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. 13 [X]
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 13
__________________ [ 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
(Registrant's 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
Burt Leibert
Willkie Farr & Gallagher
787 Seventh Avenue
New York, New York 10019
______________
Approximate Date of Proposed Public Offering: Continuous.
It is proposed that this filing will become effective (check appropriate
box):
[XX] Immediately upon filing pursuant to paragraph (b) of Rule 485
[ ] On (date) pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a) of Rule 485
[ ] On (date) pursuant to paragraph (a)(1) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2) of rule 485
[ ] On (date) pursuant to 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
SMITH BARNEY VARIABLE ACCOUNT FUNDS
PART A
SMITH BARNEY VARIABLE ACCOUNT FUNDS
Prospectus
April 30, 1999
The Income and Growth Portfolio seeks current income and long-term
growth of income and capital by investing primarily 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. [This Portfolio currently has insufficient assets
to enable it to invest in accordance with its investment program and
as a result invests all of its assets in repurchase agreements.]
The Reserve Account Portfolio seeks current income from a portfolio
of money market instruments and other high quality fixed income
obligations with limited maturities. This Portfolio currently has
insufficient assets to enable it to invest in accordance with its
investment program and as a result invests all of its assets in
repurchase agreements.
Shares of each Portfolio are offered only to
insurance company separate accounts which fund
certain variable annuity and variable life
insurance contracts. This prospectus should be
read together with the prospectus for those
contracts.
The Securities and Exchange Commission has not
approved or disapproved these securities or
determined whether this prospectus is accurate
or complete. Any statement to the contrary is a
crime.
Contents
Fund goal and main strategies
Page
The Income and Growth Portfolio
1
The U.S. Government/High Quality
Securities
Portfolio
3
The Reserve Account Portfolio
5
More on the Portfolios' investments
6
Management
7
Share transactions
8
Share price
9
Dividends, distributions and taxes
9
Financial highlights
10
The manager:
SSBC Fund Management Inc. (SSBC) serves as the manager and selects
investments for each Portfolio. SSBC is an affiliate of Salomon Smith
Barney Inc. and subsidiary of Citigroup Inc. Citigroup businesses
produce a broad range of financial services - asset management, banking
and consumer finance, credit and charge cards, insurance, investments,
investment banking and trading - and use diverse channels to make them
available to consumers and corporate customers around the world.
You should know:
An investment in a Portfolio is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any
other government agency.
Fund goal and main strategies
The Income and Growth Portfolio
Investment objective
Current income and long-term growth of income and capital.
Key investments
The Portfolio invests primarily in dividend paying
common stocks of U.S. companies
having market capitalizations of at least $5 billion at the time of investment.
Selection process
The manager employs a two-step selection process.
First, the manager uses proprietary
models and fundamental research to find stocks that are
underpriced in the market
relative to their fundamental value. Next, the manager looks
for a positive catalyst in
the company's near term outlook which the manager believes
would accelerate earnings.
In selecting individual companies for investment, the manager looks
for the following:
- - Low market valuations measured by the manager's valuation models
- -Above average dividend yields and established dividend records
- -Positive changes in earnings prospects because of
- - New management
- - Effective research, product development and marketing
- - A business strategy not yet recognized by the marketplace
- - Regulatory changes favoring the company
- - High return on invested capital and strong cash flow
- - Liquidity
Principal risks of investing in the Portfolio
While an investment in common stocks offers the potential
for capital appreciation, it
also involves certain risks. Investors could lose money on
their investment in the
Portfolio, or the Portfolio may not perform as well as other
investments, if any of the
following occurs:
? The U.S. stock market goes down.
? Value stocks or larger capitalization stocks fall
temporarily out of favor with investors.
? An adverse event depresses the value of a company's stock
held by the Portfolio.
The manager's judgment about the attractiveness, value
or potential appreciation of a
particular stock proves to be incorrect.
Portfolio performance
This bar chart indicates the risks of investing in the
Portfolio by showing changes in
the Portfolio's performance from year to year.
The table shows how the Portfolio's
average annual returns for different calendar periods
compare to the return of the
Standard & Poor's (S&P) 500 Index. The S&P 500 Index is an index
of widely held common
stocks listed on the New York and American Stock Exchanges and
the over-the-counter
markets. Figures for the index include reinvestment of
dividends. The index is unmanaged
and is not subject to management and trading expenses as the
Portfolio is. Past
performance does not necessarily indicate how the Portfolio
will perform in the future.
The bar chart shows the performance of the
Portfolio's shares for each full calendar
year since its inception in 1989.
Quarterly returns:
Highest: 15.10% in 1st quarter 1998
Lowest: -11.59% in 3rd quarter 1998
Portfolio manager
Ellen Cardozo Sonsino
Ellen Cardozo Sonsino is primarily responsible for the day-to-day
management of the
Portfolio. Ms. Sonsino, an investment officer of SSBC Fund Management Inc.
and a managing director of Salomon Smith Barney, has been with
Salomon Smith Barney since
1984 and has 21 years of investment management experience.
Fund goal and main strategies
The U.S. Government/High
Quality Securities Portfolio
Investment objective
High current income and security of principal.
Key investments
The Portfolio invests primarily in U.S. government securities and
in U.S. corporate
fixed income obligations. A substantial portion of the Portfolio's
assets may be invested in mortgage-related securities,
including GNMA Certificates. GNMA Certificates
represent part ownership of a pool of mortgage loans
with the characteristic that the
timely payment of principal and interest from the pool is
guaranteed by the U.S. Government.
Credit quality: The Portfolio invests primarily in high quality fixed income
securities, which are securities rated within the two highest
rating categories by a
nationally recognized ratings organization, or, if
unrated, are of equivalent quality as
determined by the manager. All of the Portfolio's
nvestments will be rated at least
investment grade at the time of purchase.
Maturity: The Portfolio maintains an average portfolio maturity
of between 1 and 5
years. Average maturity is a dollar weighted average of the
maturities of individual
fixed income securities which the Portfolio owns. The Portfolio
may invest in
individual securities of any maturity.
Selection process
The manager employs a three step "top down" investment approach
to selecting investments
for the Portfolio by identifying undervalued
sectors of the fixed income securities
market first and then selecting attractive individual
securities within those
undervalued sectors. As the third component to
this approach, the manager evaluates
each potential investment to determine whether that
security would introduce undue risk
to the overall portfolio.
Specifically, the manager:
? Uses fundamental research methods to identify
undervalued sectors of the government
and corporate debt markets and adjusts portfolio
positions to take advantage of new
information
Determines appropriate sector and maturity weightings based on the manager's
intermediate and long-term assessments of broad economic
and interest rate trends
? Analyzes yield, maturity, issue classification and quality characteristics of
individual securities to identify those which the manager
believes offer high levels
of current income at lower levels of risk
Principal risks of investing in the Portfolio
While an investment in fixed income securities generally
involves less risk than an
investment in equity securities, it does
involve certain risks. Investors could lose
money in the Portfolio or the Portfolio's
performance could fall below other possible
investments, if:
? Interest rates go up, causing the prices of
debt securities held by the Portfolio to
fall.
? The issuer of a debt security in the
portfolio defaults on its obligation to pay
principal or interest, has its credit rating
downgraded by a rating organization or
is perceived by the market to be less creditworthy.
? As a result of declining interest rates,
the issuer of a security exercises its
right to prepay principal earlier than scheduled,
forcing the Portfolio to reinvest
in lower yielding securities.
This is known as call or prepayment risk.
? As a result of rising interest rates,
the issuer of a security exercises its right
to pay principal later than scheduled, which
will lock in a below-market interest
rate and reduce the value of the security.
This is known as extension risk.
? The manager's judgment about the attractiveness,
value or potential appreciation of
a particular security proves to be incorrect.
Portfolio performance
This bar chart indicates the risks of investing in the Portfolio
by showing changes in
the Portfolio's performance from year to year.
The table shows how the Portfolio's
average annual returns for different calendar periods
compare to the return of the
Lehman Brothers GNMA Mutual Fund Index (Lehman Brothers Index).
The Lehman Brothers
Index is composed of 15-year and 30-year fixed-rate
securities backed by mortgage pools
of the Government National Mortgage Association.
The index is unmanaged and is not
subject to management and trading expenses as
the Portfolio is. Past performance does
not necessarily indicate how the Portfolio
will perform in the future.
The bar chart shows the performance of
the Portfolio's shares for each full
calendar year since its inception in
1989`
Quarterly returns:
Highest: 6.47% in 2nd quarter 1992
Lowest: -3.42% in 1st quarter 1992
Fund goal and main strategies
The Reserve Account Portfolio
Investment objective
Current income.
Key investments
The Portfolio invests all of its assets in repurchase agreements.
The Portfolio has
insufficient assets to invest those assets according
to the policies which have been
adopted by the board of trustees of the trust. These policies provide for the
Portfolio to invest exclusively in money market instruments
and other high quality
fixed income obligations with limited maturities.
The Portfolio does not anticipate
that it will ever grow to a sufficient size to
invest according to these policies.
Credit quality: The Portfolio invests exclusively
in repurchase agreements which are
fully collaterlized as to principal and interest by
U.S. government securities and
money market instruments rated within the two highest rating
categories by a nationally
recognized ratings agency or, if unrated, are of equivalent
quality as determined by
the manager.
Principal risks of investing in the Portfolio
Because the Portfolio invests exclusively in repurchase agreements,
the Portfolio is
subject to the risks associated with entering into
repurchase agreements which are
described on page 7 below.
Portfolio performance
This bar chart indicates the risks of investing in the
Portfolio by showing changes in
the Portfolio's performance from year to year.
The table shows how the Portfolio's
average annual returns for different calendar periods
compare to the return of the
Salomon Brothers 1-Year Treasury Index (Salomon Brothers Index).
The Salomon Brothers
Index is composed of one 1-Year
United States Treasury Bond whose return is tracked
until its maturity. The index is unmanaged and is not
ubject to management and trading
expenses as the Portfolio is. Past performance does not
necessarily indicate how the
Portfolio will perform in the future.
The bar chart shows the performance of the
Portfolio's shares for each full calendar
year since its inception in 1989
Quarterly Returns:
Highest: xx% in 3.37 quarter 4Q99
Lowest: xx% in -.92% quarter 4Q96
Portfolio manager
SSBC employs a team of investment professionals to make the day-to-day
investment decisions for the Portfolio.
More on the Portfolios' Investments
Additional investments and investment techniques. Each portfolio describes its
investment objective and its principal investment strategies and
risks under "Portfolio
Goals and Strategies." This section provides additional information about the
Portfolios' investments and certain portfolio management techniques
the Portfolios may
use. More information about the Portfolios' investments
and portfolio management
techniques, some of which entail risks, is included
in the statement of additional
information (SAI).
Fixed income investments. The U.S. Government/High Quality Securities
Portfolio and,
to a limited extent, the Income and Growth Portfolio, invest in fixed income
securities, including bonds, notes (as well as structured notes),
mortgage-related and
asset-backed securities (The U.S. Government/High Quality Securities
Portfolio only),
convertible securities, preferred stocks, and money market instruments.
Fixed income
securities may be issued by U.S. corporations;
U.S. banks and U.S. branches of foreign
banks; the U.S. government, its agencies,
authorities, instrumentalities or sponsored
enterprises; and state and municipal governments.
These securities may have all types of interest
rate payment and reset terms, including
fixed rate, adjustable rate, zero coupon, contingent,
deferred, payment in kind and
auction rate features.
Mortgage-related securities may be issued by private
companies or by agencies of the
U.S. government and represent direct or indirect participations in, or are
collateralized by and payable from, mortgage loans
secured by real property. Asset
backed securities represent participation in, or are
secured by and payable from,
assets such as installment sales or loan contracts, leases, credit card
receivables and other categories of receivables.
Investment Grade Securities. Securities are investment grade if:
? They are rated, respectively, in one of the top
four long-term rating categories
of a nationally recognized statistical rating organization.
? They have received a comparable short-term or other rating.
? They are unrated securities that the manager believes
are of comparable quality to
investment grade rated securities.
If a security receives different ratings by two or more
nationally recognized ratings agencies, a Portfolio will
treat the security as being
rated in the highest rating
category. A Portfolio may choose not to sell securities
that are downgraded after
their purchase below the Portfolio's minimum acceptable credit
rating. The Income and
Growth Portfolio's credit quality standards also
apply to counterparties to over-the-
counter derivatives contracts.
Foreign investments. The Income and Growth Portfolio may purchase
American Depositary Receipts (ADRs) which are U.S.
dollar denominated securities r
epresenting an interest in an underlying foreign security.
Because the value of an ADR is dependent upon the
market price of the underlying foreign security, ADRs are
subject to most of the risks associated with foreign investing.
Foreign countries generally have markets that are
less liquid and more volatile than markets in the U.S.
In some foreign countries, there is also less information
available about foreign issuers and markets because of
less rigorous accounting and regulatory standards than
in the U.S. Currency fluctuations could erase investment
gains or add to investment losses.
Securities lending. Each Portfolio may engage in securities
lending to increase its
net investment income. Each Portfolio will only lend
securities if the loans are
callable by the Portfolio at any time and the loans are
continuously secured by cash or
liquid securities equal to no less than the market value,
determined daily, of the
securities loaned. The risks in lending securities consist of
possible delay in
receiving additional collateral, delay in recovery of securities
when the loan is
called or possible loss of collateral should the borrower fail financially.
Repurchase Agreements. Each Portfolio may enter into repurchase agreements. A
repurchase agreement arises when a Portfolio purchases a security
and simultaneously
agrees to resell it to the counterparty at an agreed-upon future date,
normally the
next business day. The Portfolio earns a rate of return on the
repurchase agreement
because the resale price is higher than the purchase price.
In entering into a
repurchase agreement, a Portfolio bears a risk of loss in the
event that the
counterparty defaults on its obligation to repurchase the
security and the Portfolio is
delayed or prevented from exercising its rights to dispose of the
security. This
includes the risk of a possible decline in the value of the
security during the period
in which the Portfolio seeks to assert its rights to it, the
risk of incurring expenses
associated with asserting those rights and the risk of losing
all or a part of the
income from the agreement. Each Portfolio only enters into
repurchase agreements with
commercial banks or broker-dealers considered creditworthy by
the manager and which are
fully collateralized as to principal and interest
by U.S. Government securities and
money market instruments.
Reverse Repurchase Agreements. The U.S. Government/
High Quality Securities Portfolio
may enter into reverse repurchase agreements.
In a reverse repurchase agreement, the
Portfolio sells securities and agrees to repurchase
them at a mutually agreed upon date
and price. At the time the Portfolio enters
into a reverse repurchase agreement, it
will establish a segregated account containing
cash or liquid assets having a value not
less than the repurchase price (including accrued interest)
that is marked to market
daily. Reverse repurchase agreements involve several risks.
These include the risk
that the investments made with the cash proceeds
of the initial sale will incur losses
or otherwise generate a lower return than the
interest included in the amount of the
repurchase price. They also involve the risk
that the market value of the securities
which the Portfolio is obligated to repurchase
may decline below the repurchase price
or that the counterparty may default on its
obligation to resell the securities. To
the extent a fund enters into reverse
repurchase agreements to leverage its portfolio
this practice may have the effect of magnifying losses or gains.
Defensive investing: Each Portfolio may depart from its principal investment
strategies in response to adverse market, economic or
political conditions by taking
temporary defensive positions in all types of
money market and short-term debt
securities. If a Portfolio takes a temporary
defensive position, it may be unable to
achieve its investment goal.
Management
SSBC manages the investment operations of
each Portfolio and receives the following
fees from each portfolio for these services:
Portfolio
Actual management fee
paid for the fiscal
year ended December
31, 1998
(as a percentage
of the portfolio's
average daily net
assets)
Contractual
management fee
(as a percentage
of the portfolio's
average daily net
assets)
The Income and Growth Portfolio
0.60%
0.60%
The U.S. Government/High Quality
Securities Portfolio
0.45%
0.45%
The Reserve Account Portfolio
0.45%
0.45%
Year 2000 issue. Information technology experts are concerned about
computer systems' ability to process date-related information on and
after January 1, 2000. This situation, commonly known as the "Year
2000" issue, could have an adverse impact on the Portfolios. The
managers are addressing the Year 2000 issue for their systems. The
Portfolios have been informed by their other service providers that they
are taking similar measures. Although the Portfolios do not expect the
Year 2000 issue to adversely affect them, the Portfolios cannot
guarantee that their efforts (limited to requesting and receiving
reports from their service providers) or the efforts of their service
providers to correct the problem will be successful.
Share Transactions
Availability of the Portfolios
Shares of the Portfolios are available only through the purchase of
variable annuity or variable life insurance contracts issued by
insurance companies through their separate accounts. The variable
insurance products may or may not make investments in all the Portfolios
described in this prospectus.
The interests of different variable insurance products investing in a
Portfolio could conflict due to differences of tax treatment and other
considerations. The Portfolios currently do not foresee any
disadvantages to investors arising from the fact that each Portfolio may
offer its shares to different insurance company separate accounts that
serve as the investment medium for their variable annuity and variable
life products. Nevertheless, the board of trustees intends to monitor
events to identify any material irreconcilable conflicts which may
arise, and to determine what action, if any, should be taken in response
to these conflicts. If a conflict were to occur, one or more insurance
companies' separate accounts might be required to withdraw their
investments in one or more Portfolios and shares of another Portfolio
may be substituted. In addition, the sale of shares may be suspended or
terminated if required by law or regulatory authority or is in the best
interests of the portfolios' shareholders.
Redemption of shares
The redemption price of the shares of each Portfolio will be the net
asset value next determined after receipt by the Portfolio of a
redemption order from a separate account, which may be more or less than
the price paid for the shares. The Portfolio will ordinarily make
payment within one business day after receipt of a redemption request in
good order, though redemption proceeds must be remitted to a separate
account on or before the seventh day following receipt of the request in
good order, except on a day on which the New York Stock Exchange is
closed or as permitted by the SEC in extraordinary circumstances.
Share Price
Each Portfolio's net asset value is the value of its assets minus its
liabilities. Each Portfolio calculates its net asset value every day
the New York Stock Exchange is open. This calculation is done when
regular trading closes on the Exchange (normally 4:00 p.m., Eastern
time). If the New York Stock Exchange closes early, each portfolio
accelerates the calculation of its net asset value to the actual closing
time.
Each Portfolio generally values its portfolio securities based on market
prices or quotations. When market prices are not available, or when the
manager believes that they are unreliable, the Portfolio may price those
securities at fair value. Fair value is determined in accordance with
procedures approved by the Portfolio's board. A Portfolio that uses
fair value to price securities may value those securities higher or
lower than another portfolio that uses market quotations to price the
same securities.
Unless there are extraordinary or unusual circumstances, the Portfolios
use the amortized cost method of valuing their money market securities
with remaining maturities of 60 days or less. Under the amortized cost
method, assets are valued by constantly amortizing over the remaining
life of an instrument the difference between the principal amount due at
maturity and the cost of the instrument to the Portfolio.
Dividends, Distributions and Taxes
Each Portfolio intends to qualify and be taxed as a "regulated
investment company" under Subchapter M of the Internal Revenue Code of
1986 (the "Code"), as amended. In order to qualify to be taxed as a
regulated investment company, each Portfolio must meet certain income
and diversification tests and distribution requirements. As a regulated
investment company meeting these requirements, a Portfolio will not be
subject to federal income tax on its net investment income and net
capital gains that it distributes to its shareholders. All income and
capital gain distributions are automatically reinvested in additional
shares of the Portfolio at net asset value and are includable in gross
income of the separate accounts holding such shares. The Income and
Growth Portfolio expects distributions to be primarily from capital
gain. The U.S. Government/High Quality Securities Portfolio and the
Reserve Account Portfolio expect distributions to be primarily from
income. 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.
Financial Highlights
The financial highlights tables for the fiscal years
ended December 31 are intended to help you
understand the performance of each Portfolio for the
past five years. The information in the
following tables was audited by KPMG LLP,
independent accountants, whose report, along with each
Portfolio's financial statements, are included
in the annual report (available upon request). Certain
information reflects financial results for a
single share. Total returns represent the rate that a
shareholder would have earned (or lost) on a share
of a Portfolio assuming reinvestment of all
dividends and distributions.
Income From Investment
Operations
Distributions
Ratios to Average Net
Assets
Year
Ended
Net
Asset
Value,
Beginning of
Year
Net
Investment
Income(1)
Net
Realized
and
Unrealized Gain
(Loss)
on
Investment
Total
Income
(loss)
From
Investment
Operations
Dividen
ds from
Net
Investment
Income
Distributions
from
Net
Realized
Gains
Total
Distributions
Net
Asset
Value
, End
of
Year
Total
Return
Net
Assets
End of
Year
(000's)
Expenses
(1)
Net
Investment
Income
Portfolio
Turnover
Rate
INCOME AND GROWTH PORTFOLIO
1998
17.29
0.29
$1.87
$2.16
$(0.49)
$(4.98)
$(5.47)
$13.9
8
12.8
9%
$13,778
0.76%
1.53%
49.00%
1997
14.69
0.47
3.61
4.08
(0.10)
$(1.38)
$(1.48)
17.29
28.1
1
16,236
0.77
2.18
38.00
1996
15.24
0.57
2.68
3.25
(0.56)
(3.24)
(3.80)
14.69
21.0
2
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
27.5
6
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
(3.1
2)
27,484
0.75
2.49
40.41
U.S. GOVERNMENT/HIGH QUALITY SECURITIES PORTFOLIO
1998
12.66
0.03
___
0.03
(1.06)
(1.23)
(2.29)
10.40
0.22
973
1.00
0.22
0.00%
1997
12.90
.72
(.02)
.70
(.04)
(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
17.2
0
4,856
0.87
6.36
0.00
1994
13.35
0.84
(0.89)
(0.05)
(0.84)
- -
(0.84)
12.46
(0.3
5)
4,838
0.76
5.87
36.33
RESERVE ACCOUNT PORTFOLIO
1998
7.70
(0.07)
__
(0.07)
(0.27)
__
(0.27)
7.36
(0.8
9)
56
1.00
(1.00)
0%
1997
10.99
.15
- -
.15
(0.25)
(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
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. If such fees were not waived
and expenses not 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.
SMITH BARNEY VARIABLE ACCOUNT FUNDS
ADDITIONAL INFORMATION
Shareholder reports. Annual and semiannual reports to shareholders provide
additional information about each Portfolio's investments. These reports
discuss the market conditions and investment strategies that affected each
Portfolio's performance.
[Each Portfolio sends one report to a household if more than one account has
the same address. Contact your Salomon Smith Barney Financial Consultant,
dealer representative or transfer agent if you do not want this policy to
apply to you.]
Statement of additional information. The statement of additional information
provides more detailed information about the Portfolios. It is incorporated
by reference into this prospectus.
You can make inquiries about the Portfolios or obtain shareholder reports or
the statement of additional information (without charge) by calling 1-800-451-
2010 or writing to Smith Barney Variable Account Funds, 388 Greenwich Street,
MF2, New York, NY 10013.
You can also review the Portfolios' shareholder reports, prospectus and
statement of additional information at the Securities and Exchange
Commission's Public Reference Room in Washington, D.C. The Commission charges
a fee for this service. Information about the public reference room may be
obtained by calling 1-800-SEC-0330. You can get the same reports and
information free from the Commission's Internet web site at http: www.sec.gov
If someone makes a statement about any of the Portfolios that is not in this
prospectus, you should not rely upon that information. The Portfolios are not
offering to sell their shares to any person to whom the Portfolios may not
lawfully sell their shares.
(Investment Company Act file no. 811-04959)
PART B
April 30, 1999
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 by investing primarily 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. This Portfolio currently
has insufficient assets to enable it to invest in accordance with
its investment program.
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.
This Statement of Additional Information ("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, 1999 Prospectus which
may be obtained from the Fund by writing the Fund at the address listed
above, or by contacting your Salomon 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
Investment Policies
2
Investment Restrictions
5
Performance Information
7
Trustees and Officers
8
Determination of Net Asset Value
10
Redemption of Shares
10
Diversification
11
Distributor
11
Custodian
11
Independent Auditors
11
The Fund
11
Management Agreements
12
Voting Rights
14
Financial Statements
14
Appendix-Ratings of Debt Obligations
15
INVESTMENT POLICIES
The prospectus describes the investment objectives and
policies of each Portfolio.
The following discussion supplements the description of
the Portfolio's investment
policies in the prospectus. The investment objectives and
policies of each Portfolio are
non-fundamental and thus may be modified by the trustees of
the Fund provided that any
modification is not prohibited by the Portfolios' investment
restrictions or applicable
laws. Each Portfolio's investment adviser is SSBC Fund
Management Inc. ("SSBC" or the
"manager").
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 (the "Separate
Accounts") as an investment for Contracts, as described in
the accompanying Contract
prospectus. 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.
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 Fund's custodian).
At least 65% of the
Portfolio's assets will at all times be invested in equity
securities. The Portfolio may
also purchase preferred stocks and convertible securities.
Temporary defensive
investments or investment in 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 Portfolio's assets and an additional
10% of its assets may be
invested in American Depository Receipts ("ADR"s) representing
shares in foreign
securities that are traded in United States securities markets.
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.
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 lend money or assets, as
described in investment restriction 9 on page 6, the Portfolio
does not currently intend
to, nor does it intend to engage in loans other than short-term loans.
While the Portfolio is permitted to invest in warrants
(including 2% or less of the Portfolio's 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 option's 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 Moody's
Investors Service, Inc. ("Moody's") or AAA, AA, A and
BBB by Standard & Poor's Ratings Group ("S&P").
The Income and Growth Portfolio may, but need not, use
derivative contracts, such as
futures and options on securities, securities indices or
currencies; options on these
futures; forward currency contracts; and interest rate or
currency swaps for any of the following purposes:
To hedge against the economic impact of adverse
changes in the market value of its
securities because of changes in stock market prices,
currency exchange rates or interest rates
As a substitute for buying or selling securities
To enhance the Portfolio's return
A derivative contract will obligate or entitle the Portfolio
to deliver or receive an
asset or cash payment based on the change in value of one or
more securities, currencies
or indices. Even a small investment in derivative contracts
can have a big impact on a
Portfolio's stock market, currency and interest rate exposure.
Therefore, using
derivatives can disproportionately increase losses and reduce
opportunities for gains when stock prices, currency rates or
interest rates are changing. The Portfolio may not
fully benefit from or may lose money on derivatives if changes
in their value do not
correspond accurately to changes in the value of the
Portfolio's holdings. The other
parties to certain derivative contracts present the same
types of credit risk as issuers
of fixed income securities. Derivatives can also make
the Portfolio less liquid and
harder to value, especially in declining markets.
The U.S. Government/High Quality Securities Portfolio
has insufficient assets to
enable it to invest in accordance with its investment
policies. Instead, the Portfolio
invests substantially all of its assets in repurchase agreements
and U.S. treasury bills:. If the Portfolio was able to invest
in accordance with its investments policies
the Portfolio would invest 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
an NRSRO such as S&P (AAA, AA) or Moody's (Aaa, Aa) or if
unrated, are determined to be
of comparable quality by the manager. Except when the Portfolio
it is in a temporary
defensive investment position, at least 65% of the Portfolio's
total assets would be
invested in these securities, including the securities
held subject to repurchase agreements .
A substantial portion of the Portfolio's investments would
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 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. The balance of the investments of the Portfolio
would 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 of Moody's.
The Reserve Account Portfolio has insufficient assets
to enable it to invest in
accordance with its investment policies. The Portfolio invests
substantially all of its assets in repurchase agreements and
U.S. treasury bills. If the Portfolio were able to
invest in accordance with its investment policies, the
Portfolio would invest in high-grade fixed income obligations
(including money market instruments) with a maximum
maturity of seven years. These obligations include
U.S. Government Obligations;
commercial paper rated A-1 or A-2 by S&P or Prime-1 or
Prime-2 by Moody's; high quality
corporate notes and bonds, including floating rate issues,
rated within the two highest
categories by an NRSRO such as S&P or Moody's or, if not
rated of comparable quality as
determined by the manager, bankers' acceptances; certificates
of deposit and securities
backed by letters of credit. Normally, a portion of the
Portfolio would consist of
investments that mature in two to seven years; however, it
would be expected there would
be occasions when as much as all of the Portfolio would be
invested in money market
instruments.
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. 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 Portfolio's investment objective. A high portfolio turnover results in
correspondingly greater transaction costs.
The Fund's 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 Information
GNMA Securities. Government National
Mortgage Association ("GNMA"), an agency of
the United Sates 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. Schedule
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 of 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 shareholder's investment in
Government/High Quality Portfolio.
Prepayments and scheduled payments of principal
will be reinvested by the Fund in then
available GNMA Certificates which may bear
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 it most recently
published financial statements prior to the date of investment).
These obligations
include:
Bankers' Acceptance: A short-term credit
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.
Reverse Repurchase Agreements. 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 borrowing 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 advantageous to the Portfolio's
assets. The Fund's custodian
bank will maintain a segregated account of the Portfolio
with securities having a value
equal to or greater than such commitments.
Securities Lending. 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
Portfolio's 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 Portfolio's
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.
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.
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.
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
2. 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
2. 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
with any such borrowing
and in amounts not in excess of 7 1/2% of the value of the
Fund's 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
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
2. 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 Portfolio's 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 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 set forth
above or applicable law, and any such
change will first be disclosed in the then current prospectus.
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
2. 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
of an issuer if those
officers and Trustees of the Fund, its manager, or
Salomon 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
Portfolio's cumulative 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. Cumulative 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 the 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.
Each Portfolio's cumulative total return and average
annual total return for the
one and five year periods, and since each Portfolio's inception
date are shown below.
Portfolio
Cumulative Total Returns as of 12/31/98
1 year
5 year
Since Inception
7/20/89
Income and Growth Portfolio
12.89 %
115.95 %
252.86 % 7/20/89
U.S. Gov't/High Quality
Securities Portfolio
0.22
%
27.52
%
81.02 % 7/31/89
Reserve Account Portfolio
-0.89
%
13.26
%
53.61% 8/2/89
Portfolio
Average Annual Total Returns as of
12/31/98
1 year
5 year
Since
Inception
7/20/89
Income and Growth Portfolio
12.89 %
16.65 %
14.27 %
7/20/89
U.S. Gov't/High Quality
Securities Portfolio
0.22
%
4.98%
6.50% 7/31/89
Reserve Account Portfolio
-0.89%
2.52
%
4.66 % 8/2/89
Each cumulative Portfolio's 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 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 Portfolio's 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
Portfolio's current distribution return to yields
published for other investment
companies and other investment vehicles. From time
to time, the Fund may include its
current distribution return in information furnished to present or prospective
shareowners.
A Portfolio's 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 Portfolio's
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
Portfolio's shares and to the risks associated with the
Portfolio's investment objective
and policies. For example, in comparing current
distribution returns with those offered
by Certificate of Deposit ("CDs"), it should
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
Donoghue's Money Fund Report, a widely-distributed
publication on money market funds.
Performance information may be useful in
evaluating a Portfolio and for 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 Portfolio's performance for any future period.
TRUSTEES AND OFFICERS
LEE ABRAHAM, Trustee
Retired; formerly Chairman and Chief Executive
Officer of Associated Merchandising
Corporation, a major retail merchandising and sourcing
organization; Director of Galey &
Lord, an apparel manufacturer, Liz Claiborne, a
specialty retailer, R.G. Barry Corp., a
footwear manufacturer and Signet Group plc, a
specialty retailer. His address is 106
Barnes Road, Stamford, Connecticut 06902; Age 76.
ALLAN J. BLOOSTEIN, Trustee
President of Allan J. Bloostein Associates,
a consulting firm; Retired Vice Chairman and
Director of The May Department Stores Company;
Director of CVS Corporation, a drug store
chain, and Taubman Centers Inc., a real estate
development company. His address is 27
West 67th Street, New York, New York 10023; Age 69.
JANE DASHER, Trustee
Investment Officer of Korsant Partners, a family
investment company; Prior to 1997, an
Independent Financial Consultant; Age 49.
DONALD R. FOLEY, Trustee
Retired 3668 Freshwater Drive, Jupiter, Florida 33477.
Formerly Vice President of Edwin
Bird Wilson, Incorporated (advertising); Age 76.
RICHARD E. HANSON, JR., Trustee
Head of School, New Atlanta Jewish Community High School,
Atlanta Georgia since September
1996; formerly Headmaster, The Peck School, Morristown,
New Jersey; prior to July 1,
1994, Headmaster, Lawrence County Day School-Woodmere
Academy, Woodmere, New York; His
address is 58 Ivy Chase, Atlanta, GA 30342; Age 57.
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 fourteen
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 67.
*HEATH B. McLENDON, Chairman of the Board and Chief
Executive Officer
Chairman of the Board and Investment Officer; Managing
Director of Salomon Smith Barney
Inc. ("Salomon Smith Barney"); President of SSBC
and Travelers Investment Adviser, Inc.
("TIA); Chairman or Co-Chairman of the Board of
fifty-nine investment companies managed
by affiliates of Salomon Smith Barney; Age 65.
RODERICK C. RASMUSSEN, Trustee
Investment Counselor, 81 Mountain Road, Verona,
New Jersey 07044. Formerly Vice President
of Dresdner and Company Inc. (investment counselors);
Age 72.
JOHN P. TOOLAN, Trustee
Retired, 13 Chadwell Place, Morristown, New Jersey 07960.
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 68.
*LEWIS E. DAIDONE, Senior Vice President and Treasurer
Managing Director of Salomon Smith Barney, Senior
Vice President and Treasurer of fifty-
nine investment companies associated with Salomon
Smith Barney, and Director and Senior
Vice President of the Manager; Age 41.
*PAUL BROOK, Controller
Director of Salomon Smith Barney and Controller or
Assistant Treasurer of forty-three
investment companies associated with Smith Barney
since 1998; Managing Director of AMT
Capital Services Inc. from 1997-1998; Partner with Ernst & Young LLP prior to
1997; Age
45.
*CHRISTINA T. SYDOR, Secretary
Managing Director of Salomon Smith Barney and Secretary
of fifty-nine investment
companies associated with Salomon Smith Barney; Secretary
and General Counsel of the
Manager; Age 48.
On April 9, 1999, Trustees and officers owned in the
aggregate less than 1% of the
outstanding securities of the Fund.
The following table shows the compensation paid by
the Fund to each person who was a
Trustee during the Fund's 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 Salomon Smith Barney.
COMPENSATION TABLE
Name of
Person
Aggregate
Compensation
from the
Fund Fiscal
Year Ended
12/31/98
Pension or
Retirement
Benefits
Accrued as
Part of Fund's
Expenses
Total
Compensation
from Fund
and Fund
Complex Paid
to Directors
for the
Calendar
Year Ended
12/31/98
Total Number of
Funds for Which
Person Serves
within Fund
Complex for the
Calendar Year
Ended 12/31/98
Lee Abraham++
$
0
$
0
$
47,750
2
Allan J.
Bloostein++
$
0
$
0
$
90,500
9
Jane Dasher++
$
0
$
0
$
0
0
Joseph H.
Fleiss**+
$
663
$
0
$
32,943
10
Donald R.
Foley**
$ 1906
$
0
$
57,100
10
Richard E.
Hanson++
$
0
$
0
$
47,950
2
Paul Hardin
$ 1513
$
0
$
71,400
12
Heath B.
McLendon*
$
0
$
0
0
59
Roderick C.
Rasmussen
$ 1913
$
0
$
57,100
10
John P. Toolan**
$ 1613
$
0
$
54,700
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: $0, Donald R.
Foley: $6 and John P. Toolan: $1,613, and the following
amounts of their total
compensation from the Fund Complex: Joseph H. Fleiss:
$0, Donald R. Foley: $21,000, and
John P. Toolan: $54,700. During the Fund's most recent
fiscal year ended December 31,
1998, the estate of a deceased director was paid his
previously deferred compensation,
which totaled $5,032 from the Fund and $171,148 from
the Fund complex.
+ Effective January 1, 1998, Mr. Fleiss became a Trustee
Emeritus. Upon attainment of age
72 the Fund's current Trustees may elect to change to
emeritus status. Any trustee
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
to the Fund's trustees,
together with reasonable out-of-pocket expenses for each
meeting attended. During the
Fund's last fiscal year aggregate compensation from the
Fund to Emeritus Trustees (other
than Mr. Fleiss who is covered in the table above)
totaled $155.
++ Elected as of April 19, 1999, therefore no compensation
was paid by fund through
12/31/98.
DETERMINATION OF NET ASSET VALUE
The net asset value of each Portfolio's 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 Year's Day, Martin Luther King Jr. Day,
Washington's 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 "Share Price" in the Prospectus and
shareholder would incur brokerage
expenses if these securities were then converted to cash.
DIVERSIFICATION
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.
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.).
DISTRIBUTOR
CFBDS, 21 Milk Street, Boston, Massachusetts 02109, serves as the Funds'
principal
underwriter.
INDEPENDENT AUDITORS
KPMG LLP, 345 Park Avenue, New York, NY 10154,
has been selected as the Fund's
independent auditors to examine and report on the
Fund's financial statements and
highlights for the fiscal year ending December 31, 1999.
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. Pursuant to the Declaration of Trust, the Trustees
1987. 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 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
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.
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.
MANAGEMENT AGREEMENTS
The Trustees are responsible for the direction and
supervision of the Fund's
business and operations. The Fund employs SSBC Fund
Management Inc., formerly Mutual
Management Corp., 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 Salomon Smith Barney Inc.
("Salomon Smith Barney") and is a
subsidiary of Citigroup Inc., a diversified financial
service holding company. The
manager was incorporated on March 12, 1968 under the
laws of the State of Delaware. As
of March 31, 1999 the manager had aggregate assets under
the management in excess of $114
billion. The manager, Salomon 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 Salomon Smith Barney
and is subject to the right of
Salomon Smith Barney to elect that the Fund stop using
the term in any form or
combination of its name.
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 Salomon Smith
Barney's Research and other departments and staff will
furnish the manager with
information, advice and assistance and will be available
for consultation on the Fund's
Portfolios, thus Salomon Smith Barney may also be considered
an investment adviser to the
Fund. Salomon Smith Barney's 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 of .60% of the average
daily net assets of the Income and
Growth Portfolio and 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
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 1996 and 1997 the management fee
for the Income and Growth Portfolio
was $164,890 and $109,300 respectively, the management
fee for U.S. Government/High
Quality Portfolio was $17,828 and $9,382 respectively,
and the management fee for the
Reserve Account Portfolio was $5,864 and $857, respectively.
For the year ended December
31, 1998, received management fees equal to $88,984 for the
Income and Growth Portfolio
and waived all of its management fees and reimbursed
expenses of $4,832 and $15,552 for
the U.S. Government/High Quality Securities and Reserve
Account Portfolios, respectively.
The Management Agreement for each of the Fund's
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
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 Fund's
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 Fund's shares, which
are paid by the Fund, are not
deemed sales or promotion expenses.
In addition, brokerage is allocated to Salomon
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 Salomon Smith Barney (or any broker/dealer
affiliate of Salomon
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 Salomon Smith Barney, the Fund has
been assured that its orders
will be accorded priority over those received from Salomon
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 Salomon
Smith Barney in any transaction in which Salomon Smith
acts as principal.
During fiscal year 1998 the total amount of commissionable
transactions was
$17,266,156 (53.25%) of which $____ was directed to other
brokers and $8,071,796 (46.75%)
of which was directed to Salomon 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
Total
To Salomon Smith Barney
To Others
for
Execution
Only
To Others For Execution
and Research and
Statistical Services
1996
1997
1998
$49,776
$28,199
$20,477
$16,187 $16,187 32.5%
$11,06
$10,449 39.2%
$ -0- -0-%
$ -0-
$ -0- -0-%
$33,589 $33,589 67.5%
$17,139
$10,028 60.8%
The Board of Trustees of the Fund has adopted certain
policies and procedures
incorporating the standard of Rule l7e-l issued by
Securities and Exchange Commission
under the Act which requires that the commissions paid
to Salomon 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 Act (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 Portfolio's
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
January 29, 1999, Nationwide Life
Insurance Co. owned 955,741.455 (100%) of the
outstanding shares of the Income and Growth
Portfolio, 86,259.824 (100%) of the outstanding shares
of the U.S. Government/High
Quality Securities Portfolio, and 7,638.840 (100%) of the
outstanding shares of the
Reserve Account Portfolio.
FINANCIAL STATEMENTS
The Fund's, Annual Report to Shareholders, for the
fiscal year ended December 31,
1998 is incorporated herein by reference in its entirety
was filed on April 27, 1999
accession number 9155-99-273.
APPENDIX - RATINGS OF DEBT OBLIGATIONS
BOND (AND NOTES) RATINGS
Moody's 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
(b) 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 & Poor's Ratings Group
AAA - Debt rated "AAA" has the highest rating
assigned by Standard & Poor's.
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
B- 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&P's
receipt of closing
documentation confirming investments and cash flow.
* Continuance of the rating is contingent upon S&P's 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
Moody's 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
to variation. Capitalization
characteristics, while still appropriate, may be
more affected by external conditions.
Ample alternate liquidity is maintained.
Standard & Poor's 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.
PART C Other Information
Item 23 . Exhibits
(a) 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.
(b) Bylaws of the Trust are incorporated by reference to
Exhibit 2 to Pre-Effective Amendment No. 4.
(c) Not applicable.
(d) (1) 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.
(2) 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.
(3) 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.
(4) 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.
(e) Distribution Agreement between Smith Barney Variable
Account Funds and CFBDS, Inc. is incorporated by reference to Exhibit (e)
to Post-Effective Amendment No.11.
(f) Not applicable.
(g) Custodian Agreement between Registrant and Provident
National Bank is incorporated herein by reference to Exhibit 8 to Pre-
Effective Amendment No. 4.
(h) (1) Transfer Agency Agreement between Registrant and
Provident Financial Processing Corp. is incorporated herein by reference
to Exhibit 9 to Pre-Effective Amendment No. 4.
(2) Form of Transfer Agency Agreement between
Registrant and First Data Investor Services Group, Inc. is
incorporated herein by reference to Exhibit 9(b) to Post-Effective
Amendment No. 8.
(i) (1) Opinion of Sullivan & Cromwell is incorporated
by reference to Pre-Effective Amendment No. 1.
(2) Opinion of Gaston & Snow is incorporated herein
by reference to Exhibit 10 to Pre-Effective Amendment No. 4.
(j) Auditors' Consent (filed herewith)
(k) Not applicable.
(l) 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.
(m) Not applicable.
(n) Financial Data Schedule is filed herewith.
(o) Plan 3 pursuant to Rule 18f-3 is incorporated by
reference to Exhibit 18 to Post-Effective Amendment No. 7
Item 24. 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 Registrant's 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 25. Indemnification
Reference is made to ARTICLE V of Registrant's 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 26. 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 SSBC Fund Management Inc.
is included in its Form ADV (File no. 801-8314),
filed with the Commission, which is incorporated herein by reference
thereto.
Item 27. Principal Underwriters
(a) CFBDS, Inc., ("CFBDS") the Registrant's Distributor, is also
the distributor for the following Smith Barney funds: Concert
Investment Series, Consulting Group Capital Markets Funds, Greenwich
Street Series Fund, 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 Equity Funds, Smith Barney
Fundamental Value Fund Inc., Smith Barney Funds, Inc., Smith Barney
Income Funds, Smith Barney Institutional Cash Management 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 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 Small Cap Blend Fund, Inc., Smith
Barney Telecommunications Trust, Smith Barney Variable Account Funds,
Smith Barney World Funds, Inc., Travelers Series Fund Inc., and
various series of unit investment trusts.
CFBDS also serves as the distributor for the following funds: The
Travelers Fund UL for Variable Annuities, The Travelers Fund VA for
Variable Annuities, The Travelers Fund BD for Variable Annuities, The
Travelers Fund BD II for Variable Annuities, The Travelers Fund BD
III for Variable Annuities, The Travelers Fund BD IV for Variable
Annuities, The Travelers Fund ABD for Variable Annuities, The
Travelers Fund ABD II for Variable Annuities, The Travelers Separate
Account PF for Variable Annuities, The Travelers Separate Account PF
II for Variable Annuities, The Travelers Separate Account QP for
Variable Annuities, The Travelers Separate Account TM for Variable
Annuities, The Travelers Separate Account TM II for Variable
Annuities, The Travelers Separate Account Five for Variable
Annuities, The Travelers Separate Account Six for Variable Annuities,
The Travelers Separate Account Seven for Variable Annuities, The
Travelers Separate Account Eight for Variable Annuities, The
Travelers Fund UL for Variable Annuities, The Travelers Fund UL II
for Variable Annuities, The Travelers Variable Life Insurance
Separate Account One, The Travelers Variable Life Insurance Separate
Account Two, The Travelers Variable Life Insurance Separate Account
Three, The Travelers Variable Life Insurance Separate Account Four,
The Travelers Separate Account MGA, The Travelers Separate Account
MGA II, The Travelers Growth and Income Stock Account for Variable
Annuities, The Travelers Quality Bond Account for Variable Annuities,
The Travelers Money Market Account for Variable Annuities, The
Travelers Timed Growth and Income Stock Account for Variable
Annuities, The Travelers Timed Short-Term Bond Account for Variable
Annuities, The Travelers Timed Aggressive Stock Account for Variable
Annuities, The Travelers Timed Bond Account for Variable Annuities.
In addition, CFBDS, the Registrant's Distributor, is also the
distributor for CitiFunds Multi-State Tax Free Trust, CitiFunds
Premium Trust, CitiFunds Institutional Trust, CitiFunds Tax Free
Reserves, CitiFunds Trust I, CitiFunds Trust II, CitiFunds Trust III,
CitiFunds International Trust, CitiFunds Fixed Income Trust,
CitiSelect VIP Folio 200, CitiSelect VIP Folio 300, CitiSelect VIP
Folio 400, CitiSelect VIP Folio 500, CitiFunds Small Cap Growth VIP
Portfolio. CFBDS is also the placement agent for Large Cap Value
Portfolio, Small Cap Value Portfolio, International Portfolio,
Foreign Bond Portfolio, Intermediate Income Portfolio, Short-Term
Portfolio, Growth & Income Portfolio, U.S. Fixed Income Portfolio,
Large Cap Growth Portfolio, Small Cap Growth Portfolio, International
Equity Portfolio, Balanced Portfolio, Government Income Portfolio,
Tax Free Reserves Portfolio, Cash Reserves Portfolio and U.S.
Treasury Reserves Portfolio.
In addition, CFBDS is also the distributor for the following Salomon
Brothers funds: Salomon Brothers Opportunity Fund Inc., Salomon
Brothers Investors Fund Inc., Salomon Brothers Capital Fund Inc.,
Salomon Brothers Series Funds Inc., Salomon Brothers Institutional
Series Funds Inc., Salomon Brothers Variable Series Funds Inc.
In addition, CFBDS is also the distributor for the Centurion Funds,
Inc.
(b) The information required by this Item 27 with respect to each
director and officer of CFBDS is incorporated by reference to
Schedule A of Form BD filed by CFBDS pursuant to the Securities and
Exchange Act of 1934 (File No. 8-32417).
(c) Not applicable.
Item 28. 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 29. Management Services
Not applicable.
Item 30. Undertakings
None
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 1999.
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, 1999
(Heath B. McLendon) and Chief Executive Officer
/s/ Lewis E. Daidone Senior Vice President
(Lewis E. Daidone) and Treasurer April 30, 1999
Donald R. Foley* Trustee April 30, 1999
(Donald R. Foley)
Paul Hardin* Trustee April 30, 1999
(Paul Hardin)
Roderick C. Rasmussen* Trustee April 30, 1999
(Roderick C. Rasmussen)
John P. Toolan* Trustee April 30, 1999
(John P. Toolan)
*By: /s/ Christina T. Sydor April 30, 1999
Christina T. Sydor
Pursuant to Power of Attorney
EXHIBIT INDEX j Auditors'Consent
n. Financial Data Schedule
Independent Auditors' Consent
To the Shareholders and Board of Trustees of
Smith Barney Variable Account Funds:
We consent to the use of our reports dated February 8, 1999, with
respect to the Funds listed below 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.
Funds
Income and Growth Portfolio
U.S. Government/High Quality Securities Portfolio
Reserve Account Portfolio
KPMG LLP
New York, New York
April 26, 1999
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