SMITH BARNEY VARIABLE ACCOUNT FUNDS
Prospectus
April 28, 2000
The Income and Growth Portfolio seeks current income and long-
term
growth of income and capital by investing primarily in common
stocks.
The U.S. Government/High Quality Securities Portfolio seeks high
current
income and security of principal from a portfolio consisting
primarily
of U.S. government obligations and other high-quality fixed
income
securities. This Portfolio currently has insufficient assets to
enable
it to invest in accordance with its investment program.
The Reserve Account Portfolio seeks current income from a
portfolio of
money market instruments and other high-quality fixed income
obligations
with limited maturities. This Portfolio currently has
insufficient
assets to enable it to invest in accordance with its investment
program.
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
Page
Investments, risks and performance 1
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 7
Management 9
Share transactions 10
Share price 10
Dividends, distributions and taxes 12
Financial highlights 13
The manager:
SSB Citi Fund Management LLC (successor to SSBC Fund
Management Inc.) ("SSB Citi" or "the manager") serves as
the manager and selects investments for each Portfolio.
SSB Citi is an affiliate of Salomon Smith Barney Inc.
("Salomon Smith Barney") and subsidiary of Citigroup
Inc. ("Citigroup"). 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.
Please note that the investment portfolios in Smith
Barney Variable Account Funds may be consolidated into
other substantially similar existing funds. In this
regard, an application may be filed for a Securities and
Exchange Commission Order of Substitution to consolidate
these portfolios. Please further note that the U.S.
Government/High Quality Securities Portfolio and The
Reserve Account Portfolio both have insufficient assets
to invest in accordance with their stated investment
objectives, and we suggest that you consider contacting
your financial consultant or Nationwide at 1-800-848-
6331 to arrange a transfer of your assets from these
funds to other available funds.
Investments, risks and performance The Income and Growth
Portfolio
Investment objective
Current income and long-term growth of income and
capital.
Principal investment strategies
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 declines.
? 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 for each of the past 10 calendar years. The
risk return table shows how the Portfolio's average
annual returns for different calendar periods compare to
the return of the Standard & Poor's (S&P) 500 Index.
The S&P 500 Index is an index of widely held common
stocks listed on the New York and American Stock
Exchanges and the over-the-counter markets. Figures for
the index include reinvestment of dividends. The index
is unmanaged and is not subject to the same management
and trading expenses as the Portfolio is. Past
performance does not necessarily indicate how the
Portfolio will perform in the future. Performance
figures do not reflect expenses incurred from investing
through a separate account; if these expenses had been
reflected, performance would have been lower. Please
refer to the separate account prospectus for more
information on expenses.
Risk return bar chart
[BAR CHART APPEARS HERE]
% Total Return
1990 (8.37)%
1991 31.34%
1992 11.48%
1993 18.61%
1994 (3.12)%
1995 27.56%
1996 21.02%
1997 28.11%
1998 12.89%
1999 (2.74)%
Calendar years ended
December 31
Quarterly Returns:
Highest: 15.10% in 1st quarter 1991
Lowest: (11.59)% in 3rd quarter 1998
Risk return table
Average Annual Total Returns
(for the periods ended December 31, 1999)
- -----------------------------------------------------------------
- ---------------
<TABLE>
<CAPTION>
One Five Ten Since
year years years inception*
- ------------------------------------
<S> <C> <C> <C> <C>
Portfolio (2.74)% 16.74% 12.82% 12.52%
S&P 500 Index 21.03% 28.54% 17.81% 17.81%
</TABLE>
- -----------------------------------------------------------------
- ---------------
* Inception date of 7/20/89
Index comparison begins on July 31, 1989
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 SSB Citi and a managing director
of Salomon Smith Barney, has been with Salomon Smith
Barney since 1984 and has 22 years of investment
management experience.
Investments, risks and performance
The U.S. Government/High Quality Securities
Portfolio
Investment objective
High current income and security of principal.
Principal investment strategies
Key investments: The Portfolio invests substantially
all of its assets in repurchase agreements and U.S.
treasury bills. 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
primarily in U.S. government securities and in U.S.
corporate fixed income obligations. These policies also
provide that 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.
Selection process
Because of insufficient assets, it is not anticipated by
the manager that the Portfolio will ever grow to a
sufficient size to utilize its investment selection
process.
Credit quality: The Portfolio invests in repurchase
agreements which are fully collaterized 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. It may also invest in U.S. treasury bills
which are rated in the highest rating category and are
guaranteed by the full faith and credit of the U.S.
government.
Principal risks of investing in the portfolio
Because the Portfolio invests primarily in repurchase
agreements and U.S. treasury bills, the Portfolio is
subject to the risks associated with these investments.
The risks associated with entering into repurchase
agreements are described on page 8 below. Investments
in U.S. treasury bills subject the fund to interest rate
risk. If interest rates increase, the price of the
treasury bills will decline reducing the value of the
fund's portfolio.
Portfolio performance
This bar chart indicates the risks of investing in the
Portfolio by showing changes in the Portfolio's
performance for each of the past 10 calendar years. The
risk return 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 the same management and trading expenses as
the Portfolio is. Past performance does not necessarily
indicate how the Portfolio will perform in the future.
Performance figures do not reflect expenses incurred
from investing through a separate account; if these
expenses had been reflected, performance would have been
lower. Please refer to the separate account prospectus
for more information on expenses.
Risk return bar chart
[BAR CHART APPEARS HERE]
% Total Return
1990 8.11%
1991 12.58%
1992 6.91%
1993 5.91%
1994 (0.35)%
1995 17.20%
1996 3.34%
1997 5.43%
1998 0.22%
1999 2.55%
Calendar years ended
December 31
Quarterly Returns:
Highest: 6.47% in 2nd quarter 1992
Lowest: (3.42)% in 1st quarter 1992
Risk return table
Average Annual Total Returns
(for the periods ended December 31, 1999)
- -----------------------------------------------------------------
- ---------------
<TABLE>
<CAPTION>
One Five Ten Since
year years years inception*
- ------------------------------------
<S> <C> <C> <C> <C>
Portfolio 2.55% 5.59% 6.07% 6.11%
Lehman Brothers Index 1.93% 8.08% 7.90% 7.90%
</TABLE>
- -----------------------------------------------------------------
- ---------------
* Inception date of 7/31/89
Index comparison begins on July 31, 1989
Portfolio manager
James E. Conroy
James E. Conroy is primarily responsible for the day-to-
day management of the Portfolio. Mr. Conroy, an
investment officer of SSB Citi and a managing director
of Salomon Smith Barney, has been with Salomon Smith
Barney since 1990 and has 22 years of investment
management experience.
Investments, risks and performance The Reserve Account Portfolio
Investment objective
Current income.
Principal investment strategies
Key investments: The Portfolio invests substantially
all of its assets in repurchase agreements and U.S.
treasury bills. The Portfolio has insufficient assets
to invest in accordance with 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
Selection process
Because of insufficient assets, it is not anticipated by
the manager that the Portfolio will ever grow to a
sufficient size to utilize its investment selection
process.
Credit quality: The Portfolio invests in repurchase
agreements which are fully collaterized 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. It may also invest in U.S. treasury bills
which are rated in the highest rating category and are
guaranteed by the full faith and credit of the U.S.
government.
Principal risks of investing in the portfolio
Because the Portfolio invests primarily in repurchase
agreements and U.S. treasury bills, the Portfolio is
subject to the risks associated with these investments.
The risks associated with entering into repurchase
agreements are described on page 8 below. Investments
in U.S. treasury bills subject the fund to interest rate
risk. If interest rates increase, the price of the
treasury bills will decline reducing the value of the
fund's portfolio.
Portfolio performance
This bar chart indicates the risks of investing in the
Portfolio by showing changes in the Portfolio's
performance for each of the past 10 calendar years. The
risk return 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 the same management and
trading expenses as the Portfolio is. Past performance
does not necessarily indicate how the Portfolio will
perform in the future. Performance figures do not
reflect expenses incurred from investing through a
separate account; if these expenses had been reflected,
performance would have been lower. Please refer to the
separate account prospectus for more information on
expenses.
Risk return bar chart
[BAR CHART APPEARS HERE]
% Total Return
1990 8.30%
1991 10.64%
1992 4.82%
1993 4.59%
1994 1.99%
1995 8.83%
1996 1.57%
1997 1.36%
1998 (0.89)%
1999 3.40%
Calendar years ended
December 31
Quarterly Returns:
Highest: 3.37% in 4th quarter 1991
Lowest: (0.92)% in 4th quarter 1996
Risk return table
Average Annual Total Returns
(for the periods ended December 31, 1999)
- -----------------------------------------------------------------
- ---------------
<TABLE>
<CAPTION>
One Five Ten Since
year years years inception*
- ------------------------------------
<S> <C> <C> <C> <C>
Portfolio 3.40% 2.80% 4.40% 4.54%
Salomon Brothers Index 4.26% 6.00% 6.00% 6.00%
</TABLE>
- -----------------------------------------------------------------
- ---------------
* Inception date of 8/2/89
Index comparison begins on August 31, 1989
Portfolio manager
SSB Citi 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
"Investments, risks and performance." 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 its rights to dispose of the
security. This includes the risk of a possible decline
in the value of the security during the period in which
the Portfolio seeks to assert its rights to it, the risk
of incurring expenses associated with asserting those
rights and the risk of losing all or a part of the
income from the agreement. Each Portfolio only enters
into repurchase agreements with commercial banks or
broker-dealers considered creditworthy by the manager
and which are fully collateralized as to principal and
interest by U.S. Government securities and money market
instruments.
Reverse Repurchase Agreements. The U.S. Government/High
Quality Securities Portfolio may enter into reverse
repurchase agreements. In a reverse repurchase
agreement, the Portfolio sells securities and agrees to
repurchase them at a mutually agreed upon date and
price. At the time the Portfolio enters into a reverse
repurchase agreement, it will establish a segregated
account containing cash or liquid assets having a value
not less than the repurchase price (including accrued
interest) that is marked to market daily. Reverse
repurchase agreements involve several risks. These
include the risk that the investments made with the cash
proceeds of the initial sale will incur losses or
otherwise generate a lower return than the interest
included in the amount of the repurchase price. They
also involve the risk that the market value of the
securities which the Portfolio is obligated to
repurchase may decline below the repurchase price or
that the counterparty may default on its obligation to
resell the securities. To the extent a fund enters into
reverse repurchase agreements to leverage its portfolio
this practice may have the effect of magnifying losses
or gains.
Defensive investing. Each Portfolio may depart from its
principal investment strategies in response to adverse
market, economic or political conditions by taking
temporary defensive positions in all types of money
market and short-term debt securities. If a Portfolio
takes a temporary defensive position, it may be unable
to achieve its investment goal.
Management
SSB Citi manages the investment operations of each
Portfolio and receives the following fees from each
Portfolio for these services. For the year ended
December 31, 1999, SSB Citi waived all of its
management fees and reimbursed expenses for the U.S.
Government/High Quality Securities and Reserve Account
Portfolios.
Portfolio
Actual management fee
paid for the fiscal
year ended December
31, 1999
(as a percentage
of the portfolio's
average daily net
assets)
Contractual
Management fee
(as a percentage
of the portfolio's
average daily net
assets)
The Income and Growth Portfolio
0.60%
0.60%
The U.S. Government/High Quality
Securities Portfolio
0%
0.45%
The Reserve Account Portfolio
0%
0.45%
Distributor:
Smith Barney Variable Account Funds have entered into
an agreement with CFBDS, Inc. to distribute each
Portfolio's shares.
Transfer Agent and Sub-Transfer Agent:
Citi Fiduciary Trust Company, (successor to Smith Barney
Private Trust Company) (the "transfer agent") located at
388 Greenwich Street, New York, New York 10013 serves as
the transfer agent and shareholder services agent for
the fund.
PFPC Global Fund Services, located at P.O. Box 9699
Providence, R.I. 02940-9699 serves as the fund's sub-
transfer agent to render certain shareholder record
keeping and accounting services functions.
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 Company currently does 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 Securities and Exchange Commission 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. The Exchange is closed on certain
holidays listed in the SAI. 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. To the extent a
fund holds securities denominated in a foreign currency
the fund's currency conversions are done when the London
stock exchange closes, which is 12 noon Eastern time.
When reliable market prices or quotations are not
readily available, or when the value of a security has
been materially affected by events occurring after a
foreign exchange closes, 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.
International markets may be open on days when U.S.
markets are closed, and the value of foreign securities
owned by a Portfolio could change on days when Portfolio
shares may not be purchased or redeemed.
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 continue 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, if any, 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 the gross income of the separate
accounts holding such shares. The Income and Growth
Portfolio expects distributions to be primarily from
capital gains. 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
(Loss)
(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
(Loss)
Portfolio
Turnover
Rate
INCOME AND GROWTH PORTFOLIO
1999
$13.98
$0.16
$(0.34)
$(0.18)
$(0.24)
$(2.59)
$(2.83)
$10.97
(2.74)%
$10,911
1.00%
1.11%
42%
1998
17.29
0.29
1.87
2.16
(0.49)
(4.98)
(5.47)
13.98
12.89
13,778
0.76
1.53
49
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
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
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
U.S. GOVERNMENT/HIGH QUALITY SECURITIES PORTFOLIO
1999(2)
10.40
0.26
0
0.26
(0.03)
0
(0.03)
10.63
2.55
756
1.00
2.37
0
1998(2)
12.66
0.03
0
0.03
(1.06)
(1.23)
(2.29)
10.4
0
0.22
973
1.00
0.22
0
1997
12.90
0.72
(0.02)
0.70
(0.04)
(0.90)
(0.94)
12.66
5.43
1,617
1.00
4.33
43
1996
13.66
1.22
(0.76)
0.46
(1.22)
0
(1.22)
12.90
3.34
2,876
0.98
6.30
13
1995
12.46
0.94
1.20
2.14
(0.94)
0
(0.94)
13.66
17.20
4,856
0.87
6.36
0
RESERVE ACCOUNT PORTFOLIO
1999
7.36
0.25
0
0.25
0
0
0
7.61
3.40
43
1.00
2.96
0
1998
7.70
(0.07)
0
(0.07)
(0.27)
0
(0.27)
7.36
(0.89)
56
1.00
(1.00)
0
1997
10.99
.15
0
0.15
(0.25)
(3.19)
(3.44)
7.70
1.36
97
1.00
1.59
0
1996
12.71
1.92
(1.72)
0.20
(1.92)
0
(1.92)
10.9
9
1.57
435
1.00
4.98
0
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
17
(1) Under a voluntary fee waiver, the aggregate expenses of the
Portfolios may
not exceed 1.00% of the average daily net assets for any year.
With respect to
the U.S. Government/High Quality Securities Portfolio, the
investment manager
waived all or a portion of its fees in the amount of $0.05 per
share (0.45% of
average net assets) in 1999 and 1998 and $0.08 per share (0.49%
of average net
assets) in 1997. The investment manager also reimbursed the
Portfolio for
$16,270, $4,832 and $719 in expenses for the years ended December
31, 1999,
1998 and 1997. In addition, if such fees were not waived and
expenses
reimbursed, the net investment income (loss) per share would have
been $0.00,
$(0.07) and $0.64 and the expense ratio would have been
3.37%, 1.86% and 1.49%, respectively, for the years ended
December 31, 1999,
1998 and 1997. With respect to the Reserve Account Portfolio,
the investment
manager waived all or a portion of its fees in the amount of
$0.03 per share
(0.45% of average net assets) in 1999 and 1998, $1.61 per share
(10.65% of
average net assets) in 1997 and, $0.15 per
shares (0.45%of average net assets) in 1996. The investment
manager also
reimbursed the Portfolio for $29,987, $15,552, $19,395 and
$19,861 in expenses
for the years ended December 31, 1999, 1998, 1997 and 1996,
respectively. If
such fees were not waived and expenses not reimbursed, the net
investment
income (loss) per share would have been $(4.38), $(1.56),
$(1.76) and $1.27
and the
expense ratio would have been 63.63%, 20.81%, 11.65% and 2.79%,
for the years
ended December 31, 1999, 1998, 1997 and 1996, respectively.
(2) Per share amounts have been calculated using the monthly
average shares
method.
SMITH BARNEY VARIABLE ACCOUNT FUNDS
ADDITIONAL INFORMATION
Shareholder reports. Annual and semiannual reports to
shareholders provide
additional information about each Portfolio's investments. These
reports
discuss the market conditions and investment strategies that
affected each
Portfolio's performance.
Each Portfolio sends one report to a household if more than one
account has the
same address. Contact your Salomon Smith Barney Financial
Consultant, dealer
representative or the transfer agent if you do not want this
policy to apply to
you.
Statement of additional information. The statement of additional
information
provides more detailed information about the Portfolios. It is
incorporated by
reference into this prospectus.
You can make inquiries about the Portfolios or obtain shareholder
reports or
the statement of additional information (without charge) by
calling
1-800-451-2010 or writing to Smith Barney Variable Account Funds,
388
Greenwich Street, MF2, New York, NY 10013.
Visit our web site. Your web site is located at
www.smithbarney.com
Information about the Portfolios (including the SAI) can be
reviewed and copied
at the Securities and Exchange Commission's (the "Commission")
Public Reference
Room in Washington, D.C. In addition, information on the
operation of the
Public Reference Room may be obtained by calling the commission
at 1-202-942-
Reports and other information about the Fund are available on the
EDGAR
Database on the Commission's Internet site at http://www.sec.gov.
Copies
of this information may be obtained for a duplicating fee by
electronic request
at the following E-mail address: [email protected], or by
writing the
Commission's Public Reference Section, Washington, D.C. 20549-
0102.
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.
The Income and Growth Portfolio
The U.S. Government/High
Quality Securities Portfolio
The Reserve Account
Portfolio
(Investment Company Act file no. 811-04959)
April 28, 2000
SMITH BARNEY VARIABLE ACCOUNT FUNDS
388 Greenwich Street
New York, New York 10013
STATEMENT OF ADDITIONAL INFORMATION
Shares of the Smith Barney Variable Account Funds (the "fund") are
offered with a choice of three Portfolios:
The Income and Growth Portfolio seeks current income and long-
term growth of income and capital by investing primarily in common
stocks.
The U.S. Government/High Quality Securities Portfolio seeks high
current income and security of principal from a portfolio consisting
primarily of U.S. Government Obligations and other high quality fixed
income securities. This Portfolio currently has insufficient assets to
enable it to invest in accordance with its investment program.
The Reserve Account Portfolio seeks current income from a
portfolio of money market instruments and other high quality fixed
income obligations with limited maturities and employs an immunization
strategy to minimize the risk of loss of account value. This Portfolio
currently has insufficient assets to enable it to invest in accordance
with its investment program.
This Statement of Additional Information ("SAI") is not a prospectus.
It is intended to provide more detailed information about the fund as
well as matters already discussed in the prospectus and therefore
should be read in conjunction with the April 28, 2000 Prospectus which
may be obtained free of charge 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
Page
Investment Objective and Management Policies.....................
2
Investment Restrictions..................................................
5
Performance Data.........................................................
8
Trustees and Executive Officers of the Fund..........................
8
Determination of Net Asset Value .....................................
11
Purchase of Shares........................................................
11
Redemption of Shares....................................................
12
Dividends, Distributions and Taxes....................................
12
Diversification.............................................................
12
Investment Management and Other Services..........................
12
The Fund and Its Investments...........................................
13
Management Agreements................................................
14
Voting Rights..............................................................
16
Additional Information...................................................
16
Financial Statements.....................................................
17
Appendix-Ratings of Debt Obligations ...............................
18
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIE
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 SSB Citi Fund Management LLC ("SSB Citi" or the
"manager") (successor to SSBC Fund Management Inc.)
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 8 or 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
currently has insufficient assets to enable it to invest in
accordance with its investment policies. If the Portfolio were
able to invest in accordance with its investment policies, the
Portfolio would invest primarily in a combination of (i)
securities of the U.S. Government, its agencies or its
instrumentalities and (ii) other high quality fixed income
securities (including corporate bonds) rated within the two
highest categories by an NRSRO such as S&P (AAA, AA) or Moody's
(Aaa, Aa) or if unrated, are determined to be of comparable
quality by the manager. Except when the Portfolio 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.
GNMA Securities. Government National Mortgage
Association ("GNMA"), an agency of the United States Government,
guarantees the timely payment of monthly installments of
principal and interest on modified pass-through Certificates,
whether or not such amounts are collected by the issuer of these
Certificates on the underlying mortgages. In the opinion of an
Assistant Attorney General of the United States, this guarantee
is backed by the full faith and credit of the United States.
Scheduled payments of principal and interest are made each month
to holders of GNMA Certificates (such as the Government/High
Quality Portfolio). The average life of GNMA Certificates varies
with the maturities of the underlying mortgages (with maximum
maturities of 30 years) but is likely to be substantially less
than the original maturity of the mortgage pools underlying the
securities as a result of prepayments, refinancing of such
mortgages or foreclosure. Unscheduled prepayments of mortgages
are passed through to the holders of GNMA Certificates at par
with the regular monthly payments of principal and interest,
which have the effect of reducing future payment 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 thirty-three
and one-third percent 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 trust 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.
THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK.
PERFORMANCE DATA
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, five year and ten year periods,
and since each Portfolio's inception date are shown below.
Portfolio
Cumulative Total Returns as of 12/31/99
1 year
5 years
10 years
Since Inception
of the fund
Income and Growth Portfolio
(2.74) %
116.79 %
234.32%
243.19 %*
U.S. Gov't/High Quality
Securities Portfolio
2.55 %
31.24 %
80.23%
80.23 %*
Reserve Account Portfolio
3.40 %
14.82 %
53.81%
58.83% **
Portfolio
Average Annual Total Returns as of 12/31/99
1 year
5 years
10 years
Since Inception
of the fund
Income and Growth Portfolio
(2.74) %
16.74 %
12.82%
12.52 %*
U.S. Gov't/High Quality
Securities Portfolio
2.55 %
5.59 %
6.07%
6.11%*
Reserve Account Portfolio
3.40 %
2.80 %
4.40%
4.54 %**
* Index comparisons begin on July 31, 1989
** Index comparisons begin on August 31, 1989
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. For the fiscal
year ended December 31, 1999, the yields for U.S. Government/High
Quality Securities Portfolio and Reserve Account Portfolio were
4.53% and 5.88%, respectively
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 EXECUTIVE OFFICERS
The names of the trustees of the trust and executive officers of
the funds, together with information as to their principal
business occupations, are set forth below. The executive
officers of the fund are employees of organizations that provide
services to the fund. Each trustee who is an "interested person"
of the fund, as defined in the 1940 Act, is indicated by an
asterisk. The address of the "non-interested" trustees and the
executive officers of the funds is 388 Greenwich Street, New
York, New York 10013, unless otherwise indicated.
LEE ABRAHAM, Trustee
Retired; Trustee of 12 investment companies associated with
Citigroup Inc. ("Citigroup"). Director of R.G. Barry Corp., a
footwear manufacturer, Signet Group plc, a specialty retailer,
and eNote.com, Inc., a computer hardware company. Formerly
Chairman and Chief Executive Officer of Associated Merchandising
Corporation, a major retail merchandising and sourcing
organization and formerly Director of Galey & Lord and Liz
Claiborne. His address is 106 Barnes Road, Stamford, Connecticut
06902; Age 72.
ALLAN J. BLOOSTEIN, Trustee
President of Allan J. Bloostein Associates, a consulting firm;
Trustee of 19 investment companies associated with Citigroup.
Director of CVS Corporation, a drugstore chain, and Taubman
Centers Inc., a real estate development company; Retired Vice
Chairman and Director of The May Department Stores Company. His
address is 27 West 67th Street, New York, New York 10023; Age 70.
JANE F. DASHER, Trustee
Investment Officer; Korsant Partners, a family investment
company. Trustee of 12 investment companies associated with
Citigroup. Prior to 1997, Independent Financial Consultant. Her
address is 283 Greenwich Avenue, Greenwich, Connecticut 06830;
Age 50.
DONALD R. FOLEY, Trustee
Retired; Trustee of 12 investment companies associated with
Citigroup. Formerly Vice President of Edwin Bird Wilson,
Incorporated (an advertising agency); His address is 3668
Freshwater Drive, Jupiter, Florida 33477; Age 77.
RICHARD E. HANSON, JR., Trustee
Head of School, The New Atlanta Jewish Community High School,
Atlanta Georgia. Trustee of 12 investment companies associated
with Citigroup. Formerly Headmaster, The Peck School,
Morristown, New Jersey. His address is 58 Ivy Chase, Atlanta,
Georgia 30342; Age 58.
PAUL HARDIN, Trustee
Professor of Law at University of North Carolina at Chapel Hill.
Trustee of 14 investment companies associated with Citigroup.
Director of The Summit Bancorporation; Formerly, Chancellor of
the University of North Carolina at Chapel Hill; His address is
12083 Morehead, Chapel Hill, North Carolina 27514; Age 68.
*HEATH B. McLENDON, Chairman of the Board, President and Chief
Executive Officer
Managing Director of Salomon Smith Barney; Chairman, Co-Chairman
or Trustee of the Board of 71 investment companies associated
with Citigroup. Director and President of SSB Citi and Travelers
Investment Advisers, Inc. ("TIA"). His address is 7 World Trade
Center, New York, New York 10048; Age 66.
RODERICK C. RASMUSSEN, Trustee
Investment Counselor; Director of 12 investment companies
associated with Citigroup. Formerly Vice President of Dresdner
and Company Inc. (investment counselors); His address is 9
Cadence Court, Morristown, New Jersey 07960; Age 73.
JOHN P. TOOLAN, Trustee
Retired; Director of 12 investment companies associated with
Citigroup. Trustee of John Hancock Funds; Formerly, Director and
Chairman of Smith Barney Trust Company, Director of Smith Barney
Holdings Inc. and various subsidiaries, Senior Executive Vice
President, Director and Member of the Executive Committee of
Smith Barney; His address is 13 Chadwell Place, Morristown, New
Jersey 07960; Age 69.
*LEWIS E. DAIDONE, Senior Vice President and Treasurer
Managing Director of Salomon Smith Barney; Senior Vice President
or Executive Vice President and Treasurer of 61 investment
companies associated with Citigroup; Director and Senior Vice
President of the Manager and TIA; Age 42.
ELLEN CARDOZO SONSINO, Vice President
Managing Director of Salomon Smith Barney and Vice President of
[certain other] investment companies associated with Citigroup;
49.
JAMES CONROY, Vice President
Investment Officer of SSB Citi; Managing Director of Salomon
Smith Barney and Vice President of [certain other] investment
companies associated with Citigroup; 48.
*PAUL BROOK, Controller
Controller; Director of Salomon Smith Barney; Controller or
Assistant Treasurer of 43 investment companies associated with
Citigroup; from 1997-1998 Managing Director of AMT Capital
Services Inc.; prior to 1997, Partner with Ernst & Young LLP, Age
46.
*CHRISTINA T. SYDOR, Secretary
Managing Director of Salomon Smith Barney; Secretary of 61
investment companies associated with Citigroup; Secretary and
General Counsel of the Manager and TIA; Age 49.
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
12/31/99
Pension or
Retirement Benefits
Accrued as Part of
Fund's Expenses
Total
Compensation from
Fund and Fund
Complex Paid to
Trustees for the
Calendar Year
Ended 12/31/99
Total Number of Funds
for Which Person Serves
within Fund Complex for
the Calendar Year Ended
12/31/99
Lee Abraham
$ 6
$ 0
$ 71,133
12
Allan J. Bloostein
$ 6
$ 0
$ 112,483
19
Jane Dasher
$ 6
$ 0
$ 65,733
12
Donald R. Foley**
$ 606
$ 0
$ 71,300
12
Richard E. Hanson
$ 6
$ 0
$ 68,233
12
Paul Hardin
$ 609
$ 0
$ 90,450
14
Heath B. McLendon*
$ 0
$ 0
0
71
Roderick C. Rasmussen
$ 609
$ 0
$ 76,200
12
John P. Toolan**
$ 0
$ 0
$ 69,100
12
________________________________________
* 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: Donald R. Foley: $3, and John P.
Toolan: $309, and the following amounts of their total
compensation from the fund Complex: Donald R. Foley: $21,600,
and John P. Toolan: $69,100.
+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 trustees 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 $304.
On April 19, 2000, trustees and officers owned in the aggregate
less than 1% of the outstanding securities of the fund.
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, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving
and Christmas.
PURCHASE OF SHARES
The fund offers its shares of capital stock on a
continuos basis. Shares can be acquired only by buying a
Contract from a life insurance company designated by the fund and
directing the allocation of part or all of the net purchase
payment to one or more of eight subaccounts, each of which
invests in a Portfolio as permitted under the Contract
prospectus. Investors should read this SAI and the fund's
prospectus dated April 28, 2000 along with the Contract
prospectus.
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.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Each Portfolio of the fund intends to qualify as a
"regulated investment company" under the Internal Revenue Code
(the "Code") and to declare and make annual distributions of
substantially all of its investment company taxable income and
net 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 the 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.
DIVERSIFICATION
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.
INVESTMENT MANAGEMENT AND OTHER SERVICES
CUSTODIAN, TRANSFER AGENT AND SUB-TRANSFER AGENT
PNC Bank, National Association ("PNC" or "custodian"), located at
17th and Chestnut Streets, Philadelphia, Pennsylvania, 19103,
serves as the custodian of the fund. Under its custody agreement
with the fund, PNC holds the fund's securities and keeps all
necessary accounts and records. For its services, PNC receives a
monthly fee based upon the month-end market value of securities
held in custody and also receives securities transactions
charges. The assets of the fund are held under bank
custodianship in compliance with the 1940 Act.
Citi Fiduciary Trust Company, (formerly know as Smith Barney
Private Trust Company) (the "transfer agent") located at 388
Greenwich Street, New York, New York 10013 serves as the transfer
agent and shareholder services agent for the fund.
PFPC Global Fund Services ("PFPC" or "sub-transfer agent"),
located at Exchange Place, Boston, Massachusetts 02109, serves as
the trust's sub-transfer agent. Under the transfer agency
agreement, the sub-transfer agent maintains the shareholder
account records for the trust, handles certain communications
between shareholders and the trust and distributes dividends and
distributions payable by the trust. For these services, the sub-
transfer agent receives a monthly fee computed on the basis of
the number of shareholder accounts it maintains for the trust
during the month, and is reimbursed for out-of-pocket expenses.
DISTRIBUTOR
CFBDS, Inc., located at 20 Milk Street, Boston, Massachusetts
02109-5408 serves as the fund's distributor pursuant to a written
agreement dated October 8, 1998 (the "Distribution Agreement")
which was approved by the fund's Board of Trustees, including a
majority of the independent trustees on July 15, 1998. Prior to
the merger of Travelers Group, Inc. and Citicorp Inc. on October
8, 1998, Salomon Smith Barney served as the fund's distributor.
INDEPENDENT AUDITORS
KPMG LLP, 757 Third Avenue, New York, NY 10017, has
been selected as the fund's independent auditors to examine and
report on each of the fund's financial statements and highlights
for the fiscal year ending December 31, 2000.
THE FUND AND ITS INVESTMENTS
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 SSB Citi, a wholly-owned subsidiary of Salomon Smith
Barney Holdings Inc. ("Holdings"), to manage the day to day
operations of each Portfolio pursuant to a management agreement
entered into by the fund on behalf of each Portfolio. Holdings
is also the parent company of Salomon Smith Barney Inc. ("Salomon
Smith Barney") and is a subsidiary of Citigroup Inc., a
diversified financial service holding company. The manager was
incorporated on March 12, 1968 under the laws of the State of
Delaware and converted to a Delaware limited liability company in
1999. As of March 2000 the manager renders investment advice to
investment companies that had aggregate assets under management
in excess of $197 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 1997 the management fee for the Income and Growth
Portfolio was $109,300, the management fee for U.S.
Government/High Quality Portfolio was $9,382, and the management
fee for the Reserve Account Portfolio was $857. For the year
ended December 31, 1998, SSB Citi waived all of its management
fees and reimbursed expenses of $4,832 and $15,552 for the U.S.
Government/High Quality Securities and Reserve Account
Portfolios, respectively. For the year ended December 31, 1999,
the management fee for the Income and Growth Portfolio was
$77,096, for the U.S. Government/High Quality Securities and
Reserve Account Portfolios, SSBI Citi waived all of its
management fees and reimbursed expenses of $16,270 and $29,987,
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 1999, the percentage of total
brokerage commissions paid to Salomon Smith Barney was 28.43%
and the percentage of total transactions involving commissions
paid to Salomon Smith Barney was 19.09% for Income and Growth
Portfolio only. 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
1997
1998
1999
$28,199
$20,477
$11,912
$11,006
$10,449
$ 2,637 39.2%
$ -0- -0-%
$ -0-
$ -0- -0-%
$17,139
$10,028
$ 9,275
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.
Code of Ethics. Pursuant to Rule 17j-1 of the 1940 Act, the fund,
its investment adviser and principal underwriter has adopted a
code of ethics that permits personnel to invest in securities for
their own accounts, including securities that may be purchased or
held by the fund. All personnel must place the interests of
clients first and avoid activities, interests and relationships
that might interfere with the duty to make decisions in the best
interests of the clients. All personal securities transactions
by employees must adhere to the requirements of the code and must
be conducted in such a manner as to avoid any actual or potential
conflict of interest, the appearance of such a conflict, or the
abuse of an employee's position of trust and responsibility.
A copy of the fund's Code of Ethics is on file with the
Securities and Exchange Commission.
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 April 19, 2000, Nationwide Life Insurance Co. owned
891,114.622 (100%) of the outstanding shares of the Income and
Growth Portfolio, 60,316.934 (100%) of the outstanding shares of
the U.S. Government/High Quality Securities Portfolio, and
4,704.546 (100%) of the outstanding shares of the Reserve Account
Portfolio.
ADDITIONAL INFORMATION
Styles of Fund Management: In an industry where the average
portfolio manager has seven years of experience (source: ICI,
1998), the portfolio managers of Smith Barney mutual funds
average 21 years in the industry and 15 years with the firm.
Smith Barney mutual funds offers more than 60 mutual funds. We
understand that many investors prefer an active role in
allocating the mix of funds in their portfolio, while others want
the asset allocation decisions to be made by experienced
managers.
That's why we offer four "styles" of fund management that can be
tailored to suit each investor's unique financial goals.
Style Pure Series - Our style Pure Series funds stay fully
invested within their asset class and investment style, enabling
investors to make asset allocation decisions in conjunction with
their Salomon Smith Barney Financial Consultant.
Classic Investor Series - Our Classic Investor Series funds offer
a range of equity and fixed income strategies that seek to
capture opportunities across asset classes and investment styles
using disciplined investment approaches.
The Concert Allocation Series - As a fund of funds, investors can
select a Concert Portfolio that may help their investment needs.
As needs change, investors can easily choose another long-term,
diversified investment from our Concert family.
Special Discipline Series - Our Special Discipline Series funds
are designed for investors who are looking beyond more
traditional market categories: from natural resources to a roster
of state-specific municipal funds.
FINANCIAL STATEMENTS
The fund's annual report for the fiscal year ended December 31,
1999 is incorporated herein by reference in its entirety. The
annual report was filed on March 8, 2000, Accession Number 91155-
00-000190.
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.
Note: Moody's applies the numerical modifiers 1, 2
and 3 in each generic ratingclassification from Aa through Baa.
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. Advanced
refunded issues that are secured by escrowed funds held in cash,
held in trust, reinvested in direct non-callable United States
government obligations or non-callable obligations
unconditionally guaranteed by the U.S. government are identified
with a number (hatchmark) symbol, e.g. Aaa.
Standard & Poor's Ratings Group
AAA - Debt rated AAA has the highest rating assigned by
Standard & Poor's. Superior financial security on an absolute and
relative basis. Capacity to meet policyholder obligations is
extremely strong under a variety of economic and underwriting
conditions.
AA - Debt rated AA is an excellent financial instrument.
Capacity to meet policyholder obligations is strong under a
variety of economic and underwriting conditions.
A - Debt rated A is a good financial instrument. Capacity
to meet policyholder obligations is somewhat susceptible to
adverse economic and underwriting conditions.
BBB - Debt rated BBB is an adequate financial security.
Capacity to meet policyholder obligations is susceptible to
adverse economic and underwriting 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.
The rating Prime-1 is the highest commercial paper rating
assigned by Moody's. Issuers rated Prime-1 (or related supporting
institutions) are considered to have a superior capacity for
repayment of short-term promissory obligations.
Issuers rates Prime-2 (or related supporting institutions)
are considered to have a strong capacity for repayment of short-
term promissory obligations, normally evidenced by many of the
characteristics of issuers rated Prime-1 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
alternative liquidity is maintained.
Standard & Poor's Ratings Group
A-1 - Commercial paper rated A-1 by S&P indicates that the
degree of safety regarding timely payment is either overwhelming
or very strong. Those issues determined to possess overwhelming
safety characteristics are denoted A-1+.
A-2 Capacity for timely payment on commercial paper rated
A-2 is strong, but the relative degree of safety is not as high
as for issues designated A-1.
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