SMITH BARNEY VARIABLE ACCOUNT FUNDS
ANNUAL REPORT
December 31, 1995
This report is authorized for distribution to shareholders and to others only
when accompanied or preceded by a current prospectus of the Fund.
SMITH BARNEY VARIABLE ACCOUNT FUNDS
Dear Shareholder:
We are pleased to provide the annual report for the year ended December 31,
1995 for the Smith Barney Variable Account Funds. In this annual report, we
review the performance of the financial markets in 1995 and briefly discuss
the portfolio strategies employed by each Portfolio.
A Look Back at 1995
When 1995 began, the Federal Reserve had already raised interest rates six
times in 1994. As the year started, the U.S. economy, as measured by gross
domestic product (GDP), appeared to be robust. Economic indicators were strong
and the U.S. economy was growing at an annual rate of roughly 5.0%. In
February, the Federal Reserve tightened monetary policy again to slow down
what they believed was an overheated economy. However, late in the first
quarter, the economy did weaken considerably. In response to this economic
weakness, the Federal Reserve cut interest rates twice, once in July and then
in December.
As many of you no doubt know, the U.S. stock market continued its spectacular
and historic climb as the fourth quarter of 1995 ended. The favorable and
converging trends of strong corporate earnings, lower interest rates and low
inflation made the U.S. stock market the investment vehicle of choice for many
investors.
The Standard & Poor's 500 Stock-Price Index (the "S&P 500"), an unmanaged,
capitalization weighted measure of 500 widely held stocks, was up 36.94% for
the 12 months ended December 31, 1995, its strongest showing since 1958. The
Dow Jones Industrial Average (the "Dow"), a price-weighted average of 30
actively traded blue chip stocks, had its best year since 1975, closing the
year at 5117. Key sectors included technology stocks (which benefited from the
ongoing revolution in personal computers and communications) and financial
sector (which tend to perform well in a low-interest-rate environment).
Stocks were not the only winners in 1995. The U.S. bond market also performed
well for the year. The 30-year Treasury Bond was up more than 30% in 1995. In
1995, bonds benefited from an environment of low inflation and the expectation
of lower short-term interest rates.
Our long-term outlook for financial assets is positive. We expect an extension
of the economy's, "soft landing", continued low inflation, and healthy
corporate earnings in the near term. Yet, whatever transpires in 1996 and
beyond, we encourage investors to maintain a long-term perspective and stick
to a disciplined and systematic investment plan.
Income and Growth Portfolio
The Income and Growth Portfolio seeks current income and long-term growth of
capital. The Portfolio invests primarily, but not exclusively, in common
stocks. The Income and Growth Portfolio is managed conservatively with a
bottom-up value approach. (A bottom-up investing style involves searching for
stocks with outstanding performance potential before considering the impact of
economic trends.) The Income and Growth Portfolio generated an annual total
return of 27.56% for the year ended December 31, 1995.
As we stated previously, the economy declined in the first quarter of 1995 and
the Federal Reserve stopped tightening monetary policy. It appeared that the
Federal Reserve had engineered the long-heralded, but seldom achieved, "soft
landing." Our outlook for the stock market changed from cautious to very
positive. We resumed looking for companies that were likely to restructure,
continuing a key theme for the Portfolio that began in 1994. The Portfolio's
top-ten holdings at the end of 1995 were all related in some way to this
restructuring theme. Among the Portfolio's top holdings are Sears, Roebuck &
Co., Eastman Kodak Co., and Xerox, all of which have undergone major
restructuring in recent years.
In 1995, we increased the Portfolio's exposure to the insurance industry. At
the end of 1994, attention on this sector was focused on concerns regarding
the potentially enormous liability of many insurance companies, resulting in
massive claims to clean up hazardous waste sites. Initial estimates in 1994
placed the potential liability in the range of $250 billion over a 30-year
period, which put a damper on many insurance stocks. However, the initial
estimate was cut in half as insurers had an opportunity to realistically
assess their potential liabilities during 1995. Further enhancing the
attractiveness of the insurance sector was the purchase of Continental
Corporation, which had one of the industries' largest potential environmental
liabilities, by Chicago-based CNA for $1.1 billion. CNA, a part of Loews
Corp., is widely regarded as a well-managed company and this type of
consolidation was seen as a positive for the entire insurance industry.
Two stocks in the insurance sector we added to the Portfolio in 1995 were
Aetna and Allstate. The introduction of a new management team at Aetna was our
signal to take another and closer look at that company. What we found was a
classic value investment opportunity -- a stock that was worth owning because
the market had overlooked its inherent value. Allstate was undervalued due to
recent setbacks from natural disasters such as Hurricane Andrew.
In the first half of the year, we reduced or eliminated our holdings in
cyclical companies such as Dow Chemical and International Paper, even though
investor enthusiasm was high for these types of stocks while commodity prices
were going up. The Portfolio sold these holdings primarily because of the
slowdown in the U.S. economy, the high level of interest rates and slower
rates of growth in the international economy, conditions which generally have
a negative impact on cyclical companies.
The U.S. Government/High Quality Securities Portfolio
The U.S. Government/High Quality Securities Portfolio seeks high current
income and security of principal from a portfolio made up primarily of U.S.
government obligations and other high-quality fixed income obligations. For
the year ended December 31, 1995, the Portfolio's annual total return was
17.20%. The Portfolio outperformed the Lehman Brothers GNMA Mutual Fund Index,
which produced a total return of 17.05% for the same period. According to
Lipper Analytical Services, Inc., a major fund tracking organization, the
Portfolio also outperformed the average GNMA fund, which returned 16.25% for
the period ended December 31, 1995.
During the course of 1995, the Portfolio went from being very defensive to
slightly bullish. We began to increase the Portfolio's holdings in GNMA
securities which, in our view, represented a good value. In 1995, mortgage-
backed securities performed well, but not as well as U.S. Treasuries. In our
view, mortgage-backed securities continue to represent fair value because the
spread between mortgage-backed securities and Treasuries is significantly
higher today and because of our expectations that prepayments and mortgage
refinancing should be much lower than what occurred in 1993. We believe the
Portfolio's better relative performance than the index can be attributed to
lowered prepayment expectations regarding GNMA securities, a condition we
expect to continue.
A continuation of a bond market rally in 1996 is dependent on new signs of
economic weakness. We therefore expect to remain cautious in managing the
Portfolio until we perceive any signs of economic weakness in the coming
months.
The Reserve Account Portfolio
The Reserve Account Portfolio invests in money market instruments to help
provide stability, and short- and intermediate-term securities to provide
enhanced return. While intermediate-term securities are normally defined as
issues maturing within ten years, the Reserve Account Portfolio limits the
maturities of the securities it holds to five years. For the year ended
December 31, 1995, the Reserve Account Portfolio posted an annual total return
of 8.83%. The Portfolio outperformed its benchmark, the Salomon Brothers 1-
Year Treasury Index, which produced an annual total return of 8.09%.
For defensive purposes, the Portfolio also employs an immunization strategy.
While minor day-to-day price fluctuations are unavoidable, the Portfolio's
immunization strategy should produce sufficient income during adverse market
conditions to offset any potential decline in the prices of the Portfolio's
intermediate-term issues. (The Portfolio's immunization strategy involves the
use of proprietary technology that helps the portfolio manager forecast the
direction of interest rates.) In extremely uncertain or volatile periods for
interest rates, it is possible for the Portfolio to be fully invested in
short-term money market instruments. Unlike money market funds, which
generally seek to maintain a stable net asset value (NAV) of $1.00 per share,
the Reserve Account Portfolio does fluctuate with market conditions.
Because the Reserve Account Portfolio invests in short- and intermediate-term
fixed income issues, it has the flexibility to take advantage of changing
opportunities. And because the securities in the Portfolio are "laddered" to
mature at different times, we were able to adapt to the changing interest rate
environment during 1995. (A laddered portfolio is one with bonds that have
varying maturities. By purchasing bonds that mature at set intervals, the
Reserve Account Portfolio is diversified in case of changes in interest
rates.)
At the end of July, the Reserve Account Portfolio's average-weighted maturity
was 1.71 years. In order to take advantage of favorable market conditions, we
shortened the Portfolio's average-weighted maturity over the last five months
of 1995. At year end, the Portfolio's average-weighted maturity was 1.37
years.
In closing, we thank you for your investment in the Smith Barney Variable
Account Funds and look forward to serving your investment needs in 1996.
Sincerely,
Heath B. McLendon
Chairman and Chief Executive Officer
February 15, 1996
SMITH BARNEY VARIABLE ACCOUNT FUNDS
<TABLE> INCOME AND GROWTH PORTFOLIO
<CAPTION>
Historical Performance
<S>
Net Asset Value
Year Ended
<C>
Beginning
of Year
<C>
End
of Year
<C>
Income
Dividends
<C>
Capital Gain
Distribution
s
<C>
Total
Returns(1)
<C>
12/31/95
$13.05
$15.24
$0.44
$0.94
27.56%
12/31/94
14.93
13.05
0.39
1.02
(3.12)
12/31/93
14.36
14.93
0.57
1.45
18.61
12/31/92
13.76
14.36
0.50
0.48
11.48
12/31/91
10.93
13.76
0.58
0.00
31.34
12/31/90
12.66
10.93
0.66
0.00
(8.37)
Inception* to
12/31/89
12.50
12.66
0.18
0.00
2.68(2)
Total
$3.32
$3.89
</TABLE>
It is the Fund's policy to distribute dividends and capital gains, if any,
annually.
Average Annual Total Return(1)
Year Ended 12/31/95
27.56%
Five Years Ended 12/31/95
16.50
Inception* to 12/31/95
11.51
Cumulative Total Return (Inception*
to 12/31/95)
101.93
(1) Assumes reinvestment of all dividends and capital gain distributions.
(2) Total return is not annualized, as it may not be representative of the
total \return for the year.
* The inception date for the Income and Growth Portfolio is July 20, 1989.
SMITH BARNEY VARIABLE ACCOUNT FUNDS
INCOME AND GROWTH PORTFOLIO
Historical Performance (unaudited)
Growth of $10,000 Invested in Shares of
the Income and Growth Portfolio vs.
Standard & Poor's 500 Index
July 1989 - December 1995
Hypothetical illustration of $10,000 invested at inception on July 20,
1989, assuming reinvestment of dividends and capital gains, if any, through
December 31, 1995. The Standard & Poor's 500 Index is an index of widely
held common stocks listed on the New York and American Stock Exchanges and
the over-the-counter markets. Figures for the index include reinvestment of
dividends. The index is unmanaged and is not subject to the same management
and trading expenses of a mutual fund.
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.
SMITH BARNEY VARIABLE ACCOUNT FUNDS
U.S. GOVERNMENT/HIGH QUALITY SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
<S>
Historical Performance
Net Asset Value
Year Ended
<C>
Beginning
of Year
<C>
End
of Year
<C>
Income
Dividends
<C>
Capital Gain
Distributions
<C>
Total
Returns(1
)
<C>
12/31/95
$12.46
$13.66
$0.94
$0.00
17.20%
12/31/94
13.35
12.46
0.84
0.00
(0.35)
12/31/93
13.44
13.35
0.87
0.02
5.91
12/31/92
13.45
13.44
0.89
0.05
6.91
12/31/91
12.74
13.45
0.87
0.02
12.58
12/31/90
12.54
12.74
0.82
0.00
8.11
Inception* to
12/31/89
12.50
12.54
0.34
0.00
3.01(2)
Total
$5.57
$0.09
</TABLE>
It is the Fund's policy to distribute dividends and capital gains, if any,
annually.
Average Annual Total Return(1)
Year Ended 12/31/95
17.20%
Five Years Ended 12/31/95
8.82
Inception* to 12/31/95
8.19
Cumulative Total Return (Inception*
to 12/31/95)
65.79
(1) Assumes reinvestment of all dividends and capital gain distributions.
(2) Total return is not annualized, as it may not be representative of the
total return for the year.
* The inception date for the U.S. Government/High Quality Securities
Portfolio is July 31, 1989.
SMITH BARNEY VARIABLE ACCOUNT FUNDS
U.S. GOVERNMENT/HIGH QUALITY SECURITIES PORTFOLIO
Historical Performance (unaudited)
Growth of $10,000 Invested in Shares of the
U.S. Government/High Quality Securities Portfolio vs.
Lehman Brothers GNMA Mutual Fund Index
July 1989 - December 1995
Hypothetical illustration of $10,000 invested at inception on July 31,
1989, assuming reinvestment of dividends and capital gains, if any, through
December 31, 1995. The Lehman Brothers GNMA Mutual Fund Index is composed of
15-year and 30-year fixed-rate securities backed by mortgage pools of the
Government National Mortgage Association. The index is unmanaged and is not
subject to the same management and trading expenses of a mutual fund.
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.
SMITH BARNEY VARIABLE ACCOUNT FUNDS
<TABLE> RESERVE ACCOUNT PORTFOLIO
<CAPTION>
Historical Performance
<S>
Net Asset Value
Year Ended
Beginning
of Year
<C>
End
of Year
<C>
Income
Dividends
<C>
Capital Gain
Distribution
s
<C>
Total
Returns(1)
<C>
12/31/95
$12.39
$12.71
$0.74
$0.05
8.83%
12/31/94
12.75
12.39
0.58
0.03
1.99
12/31/93
12.86
12.75
0.69
0.01
4.59
12/31/92
13.08
12.86
0.78
0.07
4.82
12/31/91
12.66
13.08
0.89
0.03
10.64
12/31/90
12.55
12.66
0.93
0.00
8.30
Inception* to
12/31/89
12.50
12.55
0.36
0.00
3.26 (2)
Total
$4.97
$0.19
</TABLE>
It is the Fund's policy to distribute dividends and capital gains, if any,
annually.
Average Annual Total Return(1)
Year Ended 12/31/95
8.83%
Five Years Ended 12/31/95
6.13
Inception* to 12/31/95
6.58
Cumulative Total Return (Inception*
to 12/31/95)
50.54
(1) Assumes reinvestment of all dividends and capital gain distributions.
(2) Total return is not annualized, as it may not be representative of the
total return for the year.
* The inception date for shares of the Reserve Account Portfolio is August
2, 1989.
SMITH BARNEY VARIABLE ACCOUNT FUNDS
RESERVE ACCOUNT PORTFOLIO
Historical Performance (unaudited)
Growth of $10,000 Invested in Shares of
the Reserve Account Portfolio vs.
Salomon Brothers 1-Year Treasury Index
August 1989 - December 1995
Hypothetical illustration of $10,000 invested at inception on August 2,
1989, assuming reinvestment of dividends and capital gains, if any, through
December 31, 1995. The Salomon Brothers 1-Year Treasury Index is composed of
one 1-Year United States Treasury Bond ("Bond") whose return is tracked
until its maturity. The index is unmanaged and is not subject to the same
management and trading expenses of a mutual fund.
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.
SMITH BARNEY VARIABLE ACCOUNT FUNDS
INCOME AND GROWTH PORTFOLIO
Schedules of Investments
<TABLE> December 31, 1995
<CAPTION>
<S> <C> <C> <C>
SHARES SECURITY VALUE
COMMON STOCKS - 93.3%
Aerospace Manufacturing - 5.7%
30,000 AAR Corp. $ 660,000
11,000 Daimler-Benz Aktieng ADR 559,625
5,000 United Technologies Corp. 474,375
1,694,000
Aluminum - 1.5%
8,000 Reynolds Metal Co. 453,000
Broadcast Media - 3.1%
15,000 New York Times Co., Class A Shares 444,375
14,014 Times Mirror Co., Series A 474,724
919,099
Chemicals - 10.4%
10,000 Air Products and Chemicals 527,500
5,000 B.F. Goodrich 340,625
40,000 Lawter International Inc. 465,000
6,000 Monsanto Co. 735,000
14,000 Olin Corp. 1,039,500
3,107,625
Conglomerates - 3.2%
20,000 Alexander & Baldwin Inc. 460,000
10,000 Tenneco Inc. 496,250
956,250
Data Processing - Office Equipment - 3.2%
25,000 MacNeal Schwendler Corp. 400,000
4,000 Xerox Corp. 548,000
948,000
Electric Utilities - 8.2%
10,000 Entergy Corp. 292,500
20,000 Houston Industries Inc. 485,000
20,000 Peco Energy Co. 602,500
20,000 Pinnacle West Capital 575,000
15,000 Unicom Corp. 491,250
2,446,250
Electrical Equipment - 7.9%
10,000 Emerson Electric Co. $ 817,500
14,000 General Electric Co. 1,008,000
10,000 Stanley Works 515,000
2,340,500
Energy Oil Integrated - International - 8.5%
10,000 Chevron Corp. 525,000
11,000 Mobil Corp. 1,232,000
10,000 Texaco Inc. 785,000
2,542,000
Financial Services - 6.2%
10,000 Chase Manhattan Corp. 606,250
27,000 Commonwealth Bank of Australia ADR@ 650,140
10,000 Household International Inc. 591,250
1,847,640
Machinery - Diversified - 1.0%
20,000 Gorman-Rupp Co. 310,000
Insurance Multi-line - 4.1%
9,270 Allstate Insurance Corp. 381,229
10,000 Aon Corp. 498,750
10,000 Provident Companies Inc.** 338,750
1,218,729
Mining & Metals - 2.1%
15,000 Cleveland Cliffs Inc. 615,000
Oil Well Equipment & Services - 1.6%
20,000 Dresser Industries Inc. 487,500
Paper Products 2.8%
10,000 Kimberly-Clark Corp. 827,500
Pharmaceuticals - 2.9%
6,000 America Home Products 582,000
10,000 Glaxo Wellcome PLC 282,500
864,500
Photography - 4.0%
18,000 Eastman Kodak Co. 1,206,000
Retail - General Merchandising - 3.9%
5,000 Avon Products Inc. $ 376,875
20,000 Sears, Roebuck & Co. 780,000
1,156,875
Telephone - 2.9%
12,000 BCE Inc. 414,000
10,000 GTE 440,000
854,000
Transportation - Railroad - 3.8%
20,000 Arnold Industries Inc. 347,500
20,000 Illinois Central Corp. 767,500
1,115,000
Miscellaneous - 6.3%
20,000 Brunswick Corp. 480,000
7,000 Crescent Real Estate Equities Inc. 238,875
20,000 Jostens Inc. 485,000
10,000 Seagram Co., Ltd. 346,250
7,000 Tambrands Inc. 334,250
1,884,375
TOTAL COMMON STOCKS (Cost - $22,291,628)
$27,793,843
PREFERRED STOCKS - 2.4%
Broadcast Media - 0.5%
5,986 Times Mirror Co., Series B $ 154,888
Healthcare - 0.8%
8,500 FHP International Corp., Series A 226,313
Metals & Mining - 1.1%
10,000 Freeport McMoran Copper & Gold, Series B 325,000
TOTAL PREFERRED STOCKS (Cost - $760,442) 706,201
FACE
AMOUNT SECURITY VALUE
CONVERTIBLE DEBENTURES - 2.6%
Energy - 1.2%
$400,000 Oryx Energy, 7.500% due 5/15/14 360,000
Furniture - 1.4%
400,000 Pier 1 Imports, 6.875% due 4/1/02 428,000
TOTAL CONVERTIBLE DEBENTURES (Cost - $993,500) 788,000
REPURCHASE AGREEMENT - 1.7%
496,000 Chemical Securities Inc., 7.980% due 1/2/96;
Proceeds at maturity - $496,320; (Fully collateralized
by U.S. Treasury Notes, 6.125% due 5/31/97;
Market value - $505,933) (Cost - $496,000) 496,000
TOTAL INVESTMENTS - 100%
(Cost - $24,541,570)*** $ 29,784,044
</TABLE>
SMITH BARNEY VARIABLE ACCOUNT FUNDS, INC.
U.S. GOVERNMENT/HIGH QUALITY SECURITIES PORTFOLIO
Schedules of Investments (continued)
<TABLE> December 31, 1995
<CAPTION>
FACE
AMOUNT SECURITY VALUE
<S> <C> <C> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS - 90.4%
$700,000 U.S. Treasury Bond, 7.250% due 5/15/16 $ 799,323
450,000 U.S. Treasury Note, 6.500% due 4/30/99 466,785
250,000 U.S. Treasury Note, 7.250% due 5/15/04 277,765
400,000 Federal Home Loan Banks, 6.850% due 2/25/97 407,036
500,000 Federal National Mortgage Association, 6.270% due 4/1/99 500,885
181,240 GNMA Certificates I, 8.000% due 6/15/17* 188,943
66,526 GNMA Certificates I, 10.000% due 3/15/20* 72,992
331,786 GNMA Certificates I, 8.500% due 4/15/21* 348,582
315,773 GNMA Certificates I, 9.000% due 1/15/22* 334,817
451,651 GNMA Certificates I, 7.500% due 2/15/24* 464,917
491,893 GNMA Certificates I, 7.000% due 7/15/24* 498,195
TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS (Cost - $3,985,356) 4,360,240
CORPORATE NOTES - 5.4%
250,000 Shell Oil Corp., 6.950% due 12/15/98
(Cost - $264,973) 259,687
SHORT-TERM INVESTMENT - 4.2%
200,000 Mobil Corp., 6.500% due 12/17/96
(Cost - $199,500) 202,250
TOTAL INVESTMENTS - 100%
(Cost - $4,449,829)*** $ 4,822,177
U.S. GOVERNMENT & AGENCY OBLIGATIONS - 44.9%
$500,000 Federal National Mortgage Association, 7.010% due 3/21/97* $ 501,700
500,000 U.S. Treasury Note, 6.380% due 1/15/99* 515,720
TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS (Cost - $978,203) 1,017,420
CORPORATE NOTES - 13.3%
100,000 Association Corp. N.A., 6.130% due 2/1/98 101,250
100,000 Shell Oil Corp., 6.000% due 1/15/97 100,625
100,000 Union Pacific Corp., 6.480% due 2/1/97 101,000
TOTAL CORPORATE NOTES
(Cost - $296,280) 302,875
SHORT-TERM INVESTMENTS - 41.8%
250,000 Federal Farm Credit Bank, 4.090% due 2/5/96 249,740
250,000 Federal Home Loan Banks, 8.250% due 11/25/96 256,335
100,000 Mobil Corp., 6.500% due 2/17/96 101,125
300,000 U.S. Treasury Note, 6.000% due 6/30/96 301,149
38,000 Repurchase Agreement - Chemical Securities Inc.;
5.798% due 1/2/96; Proceeds at maturity - $38,024;
(Fully collateralized by U.S. Treasury Notes,
6.125% due 5/31/97; Market value - $38,761) 38,000
TOTAL SHORT-TERM INVESTMENTS
(Cost - $932,375) 946,349
TOTAL INVESTMENTS - 100%
(Cost - $2,206,858)*** $ 2,266,644
@ Security exempt from registration under Rule 144A of Securities Act of
1933. These securities may be resold in transactions exempt from
registration, generally to qualified institutional buyers.
* Date shown represents the last range of maturity dates of mortgage
certificates owned.
** Non-income producing security.
*** Aggregate cost for Federal income tax purposes is substantially the
same.
</TABLE
SMITH BARNEY VARIABLE ACCOUNT FUNDS
Statements of Assets and Liabilities
December 31, 1995
</TABLE>
<TABLE> U.S. Government/
<CAPTION> Income and High Quality Reserve Account
<S> Growth Portfolio Securities Portfolio Portfolio
<C> <C> <C>
ASSETS:
Investments, at value (Cost - $24,541,570,
$4,449,829 and $2,206,858, respectively) $ 29,784,044 $ 4,822,177 $ 2,266,644
Cash 683 8,285 9,602
Interest receivable - 44,917 48,168
Dividends receivable 71,897 - -
Total Assets 29,856,624 4,875,379 2,324,414
LIABILITIES:
Payable for Fund shares purchased 1,624 189 100
Management fees payable 14,960 1,844 876
Accrued expenses 57,995 17,819 7,955
Total Liabilities 74,579 19,852 8,931
Total Net Assets $ 29,782,045 $ 4,855,527 $ 2,315,483
NET ASSETS:
Par value of shares of beneficial interest $ 1,954 $ 356 $ 182
Capital paid in excess of par value 24,535,310 4,521,249 2,255,507
Undistributed (overdistributed) net investment income 2,307 23
(156)
Accumulated net realized gain (loss) on security transactions - (38,449)
164
Net unrealized appreciation of investments 5,242,474 372,348 59,786
Total Net Assets $ 29,782,045 $ 4,855,527 $ 2,315,483
Shares of beneficial interest outstanding (unlimited
shares authorized of $0.001 par value) 1,954,464 355,506 182,185
Net asset value and redemption price per share $15.24 $13.66 $12.71
</TABLE>
SMITH BARNEY VARIABLE ACCOUNT FUNDS
Statement of Operations
For the Year Ended December 31, 1995
<TABLE>
<CAPTION> U.S. Government/
<S> Income and High Quality Reserve Account
Growth Portfolio Securities Portfolio Portfolio
<C> <C> <C>
INVESTMENT INCOME:
Dividends $ 880,335 $ - $ -
Interest 146,061 356,059 147,722
Less: Foreign withholding tax (6,552) - -
Total Investment Income 1,019,844 356,059 147,722
EXPENSES
Management fees (Note 2) 172,705 22,181 10,598
Audit and legal 16,812 4,500 2,427
Trustees' fees 14,001 3,803 1,861
Shareholder and system servicing fees 7,735 6,293 5,830
Custody 5,603 1,997 500
Other 5,402 3,880
1,697
Total Expenses 222,258 42,654 22,913
Net Investment Income 797,586 313,405 124,809
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS (NOTE 3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 13,350,899 51,546 347,078
Cost of securities sold 11,682,702 49,781 337,859
Net Realized Gain 1,668,197 1,765 9,219
Change in Net Unrealized Appreciation
(Depreciation) of Investments:
Beginning of year 707,156 (89,870) (6,341)
End of year 5,242,474 372,348 59,786
Increase in Net Unrealized Appreciation 4,535,318 462,218 66,127
Net Gain on Investments 6,203,515 463,983 75,346
Increase in Net Assets From Operations $ 7,001,101 $ 777,388 $ 200,155
</TABLE
</TABLE>
<TABLE> SMITH BARNEY VARIABLE ACCOUNT FUNDS
<CAPTION>
Statements of Changes in Net Assets
For the Years Ended December 31,
<S>
Income and
Growth Portfolio
U.S. Government/
High Quality
Securities
Portfolio
Reserve Account
Portfolio
1995
1994
1995
1994
1995
1994
OPERATIONS:
<C>
<C>
<C>
<C>
<C>
<C>
Net investment income
$
797,586
$
733,994
$
313,405
$
306,260
$
124,809
$
115,212
Net realized gain (loss)
1,668,19
7
1,965,70
8
1,765
(40,196)
9,219
5,899
Increase in net unrealized appreciation
(depreciation)
4,535,31
8
(3,655,2
74)
462,218
(287,515)
66,127
(72,787)
Increase (Decrease) in Net Assets From
Operations
7,001,10
1
(955,572
)
777,388
(21,451)
200,155
48,324
DISTRIBUTION TO
SHAREHOLDERS FROM:
Net investment income
(795,426
)
(736,004
)
(313,396
)
(307,389)
(126,558
)
(114,402)
Net realized gains
(1,680,8
74)
(1,953,2
55)
- -
- -
(9,058)
(5,906)
Decrease in Net Assets From
Distributions to Shareholders
(2,476,3
00)
(2,689,2
59)
(313,396
)
(307,389)
(135,616
)
(120,308)
FUND SHARE TRANSACTIONS:
Net proceeds from sale of shares
217,148
965,156
221,967
281,249
361,578
597,365
Net asset value of shares issued for
reinvestment of dividends
2,476,30
0
2,689,25
9
313,396
307,389
(135,616
)
120,308
Cost of shares reacquired
(4,920,1
84)
(3,163,4
52)
(982,509
)
(870,655)
(773,814
)
(733,457)
Increase (Decrease) in Net Assets From
Fund Share Transactions
(2,226,7
36)
490,963
(447,146
)
(282,017)
(276,620
)
(15,784)
Increase (Decrease) in Net Assets
2,298,06
5
(3,153,8
68)
16,846
(610,857)
(212,081
)
(87,768)
NET ASSETS:
Beginning of year
27,483,9
80
30,637,8
48
4,838,68
1
5,449,538
2,527,56
4
2,615,332
End of year*
$29,782,
045
$27,483,
980
$4,855,5
27
$4,838,68
1
$2,315,4
83
$2,527,56
4
* Includes undistributed
(overdistributed) net
investment income of:
$2,307
$131
$23
$14
$(156)
$1,593
Shares issued and redeemed:
Sold
15,292
64,366
16,901
21,167
27,933
46,380
Issued on reinvestment of dividends and
distributions
163,142
207,025
22,959
24,670
10,670
9,710
Redeemed
(330,477
)
(216,397
)
(72,806)
(65,723)
(60,357)
(57,220)
Net Increase (Decrease)
(152,043
)
54,994
(32,946)
(19,886)
(21,754)
(1,130)
</TABLE
SMITH BARNEY VARIABLE ACCOUNT FUNDS
Notes to Financial Statements
1. Significant Accounting Policies
Smith Barney Variable Account Funds ("Fund"), a Massachusetts
business trust, is registered under the Investment Company Act of 1940,
as amended, as a diversified, open-end management investment company.
The Fund is sold exclusively for use with Variable Annuity Contracts.
The Fund consists of three separate investment portfolios
("Portfolios"): Income and Growth, U.S. Government/High Quality
Securities and Reserve Account Portfolios.
The significant accounting policies consistently followed by the
Fund are: (a) securities transactions are accounted for on trade date;
(b) securities traded on national securities markets are valued at
closing prices on such markets; securities for which no sales prices are
reported are valued at the mean between the closing bid and asked
prices; short-term investments that have a maturity of more than 60 days
are valued at prices based on market quotations for securities of
similar type, yield and maturity; (c) short-term investments and
securities maturing within 60 days are valued at cost plus accreted
discount, or minus amortized premium, which approximates market value;
(d) dividend income is recorded on the ex-dividend date and interest
income is recorded on the accrual basis; (e) gains or losses on the sale
of securities are calculated by using the specific identification
method; (f) 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; (g)
each Portfolio intends to comply with the requirements 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; (h)
the character of income and gains to be distributed are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. At December 31, 1995, reclassifications
were made to the Income and Growth Portfolio capital accounts to reflect
permanent book/tax differences and income and gains available for
distributions under income tax regulations. Accordingly, a portion of
accumulated net realized gains amounting to $30 has been reclassified to
paid-in-capital. Net investment income, net realized gains and net
assets were not affected by this change; and (i) 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 from these amounts.
SMITH BARNEY VARIABLE ACCOUNT FUNDS
Notes to Financial Statements (continued)
2. Management Agreements and Transactions with Affiliated Persons
Smith Barney Mutual Funds Management Inc. ("SBMFM") acts as
investment manager to the Fund. The Income and Growth, U.S.
Government/High Quality Securities and Reserve Account Portfolios pay
SBMFM a management fee calculated at an annual rate of 0.60%, 0.45% and
0.45%, respectively, on average daily net assets. These fees are
calculated daily and paid monthly.
Smith Barney Inc. ("SB"), a subsidiary of Smith Barney Holdings
Inc., acts as distributor of the Fund shares and primary broker for its
portfolio agency transactions. For the year ended December 31, 1995, SB
received brokerage commissions of $15,990.
All officers and two Trustees of the Fund are employees of SB.
3. Investment Transactions
During the year ended December 31, 1995, the aggregate cost of
purchases and proceeds from sales of investments (including maturities,
but excluding short-term securities) were as follows:
Purchases Sales
Income and Growth Portfolio $12,452,253 $13,350,899
U.S. Government/High Quality Securities Portfolio - 51,546
Reserve Account Portfolio 1,196,702 347,078
At December 31, 1995, the aggregate unrealized appreciation and
depreciation of investments for Federal income tax purposes were
approximately as follows:
Income U.S. Gov't./
and High Quality Reserve
Growth Securities Account
Portfolio Portfolio Portfolio
Gross unrealized appreciation $5,754,264 $377,633 $59,882
Gross unrealized depreciation (511,790) (5,285) (96)
Net unrealized appreciation $5,242,474 $372,348 $59,786
SMITH BARNEY VARIABLE ACCOUNT FUNDS
Notes to Financial Statements (continued)
4. Capital Loss Carryforward
At December 31, 1995, the U.S. Government High Quality Securities
Portfolio had, for Federal tax purposes, approximately $38,000 of unused
capital loss carryforwards available to offset future realized capital
gains through December 31, 2002. To the extent that these carryforward
losses are used to offset realized capital gains, it is probable that
the gains so offset will not be distributed.
5. Repurchase Agreements
The Fund purchases (and its custodian takes possession of) U.S.
Government Securities from banks and securities dealers subject to
agreements to resell the securities to the seller at a future date
(generally, the next business day) at an agreed-upon higher repurchase
price. The Fund requires daily maintenance of the market value of the
collateral in amounts at least equal to the repurchase price.
Tax Information (unaudited)
The amount of long-term capital gains paid by the Income and
Growth Portfolio to its shareholders for the fiscal year ended December
31, 1995, was $1,680,890.
</TABLE>
<TABLE>
<CAPTION> SMITH BARNEY VARIABLE ACCOUNT FUNDS
Financial Highlights
(for a share of beneficial interest in each portfolio outstanding throughout each year):
<S>
Income From Investment
Operations
Distributions
Ratios to
Average Net
Assets
Year
Ende
d
Net
Asset
Value,
Beginni
ng of
Year
Net
Invest
ment
Income
(1)
Net
Realized
and
Unrealize
d Gain
(Loss) on
Investmen
ts
Total
Income
(Loss)
From
Operat
ions
Dividen
ds from
Net
Investm
ent
Income
Distribu
tions
From Net
Realized
Gains
Total
Distribu
tions
Net
Asse
t
Valu
e,
End
of
Year
Total
Return
Net
Asset
s,
End
of
Year
(000s
)
Expense
s(1)
Net
Invest
ment
Income
Portf
olio
Turno
ver
Rate
INCOME AND GROWTH PORTFOLIO
1995
(2)
<C>
$13.05
<C>
$0.45
<C>
$3.12
<C>
$3.57
<C>
$(0.44)
<C>
$(0.94)
<C>
$(1.38)
<C>
$15.
24
<C>
27.56%
<C>
$29,7
82
<C>
0.77%
<C>
2.77%
<C>
46.26
%
1994
14.93
0.39
(0.86)
(0.47)
(0.39)
(1.02)
(1.41)
13.0
5
(3.12)
27,48
4
0.75
2.49
40.41
1993
14.36
0.57
2.02
2.59
(0.57)
(1.45)
(2.02)
14.9
3
18.61
30,63
8
0.75
3.59
70.39
1992
13.76
0.49
1.09
1.58
(0.50)
(0.48)
(0.98)
14.3
6
11.48
26,50
1
0.84
3.43
57.49
1991
10.93
0.59
2.82
3.41
(0.58)
0.00
(0.58)
13.7
6
31.34
23,76
4
0.61
4.61
31.86
U.S. GOVERNMENT/HIGH QUALITY SECURITIES PORTFOLIO
1995
12.46
0.94
1.20
2.14
(0.94)
0.00
(0.94)
13.6
6
17.20
4,856
0.87
6.36
0.00
1994
13.35
0.84
(0.89)
(0.05)
(0.84)
0.00
(0.84)
12.4
6
(0.35)
4,838
0.76
5.87
36.33
1993
13.44
0.88
(0.08)
0.80
(0.87)
(0.02)
(0.89)
13.3
5
5.91
5,450
0.74
6.09
4.06
1992
13.45
0.88
0.05
0.93
(0.89)
(0.05)
(0.94)
13.4
4
6.91
5,516
0.93
6.34
11.10
1991
12.74
0.93
0.67
1.60
(0.87)
(0.02)
(0.89)
13.4
5
12.58
4,883
0.67
7.05
12.42
RESERVE ACCOUNT PORTFOLIO
1995
12.39
0.73
0.38
1.11
(0.74)
(0.05)
(0.79)
12.7
1
8.83
2,315
0.97
5.30
16.98
1994
12.75
0.59
(0.34)
0.25
(0.58)
(0.03)
(0.61)
12.3
9
1.99
2,528
0.86
4.77
81.28
1993
12.86
0.69
(0.10)
0.59
(0.69)
(0.01)
(0.70)
12.7
5
4.59
2,615
0.98
4.90
0.00
1992
13.08
0.78
(0.15)
0.63
(0.78)
(0.07)
(0.85)
12.8
6
4.82
2,974
1.01
5.41
18.41
1991
12.66
0.86
0.48
1.34
(0.89)
(0.03)
(0.92)
13.0
8
10.64
3,132
0.65
6.61
23.90
</TABLE>
(1) The Manager waived all or a portion of its fees as follows: $0.03 per
share (0.24% of average net
assets) in 1991 with respect to the Income and Growth Portfolio; $0.02 per
share (0.10%) in 1992 and
$0.04 per share (0.35%) in 1991 with respect to the U.S. Government/High Quality
Securities Portfolio;
and $0.01 per share (0.05%) in 1993, $0.03 per share (0.34%) in 1992 and $0.6
per share (0.45%) in 1991 with respect to the Reserve Account Portfolio,
subject to a voluntary waiver
of the fee to the extent that the aggregate expenses of any Portfolio exceed
1% of the average daily net assets for any year.
(2) New SEC disclosure guidelines require that average commissions be calculated
for the current year only. For the year ended December 31, 1995, average
commissions paid on equity security transactions for
the Income and Growth Portfolio was $0.07.
Independent Auditor's Report
The Shareholders and Trustees of
Smith Barney Variable Account Funds:
We have audited the accompanying statements of assets and liabilities,
including the schedules of investments, of the Income and Growth, U.S.
Government/High Quality Securities and the Reserve Account Portfolios of
Smith Barney Variable Account Funds as of December 31, 1995, the related
statements 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 five-year period then ended. These financial statements and
financial highlights are the responsibility of the Funds' management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
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,
1995, by correspondence with the custodian. 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
Income and Growth, U.S. Government/High Quality Securities and the Reserve
Account Portfolios of Smith Barney Variable Account Funds as of December 31,
1995, the results of their operations for the year then ended, the changes in
their 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 five-year period then
ended, in conformity with generally accepted accounting principles.
February 15, 1996
- 7 -
See Notes to Financial Statements.
- 13 -
SMITH BARNEY VARIABLE ACCOUNT FUNDS, INC.
INCOME AND GROWTH PORTFOLIO
Schedules of Investments (continued)
December 31, 1995
SHARES SECURITY VALUE
See Notes to Financial Statements.
- 16 -
See Notes to Financial Statements.
- 17 -
SMITH BARNEY VARIABLE ACCOUNT FUNDS, INC.
RESERVE ACCOUNT PORTFOLIO
Schedules of Investments (continued)
December 31, 1995
FACE
AMOUNT SECURITY VALUE
See Notes to Financial Statements.
- 19 -
See Notes to Financial Statements.
See Notes to Financial Statements.
See Notes to Financial Statements.
- 25 -
- 28 -
- 29 -
- 27 -
