aggregate total
return for those same periods would have been 18.34% and 55.80%,
respectively.
Performance will vary from time to time depending on market conditions,
the composition of the Fund's portfolio, operating expenses and the
expenses exclusively attributable to the Class. Consequently, any given
performance quotation should not be considered representative of the
Class' performance for any specified period in the future. Because
performance will vary, it may not provide a basis for comparing an
investment in the Class with certain bank deposits or other investments
that pay a fixed yield for a stated period of time. Investors comparing
the Class' performance with that of other mutual funds should give
consideration to the quality and maturity of the respective investment
companies' portfolio securities.
It is important to note that the total return figures set forth above
are based on historical earnings and are not intended to indicate future
performance.
TAXES
The following is a summary of certain Federal income tax considerations
that may affect the Fund and its shareholders. The summary is not
intended as a substitute for individual tax advice and investors are
urged to consult their own tax advisors as to the tax consequences of an
investment in the Fund.
The Fund has qualified and intends to continue to qualify each year as a
regulated investment company under the Code. To so qualify, the Fund
must, among other things, derive less than 30% of its gross income in
each taxable year from the sale or disposition of stocks, securities,
and certain financial instruments held for less than three months. This
requirement may limit the extent to which the Fund is able to sell
stocks, securities or financial instruments held for less than three
months. If the Fund (a) qualifies as a regulated investment company and
(b) distributes to its shareholders at least 90% of its net investment
income (including, for this purpose, its net realized short-term capital
gains), the Fund will not be liable for Federal income taxes to the
extent that its net investment income and its net realized long- and
short-term capital gains, if any, are distributed to its shareholders.
Gains or losses on the sales of stock or securities by the Fund
generally will be long-term capital gains or losses if the Fund has held
the stock or securities for more than one year. Gains or losses on
sales of stock or securities held for not more than one year generally
will be short-term capital gains or losses.
Any net long-term capital gains realized by the Fund will be distributed
annually as described in the Prospectus. Such distributions ("capital
gain dividends") will be taxable to shareholders as long-term capital
gains, regardless of how long a shareholder has held Fund shares, and
will be designated as capital gain dividends in a written notice mailed
by the Fund to shareholders after the close of the Fund's prior taxable
year. If a shareholder receives a capital gain dividend with respect to
any share and if the share has been held by the shareholder for six
months or less, then any loss on the sale or exchange of such share will
be treated as a long-term capital loss to the extent of the capital gain
dividend.
The portion of the dividends received from the Fund that qualifies for
the dividends-received deduction for corporations will be reduced to the
extent that the Fund holds dividend-paying stock for less than 46 days
(91 for certain preferred stocks). The Fund's holding period will not
include any period during which the Fund has reduced its risk of loss
from holding the stock by purchasing an option to sell or entering into
a short sale of substantially identical stock or securities convertible
into the stock. The holding period for stock may also be reduced if the
Fund diminishes its risk of loss by holding one or more other positions
with respect to substantially similar or related properties. Dividends-
received deductions will be allowed only with respect to shares that a
corporate shareholder has held for at least 46 days within the meaning
of the same holding period rules applicable to the Fund.
If the Fund is the holder of record of any stock on the record date for
any dividends payable with respect to such stock, such dividends shall
be included in the Fund's gross income as of the later of (a) the date
that such stock became ex-dividend with respect to such dividends (that
is, the date on which a buyer of the stock would not be entitled to
receive the declared but unpaid, dividends) or (b) the date that the
Fund acquired such stock. Accordingly, in order to satisfy its income
distribution requirements, the Fund may be required to pay dividends
based on anticipated earnings and shareholders may receive dividends in
an earlier year than would otherwise be the case.
If a shareholder incurs a sales charge in acquiring shares of the Fund,
disposes of those shares within 90 days and then acquires shares in a
mutual fund for which the otherwise applicable sales charge is reduced
by reason of a reinvestment right (that is exchange privilege), the
original sales charge will not be taken into account in computing
gain/loss on the original shares to the extent the subsequent sales
charge is reduced. Instead, it will he added to the tax basis in the
newly acquired shares. Furthermore, the same rule also applies to a
disposition of the newly acquired or redeemed shares made within 90 days
of the second acquisition. This provision prevents a shareholder from
immediately deducting the sales charge by shifting his or her investment
in a family of mutual funds.
Investors considering buying shares of the Fund on or just prior to a
record date for a taxable dividend or capital gain distribution should
be aware that, regardless of whether the price of the Fund shares to be
purchased reflects the amount of the forthcoming dividend or
distribution payment, any such payment will be a taxable dividend or
distribution payment.
If a shareholder fails to furnish a correct taxpayer identification
number, fails fully to report dividend and interest income, or fails to
certify that he or she has provided a correct taxpayer identification
number and that he or she is not subject to "backup withholding," then
the shareholder may be subject to a 31% backup withholding tax with
respect to (a) any taxable dividends and distributions and (b) the
proceeds of any redemptions of Fund shares. An individual's taxpayer
identification number is his or her social security number. The backup
withholding tax is not an additional tax and may be credited against a
shareholder's regular Federal income tax liability.
The foregoing is only a summary of certain tax considerations generally
affecting the Fund and its shareholders and is not intended as a
substitute for careful tax planning. Shareholders are urged to consult
their tax advisors with specific reference to their own tax situations,
including their state and local tax liabilities.
ADDITIONAL INFORMATION
The Fund was incorporated on September 2, 1969 under the name The
Shearson Appreciation Fund, Inc. On October 28, 1987, November 5, 1995,
July 30, 1993 and October 14, 1994, the Fund changed its name to
Shearson Lehman Appreciation Fund Inc., Shearson Lehman Brothers
Appreciation Fund Inc., Smith Barney Shearson Appreciation Fund Inc. and
Smith Barney Appreciation Fund Inc., respectively.
PNC, located at 17th and Chestnut Streets, Philadelphia, Pennsylvania
19103, serves as the custodian of the Fund. Under its agreement with
the Fund, PNC holds the Fund's portfolio securities and keeps all
necessary accounts and records. For its services, PNC receives a
monthly fee based upon the month-end market value of securities held in
custody and also receives securities transaction charges. The assets of
the Fund are held under bank custodianship in compliance with the 1940
Act.
First Data Investor Services Group, Inc., located at Exchange Place,
Boston, Massachusetts 02109, serves as the Fund's transfer agent. Under
the transfer agency agreement, the Transfer Agent maintains the
shareholder account records for the Fund, handles certain communications
between shareholders and the Fund and distributes dividends and
distributions payable by the Fund. For these services, the Transfer
Agent receives a monthly fee computed on the basis of the number of
shareholder accounts it maintains for the Fund during the month and is
reimbursed for out-of-pocket expenses.
FINANCIAL STATEMENTS
The Fund's Annual Report for the fiscal year ended December 31, 1996 is
incorporated herein by reference in its entirety.
Smith Barney
Appreciation
Fund Inc.
Statement of
Additional Information
April 29, 1997
Amended as of
March 20, 1998
Smith Barney
Appreciation Fund Inc.
388 Greenwich Street
New York, New York 10013
29
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