As filed with the Securities and Exchange Commission on April 30, 1998
Securities Act Registration No. 33 -10830
Investment Company Act Registration No. 811-4959
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 10 [X]
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 10
__________________ [ X ]
Smith Barney Variable Account Funds
(a Maryland Corporation)
(Exact Name of Registrant as Specified in Charter)
388 Greenwich Street
New York, New York 10013
(Address of Principal Executive Offices)
(212) 816-6474
(Registrants Telephone Number, including Area Code)
Christina T. Sydor, Secretary
Smith Barney Variable Account Funds
388 Greenwich Street
New York, New York 10013
(Name and Address of Agent for Service)
_____________________
Copies to:
John Baumgardner, Esq.
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
_______________
Approximate Date of Proposed Public Offering: Continuous.
It is proposed that this filing will become effective (check appropriate
box):
[X] Immediately upon filing pursuant to [ ] On (date) pursuant to
paragraph (b)
paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to [ ]
On (date) pursuant to
paragraph (a)(1) paragraph (a)(1)
[ ] 75 days after filing pursuant to [ ]
On (date) pursuant to
paragraph (a)(2) paragraph (a)(2) of rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates
a new effective date for a previously filed
post effective amendment.
Title of Securities Being Registered: Shares of Beneficial Interest
SMITH BARNEY VARIABLE ACCOUNT FUNDS
FORM N-1A
CROSS REFERENCE SHEET
PURSUANT TO RULE 495(a)
Part A Item No. Prospectus Caption
1. Cover Page Cover Page
2. Synopsis Prospectus Summary
3. Financial Highlights Financial Highlights
4. General Description of Cover Page; Prospectus
Registrant Summary; Investment Objective
and Management
Policies;
Additional Information
5. Management of the Fund Management of the Fund; The
Funds Expenses;
Additional
Information
6. Capital Stock and Other Investment Objective and
Securities Management Policies;
Dividends,
Distributions and
Taxes; Additional Information
7. Purchase of Securities Purchase of Shares; Valuation
Being Offered of Shares; Redemption of
Shares; Exchange
Privilege;
Distributor; Minimum Account
Size; Additional Information
8. Redemption or Repurchase Redemption of Shares;
Purchase of
Shares; Exchange
Privilege
9. Legal Proceedings Not Applicable
Part B Item No. Statement of Additional
Information Caption
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information Distributor; Additional
and Distributor Information
13. Investment Objectives Investment Objective and
and Policies Management Policies
14. Management of the Management of the Fund;
Fund Distributor
15. Control Persons and Management of the Fund
Principal Holders of
Securities
16. Investment Advisory Management of the Fund;
and Other Services Distributor
17. Brokerage Allocation Investment Objective and
Management Policies;
Distributor
18. Capital Stock and other Purchase of Shares;
Securities Redemption of Shares; Taxes
19. Purchase, Redemption Purchase of Shares;
and Pricing of Securities Redemption of Shares;
Being Offered Valuation of Shares; Exchange
Privilege; Distributor
20. Tax Status Taxes
21. Underwriters Distributor
22. Calculation of Performance Data
Performance Data
23. Financial Statement Financial Statements
SMITH BARNEY VARIABLE ACCOUNT FUNDS
PART A PROSPECTUS
SMITH BARNEY VARIABLE ACCOUNT FUNDS
388 Greenwich Street
New York, New York 10013
1-800-451-2010
PROSPECTUS
Smith Barney Variable Account Funds, (the Fund) the investment
underlying certain variable annuity and variable life insurance contracts, is
an investment company offering a choice of three different Portfolios. Each
Portfolio is separately managed to achieve its own investment objective.
The Income and Growth Portfolio seeks current income and
long-term growth of income and capital. It invests
primarily, but not exclusively, in common stocks.
The U.S. Government/High Quality Securities Portfolio
seeks high current income and security of principal from a
portfolio consisting primarily of U.S. Government Obligations
and other high quality fixed income securities.
The Reserve Account Portfolio seeks current income from a
portfolio of money market instruments and other high quality
fixed income obligations with limited maturities and employs
an immunization strategy to minimize the risk of loss of
account value. This Portfolio currently has insufficient
assets to enable it to invest in accordance with its
investment program.
Shares of the Fund are offered only to insurance company separate
accounts (the Separate Accounts) which fund certain variable annuity and
variable life insurance contracts (the Contracts). The Separate Accounts
invest in shares of one or more of the Portfolios in accordance with
allocation instructions received from Contract owners. Such allocation
rights
are further described in the accompanying Contract Prospectus.
This Prospectus sets forth concisely certain information about
the
Fund and the Portfolios, including service fees and expenses, that
prospective
investors will find helpful in making an investment decision. Investors are
encouraged to read this Prospectus carefully and retain it for future
reference.
Additional information about the Fund is contained in a Statement
of
Additional Information, (the SAI) dated April 30, 1998, that is available
upon
request and without charge by calling or writing the Fund at the telephone
number or address set forth above or by contacting a Smith Barney Financial
Consultant. The SAI has been filed with the Securities and Exchange
Commission (the SEC) and is incorporated by reference into this Prospectus in
its entirety.
This Prospectus should be read in conjunction with the prospectus
for
the Contracts.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Prospectus is April 30, 1998.
TABLE OF CONTENTS
Prospectus Pages
Financial Highlights 3
Valuation of Shares 4
Investment Objectives 4
Funds Investment Program 5
Dividends, Automatic Reinvestment and Taxes 7
Redemption of Shares 7
Performance 7
Management of The Fund 8
Shares of the Fund 9
Additional Information 10
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest in each series outstanding throughout
each period):
The following information for each of the years in the nine-year period ended
December 31, 1997 has been audited by KPMG
Peat Marwick LLP, independent auditors whose report thereon appears in the
Funds Annual Report dated December 31, 1997.
The information set out below should be read in conjunction with the
financial statements and related notes that also
appear in the Funds 1997 Annual Report, which is incorporated by reference
into the SAI.
Income From Investment
Operations
Distribut
ions
Ratios to Average Net
Assets
Year
Ende
d
Net
Asset
Value,
Beginni
ng
of Year
Net
Investm
ent
Income(
1)
Net
Realized
and
Unrealize
d
Gain
(Loss)
on
Investmen
t
Total
Income
(loss)
From
Investm
ent
Operati
ons
Dividend
s
from Net
Investme
nt
Income
Distribut
ions
from Net
Realized
Gains
Total
Distribu
tions
Net
Asset
Value,
End of
Year
Total
Retur
n
Net
Assets
End of
Year
(000s)
Expenses
(1)
Net
Investm
ent
Income
Portf
olio
Turno
ver
Rate
INCOME AND GROWTH PORTFOLIO
1997
14.69
0.47
$3.61
$4.08
$(0.10)
$(1.38)
$(1.48)
$17.29
$28.1
1
$16,23
6
0.77%
2.18%
38.00
%
1996
15.24
0.57
2.68
3.25
(0.56)
(3.24)
(3.80)
14.69
21.02
20,812
0.74
2.39
30.00
1995
13.05
0.45
3.12
3.57
(0.44)
(0.94)
(1.38)
15.24
27.56
29,782
0.77
2.77
46.26
1994
14.93
0.39
(0.86)
(0.47)
(0.39)
(1.02)
(1.41)
13.05
(3.12
)
27,484
0.75
2.49
40.41
1993
14.36
0.57
2.02
2.59
(0.57)
(1.45)
(2.02)
14.93
18.61
30,638
0.75
3.59
70.39
1992
13.76
0.49
1.09
1.58
(0.50)
(0.48)
(0.98)
14.36
11.48
26,501
0.84
3.43
57.49
1991
10.93
0.59
2.82
3.41
(0.58)
- -
(0.58)
13.76
31.34
23,764
0.61
4.61
31.86
1990
12.66
0.64
(1.70)
(1.06)
(0.67)
- -
(0.67)
10.93
(8.37
)
16,819
0.50
5.86
17.27
1989
(a)
12.50
0.20
.14
.34
(0.18)
- -
(0.18)
12.66
2.68+
13,346
0.50*
6.43*
8.21
U.S. GOVERNMENT/HIGH QUALITY SECURITIES PORTFOLIO
1997
12.90
.72
(.02)
.70
(0.4)
(0.90)
(.94)
12.66
5.43
1,617
1.00
4.33
.43%
1996
13.66
1.22
(0.76)
(0.46)
(1.22)
- -
(1.22)
12.90
3.34
2,876
0.98
6.30
13.00
1995
12.46
0.94
1.20
2.14
(0.94)
- -
(0.94)
13.66
17.20
4,856
0.87
6.36
0.00
1994
13.35
0.84
(0.89)
(0.05)
(0.84)
- -
(0.84)
12.46
(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)
13.35
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)
13.44
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)
13.45
12.58
4,883
0.67
7.05
12.42
1990
12.54
0.83
0.19
1.02
(0.82)
- -
(0.82)
12.74
8.11
3,600
0.50
8.31
5.69
1989
(b)
12.50
0.34
0.04
0.38
(0.34)
- -
(0.34)
12.54
3.01+
2,151
0.50*
8.31*
- -
RESERVE ACCOUNT PORTFOLIO
1997
10.99
.15
- -
.15
(.25)
(3.19)
(3.44)
7.70
1.36
97
1.00
1.59
0%
1996
12.71
1.92
(1.72)
0.20
(1.92)
- -
(1.92)
10.99
1.57
435
1.00
4.98
- -
1995
12.39
0.73
0.38
1.11
(0.74)
(0.05)
(0.79)
12.71
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)
12.39
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)
12.75
4.59
2,615
0.98
4.90
- -
1992
13.08
0.78
(0.15)
0.63
(0.78)
(0.07)
(0.85)
12.86
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)
13.08
10.64
3,132
0.65
6.61
23.90
1990
12.55
0.93
0.11
1.04
(0.93)
- -
(0.93)
12.66
8.30
2,740
0.50
7.66
7.65
1989
(c)
12.50
0.36
0.05
0.41
(0.36)
- -
(0.36)
12,55
3.26+
2,008
0.50*
8.28*
- -
1. Under a voluntary fee waiver, the aggregate expenses of the Portfolios may
not exceed 1.00% of the average daily net
assets for any year. With respect to the U.S. Government/High Quality
Securities Portfolio, the investment manager waived a
portion of its fees in the amount of $0.80 per share (0.49% of average net
assets) and also reimbursed the Portfolio for
%719 in expenses for the year ended December 31, 1997. In addition, if such
fees were not waived and expenses reimbursed,
the net investment income per share and expense ratio would have been $0.64
and 1.49%, respectively, for the year ended
December 31, 1997. With respect to the Reserve Account Portfolio, the
investment manager waived a portion of its fees in
the amount of $1.61 per share (10.65% of average net assets) in 1997, $0.15
per share (0.45% of average net assets) in 1996
and $0.01 per share (0.05% of average net assets) in 1993. The investment
manager also reimbursed the Portfolio for $19,395
and $19,861 in expenses for the years ended December 31, 1997 and 1996,
respectively. In addition, if such fees were not
waived and expenses reimbursed, the net investment income (loss) per share
would have been $(1.76) and $1.27 and the expense
ratio would have been 11.65% and 2.79%, for the year ended December 31, 1997
and 1996, respectively. +Total return is not
annualized, as the result may not be representative of the total return for
the year *annualized (a) From July 20, 1989
(commencement of operations) to December 31, 1989. (b) From July 31, 1989
(commencement of operations to December 31, 1989.
(c) From August 2, 1989 (commencement of operation) to December 31, 1989
The Fund is intended to provide a suitable investment for
variable
annuity and variable life insurance contracts (the Contracts) and shares of
the Portfolios are offered only for purchase by insurance company separate
accounts as an investment for Contracts, as described in the accompanying
Contract prospectus.
Each of the Portfolios has an investment objective similar to an
existing (or previously offered) Smith Barney mutual fund. The Income and
Growth Portfolio is most similar to Smith Barney Funds, Inc - Large Cap Value
Fund, the U.S. Government/High Quality Securities Portfolio is most similar
to
the previously offered Smith Barney Funds, Inc. U.S. Government Securities
Fund and the Reserve Account Portfolio is most similar to the previously
offered Smith Barney Funds Income Return Account Portfolio; and the same
experienced professionals who manage the existing Smith Barney Funds, Inc.
Funds also manage the two corresponding Portfolios of the Fund.
Shares of each Portfolio are offered to Separate Accounts at
their net
asset value, without a sales charge, next determined after receipt of an
order
by an insurance company. The offering of shares of a Portfolio may be
suspended from time to time and the Fund reserves the right to reject any
specific purchase order.
VALUATION OF SHARES
The net asset value of each Portfolios shares is determined as of
the
close of regular trading on the New York Stock Exchange (NYSE), which is
currently 4:00 P.M. New York City time, on each day that the NYSE is open, by
dividing the Portfolios net assets by the number of its shares outstanding.
Securities that are listed or traded on a national securities exchange are
valued at the last sale on the principal exchange on which they are listed
and
securities trading on the NASDAQ System are valued at the last sale reported
as of the close of the NYSE. If no last sale is reported, the foregoing
securities and over-the-counter securities other than those traded on the
NASDAQ System, are valued at the mean between the last reported bid and asked
prices. Fixed income obligations are valued at the mean of bid and asked
prices based on market quotations for those securities or if no quotations
are
available, then for securities of similar type, yield and maturity. 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. Short-term investments that have a maturity of 60 days or less are
stated at amortized cost, if it approximates market value. The value of
other
investments of the Fund, if any, including restricted securities, will be
determined in good faith at fair value under procedures established by and
under the general supervision of the Trustees.
INVESTMENT OBJECTIVES
The Fund consists of three investment portfolios, the Income and
Growth Portfolio, the U.S. Government/High Quality Securities Portfolio and
the Reserve Account Portfolio. The Income and Growth Portfolio seeks current
income and long-term growth of income and capital by investing primarily, but
not exclusively, in common stocks. The U.S. Government/High Quality
Securities Portfolio seeks high current income and security of principal by
investing primarily in obligations of the U.S. Government, its agencies or
its
instrumentalities and other high quality fixed income securities. The
Reserve
Account Portfolio seeks current income from a portfolio of money market
instruments and other high quality fixed income obligations with limited
maturities and employs an immunization strategy (see below) to minimize the
risk of loss of account value, [although it currently has insufficient assets
to enable it to pursue its investment objective]. Of course, no assurance can
be given that a Portfolios objective will be achieved.
THE FUNDS INVESTMENT PROGRAM
The Income and Growth Portfolio invests primarily in common
stocks
offering a current return from dividends and will also normally include some
interest-paying fixed income securities (such as U.S. Government securities,
investment grade bonds and debentures) and high quality money market
instruments (such as commercial paper and repurchase agreements
collateralized
by U.S. Government securities with broker/dealers or other financial
institutions, including the Funds Custodian). At least 65% of the Portfolios
assets will at all times be invested in equity securities. The Portfolio may
also purchase preferred stocks and convertible securities. Temporary
defensive investments or a higher percentage of fixed income securities may
be
made when deemed advisable. In the selection of common stock investments,
emphasis is generally placed on issues with established dividend records as
well as potential for price appreciation. From time to time, however, a
portion of the assets may be invested in non-dividend paying stocks. The
Portfolio may make investments in foreign securities (including EDRs, CDRs
and
GDRs) though management currently intends to limit such investments to 5% of
the Portfolios assets and an additional 10% of its assets may be invested in
American Depository Receipts (ADRs) representing shares in foreign securities
that are traded in United States securities markets. The value of an ADR
closely reflects the value of the foreign security and any fluctuation in the
price of the foreign security will affect the Portfolios share price. (See
Additional Information.)
The U.S. Government/High Quality Securities Portfolio (the
Government/High Quality Portfolio) invests primarily in a combination of (i)
securities of the U.S. Government, its agencies or its instrumentalities and
(ii) other high quality fixed income securities (including corporate bonds)
rated within the two highest categories by a Nationally Recognized
Statistical
Rating Organization (NRSRO) such as Standard & Poors Ratings Group (S&P)
(AAA,
AA) or Moodys Investors Service, Inc. (Moodys) (Aaa, Aa) or if unrated, are
determined to be of comparable quality by the Manager. Except when the
Portfolio is in a temporary defensive investment position, at least 65% of
the
Portfolios total assets will be invested in these securities, including the
securities held subject to repurchase agreements.
It is anticipated that a substantial portion of the Portfolios
investments will consist of GNMA Certificates, which are mortgage-backed
securities representing part ownership of a pool of mortgage loans on which
timely payment of interest and principal is guaranteed by the U.S.
Government.
As a hedge against changes in interest rates, the Government/High Quality
Portfolio may enter into agreements with dealers in GNMA Certificates whereby
the Portfolio agrees to purchase or sell an agreed-upon principal amount of
GNMA Certificates at a specified price on a certain date; provided, however,
that settlement occurs within 120 days of the trade date. For more detailed
information, see Additional Information on page 11. The balance of the
investments of the Government/High Quality Portfolio will be fixed income
securities of private issuers and money market instruments, including
certificates of deposit, bankers acceptances, and commercial paper rated A-1
or A-2 by S&P or Prime-1 or Prime-2 by Moodys.
The Reserve Account Portfolio currently has insufficient assets
to
enable it to invest in accordance with its investment policies. Under its
investment policies, it invests in high-grade fixed income obligations
(including money market instruments) with a maximum maturity of seven years.
Such obligations include U.S. Government Obligations; commercial paper rated
A-1 or A-2 by S&P or Prime-1 or Prime-2 by Moodys; high quality corporate
notes and bonds, including floating rate issues, rated within the two highest
categories by an NRSRO such as S&P or Moodys or, if not rated, of comparable
quality as determined by the Manager; bankers acceptances; certificates of
deposit (see Additional Information); and securities backed by letters of
credit. Normally, a portion of the Portfolio will consist of investments
that
mature in two to seven years; however, it is expected there will be occasions
when as much as all of the Portfolio will be invested in money market
instruments. This portfolio composition is intended to achieve a higher
level
of income than would otherwise be available from an exclusively short-term
portfolio with substantially less risk than that of a conventional bond or
note portfolio. While minor day-to-day price fluctuations are unavoidable,
measured over a three-month period, it is believed that the Portfolios
immunization strategy will produce sufficient income accrual during adverse
market conditions to offset any potential loss in the Portfolio security
value.
None of the Portfolios will engage in the trading of
securities for
the purpose of realizing short-term profits; however, each Portfolio will
adjust its portfolio as considered advisable in view of prevailing or
anticipated market conditions and the Portfolios investment objective.
Investors should realize that shares of each Portfolio will fluctuate with
the
market value of the securities in the Portfolio.
The Fund is subject to diversification requirements promulgated
by the
U.S. Treasury Department which, among other things, currently limit each
Portfolio to investing no more than 55% of its total assets in any one
investment. See Dividends, Distributions and Taxes.
Each Portfolio may seek to increase its net investment income by
lending its securities to brokers, dealers and other financial institutions
provided such loans are callable at any time and are continuously secured by
cash or U.S. Government Obligations equal to no less than the market value,
determined daily, of the securities loaned. Such lending will be limited to
not more than one-third of the value of a Portfolios total assets. The
Portfolio will continue to be entitled to the interest payable on the loaned
security and, in addition, will receive interest on the amount of the loan,
less finders, administrative and custodial fees. In the event of the
bankruptcy of the other party to the transaction, a Portfolio could
experience
delays in recovering the securities loaned. To the extent that, in the
meantime, the value of the securities may have increased, the Portfolio could
experience a loss. In all cases, MMC must find the creditworthiness of the
other party to the transaction to be satisfactory under guidelines approved
by
the Trustees. See the SAI for further information on lending of securities.
The investment objective and policies of each Portfolio are non-
fundamental and, as such, may be modified by the Trustees of the Fund
provided
such modification is not prohibited by the investment restrictions (which are
set forth in the SAI) or applicable law, and any such change will first be
disclosed in the then current Prospectus.
Year 2000. The investment management services provided to the Fund by
Mutual Management corp (MMC or the Manager) and the services provided to
shareholders by Smith Barney, the Funds Distributor, depend on the smooth
functioning of their computer systems. Many computer software systems in use
today cannot recognize the year 2000, but revert to 1900 or some other date,
due to the manner in which dates were encoded and calculated. That failure
could have a negative impact on the Funds operations, including the handling
of securities trades, pricing and account services. MMC and Smith Barney
have advised the Fund that they have been reviewing all of their computer
systems and actively working on necessary changes to their systems to prepare
for the year 2000 and expect that their systems will be compliant before that
date. In addition, MMC has been advised by the Funds custodian, transfer
agent and accounting service agent that they are also in the process of
modifying their systems with the same goal. There can, however, be no
assurance that MMC, Smith Barney or any other service provider will be
successful, or that interaction with other non-complying computer systems
will not impair Fund services at that time.
DIVIDENDS, AUTOMATIC REINVESTMENT AND TAXES
Each Portfolio of the Fund intends to qualify as a regulated
investment company under the Internal Revenue Code (the Code) and to declare
and make annual distributions of substantially all of its taxable income and
net taxable capital gains to its shareowners (i.e. the Separate Accounts).
Such distributions are automatically invested in additional shares of the
Portfolio at net asset value and are includable in gross income of the
Separate Accounts holding such shares. See the accompanying Contract
Prospectus for information regarding the federal income tax treatment of
distributions to the Separate Accounts and to holders of the Contracts.
Each Portfolio of the Fund is subject to asset diversification
regulations promulgated by the U.S. Treasury Department under the Code. The
regulations generally provide that, as of the end of each calendar quarter or
within 30 days thereafter, no more than 55% of the total assets of the
Portfolio may be represented by any one investment, no more than 70% by any
two investments, no more than 80% by any three investments, and no more than
90% by any four investments. For this purpose all securities of the same
issuer are considered a single investment. If a Portfolio should fail to
comply with these regulations, Contracts invested in that Portfolio would not
be treated as annuity, endowment or life insurance contracts under the Code.
REDEMPTION OF SHARES
The redemption price of the shares of each Portfolio will be the
net
asset value next determined after receipt by the Fund of a redemption order
from a Separate Account, which may be more or less than the price paid for
the
shares. The Fund will ordinarily make payment within one business day,
though
redemption proceeds must be remitted to a Separate Account on or before the
seventh day following receipt of proper tender, except on a day on which the
NYSE is closed or as permitted by the Securities and Exchange Commission in
extraordinary circumstances. Payment to the Contract owner is described in
the accompanying Contract Prospectus.
PERFORMANCE
From time to time the Fund may include a Portfolios total return,
average annual total return, yield and current distribution return in
advertisements and/or other types of sales literature. These figures are
based on historical earnings and are not intended to indicate future
performance. In addition, these figures will not reflect the deduction of
the charges that are imposed on the Contracts by the Separate Account (see
the
Contract Prospectus) which, if reflected, would reduce the performance
quoted.
Total return is computed for a specified period of time assuming reinvestment
of all income dividends and capital gains distributions at net asset value on
the ex-dividend dates at prices calculated as stated in this Prospectus, then
dividing the value of the investment at the end of the period so calculated
by
the initial amount invested and subtracting 100%. The standard average
annual
total return, as prescribed by the Securities and Exchange Commission (SEC),
is derived from this total return, which provides the ending redeemable
value.
Such standard total return information may also be accompanied with
nonstandard total return information over different periods of time by means
of aggregate, average, year-by-year, or other types of total return figures.
The yield of a Portfolio refers to the net investment income earned by
investments in the Portfolio over a thirty-day period. This net investment
income is then annualized, i.e., the amount of income earned by the
investments during that thirty-day period is assumed to be earned each 30-day
period for twelve periods and is expressed as a percentage of the
investments.
The yield quotation is calculated according to a formula prescribed by the
SEC
to facilitate comparison with yields quoted by other investment companies.
The Fund calculates current distribution return for the Income and Growth
Portfolio by dividing the distributions from investment income declared
during
the most recent twelve months by the net asset value on the last day of the
period for which current distribution return is presented. The Fund
calculates
current distribution return for the U.S. Government Securities Portfolio by
annualizing the most recent quarterly distribution from investment income and
dividing by the net asset value on the last day of the period for which
current distribution return is presented. The Fund calculates current
distribution return for the Reserve Portfolio by annualizing the most recent
monthly distribution and dividing by the net asset value on the last day of
the period for which current distribution return is presented. A Portfolios
current distribution return may vary from time to time depending on market
conditions, the composition of its investment portfolio and operating
expenses. These factors and possible differences in the methods used in
calculating current distribution return, and the charges that are imposed on
the Contracts by the Separate Account, should be considered when comparing
the
Portfolios current distribution return to yields published for other
investment companies and other investment vehicles.
MANAGEMENT
The Trustees are responsible for the direction and supervision of
the
Funds business and operations. The Fund employs Mutual Management Corp.,
formerly Smith Barney Mutual Funds Management Inc., a wholly-owned subsidiary
of Salomon Smith Barney Holdings Inc. (Holdings), to manage the day to day
operations of each Portfolio pursuant to a management agreement entered into
by the Fund on behalf of each Portfolio. Holdings is also the parent company
of Smith Barney Inc. (Smith Barney) and is a subsidiary of the Travelers
Group
Inc., a diversified financial service holding company.
The Manager provides each Portfolio with advice and assistance
with
respect to the acquisition, holding or disposal of securities and
recommendations with respect to other aspects of the business and affairs of
each Portfolio and furnishes each Portfolio with bookkeeping, accounting and
administrative services, office space and equipment, and the services of the
officers and employees of the Fund. By written agreement the Research and
other departments and staff of Smith Barney will furnish the Manager with
information, advice and assistance and will be available for consultation on
the Funds Portfolios, thus Smith Barney may also be considered an investment
adviser to the Fund. Smith Barney services are paid for by the Manager;
there
is no charge to the Fund for such services. For the services provided by the
Manager, the Fund pays the Manager a fee calculated at the annual rate of
0.60% paid monthly of the average daily net assets of the Income and Growth
Portfolio and a fee calculated at the annual rate of 0.45% paid monthly of
the
average daily net assets of each of the Government/High Quality Portfolio and
the Reserve Account Portfolio. The Manager has agreed to waive its fee to
the
extent that the aggregate expenses of any Portfolio exclusive of taxes,
brokerage, interest and extraordinary expenses, such as litigation and
indemnification expenses, exceed 1% of the average daily net assets for any
fiscal year of the Portfolio. The 1% voluntary expense limitation shall be
in
effect until it is terminated by notice to shareowners and by supplement to
the then current Prospectus. For the Funds last fiscal year the management
fee was .60% of the Income and Growth Portfolios average net assets, .45% of
the U.S. Government/High Quality Portfolios average net assets and .45% of
the
Reserve Account Portfolios average net assets; and total expenses were .77%,
1% and 1%, respectively.
Smith Barney distributes shares of the Fund as principal
underwriter.
In addition, brokerage is allocated to Smith Barney, provided that, in the
judgment of the Trustees of the Fund, the commission, fee or other
remuneration received or to be received by Smith Barney (or any broker/dealer
affiliate of Smith Barney that is also a member of a securities exchange) is
reasonable and fair compared to the commission, fee or other remuneration
received by other brokers in connection with comparable transactions
involving
similar securities being purchased or sold on a securities exchange during
the
same or comparable period of time. In all trades to be directed to Smith
Barney, the Fund has been assured that its orders will be accorded priority
over those received from Smith Barney for its own account or for any of its
directors, officers or employees. It may be expected that the preponderance
of transactions in the Government/High Quality Portfolio and the Reserve
Account Portfolio will be principal transactions. The Fund will not deal with
Smith Barney in any transaction in which Smith Barney acts as principal.
Bruce Sargent is primarily for management of the Income and
Growth
Portfolio, Ellen C. Sonsino is a co-portfolio manager of the Portfolio.
James Conroy is primarily for management of the U.S. Government/High Quality
Securities Portfolio and Patrick Sheehan is primarily responsible for the
Reserve Account Portfolio, including making all investment decisions. Mr.
Sargent is Managing Director of Smith Barney and has been involved in equity
investing for Smith Barney for over 25 years and currently manages
approximately $10 billion in assets. Ms. Sonsino is a Managing Director of
Smith Barney. She has approximately 20 years of Wall Street experience, and
has been with Smith Barney since 1984. Mr. Conroy is Vice President of the
Manager and is responsible for managing the day-to-day operations of the U.S.
Government Securities Portfolio, including the making of investment
decisions.
In addition, Mr. Conroy has also served as Vice President and Investment
Officer of Smith Barney Managed Governments Fund Inc. since February 1990 and
as First Vice President and Investment Officer of Smith Barney Government
Securities Fund since its inception in March 1984. Mr. Sheehan is Managing
Director of Smith Barney and Vice President of the Fund and of other
investment companies associated with Smith Barney. Prior to joining Smith
Barney in January 1992, Mr. Sheehan was a portfolio manager of various fixed-
income investment companies of Value Line Inc. from June 1990 through January
1992. From January 1989 through May 1990 Mr. Sheehan was a Senior Vice
President of Seamans Bank for Savings in charge of assets & liability
management.
On April 6, 1998, the Travelers Group (Travelers) announced that
it
had entered into a Merger Agreement with Citicorp. The transaction, which is
expected to be completed during the third quarter of 1998, is subject to
various regulatory approvals, including approval by the Federal Reserve
Board.
The transaction is also subject to approval by the stockholders of each of
Travelers and Citicorp. Upon consummation of the merger, the surviving
corporation would be a bank holding company subject to regulation under the
Bank Holding Company Act of 1956 (the BHCA), the requirements of the Glass-
Steagall Act and certain other laws and regulations. Although the effects of
the merger of Travelers and Citicorp and compliance with the requirements of
the BHCA and the Glass-Steagall Act are still under review, the MMC does not
believe that its compliance with applicable law following the merger of
Travelers and Citicorp will have a material adverse effect on its ability to
continue to provide the Fund with the same level of investment advisory
services that it currently receives.
The Manager was incorporated on March 12, 1968 under the laws of
the
State of Delaware. As of March 31, 1998 the Manager had aggregate assets
under the management of approximately $100.5 billion. The Manager, Smith
Barney and Holdings are each located at 388 Greenwich Street, New York, NY
10013. The term Smith Barney in the title of the Fund has been adopted by
permission of Smith Barney and is subject to the right of Smith Barney to
elect that the Fund stop using the term in any form or combination of its
name.
SHARES OF THE FUND
The Fund, an open-end, diversified, managed investment company,
is
organized as a Massachusetts business trust pursuant to the Declaration of
Trust dated December 18, 1986. The Trustees have authorized the issuance of
three series of shares, each representing shares in one of three separate
Portfolios - the Income and Growth Portfolio, the U.S. Government/High
Quality
Securities Portfolio and the Reserve Account Portfolio. The Trustees also
have the power to create additional series of shares. The assets of each
Portfolio will be segregated and separately managed. Each share of a
Portfolio represents an equal proportionate interest in that Portfolio with
each other share of the same Portfolio and is entitled to such dividends and
distributions out of the net income of that Portfolio as are declared in the
discretion of the Trustees. Shareowners are entitled to one vote for each
share held and will vote by individual Portfolio except to the extent
required
by the Act. The Fund is not required to hold annual shareowner meetings,
although special meetings may be called for the Fund as a whole, or a
specific
Portfolio, for purposes such as electing or removing Trustees, changing
fundamental policies or approving a management contract. Shareowners may, in
accordance with the Declaration of Trust, cause a meeting of shareowners to
be
held for the purpose of voting on the removal of Trustees. In accordance
with
current law and as explained further in the accompanying Contract Prospectus,
the Separate Account will vote its shares in accordance with instructions
received from policyowners.
ADDITIONAL INFORMATION
GNMA Securities. Government National Mortgage Association
(GNMA), an
agency of the United States Government, guarantees the timely payment of
monthly installments of principal and interest on modified pass-through
Certificates, whether or not such amounts are collected by the issuer of
these
Certificates on the underlying mortgages. In the opinion of an Assistant
Attorney General of the United States, this guarantee is backed by the full
faith and credit of the United States. Scheduled payments of principal and
interest are made each month to holders of GNMA Certificates (such as the
Government/High Quality Portfolio). The average life of GNMA Certificates
varies with the maturities of the underlying mortgages (with maximum
maturities of 30 years) but is likely to be substantially less than the
original maturity of the mortgage pools underlying the securities as a result
of prepayments, refinancing of such mortgages or foreclosure. Unscheduled
prepayments of mortgages are passed through to the holders of GNMA
Certificates at par with the regular monthly payments of principal and
interest, which have the effect of reducing future payment on such
Certificates.
GNMA Certificates have historically involved no credit risk;
however,
due to fluctuations in interest rates, the market value of such securities
will vary during the period of a shareholders investment in the
Government/High Quality Portfolio. Prepayments and scheduled payments of
principal will be reinvested by the Fund in then available GNMA Certificates
which may bear interest at a rate lower or higher than the Certificate from
which the payment was received. As with other debt securities, the price of
GNMA Certificates is likely to decrease in times of rising interest rates;
however, in periods of falling interest rates the potential for prepayment
may
reduce the general upward price increase of GNMA Certificates that might
otherwise occur.
Other U.S. Government Obligations. In addition to GNMA
Securities and
direct obligations of the U.S. Treasury (such as Treasury Bills, Notes and
Bonds), U.S. Government Obligations in which the Fund may invest include: (1)
obligations of, or issued by, Banks for Cooperatives, Federal Land Banks,
Federal Intermediate Credit Banks, Federal Home Loan Banks, the Federal Home
Loan Bank Board, any wholly-owned Government corporation so designated in
Section 9101 (3) of Title 31, or the Student Loan Marketing Association; (2)
other securities fully guaranteed as to principal and interest by the United
States of America; (3) other obligations of, or issued by, or fully
guaranteed
as to principal and interest by the Federal National Mortgage Association or
any agency of the United States; and (4) obligations currently or previously
sold by the Federal Home Loan Mortgage Corporation.
Bank Obligations. Obligations purchased from U.S. banks or other
financial institutions that are members of the Federal Reserve System or the
Federal Deposit Insurance Corporation (FDIC) (including obligations of
foreign
branches of such members) if either: (a) the principal amount of the
obligation is insured in full by the FDIC, or (b) the issuer of such
obligation has capital, surplus and undivided profits in excess of $100
million or total assets of $1 billion (as reported in its most recently
published financial statements prior to the date of investment ). These
obligations include:
Bankers Acceptance: A short-term credit instrument evidencing
the
obligation of a bank to pay a draft drawn upon it by a customer. This
instrument reflects the obligation not only of the drawer but also of
the bank to pay the face amount of the instrument upon maturity.
Certificate of Deposit: A certificate evidencing the obligation
of a
bank to repay funds deposited with it earning a specified rate of
interest
over a given period.
Foreign Securities. Such securities involve considerations that
are
not ordinarily associated with investing in domestic securities including
currency exchange control laws, the possibility of expropriation, seizure, or
nationalization of foreign assets, less liquidity and more volatility in
foreign securities markets and the impact of political, social or diplomatic
developments or the adoption of other foreign government restrictions that
might adversely affect the payment of principal, interest or dividends on the
securities. Similar considerations may apply to obligations of foreign
branches of U.S. banks and to American Depository Receipts.
Repurchase Agreements. A repurchase agreement arises when the
Fund
purchases a security for a Portfolio and simultaneously agrees to resell it
to
the vendor at an agreed-upon future date, normally on the next business day.
The resale price is greater than the purchase price, which reflects an
agreed-
upon rate of return for the period the Portfolio holds the security and which
is not related to the coupon rate on the purchased security. The Fund
requires continual maintenance of the market value of the collateral in
amounts at least equal to the resale price, thus risk is limited to the
ability of the seller to pay the agreed-upon amount on the delivery date;
however, if the seller defaults, realization upon the collateral by the Fund
may be delayed or limited or the Portfolio might incur a loss if the value of
the collateral securing the repurchase agreement declines and might incur
disposition costs in connection with liquidating the collateral. A Portfolio
will only enter into repurchase agreements with broker/dealers or other
financial institutions which are deemed creditworthy by the Manager under
guidelines approved by the Trustees. It is the policy of the Fund not to
invest in repurchase agreements that do not mature within seven days if any
such investment together with any other illiquid assets held by the Portfolio
amount to more than 10% of that Portfolios total assets.
The Fund may enter into reverse repurchase agreements on behalf
of the
Reserve Account Portfolio and the U.S. Government/High Quality Securities
Portfolio. Each of these Portfolios may enter into reverse repurchase
agreements with broker/dealers and other financial institutions. Such
agreements involve the sale of Portfolio securities with an agreement to
repurchase the securities at an agreed-upon price, date and interest payment
and have the characteristics of borrowing. Since the proceeds of borrowings
under reverse repurchase agreements are invested, this would introduce the
speculative factor known as leverage. The securities purchased with the
funds
obtained from the agreement and securities collateralizing the agreement will
have maturity dates no later than the repayment date. Generally the effect
of
such a transaction is that the Fund can recover all or most of the cash
invested in the portfolio securities involved during the term of the reverse
repurchase agreement, while in many cases it will be able to keep some of the
interest income associated with those securities. Such transactions are only
advantageous if the Portfolio has an opportunity to earn a greater rate of
interest on the cash derived from the transaction than the interest cost of
obtaining that cash. Opportunities to realize earnings from the use of the
proceeds equal to or greater than the interest required to be paid may not
always be available, and the Fund intends to use the reverse repurchase
technique only when the Manager believes it will be advatageous to the
Portfolios assets. The Funds custodian bank will maintain a segregated
account for the Portfolio with securities having a value equal to or greater
than such commitments.
Delayed Delivery. A delayed delivery transaction involves the
purchase
of securities at an agreed-upon price on a specified future date. At the
time
the Fund enters into a binding obligation to purchase securities on a delayed
delivery basis the Portfolio will establish with the Custodian a segregated
account with assets of a dollar amount sufficient to make payment for the
securities to be purchased. The value of the securities on the delivery date
may be more or less than their purchase price. Securities purchased on a
delayed delivery basis do not generally earn interest until their scheduled
delivery date.
PART B STATEMENT OF ADDITIONAL INFORMATION
April 30, 1998
SMITH BARNEY VARIABLE ACCOUNT FUNDS
388 Greenwich Street
New York, New York 10013
STATEMENT OF ADDITIONAL INFORMATION
Shares of the Smith Barney Variable Account Funds (the
Fund) are offered with a choice of three
Portfolios:
The Income and Growth Portfolio seeks current income
and long-term growth of income and capital. This
Portfolio invests primarily, but not exclusively, in
common stocks.
The U.S. Government/High Quality Securities Portfolio
seeks high current income and security of principal
from a portfolio consisting primarily of U.S.
Government Obligations and other high quality fixed
income securities.
The Reserve Account Portfolio seeks current income
from a portfolio of money market instruments and other
high quality fixed income obligations.
This Statement of Additional Information (the SAI) is not a
Prospectus. It is intended to provide more detailed information
about the Fund as well as matters already discussed in the
Prospectus and therefore should be read in conjunction with the
April 30, 1998 Prospectus which may be obtained from the Fund or
your Smith Barney Financial Consultant. Shares of the Fund may
only be purchased by insurance company separate accounts.
TABLE OF CONTENTS
Statement of Additional
Information
Pages
Trustees and Officers
2 - 3
Investment Policies
3 - 5
Investment Restrictions
5 - 6
Performance Information
6 - 8
Determination of Net Asset
Value
8
Redemption of Shares
8
Custodian
8
Counsel
8
Independent Auditors
8
The Fund
8 - 9
Management Agreements
9- 11
Voting Rights
11
Financial Statements
11 - 12
Appendix-Ratings of Debt
Obligations
12 - 15
TRUSTEES AND OFFICERS
DONALD R. FOLEY, Trustee
Retired, 3668 Freshwater Drive, Jupiter, Florida 33477. Director
of ten investment companies associated with Smith Barney.
Formerly Vice President of Edwin Bird Wilson, Incorporated
(advertising); Age 75
PAUL HARDIN, Trustee
Professor of Law at the University of North Carolina at Chapel
Hill, University of North Carolina, 103 S. Building, Chapel Hill,
North Carolina 27599; Director of twelve investment companies
associated with Smith Barney; and a Director of The Summit
Bancorporation; Formerly, Chancellor of the University of North
Carolina at Chapel Hill, University of North Carolina; Age 65.
*HEATH B. McLENDON, Chairman of the Board and Chief Executive
Officer
Managing Director of Smith Barney ; Director of forty-two
investment companies associated with Smith Barney; Chairman of
the Manager; Chairman of the Board of Smith Barney Strategy
Advisors Inc.; prior to July 1993, Senior Executive Vice President
of Shearson Lehman Brothers; Vice Chairman of the Board of Asset
Management; Age 64.
RODERICK C. RASMUSSEN, Trustee
Investment Counselor, 81 Mountain Road, Verona, New Jersey 07044.
Director of ten investment companies associated with Smith Barney.
Formerly Vice President of Dresdner and Company Inc. (investment
counselors); Age 71.
JOHN P. TOOLAN, Trustee
Retired, 13 Chadwell Place, Morristown, New Jersey 07960. Director
of ten investment companies associated with Smith Barney.
Formerly, Director and Chairman of the Smith Barney Trust Company,
Director of Smith Barney Holdings Inc. and the Manager and Senior
Executive Vice President, Director and Member of the Executive
Committee of Smith Barney; Age 67.
*LEWIS E. DAIDONE, Senior Vice President and Treasurer
Managing Director of Smith Barney, Senior Vice President and
Treasurer of forty-two investment companies associated with Smith
Barney, and Director and Senior Vice President of the Manager; Age
40.
*BRUCE D. SARGENT, Vice President and Investment Officer
Managing Director of Smith Barney, Vice President and Director of
the Manager, Director and Vice President of three investment
companies associated with Smith Barney; Age 54.
*THOMAS M. REYNOLDS, Controller and Assistant Secretary
Director of Smith Barney and Controller and Assistant Secretary of
thirty-seven investment companies associated with Smith Barney.
Prior to September 1991, Assistant Treasurer of Aquila Management
Corporation and its associated investment companies; Age 38.
*CHRISTINA T. SYDOR, Secretary
Managing Director of Smith Barney and Secretary of forty-two
investment companies associated with Smith Barney; Secretary and
General Counsel of the Manager; Age 47.
On April 8, 1998, Trustees and officers owned in the aggregate
less than 1% of the outstanding securities of the Fund.
___________________
* Designates interested persons as defined in the Investment
Company Act of 1940 whose business address is 388 Greenwich
Street, New York, New York 10013. Such persons are not
separately compensated for their services as Fund officers or
Trustees.
The following table shows the compensation paid by the Fund to
each person who was a Trustee during the Funds last fiscal year.
None of the officers of the Fund received any compensation from
the Fund for such period. Officers and interested Trustees of the
Fund are compensated by Smith Barney.
COMPENSATION TABLE
Name of Person
Aggregate
Compensation
from the
Fund
Pension or
Retirement
Benefits
Accrued as
Part of Funds
Expenses
Total
Compensation
from Fund
Complex
Total Number of
Funds for Which
Person Serves
within
Fund Complex
Joseph H.
Fleiss**+
$1,510.
00
$0
$54,900
10
Donald R.
Foley**
1,510.0
0
0
55,400
10
Paul Hardin
1,519.0
0
0
73,000
12
Francis P.
Martin**
1,219.0
0
0
53,000
10
Heath B.
McLendon*
-0-
0
- -0-
42
Roderick C.
Rasmussen
1,219.0
0
0
55,400
10
John P. Toolan**
1,519.0
0
0
55,400
10
________________________________________
* Designates a trustee who is an interested person of the
Fund.
** Pursuant to a deferred compensation plan, the indicated persons
elected to defer the following amounts of their compensation from
the Fund: Joseph H. Fleiss: $9, Donald R. Foley: $9, Francis P.
Martin: $300 and John P. Toolan: $1,519, and the following amounts
of their total compensation from the Fund Complex: Joseph H.
Fleiss: $21,000, Donald R. Foley: $21,000, Francis P. Martin:
$53,000 and John P. Toolan: $55,400
+ Effective January 1, 1998, Mr. Fleiss became a Trustee Emeritus.
Upon attainment of age 72 the Funds current Trustees may elect to
change to emeritus status. Any directors elected or appointed to
the Board of Directors in the future will be required to change to
emeritus status upon attainment of age 80. Trustees Emeritus are
entitled to serve in emeritus status for a maximum of 10 years
during which time they are paid 50% of the annual retainer fee and
meeting fees otherwise applicable to the Funds directors,
together with reasonable out-of-pocket expenses for each meeting
attended. During the Funds last fiscal year aggregate
compensation from the Fund to Emeritus Trustees totaled $610.
INVESTMENT POLICIES
The Fund effects portfolio transactions with a view towards
attaining the investment objective of each Portfolio and is not
limited to a predetermined rate of portfolio turnover. A high
portfolio turnover results in correspondingly greater transaction
costs. See Management in the Prospectus.
Each Portfolio may seek to increase its net investment
income by lending its securities provided such loans are callable
at any time and are continuously secured by cash or U.S.
Government obligations equal to no less than the market value,
determined daily, of the securities loaned. The Portfolio will
receive amounts equal to dividends or interest on the securities
loaned. It will also earn income for having made the loan because
cash collateral pursuant to these loans will be invested in
short-term money market instruments. In connection with lending
of securities the Fund may pay reasonable finders, administrative
and custodial fees. Management will limit such lending to not
more than one-third of the value of a Portfolios total assets.
Where voting or consent rights with respect to loaned securities
pass to the borrower, management will follow the policy of calling
the loan, in whole or in part as may be appropriate, to permit the
exercise of such voting or consent rights if the issues involved
have a material effect on the Portfolios investment in the
securities loaned. Apart from lending its securities and
acquiring debt securities of a type customarily purchased by
financial institutions, none of the Portfolios will make loans to
other persons.
The Funds Declaration of Trust permits the Trustees to
establish additional Portfolios of the Fund from time to time.
The investment objectives, policies and restrictions applicable to
additional Portfolios would be established by the Trustees at the
time such Portfolios were established and may differ from those
set forth in the Prospectus and this SAI.
Additional Policies - Income and Growth Portfolio.
Although the Portfolio may, as described below, sell short
against the box, buy or sell puts or calls and borrow money, it
has no intention of doing so in the foreseeable future.
Similarly, although the Portfolio may invest in foreign securities
and lend money or assets, as described in investment restriction 9
on page 6, the Portfolio does not currently intend to commit more
than 5% of its assets to investments in foreign securities
(including EDRs, CDRs and GDRs) and an additional 10% of its
assets in American Depositary Receipts representing shares in
foreign securities which are traded in United States securities
markets, nor does it intend to engage in loans other than
short-term loans. If in seeking to achieve its investment
objectives the Fund believes opportunities warrant its investment
in foreign securities, management would give appropriate
consideration, in its judgment, to risks that may be associated
with foreign investments, including currency exchange control
regulations and costs, the possibility of expropriation, seizure,
or nationalization of foreign deposits, less liquidity and volume
and more volatility in foreign securities markets and the impact
of political, social, economic or diplomatic developments or the
adoption of other foreign government restrictions that might
adversely affect the payment of principal and interest on
securities in the Portfolio. If it should become necessary, the
Fund might encounter greater difficulties in invoking legal
processes abroad than would be case in the United States. In
addition, there may be less publicly available information about a
non-U.S. company, and non-U.S. companies are not generally subject
to uniform accounting and financial reporting standards, practices
and requirements comparable to those applicable to U.S. companies.
Furthermore, some of these securities may be subject to foreign
brokerage and withholding taxes.
While the Portfolio is permitted to invest in warrants
(including 2% or less of the Portfolios total net assets in
warrants that are not listed on the New York Stock Exchange or
American Stock Exchange), the Portfolio has no intention of doing
so in the foreseeable future. For purposes of computing the
foregoing percentage, warrants acquired by the Portfolio in units
or attached to securities will be deemed to be without value.
In addition, although the Income and Growth Portfolio may
buy or sell covered put and covered call options up to 15% of its
net assets, (including collars, caps, floor and swaps) provided
such options are listed on a national securities exchange, the
Portfolio does not currently intend to commit more than 5% of its
assets to be invested in or subject to put and call options. A
call option gives a holder the right to purchase a specific
stock at a specified price referred to as the exercise price,
within a specific period of time (usually 3, 6, or 9 months). A
put option gives a holder the right to sell a specific stock at
a specified price within a specified time period. The initial
purchaser of a call option pays the writer a premium, which is
paid at the time of purchase and is retained by the writer whether
or not such option is exercised. Put and call options are
currently traded on The Chicago Board Options Exchange and several
other national exchanges. Institutions, such as the Fund, that
sell (or write) call options against securities held in their
investment portfolios retain the premium. If the writer
determines not to deliver the stock prior to the options being
exercised, the writer may purchase in the secondary market an
identical option for the same stock with the same price and
expiration date in fulfillment of the obligation. In the event
the option is exercised the writer must deliver the underlying
stock to fulfill the option obligation. The brokerage commissions
associated with the buying and selling of call options are
normally proportionately higher than those associated with general
securities transactions.
The Portfolio may invest in investment grade bonds, i.e.
U.S. Government obligations or bonds rated in the four highest
rating categories of a nationally recognized statistical rating
organization (an NRSRO), such as those rated Aaa, Aa, A and Baa by
Moodys Investors Service, Inc. (Moodys) or AAA, AA, A and
BBB by Standard & Poors Ratings Group (S&P).
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions and
fundamental policies that cannot be changed without approval by a
vote of a majority of the outstanding voting securities of each
Portfolio affected by the change as defined in the Investment
Company Act of 1940 (the Act) and Rule 18f-2 thereunder (see
Voting).
Without the approval of a majority of its outstanding voting
securities, the Income and Growth Portfolio may not:
1. With respect to 75% of its assets, invest more than 5%
of the value of its total assets in any one issuer, except
securities of the U.S. Government, its agencies or its
instrumentalities; 2. Invest more than 25% of the value of its
total assets in any one industry, except that securities of the
U.S. Government, its agencies and instrumentalities are not
considered an industry for purposes of this limitation; 3.
Purchase securities on margin; 4. Make short sales of securities
or maintain a short position unless at all times when a short
position is open, the Portfolio owns or has the right to obtain,
at no added cost, securities identical to those sold short; 5.
Borrow money, except as a temporary measure for extraordinary or
emergency purposes, and then not in excess of the lesser of 10% of
its total assets taken at cost or 5% of the value of its total
assets; or mortgage or pledge any of its assets,. except to secure
such borrowings; 6. Act as an underwriter of securities except to
the extent the Fund may be deemed to be an underwriter in
connection with the sale of portfolio holdings; 7. Invest in real
estate (the purchase by the Portfolio of securities for which
there is an established market of companies engaged in real estate
activities or investments shall not be deemed to be prohibited by
this fundamental investment limitation); 8. Purchase or sell
commodities; and 9. Make loans, except the Portfolio will
purchase debt obligations, may enter into repurchase agreements
and may lend its securities.
Without the approval of a majority of its outstanding voting
securities the U.S. Government/High Quality Securities Portfolio
may not:
1. With respect to 75% of its assets, invest more than 5%
of the value of its total assets in any one issuer, except
securities of the U.S. Government, its agencies or
instrumentalities; 2. Invest more than 25% of the value of its
total assets in any one industry, except that securities of the
U.S. Government, its agencies and instrumentalities are not
considered an industry for purposes of this limitation; 3.
Purchase securities on margin; 4. Sell securities short (provided
however the Portfolio may sell short if it maintains a segregated
account of cash or U.S. Government obligations with the Custodian,
so that the amount deposited in it plus the collateral deposited
with the broker equals the current market value of the securities
sold short and is not less than the market value of the securities
at the time they were sold short); 5. Borrow money, except from
banks for temporary purposes and then in amounts not in excess of
5% of the value of its assets at the time of such borrowing; or
mortgage, pledge or hypothecate any assets except in connection
with any such borrowing and in amounts not in excess of 7 1/2% of
the value of the Funds assets at the time of such borrowing.
(This borrowing provision is not for investment leverage, but
solely to facilitate management of the Portfolio by enabling it to
meet redemption requests where the liquidation of portfolio
securities is deemed to be disadvantageous or inconvenient.)
Borrowings may take the form of a sale of portfolio securities
accompanied by a simultaneous agreement as to their repurchase; 6.
Act as an underwriter of securities except to the extent the Fund
may be deemed to be an underwriter in connection with the sale of
portfolio holdings; 7. Invest in real estate (the Portfolio,
however, will purchase mortgage-related securities); 8. Purchase
or sell commodities; and 9. Make loans, except the Portfolio will
purchase debt obligations, may enter into repurchase agreements
and may lend its securities.
Without the approval of a majority of its outstanding voting
securities the Reserve Account Portfolio may not:
1. With respect to 75% of its assets, invest more than 5%
of its assets in the securities of any one issuer, except
securities of the U.S. Government, its agencies or
instrumentalities; 2. Invest more than 25% of the value of its
total assets in any one industry, except that securities of the
U.S. Government, its agencies and instrumentalities are not
considered an industry for purposes of this limitation; 3.
Purchase securities on margin; 4. Sell securities short; 5.
Borrow money except from banks for temporary purposes in an amount
up to 10% of the value of its total assets and may mortgage or
pledge its assets in an amount up to 10% of the value of its total
assets only to secure such borrowings. The Portfolio will borrow
money only to accommodate requests for the redemption of shares
while effecting an orderly liquidation of portfolio securities or
to clear securities transactions and not for leveraging purposes.
This restriction shall not be deemed to prohibit the Portfolio
from entering into reverse repurchase agreements so long as not
more than 33 1/3% of the Portfolios total assets are subject to
such agreements; 6. Act as an underwriter of securities except to
the extent the Fund may be deemed to be an underwriter in
connection with the sale of portfolio holdings; 7. Invest in
commodities; and 8. Make loans, except the Portfolio will
purchase debt obligations, may enter into repurchase agreements
and may lend its securities.
The restrictions below are non-fundamental and may be
changed by the Trustees without shareholder approval or
ratification. Each of the Portfolios may not:
1. Invest more than 5% of its total assets in issuers with
less than three years of continuous operation (including that of
predecessors) or so-called unseasoned equity securities that
are not either admitted for trading on a national stock exchange
or regularly quoted in the over-the-counter market (this
restriction, however, would not apply to a newly created agency or
instrumentality of the U.S. Government); 2. Purchase more than
10% of any class of the outstanding securities, or any class of
voting securities, of any issuer; 3. Invest in or hold securities
of an issuer if those officers and Trustees of the Fund, its
Manager, or Smith Barney owning beneficially more than 1/2 of 1%
of the securities of such issuer together own more than 5% of the
securities of such issuer; 4. Purchase securities of another
investment company except as part of a merger, consolidation or
acquisition or as permitted by Section l2(d)(l) of the Investment
Company Act of 1940; 5. Have more than 15% of its net assets at
any time invested in or subject to puts, calls or combinations
thereof and may not purchase, sell or write options that are not
listed on a national securities exchange; 6. Invest in interests
in oil or gas or other mineral exploration or development
programs; and 7. The U.S. Government/High Quality Securities
Portfolio and the Reserve Account Portfolio each may not purchase
common stocks, preferred stocks, warrants or other equity
securities.
The foregoing percentage restrictions apply at the time an
investment is made; a subsequent increase or decrease in
percentage may result from changes in values or net assets.
PERFORMANCE INFORMATION
From time to time the Fund may advertise a Portfolios total
return, average annual total return, yield and current
distribution return in advertisements and other types of sales
literature. These figures are based on historical earnings and
are not intended to indicate future performance. In addition,
these figures will not reflect the deduction of the charges that
are imposed on the Contracts by the Separate Account (see Contract
prospectus) which, if reflected, would reduce the performance
quoted. The total return shows what an investment in the
Portfolio would have earned over a specified period of time (one,
five or ten years) assuming that all distributions and dividends
by the Portfolio were invested on the reinvestment dates during
the period less all recurring fees.
Each Portfolios total return and average annual total
return for the one and five year periods, and since each
Portfolios inception date is shown below.
Portfolio
Total Returns as of 12/31/97
1 year
5 year
Since Inception
Income and Growth
Portfolio
28.11%
126.90%
212.57%
U.S. Govt/High
Quality
Securities
Portfolio
5.43
34.75
80.62
Reserve Account
Portfolio
1.36
19.52
55.00
Portfolio
Average Annual Total Returns as of
12/31/97
1 year
5 year
Since Inception
Income and Growth
Portfolio
28.11%
17.81%
14.43%
U.S. Govt/High
Quality
Securities
Portfolio
5.43
6.15
7.27
Reserve Account
Portfolio
1.36
3.63
5.35
Each Portfolios yield is computed by dividing the net
investment income per share earned during a specified thirty day
period by the net asset value per share on the last day of such
period and annualizing the result. For purposes of the yield
calculation, interest income is determined based on a yield to
maturity percentage for each long-term fixed income obligation in
the portfolio; income on short-term obligations is based on
current payment rate.
The Fund calculates current distribution return for each
Portfolio by dividing the distributions from investment income
declared during the most recent twelve months by the net asset
value on the last day of the period for which current distribution
return is presented. From time to time, the Fund may include its
current distribution return in information furnished to present or
prospective shareowners.
A Portfolios current distribution return may vary from time
to time depending on market conditions, the composition of its
investment portfolio and operating expenses. These factors and
possible differences in the methods used in calculating current
distribution return, and the charges that are imposed on the
Contracts by the Separate Account, should be considered when
comparing a Portfolios current distribution return to yields
published for other investment companies and other investment
vehicles. Current distribution return should also be considered
relative to changes in the value of the Portfolios shares and to
the risks associated with the Portfolios investment objective and
policies. For example, in comparing current distribution returns
with those offered by Certificate of Deposit (CDs), it should
be noted that CDs are insured (up to $100,000) and offered a fixed
rate of return. Returns of the Reserve Account Portfolio may from
time to time be compared with returns of money market funds
measured by Donoghues Money Fund Report, a widely-distributed
publication on money market funds.
Performance information may be useful in evaluating a
Portfolio and for a providing a basis for comparison with other
financial alternatives. Since the performance of each Portfolio
changes in response to fluctuations in market conditions, interest
rate and Portfolio expenses, no performance quotation should be
considered a representation as to the Portfolios performance for
any future period.
DETERMINATION OF NET ASSET VALUE
The net asset value of each Portfolios share will be
determined on any day that the New York Stock Exchange is open.
The New York Stock Exchange is closed on the following holidays:
New Years Day, Martin Luther King Jr. Day, Washingtons Birthday,
Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
REDEMPTION OF SHARES
Redemption payments shall be made wholly in cash unless the
Trustees believe that economic conditions exist that would make
such a practice detrimental to the best interests of the Fund and
its remaining shareowners. If a redemption is paid in portfolio
securities, such securities will be valued in accordance with the
procedures described under Valuation of Shares in the
Prospectus and a shareholder would incur brokerage expenses if
these securities were then converted to cash.
CUSTODIAN
Portfolio securities and cash owned by the Fund are held in
the custody of PNC Bank, National Association, 17th and Chestnut
Streets, Philadelphia, PA 19103 (foreign securities, if any, will
be held in the custody of The Chase Manhattan Bank, N.A.).
COUNSEL
Sullivan & Cromwell serves as legal counsel to the Funds.
The Independent Directors of the Fund have selected Sullivan &
Cromwell as their legal counsel.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, 345 Park Avenue, New York, NY 10154,
has been selected as the Funds independent auditors to examine and
report on the Funds financial statements and highlights for the
fiscal year ending December 31, 1998.
THE FUND
Pursuant to the Declaration of Trust, the Trustees have
authorized the issuance of three series of shares, each
representing shares in one of three separate Portfolios - the
Income and Growth Portfolio, the U.S. Government/High Quality
Securities Portfolio and the Reserve Account Portfolio. Pursuant
to such authority, the Trustees may also authorize the creation of
additional series of shares and additional classes of shares
within any series (which would be used to distinguish among the
rights of different categories of shareholders, as might be
required by future regulations or other unforeseen circumstances).
The investment objectives, policies and restrictions applicable to
additional Portfolios would be established by the Trustees at the
time such Portfolios were established and may differ from those
set forth in the Prospectus and this SAI. In the event of
liquidation or dissolution of a Portfolio or of the Fund, shares
of a Portfolio are entitled to receive the assets belonging to
that Portfolio and a proportionate distribution, based on the
relative net assets of the respective Portfolios, of any general
assets not belonging to any particular Portfolio that are
available for distribution.
The Declaration of Trust may be amended only by a majority
shareholder vote as defined therein, except for certain
amendments that may be made by the Trustees. The Declaration of
Trust and the By-Laws of the Fund are designed to make the Fund
similar in most respects to a Massachusetts business corporation.
The principal distinction between the two forms relates to
shareowner liability described below. Under Massachusetts law,
shareowners of a business trust may, under certain circumstances,
be held personally liable as partners for the obligations of the
trust, which is not the case with a corporation. The Declaration
of Trust of the Fund provides that shareowners shall not be
subject to any personal liability for the acts or obligations of
the Fund and that every written obligation, contract, instrument
or undertaking made by the Fund shall contain a provision to the
effect that the shareowners are not personally liable thereunder.
Special counsel for the Fund are of the opinion that no
personal liability will attach to the shareowner under any
undertaking containing such provision when adequate notice of such
provision is given, except possibly in a few jurisdictions. With
respect to all types of claims in the latter jurisdictions and
with respect to tort claims, contract claims where the provision
referred to is omitted from the undertaking, claims for taxes and
certain statutory liabilities in other jurisdictions, a shareowner
may be held personally liable to the extent that claims are not
satisfied by the Fund; however, upon payment of any such liability
the shareowner will be entitled to reimbursement from the general
assets of the Fund. The Trustees intend to conduct the operations
of the Fund, with the advice of counsel, in such a way so as to
avoid, as far as possible, ultimate liability of the shareowners
for liabilities of the Fund.
The Declaration of Trust further provides that no Trustee,
officer or employee of the Fund is liable to the Fund or to a
shareowner, except as such liability may arise from his or its own
bad faith, willful misfeasance, gross negligence, or reckless
disregard of his or its duties, nor is any Trustee, officer or
employee personally liable to any third persons in connection with
the affairs of the Fund. It also provides that all third persons
shall look solely to the Fund property or the property of the
appropriate Portfolio of the Fund for satisfaction of claims
arising in connection with the affairs of the Fund or a particular
Portfolio, respectively. With the exceptions stated, the
Declaration of Trust provides that a Trustee, officer or employee
is entitled to be indemnified against all liability in connection
with the affairs of the Fund.
The Fund shall continue without limitation of time subject
to the provisions in the Declaration of Trust concerning
termination of the trust or any of the series of the trust by
action of the shareowners or by action of the Trustees upon notice
to the shareowners.
The term Smith Barney in the title of the Fund has been
adopted by permission of Smith Barney and is subject to the right
of Smith Barney to elect that the Fund stop using the term in any
form or combination of its name.
MANAGEMENT AGREEMENTS
The Trustees are responsible for the direction and
supervision of the Funds business and operations. Mutual
Management Corp. (the Manager) manages the day to day
operations of Portfolio pursuant to a management agreement entered
into by the Fund on behalf of each Portfolio.
The Manager provides each Portfolio with advice and
assistance with respect to the acquisition, holding or disposal of
securities and recommendations with respect to other aspects of
the business and affairs of each Portfolio and furnishes each
Portfolio with bookkeeping, accounting and administrative
services, office space and equipment, and the services of the
officers and employees of the Fund. By written agreement Smith
Barneys Research and other departments and staff will furnish the
Manager with information, advice and assistance and will be
available for consultation on the Funds Portfolios, thus Smith
Barney may also be considered an investment adviser to the Fund.
Smith Barneys services are paid for by the Manager; there is no
charge to the Fund for such services. For the services provided
by the Manager, the Fund pays the Manager monthly fees equal to
1/12 of .60% of the average daily net assets of the Income and
Growth Portfolio and 1/12 of .45% of the average daily net assets
of the U.S. Government/High Quality Portfolio and the Reserve
Account Portfolio. The Manager has agreed to waive its fee to the
extent that the aggregate expenses of any Portfolio exclusive of
taxes, brokerage, interest and extraordinary expenses, such as
litigation and indemnification expenses, exceed 1% of the average
daily net assets for any fiscal year of the Portfolio. The 1%
voluntary expense limitation shall be in effect until it is
terminated by notice to shareowners and by supplement to the then
current prospectus.
For the years 1995, 1996 and 1997 the management fee for the
Income and Growth Portfolio was $172,705, $164,890, and $109,300,
respectively, the management fee for U.S. Government/High Quality
Portfolio was $22,181, $17,828, and $9,382, respectively, and the
management fee for the Reserve Account Portfolio was, $10,598,
$5,864 and $857, respectively.
The Management Agreement for each of the Funds Portfolios
provides that all other expenses not specifically assumed by the
Manager under the Management Agreement on behalf of the Portfolio
are borne by the Fund. Expenses payable by the Fund include, but
are not limited to, all charges of custodians (including sums as
custodian and sums for keeping books and for rendering other
services to the Fund) and shareowner servicing agents, expenses of
preparing and printing its prospectuses, proxy material, reports
and notices sent to shareowners, all expenses of shareowners and
Trustees meetings, filing fees and expenses relating to the
registration statements, fees of auditors and legal counsel, out-
of-pocket expenses of Trustees and fees of Trustees who are not
interested persons as defined in the Act, interest, taxes and
governmental fees, fees and commissions of every kind, expenses of
issue, repurchase or redemption of shares, insurance expense,
association membership dues, all other costs incident to the
Funds existence and extraordinary expenses such as litigation and
indemnification expenses. Direct expenses of each Portfolio of
the Fund, including but not limited to the respective management
fees, are charged to that Portfolio, and general trust expenses
are allocated among the Portfolios on the basis of relative net
assets. No sales or promotion expenses are incurred by the Fund,
but expenses incurred in complying with laws regulating the issue
or sale of the Funds shares, which are paid by the Fund, are not
deemed sales or promotion expenses.
Smith Barney distributes shares of the Fund as principal
underwriter. In addition, brokerage is allocated to Smith Barney,
provided that, in the judgment of the Trustees of the Fund, the
commission, fee or other remuneration received or to be received
by Smith Barney (or any broker/dealer affiliate of Smith Barney
that is also a member of a securities exchange) is reasonable and
fair compared to the commission, fee or other remuneration
received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold
on a securities exchange during the same or comparable period of
time. In all trades to be directed to Smith Barney, the Fund has
been assured that its orders will be accorded priority over those
received from Smith Barney for its own account or for any of its
Trustees, officers or employees. It may expect that the
preponderance of transactions in the Government/High Quality
Portfolio and the Reserve Account Portfolio will be principal
transactions, and the Fund will not deal with Smith Barney in any
transaction in which Smith Barney acts as principal.
During fiscal year 1997 the total amount of commissionable
transactions was $28,199, (60.8%) of which was directed to other
brokers and $11,060 (39.2%) of which was directed to Smith Barney.
Shown below are the total brokerage fees paid by the Fund for each
of the past three years on behalf of the Income and Growth
Portfolio, the portion paid to Smith Barney and the portion paid
to other brokers for the execution of orders allocated in
consideration of research and statistical services or solely for
their ability to execute the order.
Commissions
To Others For
Execution and
For Execution Only Research and
Statistical
Total To Smith Barney To Others Services
1995 $41,731 $15,990 38.3% $ -0- -0-%
$25,741 61.7 %
1996 $49,776 $16,187 32.5% $ -0- -0-%
$33,589 67.5%
1997 $28,199 $11,060 39.2% $ -0- -0-% $17,139 60.8%
The Board of Trustees of the Fund has adopted certain policies and
procedures incorporating the standard of Rule l7e-l issued by the
Securities and Exchange Commission under the Act which requires
that the commissions paid to Smith Barney must be reasonable and
fair compared to the commission, fee or other remuneration
received or to be received by other brokers in connection with
comparable transactions involving similar securities during a
comparable period of time. The Rule and the policy and procedures
also contain review requirements and require the Manager to
furnish reports to the Board of Trustees and to maintain records
in connection with such reviews.
VOTING RIGHTS
The Trustees themselves have the power to alter the number
and the terms of office of the Trustees, and they may at any time
lengthen their own terms or make their terms of unlimited duration
(subject to certain removal procedures) and appoint their own
successors, provided that in accordance with the Act always at
least a majority, but in most instances, at least two-thirds of
the Trustees have been elected by the shareowners of the Fund.
Shares do not have cumulative voting rights and therefore the
owners of more than 50% of the outstanding shares of the Fund may
elect all of the Trustees irrespective of the votes of other
shareowners. Shares of the Fund entitle their owners to one vote
per share; however, on any matter submitted to a vote of the
shareowners, all shares then entitled to vote will be voted by
individual Portfolio unless otherwise required by the Investment
Company Act of 1940 (in which case all shares will be voted in the
aggregate). For example, a change in investment policy for a
Portfolio would be voted upon only by shareowners of the Portfolio
involved. Additionally, approval of each Portfolios management
agreement is a matter to be determined separately by that
Portfolio. Approval of a proposal by the shareowners of one
Portfolio is effective as to that Portfolio whether or not enough
votes are received from the shareowners of the other Portfolio to
approve the proposal as to that Portfolio. As of April 8, 1998,
Nationwide Life Insurance Co. owned 826,543.078 (100%) of the
outstanding shares of the Income and Growth Portfolio, 101,002.640
(100%) of the outstanding shares of the U.S. Government/High
Quality Securities Portfolio, and 12,276.922 (100%) of the
outstanding shares of the Reserve Account Portfolio.
FINANCIAL STATEMENTS
The following financial information is hereby incorporated
by reference to the Funds December 31, 1997 Annual Report to
Shareholders a copy of which is furnished with this Statement of
Additional Information:
Independent Auditors Report
Statements of Assets and Liabilities as of December
31, 1997
Schedules of Investments as of December 31, 1997
Statements of Operations for the year ended December
31, 1997
Statements of Changes in Net Assets for the years
ended December 31, 1997 and 1996
Notes to Financial Statements
Financial Highlights
APPENDIX - RATINGS OF DEBT OBLIGATIONS
BOND (AND NOTES) RATINGS
Moodys Investors Service, Inc.
Aaa - Bonds that are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred
to as gilt edged. Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present that make the long term risks appear somewhat
larger than in Aaa securities.
A - Bonds that are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are considered adequate by
elements may be present that suggest a susceptibility to impairment sometime
in the future.
Baa - Bonds that are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may
be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree.
Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C are the lowest class of bonds and issues so
rated can be regarded
as having extremely poor prospects of ever attaining any real investment
standing.
Con (..) - Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b)
earnings of projects unseasoned in operating experience, (c) rentals which
begin when facilities are completed, or (d) payments to which some other
limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
Note: The modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end
of its generic rating category.
Standard & Poors Ratings Group
AAA - Debt rated AAA has the highest rating assigned by Standard &
Poors. Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only in small
degree.
A- Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher rated categories.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is
regarded, on balance, as predominantly speculative with respect to capacity
to pay interest and repay principal in accordance with the terms of the
obligation. BB indicates the lowest degree of speculation and C the
highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Plus (+) or Minus (-): The ratings from AA to B may be modified by
the addition of a plus or minus sign to show relative standing within the
major rating categories.
Provisional Ratings: The letter p indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the
successful and timely completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the project, makes no
comment on the likelihood of, or the risk of default upon failure of, such
completion. The investor should exercise judgment with respect to such
likelihood and risk.
L The letter L indicates that the rating pertains to the principal
amount of those bonds where the underlying deposit collateral is fully
insured by the Federal Savings & Loan Insurance Corp. or the Federal Deposit
Insurance Corp.
Continuance of the rating is contingent upon S&Ps receipt of closing
documentation confirming investments and cash flow.
* Continuance of the rating is contingent upon S&Ps receipt of an
executed copy of the escrow agreement.
NR Indicates no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
COMMERCIAL PAPER RATINGS
Moodys Investors Service, Inc.
Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-
1 repayment will normally be evidenced by the following characteristics:
leading market positions in well-established industries; high rates of
return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in
earnings coverage of fixed financial changes and high internal cash
generation; well-established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have
strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but to
a lesser degree. Earnings trends and coverage ratios, while sound, will be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Standard & Poors Ratings Group
A-1 - This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issuers
determined to possess overwhelming safety characteristics will be denoted
with a plus (+) sign designation.
A-2 - Capacity for timely payment on issues with this designation is
strong. However, the
relative degree of safety is not as high as for issues designated A-1.
u:\funds\$sva\1998\secdocs\sai98.doc 19
PART C
Form N-1A
Information required to be included in Part C is set forth under the
appropriate item, so numbered in Part C of this Post-Effective Amendment
to
the Registration Statement.
PART C Other Information
Item 24 . Financial Statements and Exhibits
Location In:
(a) Financial Statements Part A
Part B Annual Report
Statements of Assets and Liabilities
as of December 31, 1997 -- *
Statements of Operations for the
year ended December 31, 1997 -- *
Statements of Changes in Net Assets for
the years ended December 31, 1997 and 1996 -- *
Notes to Financial Statements -- *
_________________________________
*See the Annual Report to Shareholders which is incorporated by
reference in the Statement of Additional Information.
All other statements and schedules are omitted because they are not
applicable or the required information is shown in the financial statements
or
notes thereto.
(b) Exhibits
(1) Declaration of Trust dated as of December 18, 1986 is
incorporated herein by reference to Exhibit 1 to Pre-Effective Amendment No.
1 to the Registration Statement N. 33-10839.
(2) Bylaws of the Trust are incorporated by reference to
Exhibit 2 to Pre-Effective Amendment No. 4.
(3) Not applicable.
(4) Not applicable.
(5) (a) Management Agreement between the Income and
Growth Portfolio and Smith, Barney Advisers, Inc. is incorporated by
reference to Exhibit 5(a)(i) to Pre-Effective Amendment No. 4.
(b) Management Agreement between U.S.
Government/High Quality Securities Portfolio and Smith, Barney Advisers, Inc.
by reference to Exhibit 5(a)(ii) to Pre-Effective Amendment No. 4.
(c) Management Agreement between Reserve Account
Portfolio and Smith Barney Advisers, Inc. is incorporated by reference to
Exhibit
(5)(a)(iii) to Pre-Effective Amendment No. 4.
(d) Subadvisory Agreement between Smith, Barney
Advisers, Inc. and Smith Barney, Harris Upham & Co. Incorporated is
incorporated by reference to Exhibit (5)(b) to Pre-Effective Amendment No. 4.
(6) Distribution Agreement between Smith Barney Variable
Account Funds and Smith Barney, Harris Upham & Co. Incorporated is
incorporated by reference to Exhibit 6(a) to Pre-Effective Amendment No. 4.
(7) Not applicable.
(8) Custodian Agreement between Registrant and Provident
National Bank is incorporated herein by reference to Exhibit 8 to Pre-
Effective
Amendment No. 4.
(9) (a) Transfer Agency Agreement between Registrant and
Provident Financial Processing Corp. is incorporated herein by reference
to Exhibit 9 to Pre-Effective Amendment No. 4.
(b) Form of Transfer Agency Agreement between
Registrant and First Data Investor Services Group, Inc. (filed herewith)
(10) (a) Opinion of Sullivan & Cromwell is incorporated
by reference to Pre-Effective Amendment No. 1.
(b) Opinion of Gaston & Snow is incorporated herein
by reference to Exhibit 10 to Pre-Effective Amendment No. 4.
(11) (i) Auditors Report (see the Annual Report to
Shareholders which is incorporated by reference in the Statement of
Additional
Information)
(ii) Auditors Consent (filed herewith)
(12) Not applicable.
(13) Subscription Agreement between the Fund and Smith,
Barney Advisers, Inc. dated June 27, 1989 is incorporated herein by
reference to Exhibit 13 to Pre-Effective Amendment No. 4.
(14) Not applicable.
(15) Not applicable.
(16) Schedule for Comparison of Performance Quotation is
incorporated herein by reference to Exhibit 16 of Post Effective Amendment
No. 8.
(17) Financial Data Schedule (filed herewith)
(18) Plan 3 pursuant to Rule 18f-3 is incorporated by
reference to Exhibit 18 to Post-Effective Amendment No. 7
Item 25. Persons Controlled by or under Common Control with Registrant.
The Registrant is not controlled directly or indirectly by
any person. Information with respect to the Registrants investment manager
is set forth under the caption Management in the prospectus included in
Part
A of this Amendment to the Registration Statement on Form N-1A.
Item 26. Number of Holders of Securities
Number of Record Holders
Title of Class on April 23, 1998
Income and Growth Portfolio 1
U.S. Government/High Quality Securities Portfolio 1
Reserve Account Portfolio 1
Item 27. Indemnification
Reference is made to ARTICLE V of Registrants Declaration
of Trust for a complete statement of its terms. Section 52. of ARTICLE V
provides: No Trustee, officer, employee or agent of the Trust shall be
liable to
the Trust, its Shareholders, or to any Shareholder, Trustee, officer,
employee or agent thereof for any action or failure to act (including without
limitation the failure to compel in any way any former or acting Trustee to
redress any breach of trust) except for his own bad faith, willful
misfeasance, gross negligence or reckless disregard of his or its duties.
Emphasis added.
Item 28. Business and other Connections of the Manager and Investment
Adviser
See the material under the caption Management included in
Part A (Prospectus) of this Registration Statement and the material appearing
under the caption Management Agreements included in Part B (Statement
of Additional Information) of this Registration Statement.
Information as to the Directors and Officers of Mutual Management Corp.
is included in its Form ADV (File no. 801-8314),
filed with the Commission, which is incorporated herein by reference
thereto.
Item 29. Principal Underwriters
(a) Smith Barney Inc. (Smith Barney) also acts as principal
underwriter for
Smith Barney Inc. (Smith Barney) currently acts as a distributor for Concert
Allocation Series; Concert Investment Series; Consulting Group Capital
Markets
Funds; Global Horizons Investment Series (Cayman Islands); Greenwich Street
California Municipal Fund Inc.; Greenwich Street Municipal Fund Inc.;
Greenwich Street Series Fund; High Income Opportunity Fund
Inc.; The Italy Fund Inc.; Managed High Income Portfolio Inc.; Managed
Municipals Portfolio II Inc.; Managed Municipals Portfolio Inc.; Municipal
High
Income Fund Inc.; Puerto Rico Daily Liquidity Fund Inc.; Smith Barney
Adjustable Rate Government Income Fund; Smith Barney Aggressive Growth Fund
Inc.; Smith Barney Appreciation Fund Inc.; Smith Barney Arizona
Municipals Fund Inc.; Smith Barney California Municipals Fund Inc.; Smith
Barney Concert Allocation Series Inc.; Smith Barney Small Cap Blend Fund,
Inc.; Smith Barney Equity Funds; Smith Barney Fundamental
Value Fund Inc.; Smith Barney Funds, Inc.; Smith Barney Income Funds; Smith
Barney Income Trust; Smith Barney Institutional Cash Management Fund, Inc.;
Smith Barney Intermediate Municipal Fund, Inc.; Smith
Barney Investment Funds Inc.; Smith Barney Investment Trust; Smith Barney
Managed Governments Fund Inc.; Smith Barney Managed Municipals Fund Inc.;
Smith Barney Massachusetts Municipals Fund; Smith Barney
Money Funds, Inc.; Smith Barney Muni Funds; Smith Barney Municipal Fund,
Inc.; Smith Barney Municipal Money Market Fund, Inc.; Smith Barney Natural
Resources Fund Inc.; Smith Barney New Jersey Municipals Fund Inc.; Smith
Barney Oregon Municipals Fund Inc.; Smith Barney Principal Return Fund; Smith
Barney Puerto Rico Equity Index and Income Fund Smith Barney
Telecommunications Trust; Smith Barney Variable Account Funds; Smith Barney
World Funds, Inc.; Smith Barney Worldwide Special Fund N.V. (Netherlands
Antilles); Travelers Series Fund Inc.; The USA High Yield Fund N.V.;
Worldwide Securities Limited (Bermuda); Zenix Income Fund Inc. and various
series of unit investment trusts.
(b) The information required by this Item 29 with respect to each
director and officer of Smith Barney is incorporated by reference to
Schedule A of Form BD filed by Smith Barney pursuant to the Securities
Exchange Act of 1934 (SEC File No. 8-8177)
(c) not applicable
Item 30. Location of Accounts and Records
PNC Bank, National Association, 17th and Chestnut Streets,
Philadelphia, Pennsylvania 19103, and First Data Investor Services Group,
Inc., Exchange Place, Boston, Massachusetts 02109-2873, will maintain the
custodian and the shareholders servicing agent records, respectively required
by Section 31(a) of the Investment Company Act of 1940, as amended (the 1940
Act).
All other records required by Section 31(a) of the 1940 Act are
maintained at the offices of the Registrant at 388 Greenwich Street, New
York, New York 10013 (and preserved for the periods specified by Rule
31a-2 of the 1940 Act) .
Item 31. Management Services
Not applicable.
Item 32. Undertakings
(a) Not applicable
(b) Not applicable
(c) Registrant undertakes to furnish each person to whom a
prospectus is delivered with a copy of Registrants latest report to
shareholders, upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets
all of the requirements for effectiveness of this Post-Effective Amendment to
the
Registration Statement pursuant to Rule 485(b) under the Securities Act
of 1933 and has duly caused this Post-Effective Amendment to its Registration
Statement to be signed on its behalf by the undersigned, and where
applicable, the true and lawful attorney-in-fact, thereto duly authorized, in
the City of New
York, and State of New York on the 30th day of April 1998.
SMITH BARNEY VARIABLE ACCOUNT FUNDS
By/s/ Heath B. McLendon
Heath B. McLendon
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below
by the following persons in the capacities and on the date indicated.
Signatures Title Date
/s/ Heath B. McLendon Chairman of the Board April 30, 1998
(Heath B. McLendon) and Chief Executive Officer
/s/ Lewis E. Daidone Senior Vice President
(Lewis E. Daidone) and Treasurer April 30, 1998
Joseph H. Fleiss* Trustee April 30, 1998
(Joseph H. Fleiss)
Donald R. Foley* Trustee April 30, 1998
(Donald R. Foley)
Paul Hardin* Trustee April
30,1998
(Paul Hardin)
Roderick C. Rasmussen* Trustee April 30, 1998
(Roderick C. Rasmussen)
John P. Toolan* Trustee April 30, 1998
(John P. Toolan)
*By: /s/ Christina T. Sydor April 30,
1998
Christina T. Sydor
Pursuant to Power of Attorney
EXHIBIT INDEX
Auditors Consent
Financial Data Schedule
Cover Letter to SEC
Independent Auditors Consent
To the Shareholders and Board of Trustees of
Smith Barney Variable Account Funds:
We consent to the use of our report dated February 10, 1998 for Income and
Growth Portfolio, U.S. Government/High Quality Securities Portfolio and
Reserve Account Portfolio of Smith Barney Variable Account Funds
incorporated herein by reference and to the references to our Firm under the
headings Financial Highlights in the Prospectus and Independent Auditors
in the Statement of Additional Information.
KPMG Peat Marwick LLP
New York, New York
April 27, 1998
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