<PAGE>
Congratulations
Hersh Cohen on Your
20th Anniversary
of Managing the Appreciation Fund!
[PHOTO]
[GRAPHIC]
Smith Barney
Appreciation
Fund Inc.
-----------------
[GRAPHIC] ANNUAL REPORT
-----------------
December 31, 1998
Smith Barney Mutual Funds
[LOGO] Investing for your future
Every day(R).
<PAGE>
Smith Barney
Appreciation Fund Inc.
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The Smith Barney Appreciation Fund seeks long-term capital appreciation
primarily through investment in equity securities.
Smith Barney Appreciation Fund Inc.
Average Annual Total Returns
December 31, 1998
Without Sales Charges(1)
-------------------------------------------------
Class A Class B Class L(2)
================================================================================
One-Year 20.45% 19.52% 19.52%
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Five-Year 18.40 17.48 17.52
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Ten-Year 15.93 N/A N/A
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Since Inception+ 12.83 15.92 15.42
================================================================================
With Sales Charges(3)
-------------------------------------------------
Class A Class B Class L(2)
================================================================================
One-Year 14.45% 14.52% 17.32%
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Five-Year 17.19 17.38 17.29
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Ten-Year 15.34 N/A N/A
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Since Inception+ 12.63 15.92 15.23
================================================================================
(1) 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 and L shares or the applicable
contingent deferred sales charges ("CDSC") with respect to Class B and L
shares.
(2) On June 12, 1998, Class C shares were renamed Class L shares.
(3) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A and L shares reflect the
deduction of the maximum sales charge of 5.00% and 1.00%, respectively;
and Class B shares reflect the deduction of a 5.00% CDSC, which applies if
shares are redeemed within one year from initial purchase. Thereafter,
this CDSC declines by 1.00% per year until no CDSC is incurred. Class L
shares also reflect the deduction of a 1.00% CDSC, which applies if shares
are redeemed within the first year of purchase.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost.
+ Inception dates for Class A, B and L shares are March 10, 1970, November
6, 1992 and February 4, 1993, respectively.
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CELEBRATING 20 YEARS!
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In January 1999, Portfolio Manager Hersh Cohen celebrated his 20th anniversary
successfully managing the Appreciation Fund. In fact, the Fund has only been
down twice in the last ten years--in 1990 by 0.27% and in 1994 by 0.77%. Over
the years, the Appreciation Fund has grown to serve more than 271,000
shareholders and has $4.9 billion in assets under management as of December 31,
1998. In volatile markets, shareholders appreciate the Appreciation Fund and are
comfortable with Hersh's prudent long-term, risk-average approach to managing
money.
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NASDAQ SYMBOL
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Class A SHAPX
Class B SAPBX
Class L SAPCX
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WHAT'S INSIDE
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Shareholder Letter ....................................................... 1
An Interview with Portfolio Manager
Harry "Hersh" Cohen ...................................................... 5
Historical Performance ................................................... 7
Schedule of Investments .................................................. 12
Statement of Assets and Liabilities ...................................... 16
Statement of Operations .................................................. 17
Statements of Changes in Net Assets ...................................... 18
Notes to Financial Statements ............................................ 19
Financial Highlights ..................................................... 24
Tax Information .......................................................... 27
Independent Auditors' Report ............................................. 28
Additional Shareholder Information ....................................... 29
<PAGE>
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Shareholder Letter
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[PHOTO] [PHOTO]
HEATH B. HARRY "HERSH"
MCLENDON D. COHEN
Chairman Vice President and
Investment Officer
Dear Shareholder:
We are pleased to present this special annual report for the Smith Barney
Appreciation Fund for the year ended December 31, 1998. 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. In addition, an interview with Portfolio Manager Hersh Cohen appears on
page five.
Celebrating 20 Years of the Fund's Strong
Track Record in Volatile Markets!
In January 1999, Portfolio Manager Hersh Cohen celebrated his 20th anniversary
successfully managing the Appreciation Fund. In fact, the Fund has only been
down twice in the last ten years--in 1990 by 0.27% and in 1994 by 0.77%. The
Appreciation Fund has grown to serve more than 271,000 shareholders and has $4.9
billion in assets under management as of December 31, 1998. In volatile markets,
shareholders appreciate the Appreciation Fund and are comfortable with Hersh's
prudent long-term, risk-averse approach to managing money.
A Classic Investor Series Fund
The Appreciation Fund is part of the Classic Investor Series of Smith Barney
Mutual Funds. The Classic Investor Series funds are mutual funds whose
investment decisions are determined by experienced portfolio managers, based on
each fund's investment objectives and guidelines. Funds in the Smith Barney
Classic Investor Series invest across asset classes and sectors, utilizing a
range of strategies in order to achieve their objectives.
Performance Update
For the year ended December 31, 1998, the Fund's Class A shares returned 20.45%
without sales charges. While that return was well above the stock market's
long-term trend, the Fund lagged the S&P 500's total return of 28.72% by a few
percentage points. Additional performance information about the Fund's other
share classes can be found on pages seven through nine.
The chart on pages ten and eleven showing the growth of a $10,000 investment in
the Fund's Class A shares versus the S&P 500 indicates that the Appreciation
Fund has delivered consistent long-term growth during the 20 years Portfolio
Manager Hersh Cohen has been at the helm.
Market and Economic Overview
Move over baseball! The stock market has taken over as the national pastime. All
across the country, in virtually every walk of life, the stock market has become
the main topic of conversation and even an obsession with millions of people.
The root causes are many, ranging from several years of economic expansion with
accompanying strong corporate earnings growth, to the proliferation of
self-directed retirement plans, to the phenomenal speed of information that can
be obtained through the Internet. What began a few years ago as a growing
recognition by people that their retirement savings were inadequate has turned
into something much more and has taken on a life of its own.
Regardless of the news or economic background, most stocks continue to move
relentlessly higher, led by a belief in technology as a new religion. And why
not?
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Smith Barney Appreciation Fund Inc. 1
<PAGE>
Every market decline in recent memory has quickly given way to dramatic moves to
new and higher ground. Even Federal Reserve Board Chairman Alan Greenspan, after
warning about the unsustainability of stock prices that were out of line with
earnings, blinked when a major hedge fund debacle seemed to threaten the
financial markets. To a greater degree than ever before, the rewards in this
stock market are going to investors who take the biggest risks, while investors
exercising caution suffer from missed opportunities, or even worse, own lagging
stocks.
As we have indicated for two decades, we attempt to walk a fine line in the
Appreciation Fund between taking on the inherent risk of owning stocks to
achieve capital gains and the desire to avoid debilitating losses during periods
of market weakness. The year 1998 was a good example. We posted a significant
return for Class A shares of 20.45% for the year, and we were in very minor
negative territory only two days during October's slide. We did a good bit of
buying during the September to October decline, while remaining more cautious
than most managers coming out of that break, which definitely cost us some
upside during November and December.
In a year as volatile as 1998, it was inevitable that more changes than usual
were made in the Fund's portfolio. In many instances, our changes involved
profit taking in portions of several pharmaceutical stocks that had registered
enormous gains, and in our view, had become pricey. We also pruned back
positions in such big movers as Time Warner, Gannett, regional Bell operating
companies, Unilever, Wells Fargo, Procter and Gamble and Texas Instruments.
In a year of underperformance for energy, we were fortunate to own two of the
largest takeovers targets of the year, Amoco and Mobil. Amoco was disposed of on
its price rise into its merger. Mobil will be merged into Exxon, another of our
large positions. We also sold a few disappointing stocks, such as Olin and St.
Paul Companies. Honeywell, a long-time holding in the Fund, was reluctantly
parted with, as orders finally showed signs of slowing.
As a result of its being taken over, General Reinsurance became Berkshire
Hathaway, and is now the Appreciation Fund's largest position. Because of Warren
Buffett's outstanding management, it is a position with which we are very
comfortable. During the Fund's fiscal year, material holdings were established
in Bank of New York, MediaOne and Federal Express. Probably our biggest
disappointment during the reporting period was Allstate, our third-largest
holding. We still believe that the company is doing everything right, and that
the stock is very inexpensive. Investors seem concerned about Allstate's revenue
growth, but the company has the resources not only to grow in a competitive
environment, but also to keep costs low. We did add to our Intel and Microsoft
holdings during the year, and we started a small position in America Online,
because of its potential for a bright future.
The U.S. economy has some enormous plusses working for it. Employment is strong,
and inflation, as is now widely appreciated, is non-existent. The computer and
telecommunications boom is helping create jobs to replace those lost in the
various mega-mergers that have been announced with greater frequency. Falling
oil prices have served nearly as well as a tax cut for most people, stimulating
more spending and helping to offset weak conditions in the beaten down oil
industry. The Federal Reserve Board's cuts in short-term interest rates, coupled
with economic weakness in Asia and Latin America, have kept our long-term
interest rates low, giving a boost to new housing starts and, in turn, helping
to create vigorous sales of existing homes. Consumers are confident and
increasing their borrowing to sustain their spending.
The U.S. stock market has benefited from these positive economic conditions.
Yet, many investors have been willing to pay record high prices for stocks while
the overall corporate earnings outlook deteriorates. Stocks of companies with
the promise of higher profits are being priced as if those earnings are assured
indefinitely.
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2 20th Anniversary Annual Report to Shareholders
<PAGE>
We have not seen such valuations accorded good companies since 1972, when 50 or
so stocks commanded price-to-earnings ratios in excess of 50. These valuations
leave no room for disappointment. The 20% sell-off in August and September seems
to have become a distant memory for investors, even though it demonstrated how
quickly problems can arise. Prosperity in the U.S. cannot continue unabated with
so many other parts of the world suffering the effects of poor government
policies, shrinking commodity prices and contracting economies. We already have
seen the negative impact on earnings of many of our biggest companies that rely
on foreign revenues for half of their profits.
It is very hard to find compelling values in a market as overvalued as this one
has been. Volatility seems likely to continue unabated, fueled by liquidity on
the one hand and extreme valuations on the other. We will continue to exercise
caution unless we see more attractive prices.
Thank you for investing in the Smith Barney Appreciation Fund. We encourage you
to visit our Web site at www.smithbarney.com. We look forward to continuing to
help you pursue your financial goals in the new century ahead.
Sincerely,
/s/ Heath B. McLendon /s/ Harry Cohen
Heath B. McLendon Harry "Hersh" D. Cohen
Chairman Vice President and
Investment Officer
January 8, 1999
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Top Ten Holdings* As of December 31, 1998
- --------------------------------------------------------------------------------
1. Berkshire Hathaway Inc. Class A shares 4.8%
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2. General Electric Co. 3.3
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3. Allstate Corp. 2.8
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4. Microsoft Corp. 2.4
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5. International Business Machines Corp. 2.4
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6. Intel Corp. 2.2
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7. Bank of New York Co., Inc. 2.1
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8. Wal-Mart Stores, Inc. 2.0
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9. Fannie Mae 2.0
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10. Bristol-Myers & Squibb Co. 2.0
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* As a percentage of common stocks.
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Smith Barney Appreciation Fund Inc. 3
<PAGE>
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Harry "Hersh" Cohen [PHOTO]
In His Own Words...
On His Investment Strategy
"The core of the stock portion of the Appreciation Fund consists of high-quality
growth stocks with dominant market portions, global franchises, seasoned and
respected management teams and excellent balance sheets. Around this core, we
continue to look for special situations such as a restructuring candidate or
undervalued company that is more dependent on economic cycles."
"The Appreciation Fund tends to capture a good amount of any upside in the
market, but also cushions any risk to the downside."
"We believe that the stock market reacts to three factors: earnings, interest
rates and psychology."
On Market Volatility
"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. When times are tough
and there is a lot of turbulence, we have tended to do better than many other
managers."
"We will continue to try and provide reasonable returns by owning the best
companies we can find, while building a cushion against the market volatility
that has lately become so prevalent."
On How He Buys Stocks
"When you buy stocks properly, it really makes your life easier. If you don't
pay too much for a stock, it is less vulnerable to negative news."
"We're very careful about how we buy stocks. We prefer solid companies on sound
financial footing but with an interesting story and unequal value in its share
price."
On Successful Stock Investing
"While we strongly believe that Wall Street is a great place to be, as veteran
market observers we like to remind investors that there will be potholes along
the way. In our view, the key to successful stock investing is to stay
diversified, remain patient and maintain a long-term perspective."
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4 20th Anniversary Annual Report to Shareholders
<PAGE>
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Q&A
- --------------------------------------------------------------------------------
An Interview with Hersh Cohen
We recently had the pleasure of talking with Hersh Cohen on his 20th Anniversary
of managing the Smith Barney Appreciation Fund where he looked back on some
memorable market events and offered some advice for first-time stock investors
in volatile markets. Mr. Cohen has been the manager of the Smith Barney
Appreciation Fund since January 1979 and has been with Salomon Smith Barney
since 1969. He received a B.A. degree from Case Western University and a Ph.D.
in Psychology from Tufts University.
Hersh, how would you describe the Appreciation Fund's investment approach?
HERSH: Our management philosophy is that consistency of results is paramount.
We're looking to achieve positive returns if at all possible, every year, for
our shareholders. In our opinion, the worst thing a manager can do is lose
money.
First, we like to own great companies that make products that people want or
need. And our preference is usually for companies that do not have to reinvent
demand every quarter. Moreover, we like to buy great companies where they have
an edge or where we can get them at a fair price. Other qualities we look for in
great companies is outstanding management, superior balance sheets and whether
they are dominant players in their industry.
Second, we look for companies where there are undervalued assets for example, a
company with hidden real estate values. In the 1980s, we identified undervalued
entertainment companies with large film libraries that were not recognized by
the marketplace.
Another aspect of our management philosophy is that we constantly adjust our
positions in individual holdings based on our ongoing analysis of a company's
situation. Moreover, we change the Fund's overall cash position based on whether
we believe market conditions warrant a more defensive posture.
Recently growth stocks have briskly outperformed value stocks. Has this shift in
investor sentiment caused any changes to your investment style?
HERSH: We don't think there is a distinction between growth and value styles. We
think the actual distinction is growth versus cyclical. Because to us, the best
values are growth stocks when you can buy them at fair prices and when they
represent great values. A consistent investment style is extremely important for
fund investors. If we started changing our style, we would wind up chasing our
tail.
What are some of your favorite stock stories over the last 20 years?
HERSH: First off, you need to distinguish between the short- and long-term. On a
long-term basis, our favorite companies tend to be organizations that are
dominant in their industry with a constant demand for their products. Consider
companies in the pharmaceutical industry that are making products that change
people's lives for the better by curing diseases. These are compelling stories
because these companies are plowing a lot of money back into research and
development and introducing great new products.
Of course, you have to take a close look at technology, another industry that
has totally changed people's lives. And we think those companies are great and
very valid long-term stories. Financial services companies that serve the
financial needs of people have also been attractive long-term stories.
With respect to a short-term story, we are excited about our biggest position in
the Appreciation Fund now-- Berkshire Hathaway. We owned General Reinsurance
before its merger into Berkshire-Hathaway (which is run by Warren Buffet).
Warren Buffet is a great manager with a proven track record over the years.
How has the mutual fund industry changed in the last 20 years?
HERSH: The mutual fund industry has changed dramatically. When I first entered
the business in 1969, there were maybe 400 equity mutual funds. By 1980 there
were maybe 300 equity mutual funds because investors lost interest in stocks in
the 1970s due to underperformance.
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Smith Barney Appreciation Fund Inc. 5
<PAGE>
- --------------------------------------------------------------------------------
Q&A
- --------------------------------------------------------------------------------
Today, there are literally thousands of equity mutual funds. And 20 years ago, I
think people who invested in funds were truly thinking about long-term results
and about making money each year. Today's investor has a much more short-term
orientation. That's because it's much easier now to trade mutual funds and get
in and get out. And people can now change their allocation and their 401(k)
almost on a daily basis. So there has been much more short-term jumping around
by many investors. I'm not sure this trend is in the best long-term interests of
investors.
Moreover, mutual fund managers face enormous pressures to get money and put it
to work. So the old contrarian ideal of safeguarding principal and prudent
avoidance of potential losses that was very popular in the 1970s has really gone
by the boards. To me, that is not true investing.
What is the most memorable market event you have experienced in your career?
HERSH: One of the most memorable and the most influential market events was the
big market decline that began in January of 1973 and ended in December of 1974.
That decline took 50% off the popular averages and 80% to 90% off the typical
stock. That was something that clearly had a major influence on my thinking and
my approach to stock investing. But we never lost faith in stocks and we were
well positioned when the rally in stocks began after 1974.
Hersh, last year was a difficult time for many investors because of market
volatility. How do you manage money in the kind of challenging market we have
recently experienced?
HERSH: We like to take money off the table when the market is booming. And you
certainly had a market surging in the spring and early summer of 1998. And then
we like to put money to work when things are down. This is the only business
where the reflexive tendency of people is to buy more after prices are up and
sell more when prices are down. Which is, of course, exactly the wrong thing to
do. You want to put more money to work when prices are low. And put less money
to work when prices are high. That's what we try and do in the Appreciation
Fund.
We did that last year and it worked reasonably well. You need to be true to your
principles. And if you think things are inexpensive and yet the market is
getting killed around you, you just hold your nose and dive in. Conversely, when
things are bubbling to the upside, you have to be willing to take a little bit
off the table.
How has the average investor's attitude toward investing and saving changed in
the last 20 years?
HERSH: People clearly woke up a few years ago and said, "We're not saving enough
for retirement." That's the biggest thing. People always thought they would be
taken care of by defined benefit pension plans in combination with Social
Security. And that was a big change. In the 1940s coming out of the Depression,
people really thought they had to save. And so the savings rate in the U.S. at
that time was very high and people started putting money into stocks in the
1950s. And they really were saving. And we had this grand bull market in stocks
in the 1950s and 1960s. The high inflation in the 1970s pushed people into
higher tax brackets and the savings rate was really impaired and dropped to
practically zero.
Hersh, any advice for first-time stock investors?
HERSH: Number one: put some money to work. Number two: have patience and
maintain a long-term perspective. Number three, if you are not going to put in
the time and effort to do it yourself, entrust it to a professional whose
investment philosophy is consistent and with whom you can identify.
Hersh, thanks for spending some time with us and congratulations on your 20th
Anniversary with the Smith Barney Appreciation Fund.
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6 20th Anniversary Annual Report to Shareholders
<PAGE>
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Historical Performance -- Class A Shares
- --------------------------------------------------------------------------------
Net Asset Value
---------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================
12/30/98 $13.92 $15.31 $0.18 $1.23 20.45%
- --------------------------------------------------------------------------------
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 $2.14 $7.01
================================================================================
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Historical Performance -- Class B Shares
- --------------------------------------------------------------------------------
Net Asset Value
---------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================
12/30/98 $13.88 $15.26 $0.06 $1.23 19.52%
- --------------------------------------------------------------------------------
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 $0.66 $6.51
================================================================================
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Historical Performance -- Class L Shares
- --------------------------------------------------------------------------------
Net Asset Value
---------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================
12/30/98 $13.88 $15.26 $0.06 $1.23 19.52%
- --------------------------------------------------------------------------------
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 $0.52 $6.42
================================================================================
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Smith Barney Appreciation Fund Inc. 7
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance -- Class Y Shares
- --------------------------------------------------------------------------------
Net Asset Value
---------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================
12/31/98 $13.93 $15.28 $0.29 $1.23 20.93%
- --------------------------------------------------------------------------------
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 $0.76 $4.46
================================================================================
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Historical Performance -- Class Z Shares
- --------------------------------------------------------------------------------
Net Asset Value
---------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================
12/31/98 $13.94 $15.29 $0.29 $1.23 20.91%
- --------------------------------------------------------------------------------
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 $1.57 $6.51
================================================================================
It is the Fund's policy to distribute dividends and capital gains, if any,
annually.
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Without Sales Charges(1)
---------------------------------------------------------
Class A Class B Class L Class Y Class Z
===========================================================================================
<S> <C> <C> <C> <C> <C>
Year Ended 12/31/98 20.45% 19.52% 19.52% 20.93% 20.91%
- -------------------------------------------------------------------------------------------
Five Years Ended 12/31/98 18.40 17.48 17.52 N/A 18.79
- -------------------------------------------------------------------------------------------
Ten Years Ended 12/31/98 15.93 N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------
Inception* through 12/31/98 12.83 15.92 15.42 22.35 17.18
===========================================================================================
</TABLE>
<TABLE>
<CAPTION>
With Sales Charges(2)
---------------------------------------------------------
Class A Class B Class L Class Y Class Z
===========================================================================================
<S> <C> <C> <C> <C> <C>
Year Ended 12/31/98 14.45% 14.52% 17.32% 20.93% 20.91%
- -------------------------------------------------------------------------------------------
Five Years Ended 12/31/98 17.19 17.38 17.29 N/A 18.79
- -------------------------------------------------------------------------------------------
Ten Years Ended 12/31/98 15.34 N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------
Inception* through 12/31/98 12.63 15.92 15.23 22.35 17.18
===========================================================================================
</TABLE>
- --------------------------------------------------------------------------------
8 20th Anniversary Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
================================================================================
Class A (12/31/88 through 12/31/98) 338.58%
- --------------------------------------------------------------------------------
Class A (Inception* through 12/31/98) 3,143.26
- --------------------------------------------------------------------------------
Class B (Inception* through 12/31/98) 148.19
- --------------------------------------------------------------------------------
Class L (Inception* through 12/31/98) 133.33
- --------------------------------------------------------------------------------
Class Y (Inception* through 12/31/98) 80.26
- --------------------------------------------------------------------------------
Class Z (Inception* through 12/31/98) 165.20
================================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A and L shares or the
applicable contingent deferred sales charges ("CDSC") with respect to
Class B and L shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A and Class L shares reflect
the deduction of the maximum initial sales charge of 5.00% and 1.00%,
respectively; Class B shares reflect the deduction of a 5.00% CDSC, which
applies if shares are redeemed within one year from purchase and declines
thereafter by 1.00% per year until no CDSC is incurred. Class L shares
also reflect the deduction of a 1.00% CDSC, which applies if shares are
redeemed within the first year of purchase.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
* The inception dates for Class A, B, L, 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. 9
<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, 1998
January 1979:
Hersh Cohen becomes the
Portfolio Manager of the [PHOTO]
Smith Barney
Appreciation Fund Inc.
[GRAPHIC]
<TABLE>
<CAPTION>
Smith Barney
Appreciation
Date Fund Inc. S&P 500 Index
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
3/10/70 9,503 10,000
- ----------------------------------------------------------------------------------------------------------
War in Cambodia escalates 6/70 8,233
12/70 10,995 10,629
- ----------------------------------------------------------------------------------------------------------
Freeze on wages and prices 6/71 11,678
NASDAQ introduced 12/71 12,840 12,148
- ----------------------------------------------------------------------------------------------------------
Watergate break-in 6/72 12,933
Nixon visits China 12/72 12,722 14,457
- ----------------------------------------------------------------------------------------------------------
OPEC oil embargo 6/73 12,956
12/73 9,164 12,333
- ----------------------------------------------------------------------------------------------------------
Nixon resigns as President 6/74 11,079
12/74 6,902 9,069
- ----------------------------------------------------------------------------------------------------------
U.S. involvement in Vietnam ends 6/75 12,864
12/75 8,196 12,445
- ----------------------------------------------------------------------------------------------------------
Bicentennial celebration 6/76 14,662
12/76 9,875 15,423
- ----------------------------------------------------------------------------------------------------------
U.S. energy crisis 6/77 14,747
12/77 9,519 14,320
- ----------------------------------------------------------------------------------------------------------
Genocide in Cambodia 6/78 14,772
Camp David accords 12/78 11,577 15,261
- ----------------------------------------------------------------------------------------------------------
Three Mile Island disaster 6/79 16,789
Iran hostage crisis begins 12/79 16,786 18,098
- ----------------------------------------------------------------------------------------------------------
Reagan elected President in landslide 6/80 19,693
12/80 22,781 23,980
- ----------------------------------------------------------------------------------------------------------
Assassination attempts on Reagan 6/81 23,752
and Pope. First space shuttle launch 12/81 12,722 22,800
- ----------------------------------------------------------------------------------------------------------
Worst U.S. recession in 40 years 6/82 21,015
12/82 28,710 27,712
- ----------------------------------------------------------------------------------------------------------
</TABLE>
* Hypothetical illustration of $10,000 invested in Class A shares on May 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, 1998. The Standard & Poor's 500 Stock
Index ("S&P 500") 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. Investors may not invest directly in an
index. The performance of the Portfolio's other classes may be greater or
less than the Class A shares' performance
- --------------------------------------------------------------------------------
10 20th Anniversary 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
(December 31, 1978 through December 31, 1998)
SB Appreciation Fund
(Class A Shares) S&P 500
17.82%** 17.75%
-----------------------------------------------------
[GRAPHIC]
<TABLE>
<CAPTION>
Smith Barney
Appreciation
Date Fund Inc. S&P 500 Index
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beirut bombing 6/83 33,872
12/83 35,309 33,964
- ----------------------------------------------------------------------------------------------------------
Iran/Iraq conflict 6/84 32,299
12/84 35,957 36,095
- ----------------------------------------------------------------------------------------------------------
U.S. becomes debtor nation 6/85 42,299
Gramm-Rudman Act 12/85 48,332 47,544
- ----------------------------------------------------------------------------------------------------------
Tax reform 6/86 57,448
Bombing of Libya 12/86 57,915 56,420
- ----------------------------------------------------------------------------------------------------------
Market correction 6/87 71,901
12/87 61,986 59,383
- ----------------------------------------------------------------------------------------------------------
RJR Nabisco buyout 6/88 66,925
12/88 70,270 69,220
- ----------------------------------------------------------------------------------------------------------
Collapse of high-yield bond market 6/89 80,656
Berlin Wall falls 12/89 91,035 91,117
- ----------------------------------------------------------------------------------------------------------
Iraq invasion of Kuwait 6/90 93,923
12/90 90,792 88,288
- ----------------------------------------------------------------------------------------------------------
U.S. recession 6/91 100,851
12/91 115,250 115,131
- ----------------------------------------------------------------------------------------------------------
Riots in Los Angeles 6/92 107,418
12/92 122,499 116,376
- ----------------------------------------------------------------------------------------------------------
World Trade Center terrorist bombing 6/93 122,032
Passage of NAFTA 12/93 132,462 128,073
- ----------------------------------------------------------------------------------------------------------
Orange County bankruptcy 6/94 123,744
12/94 131,442 129,758
- ----------------------------------------------------------------------------------------------------------
Dow rises above 4000 then 5000 6/95 155,956
12/95 169,895 178,460
- ----------------------------------------------------------------------------------------------------------
Dow rises above 6500 6/96 196,467
12/96 202,803 219,414
- ----------------------------------------------------------------------------------------------------------
Dow rises above 7000 6/97 264,614
12/97 255,872 292,610
- ----------------------------------------------------------------------------------------------------------
Hersh Cohen will celebrate 20 years as Portfolio Manager 6/98 288,707 344,460
of the Appreciation Fund in January 1999! 12/31/98 308,190 376,702
- ----------------------------------------------------------------------------------------------------------
</TABLE>
indicated on this 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. 11
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments December 31, 1998
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
COMMON STOCK -- 82.6%
Airlines -- 0.3%
200,000 AMR Corp.* $ 11,875,000
- --------------------------------------------------------------------------------
Auto Parts & Accessories -- 0.4%
400,000 Goodyear Tire & Rubber Co.+ 20,175,000
- --------------------------------------------------------------------------------
Automobile -- 2.0%
187,050 DaimlerChrysler A.G.* 17,968,491
300,000 Ford Motor Co. 17,606,250
850,000 General Motors Corp. 60,828,125
- --------------------------------------------------------------------------------
96,402,866
- --------------------------------------------------------------------------------
Banking -- 3.9%
2,100,000 Bank of New York Co., Inc. 84,525,000
400,000 Chase Manhattan Bank Corp. 27,225,000
250,000 First Virginia Banks, Inc.+ 11,750,000
350,000 National City Corp. 25,375,000
1,000,000 Wells Fargo & Co. 39,937,500
- --------------------------------------------------------------------------------
188,812,500
- --------------------------------------------------------------------------------
Beverage, Food & Tobacco -- 5.1%
550,000 BestFoods 29,287,500
1,300,000 Conagra, Inc.+ 40,950,000
400,000 H.J. Heinz Co.+ 22,650,000
160,500 McCormick & Co., Inc., Non-Voting Shares 5,426,906
900,000 McDonald's Corp.+ 68,962,500
1,775,000 Ralston Purina Group 57,465,625
250,000 Wm. Wrigley Jr., Co.+ 22,390,625
- --------------------------------------------------------------------------------
247,133,156
- --------------------------------------------------------------------------------
Broadcasting -- 1.6%
500,000 CBS Corp.* 16,375,000
500,000 Infinity Broadcasting Corp., Class A Shares*+ 13,687,500
600,000 Scandinavian Broadcasting Systems SA*+ 16,200,000
1,000,000 USA Networks Inc.* 33,125,000
- --------------------------------------------------------------------------------
79,387,500
- --------------------------------------------------------------------------------
Chemicals -- 2.8%
500,000 Dow Chemical Corp.+ 45,468,750
1,000,000 E.I. du Pont de Nemours & Co. 53,062,500
500,000 Hercules Inc.+ 13,687,500
271,100 Raychem Corp.+ 8,759,919
800,000 RPM Inc. 12,800,000
- --------------------------------------------------------------------------------
133,778,669
- --------------------------------------------------------------------------------
Consumer Products -- 4.8%
400,000 Eastman Kodak Co.+ 28,800,000
300,000 Gillette Co.+ 14,493,750
100,000 International Flavors & Fragrances Inc.+ 4,418,750
1,200,000 Kimberly-Clark Corp.+ 65,400,000
700,000 Newell Co.+ 28,875,000
430,000 Procter & Gamble Co.+ 39,264,375
250,000 Stanley Works 6,937,500
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
12 20th Anniversary Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) December 31, 1998
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Consumer Products -- 4.8% (continued)
550,000 Unilever NV $ 45,615,625
- --------------------------------------------------------------------------------
233,805,000
- --------------------------------------------------------------------------------
Diversified/Conglomerates -- 10.6%
1,050,000 Allied Signal Inc. 46,528,125
2,737 Berkshire Hathaway Inc., Class A Shares*+ 191,625,000
1,300,000 General Electric Co. 132,681,250
640,000 Host Marriott Services Corp.* 6,640,000
400,000 Illinois Tool Works Inc.+ 23,200,000
400,000 Minnesota Mining & Manufacturing Co. 28,450,000
600,500 PPG Industries, Inc. 34,979,125
700,000 Tyco International Ltd.+ 52,806,250
- --------------------------------------------------------------------------------
516,909,750
- --------------------------------------------------------------------------------
Electrical Equipment -- 1.3%
375,000 Emerson Electric Co.+ 23,460,937
450,000 Johnson Controls, Inc. 26,550,000
500,000 SLI, Inc.* 13,875,000
- --------------------------------------------------------------------------------
63,885,937
- --------------------------------------------------------------------------------
Entertainment & Leisure -- 2.7%
105,000 Dick Clark Productions, Inc.* 1,575,000
800,000 MediaOne Group Inc.* 37,600,000
400,000 Time-Warner, Inc.+ 24,825,000
400,000 Viacom Inc., Class B Shares* 29,600,000
1,300,000 Walt Disney Co.+ 39,000,000
- --------------------------------------------------------------------------------
132,600,000
- --------------------------------------------------------------------------------
Financial Services -- 4.6%
200,000 American Express Co. 20,450,000
300,000 Associated First Capital Corp. 12,712,500
100,000 Chapman Holdings Inc.* 500,000
1,100,000 Fannie Mae 81,400,000
300,000 H & R Block Inc. 13,500,000
1,600,000 Household International 63,400,000
200,000 Merrill Lynch & Co. 13,350,000
500,000 Washington Mutual, Inc. 19,093,750
- --------------------------------------------------------------------------------
224,406,250
- --------------------------------------------------------------------------------
Health Care/Drugs/Hospital Supplies -- 8.7%
1,550,000 Abbott Labs., Inc. 75,950,000
800,000 American Home Products Corp. 45,050,000
75,000 Amgen Inc.* 7,842,187
600,000 Bristol-Myers & Squibb Co. 80,287,500
500,000 Chiron Corp.* 13,093,750
300,000 Eli Lilly & Co. 26,662,500
750,000 Johnson & Johnson 62,906,250
450,000 Merck and Co., Inc.+ 66,459,375
153,800 Mettler-Toledo International Inc.* 4,316,013
300,000 Pfizer, Inc.+ 37,631,250
250,000 Sola International Inc.* 4,312,500
- --------------------------------------------------------------------------------
424,511,325
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Appreciation Fund Inc. 13
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) December 31, 1998
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Insurance -- 5.2%
2,900,000 Allstate Corp. $ 112,012,500
800,000 American International Group, Inc.+ 77,300,000
500,000 Chubb Corp.+ 32,437,500
395,000 CNA Financial Corp.* 15,898,750
500,000 Leucadia National Corp.+ 15,750,000
- --------------------------------------------------------------------------------
253,398,750
- --------------------------------------------------------------------------------
Office Equipment & Supplies -- 1.2%
500,000 Xerox Corp.+ 59,000,000
- --------------------------------------------------------------------------------
Oil & Gas/Service/Drilling -- 1.2%
300,000 Halliburton Co.+ 8,887,500
400,000 Nabors Industries, Inc.* 5,425,000
700,000 Schlumberger Ltd.+ 32,287,500
1,000,000 Union Pacific Resources Group, Inc. 9,062,500
200,000 Weatherford International Inc.* 3,875,000
- --------------------------------------------------------------------------------
59,537,500
- --------------------------------------------------------------------------------
Oil - International -- 3.5%
1,000,000 Exxon Corp. 73,125,000
600,000 Mobil Oil Corp. 52,275,000
350,000 Royal Dutch Petroleum Co., ADR 16,756,250
500,000 Texaco Inc.+ 26,437,500
- --------------------------------------------------------------------------------
168,593,750
- --------------------------------------------------------------------------------
Paper & Paper Products -- 0.4%
600,000 Mead Corp.+ 17,587,500
- --------------------------------------------------------------------------------
Publishing -- 1.8%
800,000 Gannett Co. 52,950,000
950,000 Meredith Corp.+ 35,981,250
- --------------------------------------------------------------------------------
88,931,250
- --------------------------------------------------------------------------------
Real Estate -- 0.5%
85,200 Forest City Enterprises, Inc. 2,236,500
930,000 The St. Joe Co. 21,796,875
- --------------------------------------------------------------------------------
24,033,375
- --------------------------------------------------------------------------------
Retail -- 3.9%
700,000 Costco Cos. Inc.*+ 50,531,250
900,000 The Home Depot, Inc.+ 55,068,750
1,000,000 Wal-Mart Stores, Inc.+ 81,437,500
- --------------------------------------------------------------------------------
187,037,500
- --------------------------------------------------------------------------------
Technology -- 11.1%
150,000 America Online, Inc.*+ 21,712,500
487,500 CISCO Systems Inc.*+ 45,246,094
900,000 First Data Corp.+ 28,518,750
400,000 Hewlett-Packard Co. 27,325,000
750,000 Intel Corp.+ 88,921,875
525,000 International Business Machines Corp. 96,993,750
650,000 Lucent Technologies Inc.+ 71,500,000
700,000 Microsoft Corp.*+ 97,081,250
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
14 20th Anniversary Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) December 31, 1998
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Technology -- 11.1% (continued)
500,000 Netscape Communications Corp.* $ 30,375,000
400,000 Texas Instruments, Inc.+ 34,225,000
- --------------------------------------------------------------------------------
541,899,219
- --------------------------------------------------------------------------------
Telephone/Communications -- 4.1%
400,000 American Telephone & Telegraph Corp.+ 30,100,000
950,000 Ameritech Corp. 60,206,250
400,000 Bell Atlantic Corp.+ 22,725,000
1,100,000 GTE Corp. 74,181,250
200,000 US West Inc. 12,925,000
- --------------------------------------------------------------------------------
200,137,500
- --------------------------------------------------------------------------------
Transportation -- 0.9%
300,000 FDX Corp.* 26,700,000
300,000 Florida East Coast Industries, Inc. 10,556,250
236,300 Wisconsin Central Transmission, Inc.*+ 4,061,406
- --------------------------------------------------------------------------------
41,317,656
- --------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost-- $2,344,596,250) 4,015,156,953
================================================================================
FACE
AMOUNT SECURITY VALUE
================================================================================
REPURCHASE AGREEMENTS -- 17.4%
$99,936,000 Chase Manhattan Inc., 4.500% due 1/4/99;
Proceeds at maturity -- $99,985,968
(Fully collateralized by U.S. Treasury
Notes, 6.250% due 1/31/02; Market
Value -- $101,939,142) 99,936,000
522,050,000 Warburg Dillon Read LLC, 4.700% due 1/4/99
Proceeds at maturity -- $522,322,554 (Fully
collateralized by U.S. Treasury Notes,
5.750% due 8/15/03; Market Value --
$532,500,000) 522,050,000
225,382,000 Goldman Sachs & Co., 4.700% due 1/4/99;
Proceeds at maturity -- $225,499,700 (Fully
collateralized by U.S. Treasury Notes, 3.375%
to 9.875% due 5/31/99 to 8/15/27; Market
Value -- $229,890,039) 225,382,000
- --------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS
(Cost -- $847,368,000) 847,368,000
================================================================================
TOTAL INVESTMENTS AT VALUE -- 100%
(Cost -- $3,191,964,250**) $4,862,524,953
================================================================================
* Non-Income Producing Security
+ A portion of the security is on loan (see Note 7).
** Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Appreciation Fund Inc. 15
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $2,344,596,250) $4,015,156,953
Repurchase agreements (Cost -- $847,368,000) 847,368,000
Cash 106
Collateral for securities on loan (Note 7) 850,440,534
Receivable for Fund shares sold 32,895,742
Receivable for securities sold 35,235,009
Dividends and interest receivable 4,879,590
- ------------------------------------------------------------------------------------------------------------
Total Assets 5,785,975,934
- ------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities on loan (Note 7) 850,440,534
Payable for Fund shares purchased 2,282,838
Dividends payable 3,280,653
Investment advisory fee payable 1,703,893
Distribution fee payable 623,224
Administration fee payable 619,597
Accrued expenses 1,060,432
- ------------------------------------------------------------------------------------------------------------
Total Liabilities 860,011,171
- ------------------------------------------------------------------------------------------------------------
Total Net Assets $4,925,964,763
============================================================================================================
NET ASSETS:
Par value of capital shares $ 322,113
Capital paid in excess of par value 3,113,609,473
Overdistributed net investment income (9,654)
Accumulated net realized gain on security transactions, options and futures contracts 141,482,128
Net unrealized appreciation of investments 1,670,560,703
- ------------------------------------------------------------------------------------------------------------
Total Net Assets $4,925,964,763
============================================================================================================
Shares Outstanding:
Class A 193,252,744
-------------------------------------------------------------------------------------------------------
Class B 101,776,160
-------------------------------------------------------------------------------------------------------
Class L 5,453,903
-------------------------------------------------------------------------------------------------------
Class Y 5,698,007
-------------------------------------------------------------------------------------------------------
Class Z 15,931,792
-------------------------------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $15.31
-------------------------------------------------------------------------------------------------------
Class B * $15.26
-------------------------------------------------------------------------------------------------------
Class L ** $15.26
-------------------------------------------------------------------------------------------------------
Class Y (and redemption price) $15.28
-------------------------------------------------------------------------------------------------------
Class Z (and redemption price) $15.29
-------------------------------------------------------------------------------------------------------
Maximum Public Offering Price Per Share:
Class A (net asset value plus 5.26% of net asset value per share) $16.12
-------------------------------------------------------------------------------------------------------
Class L (net asset value plus 1.01% of net asset value per share) $15.41
============================================================================================================
</TABLE>
* Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if
shares are redeemed within one year from purchase (See Note 2).
** Redemption price is NAV of Class L shares reduced by a 1.00% CDSC if
shares are redeemed within the first year of purchase.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
16 20th Anniversary Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended December 31, 1998
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 55,700,662
Interest 42,855,157
Less: Foreign withholding tax (328,987)
- --------------------------------------------------------------------------------
Total Investment Income 98,226,832
- --------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 2) 21,772,771
Investment advisory fees (Note 2) 18,906,581
Administration fees (Note 2) 6,946,684
Shareholder and system servicing fees 4,566,295
Shareholder communications 771,116
Registration fees 262,000
Custody 171,999
Directors' fees 84,999
Insurance 58,999
Audit and legal fees 53,002
Other 18,300
- --------------------------------------------------------------------------------
Total Expenses 53,612,746
- --------------------------------------------------------------------------------
Net Investment Income 44,614,086
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS,
OPTIONS AND FUTURES CONTRACTS (NOTE 3, 5 AND 6):
Realized Gain From:
Security transactions (excluding short-term securities) 425,640,347
Options purchased 118,137
Futures contracts 12,108,624
- --------------------------------------------------------------------------------
Net Realized Gain 437,867,108
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year 1,316,415,476
End of year 1,670,560,703
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 354,145,227
- --------------------------------------------------------------------------------
Net Gain on Investments, Options and Futures Contracts 792,012,335
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 836,626,421
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Appreciation Fund Inc. 17
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended December 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
=========================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 44,614,086 $ 48,540,804
Net realized gain 437,867,108 541,703,300
Increase in net unrealized appreciation 354,145,227 307,655,353
- ---------------------------------------------------------------------------------------------------------
Increase in Net Assets From Operations 836,626,421 897,899,457
- ---------------------------------------------------------------------------------------------------------
DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income (46,469,945) (46,569,463)
Net realized gains (370,466,221) (549,467,979)
- ---------------------------------------------------------------------------------------------------------
Decrease in Net Assets From Distributions to Shareholders (416,936,166) (596,037,442)
- ---------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 8):
Net proceeds from sales 817,670,978 604,826,555
Net asset value of shares issued for reinvestment of dividends 390,809,346 566,537,646
Cost of shares reacquired (936,984,556) (724,876,010)
- ---------------------------------------------------------------------------------------------------------
Increase in Net Assets From Fund Share Transactions 271,495,768 446,488,191
- ---------------------------------------------------------------------------------------------------------
Increase in Net Assets 691,186,023 748,350,206
NET ASSETS:
Beginning of year 4,234,778,740 3,486,428,534
- ---------------------------------------------------------------------------------------------------------
End of year* $ 4,925,964,763 $ 4,234,778,740
=========================================================================================================
* Includes undistributed (overdistributed) net investment income of: $(9,654) $1,962,348
=========================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
18 20th Anniversary 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 for which market quotations are not available will be
valued in good faith at fair value by or under the direction of the Board of
Trustees; (d) securities maturing within 60 days are valued at cost plus
accreted discount, or minus amortized premium, which approximates value; (e)
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; (f) interest income is recorded on the accrual basis;
(g) dividends and distributions to shareholders are recorded on the ex-dividend
date; (h) gains or losses on the sale of securities are calculated by using the
specific identification method; (i) direct expenses are charged to each class;
management fees and general fund expenses are allocated on the basis of relative
net assets; (j) 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; (k) 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; (l) 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, 1998, reclassifications were made to the Fund's
capital accounts to reflect permanent book/tax differences and income and gains
available for distributions under income tax regulations. Net investment income,
net realized gains and net assets were not affected by this change; and (m)
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"), 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
- --------------------------------------------------------------------------------
Smith Barney Appreciation Fund Inc. 19
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
0.20% on the Fund's average daily net assets up to $250 million; 0.187% on the
next $250 million; 0.174% on the next $500 million; 0.161% on the next $1
billion; 0.148% on the next $1 billion and 0.135% on the average daily net
assets in excess of $3 billion. This fee is calculated daily and paid monthly.
On October 8, 1998, CFBDS, Inc. became the Fund's distributor. Prior to that
date, Salomon Smith Barney Inc. ("SSB"), another subsidiary of SSBH, was the
Fund's distributor. SSB, as well as certain other broker-dealers, continues to
sell Fund shares to the public as a member of the selling group. For the year
ended December 31, 1998, SSB received brokerage commissions of $334,520.
On June 12, 1998, the Fund's existing Class C shares were renamed Class L
shares. Effective June 15, 1998, Class L shares are being sold at net asset
value plus a maximum initial sales charge of 1.00%. Class L shares also have a
1.00% contingent deferred sales charge ("CDSC"), which applies if redemption
occurs within the first year of purchase.
There is a 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. 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, 1998, SSB received sales charges of
approximately $1,999,000, $17,000 and $174,000 on sales of the Portfolio's Class
A, Class B and Class L shares, respectively. In addition, CDSCs paid to SSB were
approximately:
Class A Class B Class L
================================================================================
CDSCs $16,000 $1,091,000 $9,000
================================================================================
Pursuant to a Distribution Plan, the Fund pays a service fee with respect to its
Class A, B and L 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 L shares calculated at the annual
rate of 0.75% of the average daily net assets for each class. For the year ended
December 31, 1998, total Distribution Plan fees were as follows:
Class A Class B Class L
================================================================================
Distribution Plan Fees $6,774,230 $14,393,673 $604,868
================================================================================
All officers and one Director of the Fund are employees of SSB.
3. Investments
During the year ended December 31, 1998, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $2,357,429,462
- --------------------------------------------------------------------------------
Sales 2,645,541,525
================================================================================
At December 31, 1998, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
================================================================================
Gross unrealized appreciation $1,683,625,953
Gross unrealized depreciation (13,065,250)
- --------------------------------------------------------------------------------
Net unrealized appreciation $1,670,560,703
================================================================================
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.
- --------------------------------------------------------------------------------
20 20th Anniversary Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
5. Option Contracts
Premiums paid when put or call options are purchased by the Fund represent
investments, which are marked-to-market daily. When a purchased option expires,
the Fund will realize a loss in the amount of the premium paid. When the Fund
enters into a closing sales transaction, the Fund will realize a gain or loss
depending on whether the proceeds from the closing sales transaction are greater
or less than the premium paid for the option. When the Fund exercises a put
option, it will realize a gain or loss from the sale of the underlying security
and the proceeds from such sale will be decreased by the amount of the premium
originally paid. When the Fund exercises a call option, the cost of the security
that the Fund purchases upon exercise will be increased by the premium
originally paid.
At December 31, 1998, the Fund had no open purchased call or put options.
When a Fund writes a call or put option, an amount equal to the premium received
by the Fund is recorded as a liability, the value of which is marked-to-market
daily. When a written option expires, the Fund realizes a gain equal to the
amount of the premium received. When the Fund enters into a closing purchase
transaction, the Fund realizes a gain or loss depending upon whether the cost of
the closing transaction is greater or less than the premium originally received
without regard to any unrealized gain or loss on the underlying security, and
the liability related to such option is eliminated. When a written call option
is exercised, the cost of the security sold will be decreased by the premium
originally received. When a written put option is exercised, the amount of the
premium originally received will reduce the cost of the security that the Fund
purchased upon exercise. When written index options are exercised, settlement is
made in cash.
The risk associated with purchasing options is limited to the premium originally
paid. The Fund enters into options for hedging purposes. The risk in writing a
call option is that the Fund gives up the opportunity to participate in any
increase in the price of the underlying security beyond the exercise price. The
risk in writing a put option is that the Fund is exposed to the risk of a loss
if the market price of the underlying security declines.
During the year ended December 31, 1998, the Fund did not write any call or put
options.
6. Futures Contracts
Initial margin deposits made upon entering into futures contracts are recognized
as assets. Securities equal to the initial margin amount are segregated by the
custodian in the name of the broker. Additional securities are also segregated
up to the current market value of the futures contract. During the period the
futures contract is open, changes in the value of the contract are recognized as
unrealized gains or losses by "marking-to-market" on a daily basis to reflect
the market value of the contract at the end of each day's trading. Variation
margin payments are received or made and recognized as assets due from or
liabilities due to broker, depending upon whether unrealized gains or losses are
incurred. When the contract is closed, the Fund records a realized gain or loss
equal to the difference between the proceeds from (or cost of) the closing
transactions and the Fund's basis in the contract. The Fund enters into such
contracts to hedge a portion of its portfolio. The Fund bears the market risk
that arises from changes in the value of the financial instruments and
securities indices (futures contracts).
At December 31, 1998, the Fund had no open futures contracts.
- --------------------------------------------------------------------------------
Smith Barney Appreciation Fund Inc. 21
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
7. 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, 1998, the Fund loaned common stocks having a value of
approximately $828,752,387 and holds the following collateral for loaned
securities:
Security Description Value
- --------------------------------------------------------------------------------
Time Deposits:
Bank Brussels Lambert, 5.500% due 1/4/99 $ 45,774,329
Banque Nationale De Paris, 8.000% due 1/4/99 2,878,805
Rabobank Nederland, 7.750% due 1/4/99 7,706,034
Skandinaviska Enskilda Banken, 8.000% due 1/4/99 7,251,379
Societe Generale, 5.125% due 1/4/99 54,455,198
Suntrust Bank, 4.000% due 1/4/99 1,747,624
Commercial Paper:
Barton Capital, 5.249% due 1/19/99 94,370,602
CC USA Inc., 5.548% due 1/28/99 14,211,834
Corporate Receivables, 5.421% due 1/19/99 3,551,102
Corporate Receivables, 5.368% due 1/22/99 5,559,551
Countrywide Funding, 5.433% due 1/29/99 40,288,310
CXC, Inc., 5.533% due 1/8/99 99,185,408
CXC, Inc., 5.293% due 1/14/99 64,563,167
Kredietbank NV, 5.477% due 1/19/99 3,025,724
Old Line Funding, 5.445% due 1/13/99 68,275,647
Par Capital, 5.429% due 2/5/99 21,797,277
Riverwoods Funding, 5.490% due 1/15/99 66,690,861
Riverwoods Funding, 5.505% due 1/15/99 76,681,288
Toronto Dominion Holdings, 5.448% due 1/20/99 118,999,683
Triple A-1 Funding, 5.578% due 1/20/99 2,762,553
Windmill Funding, 5.557% due 1/22/99 44,438,258
Floating Rate Note:
Credit Suisse First Boston, 5.592% due 6/9/99 958,139
Repurchase Agreements:
J.P. Morgan, 5.000% due 1/4/99 5,267,761
- --------------------------------------------------------------------------------
Total $850,440,534
================================================================================
For the year ended December 31, 1998, interest income earned by the Portfolio
from securities lending was $414,229.
- --------------------------------------------------------------------------------
22 20th Anniversary Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
8. Capital Shares
At December 31, 1998, the Fund had one billion shares of capital stock
authorized with a par value of $0.001 per share. The Fund has the ability to
issue multiple classes of shares. Each share of a class represents an identical
interest and has the same rights except that each class bears expenses
specifically related to the distribution of its shares. Effective June 12, 1998,
the Fund adopted the renaming of existing Class C shares as Class L shares.
At December 31, 1998, total paid-in capital amounted to the following for each
class:
<TABLE>
<CAPTION>
Class A Class B Class L Class Y Class Z
==============================================================================================================
<S> <C> <C> <C> <C> <C>
Total Paid-in Capital $1,746,984,752 $1,038,445,752 $73,990,249 $67,798,276 $186,712,557
==============================================================================================================
</TABLE>
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1998 December 31, 1997
--------------------------- ----------------------------
Shares Amount Shares Amount
================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 31,944,426 $ 478,164,660 17,513,526 $ 251,896,803
Shares issued on reinvestment 16,242,300 246,245,285 24,941,341 348,520,671
Shares redeemed (36,385,814) (541,889,271) (24,395,501) (352,200,632)
- ------------------------------------------------------------------------------------------------
Net Increase 11,800,912 $ 182,520,674 18,059,366 $ 248,216,842
================================================================================================
Class B
Shares sold 14,958,279 $ 221,404,435 16,098,504 $ 230,730,136
Shares issued on reinvestment 7,850,793 117,753,029 13,277,335 183,519,170
Shares redeemed (22,640,705) (335,884,537) (16,311,962) (234,575,849)
- ------------------------------------------------------------------------------------------------
Net Increase 168,367 $ 3,272,927 13,063,877 $ 179,673,457
================================================================================================
Class L+
Shares sold 2,887,128 $ 42,349,991 1,806,438 $ 25,803,383
Shares issued on reinvestment 393,767 5,900,714 430,602 5,951,814
Shares redeemed (1,276,184) (18,734,090) (778,806) (11,015,972)
- ------------------------------------------------------------------------------------------------
Net Increase 2,004,711 $ 29,516,615 1,458,234 $ 20,739,225
================================================================================================
Class Y
Shares sold 2,956,701 $ 44,326,404 5,618,610 $ 83,534,538
Shares issued on reinvestment -- -- -- --
Shares redeemed (1,299,545) (19,155,296) (7,268,211) (113,802,850)
- ------------------------------------------------------------------------------------------------
Net Increase (Decrease) 1,657,156 $ 25,171,108 (1,649,601) $ (30,268,312)
================================================================================================
Class Z
Shares sold 2,085,157 $ 31,425,488 903,381 $ 12,861,695
Shares issued on reinvestment 1,376,363 20,910,318 2,032,465 28,545,991
Shares redeemed (1,447,123) (21,321,362) (905,778) (13,280,707)
- ------------------------------------------------------------------------------------------------
Net Increase 2,014,397 $ 31,014,444 2,030,068 $ 28,126,979
================================================================================================
</TABLE>
+ On June 12, 1998, Class C shares were renamed Class L shares.
- --------------------------------------------------------------------------------
Smith Barney Appreciation Fund Inc. 23
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended December 31:
<TABLE>
0<CAPTION>
Class A Shares 1998(1) 1997 1996 1995(1) 1994
=============================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 13.92 $ 12.85 $ 11.90 $ 10.15 $ 11.01
- -------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.18 0.19 0.19 0.20 0.16
Net realized and unrealized gain (loss) 2.62 3.17 2.09 2.75 (0.24)
- -------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 2.80 3.36 2.28 2.95 (0.08)
- -------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.18) (0.20) (0.19) (0.20) (0.18)
Net realized gains (1.23) (2.09) (1.14) (1.00) (0.60)
- -------------------------------------------------------------------------------------------------------------
Total Distributions (1.41) (2.29) (1.33) (1.20) (0.78)
- -------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 15.31 $ 13.92 $ 12.85 $ 11.90 $ 10.15
- -------------------------------------------------------------------------------------------------------------
Total Return 20.45% 26.29% 19.25% 29.26% (0.77)%
- -------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $ 2,959 $ 2,526 $ 2,100 $ 1,933 $ 1,690
- -------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.95% 0.95% 1.00% 1.02% 1.02%
Net investment income 1.23 1.47 1.52 1.71 1.61
- -------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 63% 57% 62% 57% 52%
=============================================================================================================
Class B Shares 1998(1) 1997 1996 1995(1) 1994
=============================================================================================================
Net Asset Value, Beginning of Year $ 13.88 $ 12.81 $ 11.88 $ 10.14 $ 11.00
- -------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.06 0.07 0.08 0.11 0.13
Net realized and unrealized gain (loss) 2.61 3.15 2.08 2.74 (0.29)
- -------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 2.67 3.22 2.16 2.85 (0.16)
- -------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.06) (0.06) (0.09) (0.11) (0.10)
Net realized gains (1.23) (2.09) (1.14) (1.00) (0.60)
- -------------------------------------------------------------------------------------------------------------
Total Distributions (1.29) (2.15) (1.23) (1.11) (0.70)
- -------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 15.26 $ 13.88 $ 12.81 $ 11.88 $ 10.14
- -------------------------------------------------------------------------------------------------------------
Total Return 19.52% 25.31% 18.29% 28.29% (1.53)%
- -------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $ 1,553 $ 1,410 $ 1,134 $ 988 $ 761
- -------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.73% 1.73% 1.78% 1.77% 1.80%
Net investment income 0.44 0.68 0.74 0.96 0.83
- -------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 63% 57% 62% 57% 52%
=============================================================================================================
</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.
- --------------------------------------------------------------------------------
24 20th Anniversary Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended December 31:
<TABLE>
<CAPTION>
Class L Shares(1) 1998(2) 1997 1996 1995(2) 1994
=============================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 13.88 $ 12.81 $ 11.88 $ 10.14 $ 11.00
- -------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.06 0.09 0.09 0.11 0.10
Net realized and unrealized gain (loss) 2.61 3.13 2.08 2.74 (0.25)
- -------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 2.67 3.22 2.17 2.85 (0.15)
- -------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.06) (0.06) (0.10) (0.11) (0.11)
Net realized gains (1.23) (2.09) (1.14) (1.00) (0.60)
- -------------------------------------------------------------------------------------------------------------
Total Distributions (1.29) (2.15) (1.24) (1.11) (0.71)
- -------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 15.26 $ 13.88 $ 12.81 $ 11.88 $ 10.14
- -------------------------------------------------------------------------------------------------------------
Total Return 19.52% 25.31% 18.34% 28.29% (1.41)%
- -------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 83,215 $ 47,872 $ 25,505 $ 14,653 $ 5,040
- -------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.73% 1.73% 1.77% 1.77% 1.66%
Net investment income 0.44 0.68 0.75 0.96 0.98
- -------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 63% 57% 62% 57% 52%
=============================================================================================================
</TABLE>
(1) On June 12, 1998, Class C shares were renamed Class L shares.
(2) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method,
because it more accurately reflects the per share data for the period.
- --------------------------------------------------------------------------------
Smith Barney Appreciation Fund Inc. 25
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended December 31:
Class Y Shares 1998(1) 1997(1) 1996(2)
================================================================================
Net Asset Value, Beginning of Year $13.93 $12.86 $12.10
- --------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.24 0.27 0.23
Net realized and unrealized gain 2.63 3.14 1.89
- --------------------------------------------------------------------------------
Total Income From Operations 2.87 3.41 2.12
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.29) (0.25) (0.22)
Net realized gains (1.23) (2.09) (1.14)
- --------------------------------------------------------------------------------
Total Distributions (1.52) (2.34) (1.36)
- --------------------------------------------------------------------------------
Net Asset Value, End of Year $15.28 $13.93 $12.86
- --------------------------------------------------------------------------------
Total Return 20.93% 26.70% 17.65%++
- --------------------------------------------------------------------------------
Net Assets, End of Year (000s) $87,041 $56,302 $73,196
- --------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.59% 0.59% 0.66%+
Net investment income 1.59 1.79 2.06+
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 63% 57% 24%
================================================================================
(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.
- --------------------------------------------------------------------------------
26 20th Anniversary Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended December 31:
<TABLE>
<CAPTION>
Class Z Shares 1998(1) 1997 1996 1995(1) 1994
=============================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 13.94 $ 12.87 $ 11.91 $ 10.16 $ 11.02
- -------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.24 0.24 0.24 0.23 0.20
Net realized and unrealized gain (loss) 2.63 3.18 2.09 2.75 (0.24)
- -------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 2.87 3.42 2.33 2.98 (0.04)
- -------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.29) (0.26) (0.23) (0.23) (0.22)
Net realized gains (1.23) (2.09) (1.14) (1.00) (0.60)
- -------------------------------------------------------------------------------------------------------------
Total Distributions (1.52) (2.35) (1.37) (1.23) (0.82)
- -------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 15.29 $ 13.94 $ 12.87 $ 11.91 $ 10.16
- -------------------------------------------------------------------------------------------------------------
Total Return 20.91% 26.72% 19.66% 29.52% (0.41)%
- -------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $243,609 $194,070 $153,034 $131,357 $101,532
- -------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.59% 0.59% 0.64% 0.77% 0.64%
Net investment income 1.59 1.82 1.88 1.96 1.99
- -------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 63% 57% 62% 57% 52%
=============================================================================================================
</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.
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
For Federal tax purposes the Fund hereby designates for the fiscal year ended
December 31, 1998:
. A corporate dividends received deduction of 55.25%.
. Total long-term capital gains distributions paid of $337,428,095.
A total of 0.03% of the ordinary dividends paid by the Fund from net investment
income are derived from Federal obligations and may be exempt from taxation at
the state level.
- --------------------------------------------------------------------------------
Smith Barney Appreciation Fund Inc. 27
<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 The Smith Barney Appreciation Fund Inc. as of
December 31, 1998, the related statement of operations for the year then ended,
the statements of changes in net assets for each of the years in the two-year
period then ended and the financial highlights for each of the years in the
four-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 the year 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, 1998, by correspondence with the custodian. As to securities
purchased or sold but not yet received or delivered, 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, 1998, 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 the financial highlights for
each of the years in the four-year period then ended, in conformity with
generally accepted accounting principles.
KPMG LLP
New York, New York
February 8, 1999
- --------------------------------------------------------------------------------
28 20th Anniversary Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Additional Shareholder Information (unaudited)
- --------------------------------------------------------------------------------
On March 9, 1998, a special meeting of shareholders of the Fund was held for the
purpose of voting on the following matters:
1. To elect Directors of the Fund; and
2. To approve or disapprove the reclassification, modification and/or
elimination of certain fundamental investment policies.
The results of the vote on Proposal 1 were as follows:
<TABLE>
<CAPTION>
Shares Voted Percentage Shares Voted Percentage
Name of Directors For Shares Voted Against Shares Voted
================================================================================================
<S> <C> <C> <C> <C>
Herbert Barg 149,432,732.843 96.771% 4,986,063.922 3.229%
Alfred J. Bianchetti 149,375,274.308 96.734 5,043,522.457 3.266
Martin Brody 149,424,955.776 96.766 4,993,840.989 3.234
Dwight B. Crane 149,739,219.186 96.970 4,679,577.579 3.030
Burt N. Dorsett 149,746,243.965 96.974 4,672,552.800 3.026
Elliot S. Jaffe 149,595,938.587 96.877 4,822,858.178 3.123
Stephen E. Kaufman 149,680,265.128 96.931 4,738,531.637 3.069
Joseph J. McCann 149,749,791.913 96.976 4,669,004.852 3.024
Heath B. McLendon 149,726,738.578 96.961 4,692,058.187 3.039
Cornelius C. Rose, Jr. 149,741,869.998 96.971 4,676,926.767 3.029
================================================================================================
</TABLE>
Proposal 2 requested that shareholders approve certain changes to the
fundamental policies of the Fund in order to modernize them in view of certain
regulatory, business or industry developments that have occurred since original
adoption of these policies by the Fund. The following chart demonstrates that
all proposals were approved by shareholders.
Please note that "M" indicates a modification of the policy and "R" indicates
the reclassification of the policy from fundamental (which would require
shareholder approval to change) to non-fundamental (which can be changed by a
vote of the Board of Directors).
================================================================================
M Issuance of Senior Securities Approved
M Borrowing Approved
M Lending by the Fund Approved
M Diversification Approved
R Margin and Short Sales Approved
M Real Estate Approved
================================================================================
The information below reports the lowest percentage of shares voting for the
proposals, the highest percentage of shares voting against and abstaining by
shareholders of the Fund on all proposals.
<TABLE>
<CAPTION>
Percentage Percentage Percentage
Shares Voted of Shares Shares Voted of Shares Shares of Shares
For Voted Against Voted Abstaining Voted
=======================================================================================
<S> <C> <C> <C> <C> <C>
138,358,203.566 89.989% 3,417,793.492 2.223% 11,973,946.707 7.788%
=======================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney Appreciation Fund Inc. 29
<PAGE>
Smith Barney
Appreciation Fund Inc.
Directors
Herbert Barg
Alfred J. Bianchetti
Martin Brody
Dwight B. Crane
Burt N. Dorsett
Elliot S. Jaffe
Stephen E. Kaufman
Joseph J. McCann
Heath B. McLendon, Chairman
Cornelius C. Rose, Jr.
James J. Crisona, Emeritus
Officers
Heath B. McLendon
President and Chief Executive Officer
Lewis E. Daidone
Senior Vice President and Treasurer
Harry D. Cohen
Vice President and Investment Officer
Paul A. Brook
Controller
Christina T. Sydor
Secretary
Investment Adviser
Mutual Management Corp.
Distributors
CFBDS, Inc.
Custodian
PNC Bank, N.A.
Shareholder Servicing Agent
First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of the shareholders of
Smith Barney Appreciation Fund Inc., but it may also be used as sales literature
when preceded or accompanied by the current Prospectus, which gives details
about charges, expenses, investment objectives and operating policies of the
Fund. If used as sales material after March 31, 1999, this report must be
accompanied by performance information for the most recently completed calendar
quarter.
SalomonSmithBarney
- ----------------------------
A member of citigroup [LOGO]
Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Mutual Funds
388 Greenwich Street, MF-2
New York, New York 10013
www.smithbarney.com
FD0312 2/99
