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. 11 [X]
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 11
__________________ [ 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):
[ ] Immediately upon filing pursuant to
paragraph (b) of Rule 485
[ ] On (date) pursuant to paragraph (b)
paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of
Rule 485 [ ]
[X] On April 30, 1999 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.
SMITH BARNEY VARIABLE ACCOUNT FUNDS
FORM N-1A
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.
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
Smith Barney Variable
Account Funds offer a
choice of three
different Portfolios.
Each Portfolio is
separately managed to
achieve its own
investment objective and
involves different
levels of risk and
potential return.
Portfolio goal and 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.
The Portfolio's Goals and Investments The Income and Growth Portfolio
Investment goals
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 unmanag
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.
.
Average Annual Total Returns
(for the periods ended December 31, 1998)
One
year
Five
years
Since
inception
Portfolio
S&P 500 Index
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 ___ quarter 199X
Lowest: xx% in ___ quarter 199X
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.
The Portfolio's Goals and Investments
The U.S. Government/High Quality Securities Portfolio
Investment goals
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 investments will be rated at least investment grade
at the time of purchase.
Maturity: The Portfolio maintains an average portfolio maturity of
between 5 and 10 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
Portfolio manager
James Conroy
James Conroy is primarily responsible for the day-to-day management of the
Portfolio. Mr. Conroy is an investment officer of SSBC Fund Management Inc.
and a managing director of Salomon Smith Barney. He has over 21 years of
investment management experience.
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 any of the following occurs:
? 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.
Average Annual Total Returns
(for the periods ended December 31, 1998)
One
year
Five
years
Since
inception
Portfolio
Lehman Brothers
Index
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 ___ quarter 199X
Lowest: xx% in ___ quarter 199X
The Portfolio's Goal and Investments
The Reserve Account Portfolio
Investment goal
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
agreeements 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 subject to management
and trading expenses as the Portfolio is. Past performance does not
necessarily indicate how the Portfolio will perform in the future.
Average Annual Total Return
(for the periods ended December 31, 1998)
One
Year
Five
Years
Since
inception
Portfolio
Lehman Brothers
Index
Quarterly returns:
Highest: xx% in __ quarter 199X
Lowest: xx% in __ quarter 199X
The bar chart shows the performance of the Portfolio's
shares for each full calendar year since its inception in 1989.
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 representing 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 it 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%
The U.S. Government/High Quality
Securities Portfolio
___%
0.45%
The Reserve Account Portfolio
___%
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
Dividends 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
1997
14.69
0.47
$3.61
$4.08
$(0.10)
$(1.38)
$(1.48)
$17.29
$28.11
$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
21.02
20,812
0.74
2.39
30.00
1995
13.05
0.45
3.12
3.57
(0.44)
(0.94)
(1.38)
15.24
27.56
29,782
0.77
2.77
46.26
1994
14.93
0.39
(0.86)
(0.47)
(0.39)
(1.02)
(1.41)
13.05
(3.12)
27,484
0.75
2.49
40.41
U.S. GOVERNMENT/HIGH QUALITY SECURITIES PORTFOLIO
1998
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
17.20
4,856
0.87
6.36
0.00
1994
13.35
0.84
(0.89)
(0.05)
(0.84)
- -
(0.84)
12.46
(0.35)
4,838
0.76
5.87
36.33
RESERVE ACCOUNT PORTFOLIO
1998
1997
10.99
.15
- -
.15
(.25)
(3.19)
(3.44)
7.70
1.36
97
1.00
1.59
0%
1996
12.71
1.92
(1.72)
0.20
(1.92)
- -
(1.92)
10.99
1.57
435
1.00
4.98
- -
1995
12.39
0.73
0.38
1.11
(0.74)
(0.05)
(0.79)
12.71
8.83
2,315
0.97
5.30
16.98
1994
12.75
0.59
(0.34)
0.25
(0.58)
(0.03)
(0.61)
12.39
1.99
2,528
0.86
4.77
81.28
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 [ _________________]
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)
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.
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
10
Custodian
10
Counsel
10
Independent Auditors
11
The Fund
11
Management Agreements
12
Voting Rights
13
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 invests primarily in
a combination of (i) securities of the U.S. Government, its agencies or
its instrumentalities and (ii) other high quality fixed income securities
(including corporate bonds) rated within the two highest categories by 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 is in a temporary defensive investment position, at least 65% of
the Portfolio's total assets will be invested in these securities,
including the securities held subject to repurchase agreements.
It is anticipated that a substantial portion of the Portfolio's
investments will consist of GNMA Certificates, which are mortgage-backed
securities representing part ownership of a pool of mortgage loans on
which timely payment of interest and principal is guaranteed by the U.S.
Government. As a hedge against changes in interest rates, the 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 will be fixed income
securities of private issuers and money market instruments, including
certificates of deposit, bankers' acceptances, and commercial paper rated
A-1 or A-2 by S&P or Prime-1 or Prime-2 of Moody's.
The Reserve Account Portfolio currently has insufficient assets to enable
it to invest in accordance with its investment policies. Instead, the
Portfolio invests all of its assets in repurchase agreements. 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. Scheduled payments of
principal and interest are made each month to holders of GNMA Certificates
(such as the Government/High Quality Portfolio). The average life of GNMA
Certificates varies with the maturities of the underlying mortgages (with
maximum maturities of 30 years) but is likely to be substantially less
than the original maturity of the mortgage pools underlying the securities
as a result of prepayments, refinancing of such mortgages or foreclosure.
Unscheduled prepayments of mortgages are passed through to the holders of
GNMA Certificates at par with the regular monthly payments of principal
and interest, which have the effect of reducing future payment 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 the
Government/High Quality Portfolio. Prepayments and scheduled payments of
principal will be reinvested by the Fund in then available GNMA
Certificates which may bear interest at a rate lower or higher than the
Certificate from which the payment was received. As with other debt
securities, the price of GNMA Certificates is likely to decrease in times
of rising interest rates; however, in periods of falling interest rates
the potential for prepayment may reduce the general upward price increase
of GNMA Certificates that might otherwise occur.
Other U.S. Government Obligations. In addition to GNMA Securities and
direct obligations of the U.S. Treasury (such as Treasury Bills, Notes and
Bonds), U.S. Government Obligations in which the Fund may invest include:
(1) obligations of, or issued by, Banks for Cooperatives, Federal Land
Banks, Federal Intermediate Credit Banks, Federal Home Loan Banks, the
Federal Home Loan Bank Board, any wholly-owned Government corporation so
designated in Section 9101 (3) of Title 31, or the Student Loan Marketing
Association; (2) other securities fully guaranteed as to principal and
interest by the United States of America; (3) other obligations of, or
issued by, or fully guaranteed as to principal and interest by the Federal
National Mortgage Association or any agency of the United States; and (4)
obligations currently or previously sold by the Federal Home Loan Mortgage
Corporation.
Bank Obligations. Obligations purchased from U.S. banks or other
financial institutions that are members of the Federal Reserve System or
the Federal Deposit Insurance Corporation ("FDIC") (including obligations
of foreign branches of such members) if either: (a) the principal amount
of the obligation is insured in fully 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 instrument evidencing the
obligation of a bank to pay a draft drawn upon it by a customer.
This instrument reflects the obligation not only of the drawer but
also of the bank to pay the face amount of the instrument upon
maturity.
Certificate of Deposit: A certificate evidencing the obligation of
a bank to repay funds deposited with it earning a specified rate of
interest over a given period.
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 than 5% of the value of
its total assets in any one issuer, except securities of the U.S.
Government, its agencies or its instrumentalities; 2. Invest more than 25%
of the value of its total assets in any one industry, except that
securities of the U.S. Government, its agencies and instrumentalities are
not considered an industry for purposes of this limitation; 3. Purchase
securities on margin; 4. Make short sales of securities or maintain a
short position unless at all times when a short position is open, the
Portfolio owns or has the right to obtain, at no added cost, securities
identical to those sold short; 5. Borrow money, except as a temporary
measure for extraordinary or emergency purposes, and then not in excess of
the lesser of 10% of its total assets taken at cost or 5% of the value of
its total assets; or mortgage or pledge any of its assets, except to
secure such borrowings; 6. Act as an underwriter of securities except to
the extent the Fund may be deemed to be an underwriter in connection with
the sale of portfolio holdings; 7. Invest in real estate (the purchase by
the Portfolio of securities for which there is an established market of
companies engaged in real estate activities or investments shall not be
deemed to be prohibited by this fundamental investment limitation); 8.
Purchase or sell commodities; and 9. Make loans, except the Portfolio
will purchase debt obligations, may enter into repurchase agreements and
may lend its securities.
Without the approval of a majority of its outstanding voting securities
the U.S. Government/High Quality Securities Portfolio may not:
1. With respect to 75% of its assets, invest more than 5% of the value of
its total assets in any one issuer, except securities of the U.S.
Government, its agencies or instrumentalities; 2. Invest more than 25% of
the value of its total assets in any one industry, except that securities
of the U.S. Government, its agencies and instrumentalities are not
considered an industry for purposes of this limitation; 3. Purchase
securities on margin; 4. Sell securities short (provided however the
Portfolio may sell short if it maintains a segregated account of cash or
U.S. Government obligations with the Custodian, so that the amount
deposited in it plus the collateral deposited with the broker equals the
current market value of the securities sold short and is not less than the
market value of the securities at the time they were sold short); 5.
Borrow money, except from banks for temporary purposes and then in amounts
not in excess of 5% of the value of its assets at the time of such
borrowing; or mortgage, pledge or hypothecate any assets except in
connection with any such borrowing and in amounts not in excess of 7 1/2%
of the value of the 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 it to meet redemption
requests where the liquidation of portfolio securities is deemed to be
disadvantageous or inconvenient.) Borrowings may take the form of a sale
of portfolio securities accompanied by a simultaneous agreement as to
their repurchase; 6. Act as an underwriter of securities except to the
extent the Fund may be deemed to be an underwriter in connection with the
sale of portfolio holdings; 7. Invest in real estate (the Portfolio,
however, will purchase mortgage-related securities); 8. Purchase or sell
commodities; and 9. Make loans, except the Portfolio will purchase debt
obligations, may enter into repurchase agreements and may lend its
securities.
Without the approval of a majority of its outstanding voting securities
the Reserve Account Portfolio may not:
1. With respect to 75% of its assets, invest more than 5% of its assets
in the securities of any one issuer, except securities of the U.S.
Government, its agencies or instrumentalities; 2. Invest more than 25% of
the value of its total assets in any one industry, except that securities
of the U.S. Government, its agencies and instrumentalities are not
considered an industry for purposes of this limitation; 3. Purchase
securities on margin; 4. Sell securities short; 5. Borrow money except
from banks for temporary purposes in an amount up to 10% of the value of
its total assets and may mortgage or pledge its assets in an amount up to
10% of the value of its total assets only to secure such borrowings. The
Portfolio will borrow money only to accommodate requests for the
redemption of shares while effecting an orderly liquidation of portfolio
securities or to clear securities transactions and not for leveraging
purposes. This restriction shall not be deemed to prohibit the Portfolio
from entering into reverse repurchase agreements so long as not more than
33 1/3% of the 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 issuers with less than
three years of continuous operation (including that of predecessors) or
so-called "unseasoned" equity securities that are not either admitted for
trading on a national stock exchange or regularly quoted in the over-the-
counter market (this restriction, however, would not apply to a newly
created agency or instrumentality of the U.S. Government); 2. Purchase
more than 10% of any class of the outstanding securities, or any class of
voting securities, of any issuer; 3. Invest in or hold securities of an
issuer if those officers and Trustees of the Fund, its manager, or 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
Income and Growth Portfolio
%
%
%
U.S. Gov't/High Quality
Securities Portfolio
Reserve Account Portfolio
Portfolio
Average Annual Total Returns as of 12/31/98
1 year
5 year
Since
Inception
Income and Growth Portfolio
%
%
%
U.S. Gov't/High Quality
Securities Portfolio
Reserve Account Portfolio
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 be noted that CDs are insured
(up to $100,000) and offered a fixed rate of return. Returns of the
Reserve Account Portfolio may from time to time be compared with returns
of money market funds measured by 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
DONALD R. FOLEY, Trustee
Retired 3668 Freshwater Drive, Jupiter, Florida 33477. Director of ten
investment companies associated with Smith Barney. Formerly Vice
President of Edwin Bird Wilson, Incorporated (advertising); Age 75
PAUL HARDIN, Trustee
Professor of Law at the University of North Carolina at Chapel Hill,
University of North Carolina, 103 S. Building, Chapel Hill, North Carolina
27599; Director of twelve investment companies associated with Smith
Barney; and a Director of The Summit Bancorporation; Formerly, Chancellor
of the University of North Carolina at Chapel Hill, University of North
Carolina; Age 67.
*HEATH B. McLENDON, Chairman of the Board and Chief Executive Officer
Managing Director of Smith Barney ; Director of forty-two investment
companies associated with Smith Barney; Chairman of the Manager; Chairman
of the Board of Smith Barney Strategy Advisors Inc.; prior to July 1993,
Senior Executive Vice President of Shearson Lehman Brothers; Vice Chairman
of the Board of Asset Management; Age 65.
RODERICK C. RASMUSSEN, Trustee
Investment Counselor, 81 Mountain Road, Verona, New Jersey 07044.
Director of ten investment companies associated with Smith Barney.
Formerly Vice President of Dresdner and Company Inc. (investment
counselors); Age 72.
JOHN P. TOOLAN, Trustee
Retired, 13 Chadwell Place, Morristown, New Jersey 07960. Director of ten
investment companies associated with Smith Barney. Formerly, Director and
Chairman of the Smith Barney Trust Company, Director of Smith Barney
Holdings Inc. and the Manager and Senior Executive Vice President,
Director and Member of the Executive Committee of Smith Barney; Age 68.
*LEWIS E. DAIDONE, Senior Vice President and Treasurer
Managing Director of Smith Barney, Senior Vice President and Treasurer of
forty-two investment companies associated with Smith Barney, and Director
and Senior Vice President of the Manager; Age 41.
*PAUL BROOK
Director of Salomon Smith Barney and Controller or Assistant Controller of
certain other investment companies associated with Salomon 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 Smith Barney and Secretary of forty-two investment
companies associated with Smith Barney; Secretary and General Counsel of
the Manager; Age 48.
On [ ], 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
Calender
Year Ended
12/31/98
Total Number of
Funds for Which
Person Serves
within Fund
Complex
Joseph H.
Fleiss**+
$663
$0
$32,943
10
Donald R.
Foley**
1906
0
57,100
10
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
Richard
Youngdahl
155
0
16,900
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, Francis P. Martin: $0 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, Francis
P. Martin: $0 and John P. Toolan: $54,700.
+ 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 applicable 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 totaled $13,732.08.
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 a 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.
COUNSEL
Willkie Farr & Gallagher serves as legal counsel to the Fund. The
Independent Directors of the Fund have selected Willkie Farr & Gallagher
as their legal counsel.
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 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 management contract. Shareowners may, in accordance with the
Declaration of Trust, cause a meeting of shareowners to be held for the
purpose of voting on the removal of Trustees. In accordance with current
law and as explained further in the accompanying Contract Prospectus, the
Separate Account will vote its shares in accordance with instructions
received from policyowners.
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 the 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 January 31, 1999 the manager had aggregate
assets under the management of approximately $115 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 1/12 of .60% of the average
daily net assets of the Income and Growth Portfolio and 1/12 of .45% of
the average daily net assets of the U.S. Government/High Quality Portfolio
and the Reserve Account Portfolio. The manager has agreed to waive its
fee to the extent that the aggregate expenses of any Portfolio exclusive
of taxes, brokerage, interest and extraordinary expenses, such as
litigation and indemnification expenses, exceed 1% of the average daily
net assets for any fiscal year of the Portfolio. The 1% voluntary expense
limitation shall be in effect until it is terminated by notice to
shareowners and by supplement to the then current prospectus.
For the years 1996, 1997 and 1998 the management fee for the Income and
Growth Portfolio was $164,890, $109,300 and $__________ respectively, the
management fee for U.S. Government/High Quality Portfolio was $17,828,
$9,382 and $__________ respectively, and the management fee for the
Reserve Account Portfolio was $5,864, $857 and $__________, 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 shareowners' and
Trustees' meetings, filing fees and expenses relating to the registration
statements, fees of auditors and legal counsel, out-of-pocket expenses of
Trustees and fees of Trustees who are not "interested persons" as defined
in the Act, interest, taxes and governmental fees, fees and commissions of
every kind, expenses of issue, repurchase or redemption of shares,
insurance expense, association membership dues, all other costs incident
to the 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
Barney acts as principal.
During fiscal year 1998 the total amount of commissionable transactions
was $ _________( %) of which was directed to other brokers and $
_________ ( %) 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
$16,187 32.5%
$11,060 39.2%
$ -0- -0-%
$ -0- -0-%
$33,589 67.5%
$17,139 60.8%
The Board of Trustees of the Fund has adopted certain policies and
procedures incorporating the standard of Rule l7e-l issued by the
Securities and Exchange Commission under the Act which requires that the
commissions paid to 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 [ ](100%) of
the outstanding shares of the Income and Growth Portfolio, 101,002.640
(100%) of the outstanding shares of the U.S. Government/High Quality
Securities Portfolio, and [ ](100%) of the outstanding shares of the
Reserve Account Portfolio.
FINANCIAL STATEMENTS
The following financial information will be incorporated by reference to
the Fund's December 31, 1998, Annual Report to Shareholders, which will be
subsequently filed:
Independent Auditors' Report
Statements of Assets and Liabilities as of December 31, 1998
Schedules of Investments as of December 31, 1998
Statements of Operations for the year ended December 31, 1998
Statements of Changes in Net Assets for the years ended December 31, 1998
and 1997
Notes to Financial Statements
Financial Highlights
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 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 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 subject 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.
mccain/83579.257/Sb-var/sai2.wpf
- - 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 attached herewith.
(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. (filed herewith)
(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) (1) Auditors' Report (to be filed by Amendment)
(2) 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 (to be filed by Amendment)
(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 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
(1) Not applicable
(2) Registrant undertakes to furnish each person to whom a
prospectus is delivered with a copy of Registrant's latest report to
shareholders, upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant 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 24th day of February 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 February 24, 1999
(Heath B. McLendon) and Chief Executive Officer
/s/ Lewis E. Daidone Senior Vice President
(Lewis E. Daidone) and Treasurer February 24, 1999
Donald R. Foley* Trustee February 24, 1999
(Donald R. Foley)
Paul Hardin* Trustee February 24, 1999
(Paul Hardin)
Roderick C. Rasmussen* Trustee February 24, 1999
(Roderick C. Rasmussen)
John P. Toolan* Trustee February 24, 1999
(John P. Toolan)
*By: /s/ Christina T. Sydor February 24, 1999
Christina T. Sydor
Pursuant to Power of Attorney
EXHIBIT INDEX
e. Distribution Agreement between the Registrant and CFBDS, Inc.
dated October 8, 1998.
j.1 Auditors'Report*
j.2 Auditors'Consent
n. Financial Data Schedule*
______________________________________
* To be filed by further Amendment
SMITH BARNEY VARIABLE ACCOUNT FUNDS
DISTRIBUTION AGREEMENT
October 8, 1998
CFBDS, Inc.
21 Milk Street
Boston, MA 02109
Dear Sirs:
This is to confirm that, in consideration of the agreements
hereinafter contained, the above-named investment company (the "Fund")
has agreed that you shall be, for the period of this Agreement, the non-
exclusive principal underwriter and distributor of shares of the Fund and
each Series of the Fund set forth on Exhibit A hereto, as such Exhibit may
be revised from time to time (each, including any shares of the Fund not
designated by series, a "Series"). For purposes of this Agreement, the
term "Shares" shall mean shares of the each Series, or one or more
Series, as the context may require.
1. Services as Principal Underwriter and Distributor
1.1 You will act as agent for the distribution of Shares
covered by, and in accordance with, the registration statement,
prospectus and statement of additional information then in effect under
the Securities Act of 1933, as amended (the "1933 Act"), and the
Investment Company Act of 1940, as amended (the "1940 Act"), and will
transmit or cause to be transmitted promptly any orders received by you or
those with whom you have sales or servicing agreements for purchase or
redemption of Shares to the Transfer and Dividend Disbursing Agent for the
Fund of which the Fund has notified you in writing.
1.2 You agree to use your best efforts to solicit orders for
the sale of Shares. It is contemplated that you will enter into sales or
servicing agreements with registered securities dealers and banks and into
servicing agreements with financial institutions and other industry
professionals, such as investment advisers, accountants and estate
planning firms. In entering into such agreements, you will act only on
your own behalf as principal underwriter and distributor. You will not be
responsible for making any distribution plan or service fee payments
pursuant to any plans the Fund may adopt or agreements it may enter into.
1.3 You shall act as principal underwriter and distributor of
Shares in compliance with all applicable laws, rules, and regulations,
including, without limitation, all rules and regulations made or adopted
from time to time by the Securities and Exchange Commission (the "SEC")
pursuant to the 1933 Act or the 1940 Act or by any securities association
registered under the Securities Exchange Act of 1934, as amended.
1.4 Whenever in their judgment such action is warranted for
any reason, including, without limitation, market, economic or political
conditions, the Fund's officers may decline to accept any orders for, or
make any sales of, any Shares until such time as those officers deem it
advisable to accept such orders and to make such sales and the Fund shall
advise you promptly of such determination.
2. Duties of the Fund
2.1 The Fund agrees to pay all costs and expenses in
connection with the registration of Shares under the 1933 Act, and all
expenses in connection with maintaining facilities for the issue and
transfer of Shares and for supplying information, prices and other data to
be furnished by the Fund hereunder, and all expenses in connection with
the preparation and printing of the Fund's prospectuses and statements of
additional information for regulatory purposes and for distribution to
shareholders; provided however, that nothing contained herein shall be
deemed to require the Fund to pay any of the costs of advertising or
marketing the sale of Shares.
2.2 The Fund agrees to execute any and all documents and to
furnish any and all information and otherwise to take any other actions
that may be reasonably necessary in the discretion of the Fund's officers
in connection with the qualification of Shares for sale in such states and
other U.S. jurisdictions as the Fund may approve and designate to you from
time to time, and the Fund agrees to pay all expenses that may be incurred
in connection with such qualification. You shall pay all expenses
connected with your own qualification as a securities broker or dealer
under state or Federal laws and, except as otherwise specifically provided
in this Agreement, all other expenses incurred by you in connection with
the sale of Shares as contemplated in this Agreement.
2.3 The Fund shall furnish you from time to time, for use in
connection with the sale of Shares, such information reports with respect
to the Fund or any relevant Series and the Shares as you may reasonably
request, all of which shall be signed by one or more of the Fund's duly
authorized officers; and the Fund warrants that the statements contained
in any such reports, when so signed by the Fund's officers, shall be true
and correct. The Fund also shall furnish you upon request with (a) the
reports of annual audits of the financial statements of the Fund for each
Series made by independent certified public accountants retained by the
Fund for such purpose; (b) semi-annual unaudited financial statements
pertaining to each Series; (c) quarterly earnings statements prepared by
the Fund; (d) a monthly itemized list of the securities in each Series'
portfolio; (e) monthly balance sheets as soon as practicable after the end
of each month; (f) the current net asset value and offering price per
share for each Series on each day such net asset value is computed and (g)
from time to time such additional information regarding the financial
condition of each Series of the Fund as you may reasonably request.
3. Representations and Warranties
The Fund represents to you that all registration statements,
prospectuses and statements of additional information filed by the Fund
with the SEC under the 1933 Act and the 1940 Act with respect to the
Shares have been prepared in conformity with the requirements of said Acts
and the rules and regulations of the SEC thereunder. As used in this
Agreement, the terms "registration statement", "prospectus" and
"statement of additional information" shall mean any registration
statement, prospectus and statement of additional information filed by the
Fund with the SEC and any amendments and supplements thereto filed by the
Fund with the SEC. The Fund represents and warrants to you that any
registration statement, prospectus and statement of additional
information, when such registration statement becomes effective and as
such prospectus and statement of additional information are amended or
supplemented, will include at the time of such effectiveness, amendment or
supplement all statements required to be contained therein in conformance
with the 1933 Act, the 1940 Act and the rules and regulations of the SEC;
that all statements of material fact contained in any registration
statement, prospectus or statement of additional information will be true
and correct when such registration statement becomes effective; and that
neither any registration statement nor any prospectus or statement of
additional information when such registration statement becomes effective
will include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading to a purchaser of the Fund's Shares.
The Fund may, but shall not be obligated to, propose from time to time
such amendment or amendments to any registration statement and such
supplement or supplements to any prospectus or statement of additional
information as, in the light of future developments, may, in the opinion
of the Fund, be necessary or advisable. If the Fund shall not propose
such amendment or amendments and/or supplement or supplements within
fifteen days after receipt by the Fund of a written request from you to do
so, you may, at your option, terminate this Agreement or decline to make
offers of the Fund's Shares until such amendments are made. The Fund
shall not file any amendment to any registration statement or supplement
to any prospectus or statement of additional information without giving
you reasonable notice thereof in advance; provided, however, that nothing
contained in this Agreement shall in any way limit the Fund's right to
file at any time such amendments to any registration statement and/or
supplements to any prospectus or statement of additional information, of
whatever character, as the Fund may deem advisable, such right being in
all respects absolute and unconditional.
4. Indemnification
4.1 The Fund authorizes you to use any prospectus or
statement of additional information furnished by the Fund from time to
time, in connection with the sale of Shares. The Fund agrees to
indemnify, defend and hold you, your several officers and directors, and
any person who controls you within the meaning of Section 15 of the 1933
Act, free and harmless from and against any and all claims, demands,
liabilities and expenses (including the cost of investigating or defending
such claims, demands or liabilities and any such counsel fees incurred in
connection therewith) which you, your officers and directors, or any such
controlling person, may incur under the 1933 Act or under common law or
otherwise, arising out of or based upon any untrue statement, or alleged
untrue statement, of a material fact contained in any registration
statement, any prospectus or any statement of additional information or
arising out of or based upon any omission, or alleged omission, to state a
material fact required to be stated in any registration statement, any
prospectus or any statement of additional information or necessary to make
the statements in any of them not misleading; provided, however, that the
Fund's agreement to indemnify you, your officers or directors, and any
such controlling person shall not be deemed to cover any claims, demands,
liabilities or expenses arising out of any statements or representations
made by you or your representatives or agents other than such statements
and representations as are contained in any prospectus or statement of
additional information and in such financial and other statements as are
furnished to you pursuant to paragraph 2.3 of this Agreement; and further
provided that the Fund's agreement to indemnify you and the Fund's
representations and warranties herein before set forth in paragraph 3 of
this Agreement shall not be deemed to cover any liability to the Fund or
its shareholders to which you would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of
your duties, or by reason of your reckless disregard of your obligations
and duties under this Agreement. The Fund's agreement to indemnify you,
your officers and directors, and any such controlling person, as
aforesaid, is expressly conditioned upon the Fund's being notified of any
action brought against you, your officers or directors, or any such
controlling person, such notification to be given by letter or by telegram
addressed to the Fund at its principal office in New York, New York and
sent to the Fund by the person against whom such action is brought, within
ten days after the summons or other first legal process shall have been
served. The failure so to notify the Fund of any such action shall not
relieve the Fund from any liability that the Fund may have to the person
against whom such action is brought by reason of any such untrue, or
alleged untrue, statement or omission, or alleged omission, otherwise than
on account of the Fund's indemnity agreement contained in this paragraph
4.1. The Fund will be entitled to assume the defense of any suit brought
to enforce any such claim, demand or liability, but, in such case, such
defense shall be conducted by counsel of good standing chosen by the Fund.
In the event the Fund elects to assume the defense of any such suit and
retains counsel of good standing, the defendant or defendants in such suit
shall bear the fees and expenses of any additional counsel retained by any
of them; but if the Fund does not elect to assume the defense of any such
suit, the Fund will reimburse you, your officers and directors, or the
controlling person or persons named as defendant or defendants in such
suit, for the fees and expenses of any counsel retained by you or them.
The Fund's indemnification agreement contained in this paragraph 4.1 and
the Fund's representations and warranties in this Agreement shall remain
operative and in full force and effect regardless of any investigation
made by or on behalf of you, your officers and directors, or any
controlling person, and shall survive the delivery of any of the Fund's
Shares. This agreement of indemnity will inure exclusively to your
benefit, to the benefit of your several officers and directors, and their
respective estates, and to the benefit of the controlling persons and
their successors. The Fund agrees to notify you promptly of the
commencement of any litigation or proceedings against the Fund or any of
its officers or Board members in connection with the issuance and sale of
any of the Fund's Shares.
4.2 You agree to indemnify, defend and hold the Fund, its
several officers and Board members, and any person who controls the Fund
within the meaning of Section 15 of the 1933 Act, free and harmless from
and against any and all claims, demands, liabilities and expenses
(including the costs of investigating or defending such claims, demands or
liabilities and any counsel fees incurred in connection therewith) that
the Fund, its officers or Board members or any such controlling person may
incur under the 1933 Act, or under common law or otherwise, but only to
the extent that such liability or expense incurred by the Fund, its
officers or Board members, or such controlling person resulting from such
claims or demands shall arise out of or be based upon (a) any unauthorized
sales literature, advertisements, information, statements or
representations or (b) any untrue, or alleged untrue, statement of a
material fact contained in information furnished in writing by you to the
Fund and used in the answers to any of the items of the registration
statement or in the corresponding statements made in the prospectus or
statement of additional information, or shall arise out of or be based
upon any omission, or alleged omission, to state a material fact in
connection with such information furnished in writing by you to the Fund
and required to be stated in such answers or necessary to make such
information not misleading. Your agreement to indemnify the Fund, its
officers or Board members, and any such controlling person, as aforesaid,
is expressly conditioned upon your being notified of any action brought
against the Fund, its officers or Board members, or any such controlling
person, such notification to be given by letter or telegram addressed to
you at your principal office in Boston, Massachusetts and sent to you by
the person against whom such action is brought, within ten days after the
summons or other first legal process shall have been served. You shall
have the right to control the defense of such action, with counsel of your
own choosing, satisfactory to the Fund, if such action is based solely
upon such alleged misstatement or omission on your part or with the Fund's
consent, and in any event the Fund, its officers or Board members or such
controlling person shall each have the right to participate in the defense
or preparation of the defense of any such action with counsel of its own
choosing reasonably acceptable to you but shall not have the right to
settle any such action without your consent, which will not be
unreasonably withheld. The failure to so notify you of any such action
shall not relieve you from any liability that you may have to the Fund,
its officers or Board members, or to such controlling person by reason of
any such untrue, or alleged untrue, statement or omission, or alleged
omission, otherwise than on account of your indemnity agreement contained
in this paragraph 4.2. You agree to notify the Fund promptly of the
commencement of any litigation or proceedings against you or any of your
officers or directors in connection with the issuance and sale of any of
the Fund's Shares.
5. Effectiveness of Registration
No Shares shall be offered by either you or the Fund under any of
the provisions of this Agreement and no orders for the purchase or sale of
such Shares under this Agreement shall be accepted by the Fund if and so
long as the effectiveness of the registration statement then in effect or
any necessary amendments thereto shall be suspended under any of the
provisions of the 1933 Act, or if and so long as a current prospectus as
required by Section 5(b) (2) of the 1933 Act is not on file with the SEC;
provided, however, that nothing contained in this paragraph 5 shall in any
way restrict or have an application to or bearing upon the Fund's
obligation to repurchase its Shares from any shareholder in accordance
with the provisions of the Fund's prospectus, statement of additional
information or charter documents, as amended from time to time.
6. Offering Price
Shares of any class of any Series of the Fund offered for sale by
you shall be offered for sale at a price per share (the "offering
price") equal to (a) their net asset value (determined in the manner set
forth in the Fund's charter documents and the then-current prospectus and
statement of additional information) plus (b) a sales charge, if
applicable, which shall be the percentage of the offering price of such
Shares as set forth in the Fund's then-current prospectus relating to such
Series. In addition to or in lieu of any sales charge applicable at the
time of sale, Shares of any class of any Series of the Fund offered for
sale by you may be subject to a contingent deferred sales charge as set
forth in the Fund's then-current prospectus and statement of additional
information. You shall be entitled to receive any sales charge levied at
the time of sale in respect of the Shares without remitting any portion to
the Fund. Any payments to a broker or dealer through whom you sell Shares
shall be governed by a separate agreement between you and such broker or
dealer and the Fund's then-current prospectus and statement of additional
information
7. Notice to You
The Fund agrees to advise you immediately in writing:
(a) of any request by the SEC for
amendments to the registration statement,
prospectus or statement of additional
information then in effect or for additional
information;
(b) in the event of the issuance by the
SEC of any stop order suspending the
effectiveness of the registration statement,
prospectus or statement of additional
information then in effect or the initiation of
any proceeding for that purpose;
(c) of the happening of any event that
makes untrue any statement of a material fact
made in the registration statement, prospectus
or statement of additional information then in
effect or that requires the making of a change
in such registration statement, prospectus or
statement of additional
information in order to make the statements
therein not misleading; and
(d) of all actions of the SEC with
respect to any amendment to the registration
statement, or any supplement to the prospectus
or statement of additional information which
may from time to time be filed with the SEC.
8. Term of the Agreement
This Agreement shall become effective on the date hereof, shall have
an initial term of one year from the date hereof, and shall continue for
successive annual periods thereafter so long as such continuance is
specifically approved at least annually by (a) the Fund's Board or (b) by
a vote of a majority (as defined in the 1940 Act) of the Fund's
outstanding voting securities, provided that in either event the
continuance is also approved by a majority of the Board members of the
Fund who are not interested persons (as defined in the 1940 Act) of any
party to this Agreement, by vote cast in person at a meeting called for
the purpose of voting on such approval. This Agreement is terminable,
without penalty, on 30 days' notice by the Fund's Board or by vote of
holders of a majority of the relevant Series outstanding voting
securities, or on 90 days' notice by you. This Agreement will also
terminate automatically, as to the relevant Series, in the event of its
assignment (as defined in the 1940 Act and the rules and regulations
thereunder).
9. Arbitration
Any claim, controversy, dispute or deadlock arising under this
Agreement (collectively, a "Dispute") shall be settled by arbitration
administered under the rules of the American Arbitration Association
("AAA") in New York, New York. Any arbitration and award of the
arbitrators, or a majority of them, shall be final and the judgment upon
the award rendered may be entered in any state or federal court having
jurisdiction. No punitive damages are to be awarded.
10. Miscellaneous
So long as you act as a principal underwriter and distributor of
Shares, you shall not perform any services for any entity other than
investment companies advised or administered by Citigroup Inc. or its
subsidiaries. The Fund recognizes that the persons employed by you to
assist in the performance of your duties under this Agreement may not
devote their full time to such service and nothing contained in this
Agreement shall be deemed to limit or restrict your or any of your
affiliates right to engage in and devote time and attention to other
businesses or to render services of whatever kind or nature. This
Agreement and the terms and conditions set forth herein shall be governed
by, and construed in accordance with, the laws of the State of New York.
11. Limitation of Liability (Massachusetts business trusts only)
The Fund and you agree that the obligations of the Fund under this
Agreement shall not be binding upon any of the Trustees, shareholders,
nominees, officers, employees or agents, whether past, present or future,
of the Fund, individually, but are binding only upon the assets and
property of the Fund, as provided in the Master Trust Agreement. The
execution and delivery of this Agreement have been authorized by the
Trustees and signed by an authorized officer of the Fund, acting as such,
and neither such authorization by such Trustees nor such execution and
delivery by such officer shall be deemed to have been made by any of them
individually or to impose any liability on any of them personally, but
shall bind only the trust property of the Fund as provided in its Master
Trust Agreement.
If the foregoing is in accordance with your understanding, kindly
indicate your acceptance of this Agreement by signing and returning to us
the enclosed copy, whereupon this Agreement will become binding on you.
Very truly yours,
SMITH BARNEY VARIABLE ACCOUNT FUNDS
By: _____________________
Authorized Officer
Accepted:
CFBDS, INC.
By: __________________________
Authorized Officer
EXHIBIT A
Smith Barney Variable Account Funds
Income and Growth Portfolio
Reserve Account Portfolio
U.S. Government/High Quality Securities Portfolio
Page: 3
Independent Auditors' Consent
To the Shareholders and Board of Trustees of
Smith Barney Variable Account Funds:
We consent to the use of our report dated February 10, 1998, with respect to
the Smith Barney Variable Account Funds, incorporated herein by reference
and to the references to our Firm under the headings "Financial
Highlights" in the Prospectus and "Independent Auditors" in the Statement
of Additional Information.
KPMG LLP
New York, New York
February 18, 1999
