-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WZ+ZndbdSF1pppw9fJif6VRNC87gfXByUC31JbwNMkppZfz1ZNbxaWfijMqg4GP8 Se0MrQRiOR+Bl1iLEehg2A== 0000091155-99-000247.txt : 19990412 0000091155-99-000247.hdr.sgml : 19990412 ACCESSION NUMBER: 0000091155-99-000247 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990409 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MANAGED ASSETS TRUST CENTRAL INDEX KEY: 0000706453 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 046480345 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-03568 FILM NUMBER: 99590210 BUSINESS ADDRESS: STREET 1: ONE TOWER SQ STREET 2: ATTN FINANCIAL SERVICES LEGAL DIVISION CITY: HARTFORD STATE: CT ZIP: 06183-2020 BUSINESS PHONE: 2032777379 MAIL ADDRESS: STREET 1: ONE TOWER SQUARE STREET 2: ATTN FINANCIAL SERVICES LEGAL DIVISION CITY: HARTFORD STATE: CT ZIP: 06183-2020 N-30D 1 THE TRAVELERS VARIABLE PRODUCTS FUNDS ANNUAL REPORTS DECEMBER 31, 1998 Managed Assets Trust High Yield Bond Trust Capital Appreciation Fund Money Market Portfolio The Travelers Series Trust: U.S. Government Securities Portfolio Social Awareness Stock Portfolio Utilities Portfolio [TravelersLife&Annuity A Member of citigroup LOGO] The Travelers Insurance Company The Travelers Life and Annuity Company One Tower Square Hartford, CT 06183 ANNUAL REPORT FOR THE TRAVELERS VARIABLE PRODUCTS FUNDS - -------------------------------------------------------------------------------- DEAR SHAREHOLDER: We are pleased to provide the annual report for The Travelers Series Trust -- Managed Assets Trust, High Yield Bond Trust, Capital Appreciation Fund, Money Market Portfolio ("Trust" or "Fund") and the Travelers Series Trust -- U.S. Government Securities, Social Awareness Stock and Utilities Portfolios; ("Portfolio") for the year ended December 31, 1998. In this letter, we briefly discuss general economic and market conditions. In addition, more detailed comparisons showing the growth of a hypothetical $10,000 investment in each Trust or Portfolio since its inception date can be found in this report. A more detailed summary of performance and current holdings for each Trust or Portfolio can be found in the pages listed below.
MARKET SCHEDULE OF SUBACCOUNT COMMENTARY INVESTMENTS - ---------- ---------- ----------- Managed Assets Trust.................................. 3 9 High Yield Bond Trust................................. 4 17 Capital Appreciation Fund............................. 5 23 Money Market Portfolio................................ 5 25 U.S. Government Securities Portfolio.................. 38 43 Social Awareness Stock Portfolio...................... 39 44 Utilities Portfolio................................... 39 47
ECONOMIC REVIEW AND OUTLOOK The year 1998 saw a widely gyrating U.S. stock market with different sectors performing differently. The large-cap oriented S&P 500 Stock-Index ("S&P 500") returned 28.72% for the year. The S&P 400 MidCap Index had a gain of roughly 5% while the Russell 2000 Index had a negative return of 2.6% for the year ended December 31, 1998. Dividend-paying defensive stocks such as utilities performed better than the average small- and mid-cap stock. While technology stocks were adversely impacted by the global financial crisis in late 1997, they have since rebounded, led by Internet-related names. The economies of the developed world flourished in 1998 while most emerging markets went down. Low interest rates, robust consumer spending and benign inflation fueled economic growth in the U.S. and Europe and created favorable conditions for corporate profitability. In contrast, Russia's economy collapsed, Asia's economies remained mired in recession and Brazil's economy faltered at year-end after $30 billion was spent to defend its currency during the reporting period. The year was also a record year for mergers and acquisitions, nearly double 1997's total. The merger of oil giants Exxon and Mobil announced in December will result in the creation of the world's largest company in terms of revenue. In the digital world, merger activity between Internet service providers, phone companies, cable companies and telecommunications firms heated up, as "convergence" became the new mantra. We remain guardedly optimistic about the resilient U.S. economy in the first half of 1999 because we expect interest rates to stay low and the productivity revolution through technology to continue. However, the risks from foreign markets cannot be discounted and future corporate earnings may come under increasing pressure. FIXED INCOME MARKET COMMENTARY Problems that started with Asia's currency devaluations in the summer of 1997 hit the bond market hard in August and September of 1998. Bond values fell dramatically and asset-backed bonds, mortgage-backed securities, emerging-market debt and corporate bonds all were negatively affected. In 1998, the more risk a bond investor assumed, the more he or she suffered. For the year ended December 31, 1998, the Lehman Government/Corporate Index returned 9.47%. During the year, the spreads between different kinds of bonds and U.S. Treasuries widened at record speed as investors gravitated to their safety amidst rising stock market volatility and higher investor anxiety about the global economy. The Federal Reserve Board ("Fed") then changed its monetary policy from one of vigilance against inflation to one of combating deflation during the reporting period and cut rates three times. So far in 1999, spreads have tightened, bond market liquidity has returned and the bond market has stabilized. Markets and policy makers expect real U.S. economic growth to finally slow to the 1%-2% level in 1998 after 3 years of 3%-plus growth. The slowdown is expected to be led by a sharp reduction in the growth rate of investment spending and 1 ANNUAL REPORT FOR THE TRAVELERS VARIABLE PRODUCTS FUNDS - -------------------------------------------------------------------------------- continued weakness in the export sector. The Conference Board survey of corporate sentiment indicates that capital-spending plans has not yet rebounded with the stock market and consumer sentiment. Year 2000 ("Y2K") spending is temporarily boosting capital spending, yet industrial overcapacity and several years of rapid spending in technology make slower investment spending highly likely. However, a drop in the rate of consumer spending growth is essential to any meaningful forecast of 1%-2% real GDP growth. This has not happened yet despite two years where consumer spending has been close to consumer income. The wealth effect from three years of 20%-plus stock market gains is estimated to increase spending 1.5% more than implied by income growth. Lower interest rates, lower oil and other commodity prices and declining import prices have further boosted consumer purchasing power. The tight employment market has also been a major force behind high consumer confidence and spending plans. December brought a further sharp drop in oil prices and continued record high (which substantially exceeded expectations) auto sales and housing starts. Unless they were all caused by unseasonably warm weather, these factors cause us to push any forecast of a consumer slowdown further out into the future which should delay any further Fed rate cuts. There are storm clouds on the horizon that could lead the consumer to retreat. Latin America has been pushed into recession by last summer's emerging market meltdown and could be subject to further pressure if a Brazilian crisis erupts. Latin America has a larger economic impact on the U.S. than Asia and Russia do. A decline in the stock market could rattle the consumer, although the stock market's continued resilience means that a sustained downturn is required before spending would be significantly impacted. Japan is also a big question mark. Economic activity is now declining there after several years of flat growth. Despite three rate cuts in the second half of 1998, it would be hard to say the Fed has an easy monetary policy. Short-term interest rates are still more than 3% above inflation and are high relative to nominal growth. Credit market spreads are high and banks are tightening credit standards. These factors create a downward bias for short-term rates over the long-term, but rates are likely to remain stable until the consumer slows down. With the Fed on hold, there will be some upward pressure on long-term rates. But slow growth outside the U.S. and continued low inflation should prevent rates from rising too much. The fact that so much of the U.S. Treasury curve trades below the federal-funds rate is a big factor in the continued high spreads in the investment grade corporate market. Because of this, spreads should move to offset the change in U.S. Treasury yields -- narrowing when yields rise and widening when yields fall. EQUITY MARKET COMMENTARY The deepening global financial crisis and its adverse impact on global economies and leveraged hedge funds sent the U.S. stock market into a tailspin during the third quarter of 1998. The S&P 500 fell by almost 10% in the third quarter while the Russell 2000 Index of smaller companies fared even worse with a decline of 20%. The third quarter began on a promising note as stock prices rose by almost 5% in the first half of July. From the then all-time highs established on July 17, 1998, a series of bad news related to political and currency turmoil led the stock market down through the end of August. The market decline over that period was close to 20%, which qualifies under most scenarios as a bear market. The bulk of the bad news in August came from the political and economic crisis in Russia and the continuing spread of the currency contagion. The collapse of the Russian ruble and the restructuring of Russian debt triggered trading and lending losses at brokerage firms and banks. The crisis in the financial sector took a turn for the worse later in the quarter as several hedge funds disclosed losses related to the global financial turmoil. Several stocks in the financial sector saw their market value cut in half during the third quarter. Increased uncertainty over Clinton's presidency and the bigger question of the damage to corporate profits added to the volatility in the stock market. The increased prospects of a global and U.S. economic slowdown led to some easing of monetary policy. Japan first decreased short-term interest rates by 20 basis points and the Fed followed suit with a 0.25% rate cut in late September. The U.S. stock market rallied in anticipation of the rate cut and stock prices rose by almost 6% in September. 2 ANNUAL REPORT FOR THE TRAVELERS VARIABLE PRODUCTS FUNDS - -------------------------------------------------------------------------------- In the large-capitalization stock universe, high-quality growth stocks performed better than value stocks in the third quarter of 1998. The utilities sector produced the only positive performance in the third quarter while the financial services and energy sectors at the other end of the spectrum fell by over 20%. Large-cap technology and health care stocks held up reasonably well, but consumer stocks declined sharply against the likely backdrop of an economic slowdown. A proactive and aggressive stance by the Fed halted the stock market slide early in the fourth quarter of 1998 and sent stock prices soaring in November and December. The fourth quarter rally erased losses from the third quarter and most market measures reached new all-time highs. The negative sentiment in the stock market persisted through the first week of October as the S&P 500 fell another 6%. Investor concerns focused on the impact of the Russian crisis and global lending and trading losses on U.S. economic and earnings growth. Sentiment reversed in the second week of October after most market indexes had declined over 20% from their all-time highs. The reversal in trend turned into a significant stock market rally when the Fed cut short term rates by an unexpected 25 basis points in the middle of October. The surprise Fed action raised hopes that a proactive stimulative monetary policy by most central banks would avert a global recession. The stock market rally, triggered by the unexpected Fed rate cut in mid-October, continued almost unabated through the months of November and December. The market was also helped by economic reports in the fourth quarter which were well ahead of expectations. Despite the strength in the economy, interest rates remained low mainly as a result of low inflation. In the large-cap universe, all sectors except energy (which declined by 3%), registered strong gains in the fourth quarter. The market rally was led by the technology and health care sectors which rose by over 30%. The financial services, transportation and producer durables sectors also performed well. The performance of the U.S. stock market in 1998 proves yet again that interest rate changes and liquidity flows may have a more dominant influence on stock prices than most other factors. In a year where earnings growth was close to zero, most measures of the U.S. stock market have risen by over 20%. Declining interest rates, which fell from 5.9% to 5.1% during 1998, have triggered a significant expansion in the market price/earnings ("P/E") multiple. The upward pressure on stock prices has been further amplified by strong money flows as yields on alternative investments have dwindled. A notable aspect of the stock market performance in 1998 was the divergence in returns across different styles and segments of the market. While the S&P 500 rose by 28.72% in 1998, the Russell 2000 actually declined by 2.6%. The gain in large-company growth stocks of 42.2% was well ahead of the 14.7% advance of large-company value stocks and almost out of sight With earnings growth slowing down, the market P/E multiple has now reached 23 times 1998 earnings. It appears that the biggest risk to the stock market still remains on the earnings front. Earnings estimates for 1999 remain high and it is quite likely that these earnings forecasts will be revised down. Despite the overhang of possible downward earnings revisions, we believe that support from low interest rates should limit an excessive downside. MANAGED ASSETS TRUST Managed Assets Trust ("Trust") seeks to provide a high total investment return through a fully managed investment policy. For the year ended December 31, 1998, the Trust had a total return of 21.44% versus 28.72% for the 60% of the S&P 500 and 9.47% for the 40% of the Lehman Government/Corporate Index benchmark. Returns were hurt by being slightly overweighted in stocks, the underperformance of the convertible bond market and the underperformance of its corporate bonds. In their disciplined approach to stock selection, the portfolio managers screen their research universe of over 1,000 securities for companies that offer improving fundamentals and relative earnings gains at discounted stock valuations. During the third quarter of 1998, stock selection in the consumer discretionary, financial services and producer durables sectors had an adverse impact on relative portfolio performance. Media stocks such as New York Times, Meredith Corp. and Clear Channel Communications and their holdings in the retail sector such as Jones Apparel and General Nutrition sold off sharply on concerns of future earnings weakness resulting from a possible recession. The prospect of a slower economy also hurt producer durable stocks like United Technologies and Deere Corp. where the managers had a modest overweight 3 ANNUAL REPORT FOR THE TRAVELERS VARIABLE PRODUCTS FUNDS - -------------------------------------------------------------------------------- position. Trading and lending losses during the third quarter devastated the financial services sector. The managers' overweight positions in BankBoston, Equitable Companies, Morgan Stanley Dean Witter and Merrill Lynch also hurt the Trust's performance. Their stock selection in the technology and energy sectors contributed positively to portfolio performance in the third quarter. Their positions in higher growth technology stocks such as Cisco Systems, EMC Corp. and Symbol Technologies performed well in the third quarter. Being underweight in several poorly performing stocks such as Computer Associates, Parametric Technologies and 3Com Corp. also helped the Trust. In the energy sector, the managers gained from underweight positions in stocks such as Royal Dutch and Occidental Petroleum. During the fourth quarter of 1998, stock selection was favorable in most sectors. The biggest contributions to relative portfolio performance came from the technology, health care, consumer discretionary, producer durables and utilities sectors. In the technology sector, a number of the managers overweight position in stable growth companies with rising earnings estimates such as Cisco Systems, Symbol Technologies, EMC Corp., Dell Computers and Lucent Technologies performed well. The biggest gain in the Trust's portfolio, however, came from America Online which rose by 70% in December alone on the heels of a frenzied pursuit of Internet stocks and its inclusion into the S&P 500 index on the last day of the year. Guidant Corp, a leading manufacturer of cardiological equipment, and Amgen, the world's largest biotechnology company, were top stock picks in the health care sector. Both stocks rose by almost 50% in the fourth quarter of 1998 on strong revenue growth and positive earnings surprises. A strong recovery in retail and media stocks from their lows in the third quarter helped performance in the consumer discretionary sector. The Trust's retail holdings in Dayton Hudson, Staples Inc. and CVS Corp. performed well and media stocks such as The New York Times and Clear Channel Communications recovered from near-recession levels as investors felt reassured about economic prospects after the Fed action to cut interest rates. The managers good performance in the producer durables sector was achieved from a combination of picking the winners in the sector and avoiding the losers. Their emphasis on Tyco International, a world leader in security systems, paid off while the managers avoided some of the bigger losers within the sector such as Minnesota Mining and Lockheed Martin. In the utilities sector, the managers have been emphasizing long-distance and cellular telephone companies such as Airtouch Communications, Sprint PCS and MCI Worldcom at the expense of the regional telephone companies and the electric utilities group. They were rewarded in these positions as investors paid a premium for the higher growth prospects of these companies within a relatively low growth sector. A small sample of their current holdings is presented here to illustrate their investment approach. In the technology sector, they focus on higher growth industries like networking and software through their positions in Symbol Technologies, EMC Corp., Cisco and Oracle which are still trading at reasonable valuations. Their emphasis on Amgen Corp. and Guidant Corp., leaders in the biotechnology and medical devices industries respectively, illustrates how they seek growth at a reasonable price. HIGH YIELD BOND TRUST The High Yield Bond Trust ("Trust") seeks generous income. The assets of the Trust will be invested in bonds which, as a class, sell at discounts from par value and are typically high-risk securities. For the year ended December 31, 1998, the High Yield Bond Trust had a total return of 6.56%. In comparison, the Lehman Aggregate Bond Index posted a total return of 8.69% for the same period. The high yield bond market generated relatively weak results during the third quarter of 1998, underperforming all of the other domestic bond market sectors. By the end of September, the Fed began taking aggressive actions to restore investor confidence in the financial markets. The Fed concluded that the financial markets were beginning to freeze up and overall liquidity in the bond market was disappearing. Many companies were finding it increasingly more difficult to borrow money through bond markets. Moreover, there was a more pronounced reluctance on the part of many investors to invest in new bonds, especially from companies that issue high yield bonds. Fears that an economic recession was becoming more likely given the turmoil in emerging market economies such as Korea, Russia and Indonesia were also key market factors. Moreover, investors became concerned that a worldwide credit crunch in the financial markets might throw the U.S. economy into a meaningful recession. By acting decisively and lowering short-term interest rates three times, the Fed was able to 4 ANNUAL REPORT FOR THE TRAVELERS VARIABLE PRODUCTS FUNDS - -------------------------------------------------------------------------------- stabilize the domestic financial markets and restore investor confidence. In the fourth quarter of 1998, as investors slowly became more comfortable with the economic outlook and the Fed's resolve to keep the economy out of a recession, the high yield bond market stabilized and outperformed other bond sectors. Yet because of a lingering uncertainty over the economy, the high yield bond market trades at undervalued levels. As more investors become convinced that the U.S. economy is still fundamentally sound, the high yield bond market should continue to stabilize and prices should improve. The portfolio manager viewed the recent correction in the high yield bond market as a buying opportunity and carefully redeployed excess cash reserves into the market during this time. However, given the continued problems in Asia, he remained underweighted in basic commodity industries such as steel, forest products, energy and petrochemicals, industries that have been negatively affected by worldwide deflationary trends in recent months. (Deflation is when prices actually fall. Deflation should not be confused with disinflation, which is the slowing down of the rate at which prices increase). The portfolio manager believes that the Trust is appropriately positioned for current economic conditions, a period characterized by slower growth and somewhat weaker corporate profits. It should be noted that he still does not anticipate a domestic economic recession for 1999. Moreover, the manager plans to stick with the Trust's relatively sound credit quality orientation given the higher volatility in the financial markets. CAPITAL APPRECIATION FUND The Capital Appreciation Fund ("Fund") seeks growth of capital through the use of common stocks. Income is not an objective. The Fund invests principally in common stocks of small- to large-companies that are expected to experience wide fluctuations in price in both rising and declining markets. For the year ended December 31, 1998, the Capital Appreciation Fund posted a total return of 61.63%. In comparison, the Russell 2000 Index returned a negative 2.55% for the same period. Looking back over the past twelve months, 1998 will surely go down as one of the market's most volatile years this decade. Continued uncertainty in Asia, instability in other emerging markets and a clear slowdown in global economic growth set the stage for a tumultuous and, at times, unforgiving marketplace. Remarkably, when all was said and done, the S&P 500 Index posted an historic fourth straight year of 20%-plus returns. However, only a select handful of companies performed exceptionally well, which masked a segmented market where many stocks actually produced negative results. Turning to the Fund, it well outperformed its benchmark, the S&P 500 Index. Gains were driven by its holdings in the technology, cable, and life sciences industries. In particular, America Online and Cisco Systems rose sharply to post strong gains for the year. These companies continued to capitalize on their leading market positions while also leveraging their foothold in the growing Internet landscape. Turning to the telecommunications industry, the portfolio managers benefited from very strong performance by Nokia, a company that is rapidly becoming the dominant global provider of telecommunications equipment. Additionally, Denver- based telecommunications company Qwest Communications saw its stock price more than double during fourth quarter. The company recently signed a lucrative joint venture contract with Microsoft. In the pharmaceutical sector, Eli Lilly moved higher, due in part to positive news on the cancer-fighting properties of its osteoporosis drug Evista. While the vast majority of the Fund posted strong results, its position in Dell Computer did lag the rest of the technology sector. While Dell continues to generate impressive results, its expensive price tag put off some investors. Nonetheless, the managers remain very upbeat on the position. Looking ahead, the managers remain positive on the longer-term prospects for growth stocks, especially in a low interest rate environment. They continue to focus on companies that can grow their earnings in any kind of economic conditions. MONEY MARKET PORTFOLIO Money Market Portfolio (formerly known as Cash Income Trust) ("Portfolio") seeks to provide shareholders with high current income from short-term money market instruments while emphasizing preservation of capital and maintaining a high degree of liquidity. The Portfolio pursues this objective by investing in securities maturing in one year or less. 5 ANNUAL REPORT FOR THE TRAVELERS VARIABLE PRODUCTS FUNDS - -------------------------------------------------------------------------------- For the year ended December 31, 1998, the Portfolio generated an effective yield of 5.08% and as of December 31, 1998, had an average maturity of 27 days. The Portfolio continues to invest primarily in U.S. Treasuries and government agency securities. This investment strategy has provided the Portfolio with safety, liquidity and stability. However, you should be aware that your investment in the Portfolio is neither insured nor guaranteed by the U.S. Government. Moreover, no assurance can be given that the Fund will be able to maintain a stable net asset value of $1.00 per share. In closing, we would like to thank you for your investment in Managed Asset Trust, High Yield Bond Trust, Capital Appreciation Fund and Money Market Portfolio. We look forward to continuing to help you pursue your financial goals. Sincerely, /s/ HEATH B. MCLENDON Heath B. McLendon Chairman January 13, 1999 6 - -------------------------------------------------------------------------------- PERFORMANCE COMPARISON -- MANAGED ASSETS TRUST AS OF 12/31/98 (UNAUDITED)
AVERAGE ANNUAL TOTAL RETURNS ---------------------------------------------- Year Ended 12/31/98 21.44% Five Years Ended 12/31/98 15.81% Ten Years Ended 12/31/98 14.27% CUMULATIVE TOTAL RETURN ---------------------------------------------- 4/8/83* through 12/31/98 416.87% * Commencement of operations
This chart assumes an initial investment of $10,000 made on December 31, 1988, assuming reinvestment of dividends, through December 31, 1998. The Lehman Government/Corporate Bond Index is a weighted composite of the Lehman Government Bond Index, which is a broad-based index of all public debt obligations of the U.S. Government and its agencies and has an average maturity of nine years and the Lehman Corporate Bond Index, which is comprised of all public fixed-rate non-convertible investment-grade domestic corporate debt, excluding collateralized mortgage obligations. The Consumer Price Index is a measure of the average change in prices over time in a fixed market basket of goods and services. The Standard & Poor's 500 Index is an unmanaged index composed of 500 widely held common stocks listed on the New York Stock Exchange, American Stock Exchange and over-the-counter market.
Lehman Standard Managed Government/Corporation Consumer & Poor's Assets Bond Price 500 Trust Index Index Index Dec-88 10000 10000 10000 10000 Dec-89 12712 11423 10465 13163 Dec-90 13026 12370 11103 12755 Dec-91 15854 14365 11443 16633 Dec-92 16668 15454 11775 17899 Dec-93 18224 17159 12099 19698 Dec-94 17815 16556 12423 19957 Dec-95 22646 19742 12738 24333 Dec-96 25766 20314 13160 29917 Dec-97 31257 22296 13383 39897 Dec-98 37960 24408 13598 51362
- -------------------------------------------------------------------------------- Past performance is not predictive of future performance. Investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Average annual total returns are historical in nature and measure net investment income and capital gain or loss from portfolio investments assuming reinvestment of dividends. The returns do not reflect expenses associated with the subaccount such as administrative fees, account charges and surrender charges which, if reflected, would reduce the performance shown. - -------------------------------------------------------------------------------- PERFORMANCE COMPARISON -- HIGH YIELD BOND TRUST AS OF 12/31/98 (UNAUDITED)
AVERAGE ANNUAL TOTAL RETURNS ---------------------------- Year Ended 12/31/98 6.56% Five Years Ended 12/31/98 10.44% Ten Years Ended 12/31/98 9.44% CUMULATIVE TOTAL RETURN ---------------------------------------------- 3/19/82* through 12/31/98 407.17% * Commencement of operations
This chart assumes an initial investment of $10,000 made on December 31, 1988, assuming reinvestment of dividends, through December 31, 1998. The Lehman Aggregate Bond Index, an unmanaged index, is composed of the Lehman Intermediate Government/Corporate Bond Index and the Mortgage Backed Securities Index and includes treasury issues, agency issues, corporate bond issues and mortgage- backed securities. The Consumer Price Index is a measure of the average change in prices over time in a fixed market basket of goods and services. The First Boston High Yield Index Top Tier is a broad-based market measure of high yield bonds, commonly known as "junk bonds."
First Boston High Lehman High Yield Aggregate Consumer Yield Bond Bond Price Index Trust Index Index Top Tier Dec-88 10000 10000 10000 10000 Dec-89 10140 11454 10465 11319 Dec-90 9215 12480 11103 11424 Dec-91 11620 14477 11443 14038 Dec-92 13149 15548 11775 15264 Dec-93 14991 17064 12099 17648 Dec-94 14802 16566 12423 17614 Dec-95 17092 19626 12738 20905 Dec-96 19835 20339 13160 23146 Dec-97 23120 22301 13383 25923 Dec-98 24636 24239 13598 26144
- -------------------------------------------------------------------------------- Past performance is not predictive of future performance. Investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Average annual total returns are historical in nature and measure net investment income and capital gain or loss from portfolio investments assuming reinvestment of dividends. The returns do not reflect expenses associated with the subaccount such as administrative fees, account charges and surrender charges which, if reflected, would reduce the performance shown. 7 - -------------------------------------------------------------------------------- PERFORMANCE COMPARISON -- CAPITAL APPRECIATION FUND AS OF 12/31/98 (UNAUDITED)
AVERAGE ANNUAL TOTAL RETURNS ---------------------------- Year Ended 12/31/98 61.63% Five Years Ended 12/31/98 27.67% Ten Years Ended 12/31/98 21.01% CUMULATIVE TOTAL RETURN ---------------------------------------------- 3/19/82* through 12/31/98 1,637.61% *Commencement of operations
This chart assumes an initial investment of $10,000 made on December 31, 1988, assuming reinvestment of dividends, through December 31, 1998. The Standard & Poor's 500 Index is an unmanaged index composed of 500 widely held common stocks listed on the New York Stock Exchange, American Stock Exchange and over-the-counter market. The Russell 2000 Index is a capitalization weighted total return index which is comprised of 2,000 of the smallest capitaled U.S. domiciled companies with less than average growth orientation whose common stock is traded in the United States of the New York Stock Exchange, American Stock Exchange and NASDAQ. The Consumer Price Index is a measure of the average change in prices over time in a fixed market basket of goods and services.
CAPITAL APPRECIATION STANDARD & POOR'S FUND 500 INDEX RUSSELL 2000 INDEX CONSUMER PRICE INDEX -------------------- ----------------- ------------------ -------------------- 12/88 10000 10000 10000 10000 12/89 11571 13163 11627 10465 12/90 10849 12755 9362 11103 12/91 14664 16633 13673 11443 12/92 17245 17899 16189 11775 12/93 19848 19698 19245 12099 12/94 18903 19957 7986 12423 12/95 25777 24333 10258 12738 12/96 33047 29917 11951 13160 12/97 41687 39923 14624 13383 12/98 67378 51396 14252 13524
- -------------------------------------------------------------------------------- Past performance is not predictive of future performance. Investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Average annual total returns are historical in nature and measure net investment income and capital gains or losses from portfolio investments assuming reinvestments of dividends. The returns do not reflect expenses associated with the subaccount such as administrative fees, account charges and surrender charges which, if reflected, would reduce the performance shown. 8 - -------------------------------------------------------------------------------- SCHEDULES OF INVESTMENTS DECEMBER 31, 1998 MANAGED ASSETS TRUST
SHARES SECURITY VALUE - ----------------------------------------------------------------------------------------------------- COMMON STOCK -- 71.3% - ----------------------------------------------------------------------------------------------------- CONSUMER CYCLICALS -- 9.7% 6,904 Clorox Co. ................................................. $ 806,474 5,492 Colgate-Palmolive Co. ...................................... 510,070 14,700 Comcast Corp., Class A Shares............................... 863,166 9,500 Costco Cos., Inc. (a)....................................... 687,266 19,027 CVS Corp. .................................................. 1,046,485 5,816 Eastman Kodak Co. .......................................... 418,752 15,594 Fruit of the Loom Inc., Class A Shares (a).................. 215,392 9,611 Gannett Co. ................................................ 636,128 11,475 Gap Inc. ................................................... 645,469 12,946 Gillette Corp. ............................................. 625,454 34,130 Home Depot, Inc. ........................................... 2,088,329 4,610 J.C. Penney Co. ............................................ 216,094 26,284 K-Mart Corp. (a)............................................ 402,474 9,364 Kimberly-Clark Corp. ....................................... 510,338 10,984 Kroger Co. (a).............................................. 664,532 4,217 May Department Stores Co. .................................. 254,601 9,121 Maytag Corp. ............................................... 567,782 12,161 McDonald's Corp. ........................................... 931,837 16,477 MediaOne Group, Inc. (a).................................... 774,419 12,261 New York Times Co., Class A Shares.......................... 425,303 11,377 Nordstrom Inc. ............................................. 394,640 26,342 Procter & Gamble Co. ....................................... 2,405,354 12,300 Rite Aid Corp. ............................................. 609,619 15,862 Safeway Inc. (a)............................................ 966,591 16,084 Staples Inc. (a)............................................ 702,670 8,631 Tele-Communications, Inc. (a)............................... 477,672 19,222 Time Warner, Inc. .......................................... 1,192,965 7,258 Times Mirror Co., Class A Shares............................ 406,448 22,165 TJX Cos., Inc. ............................................. 642,785 12,513 Unilever NV................................................. 1,037,797 5,885 Viacom Inc. Non-Voting, Class B Shares (a).................. 435,490 39,230 Wal-Mart Corp. ............................................. 3,194,793 27,295 Walt Disney Co. ............................................ 818,850 - ----------------------------------------------------------------------------------------------------- 26,576,039 - ----------------------------------------------------------------------------------------------------- CONSUMER STAPLES -- 4.6% 13,927 Adolph Coors Co., Class B Shares............................ 786,440 8,827 Anheuser-Busch Cos., Inc. .................................. 579,272 8,700 Campbell Soup Co. .......................................... 478,500 45,905 Coca-Cola Co. .............................................. 3,069,897 13,869 H.J. Heinz Co. ............................................. 785,332 12,946 Interstate Bakeries Corp. .................................. 342,260 7,160 Kellogg Co. ................................................ 244,335 4,315 Loews Corp. ................................................ 423,949 36,280 Pepsico Inc. ............................................... 1,485,213 56,215 Philip Morris Cos., Inc. ................................... 3,007,503 34,326 Sara Lee Corp. ............................................. 967,564
SEE NOTES TO FINANCIAL STATEMENTS. 9 - -------------------------------------------------------------------------------- SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998 MANAGED ASSETS TRUST 11,279 Suiza Foods Corp. (a). $ 574,524 363 Vlasic Foods International Inc. (a)......................... 8,644 - ----------------------------------------------------------------------------------------------------- 12,753,433 - ----------------------------------------------------------------------------------------------------- ENERGY -- 0.2% 4,610 Halliburton Resources, Inc. ................................ 136,571 8,238 Schlumberger Ltd. .......................................... 379,978 - ----------------------------------------------------------------------------------------------------- 516,549 - ----------------------------------------------------------------------------------------------------- FINANCIAL SERVICES -- 10.6% 24,254 Allstate Corp. ............................................. 936,811 6,081 Ambac Financial Group, Inc. ................................ 366,000 12,783 American Express Co. ....................................... 1,307,062 24,751 American International Group, Inc. ......................... 2,391,565 15,530 Associates First Capital Corp. ............................. 658,084 12,421 Bank One Corp. ............................................. 634,247 38,676 BankAmerica Corp. .......................................... 2,325,395 14,319 BankBoston Corp. ........................................... 557,546 3,236 Capital One Financial Co. .................................. 372,140 20,568 Chase Manhattan Corp. ...................................... 1,399,910 7,797 Comerica, Inc. ............................................. 531,658 8,434 Countrywide Credit Industries, Inc. ........................ 423,281 24,152 Fannie Mae.................................................. 1,787,248 12,750 Federal Home Loan Mortgage Co. ............................. 821,578 7,700 Fifth Third Bancorp......................................... 549,347 5,492 First Union Corp. of North Carolina......................... 333,982 18,046 Fleet Financial Group, Inc. ................................ 806,431 5,198 Golden West Financial Corp. ................................ 476,592 10,004 Hartford Financial Services Group, Inc. .................... 548,970 20,200 Household International, Inc. .............................. 800,425 4,413 J.P. Morgan & Co. .......................................... 463,641 16,281 Lehman Brothers Holdings, Inc. ............................. 717,382 648 M&T Bank Corp. ............................................. 336,272 17,975 Merrill Lynch & Co., Inc. .................................. 1,199,831 20,841 Morgan Stanley, Dean Witter & Co. .......................... 1,479,711 11,500 National City Corp. ........................................ 833,750 5,394 PNC Bank Corp. ............................................. 291,950 9,906 Republic New York Corp. .................................... 451,342 7,748 State Street Corp. ......................................... 538,970 13,338 Summit Bancorp.............................................. 582,704 9,513 SunAmerica Inc. ............................................ 771,742 11,311 SunTrust Banks, Inc. ....................................... 865,292 4,400 TransAmerica Corp. ......................................... 508,200 11,146 Washington Mutual Inc. ..................................... 425,638 43,600 Wells Fargo & Co. .......................................... 1,741,275 - ----------------------------------------------------------------------------------------------------- 29,235,972 - -----------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. 10 - -------------------------------------------------------------------------------- SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998 MANAGED ASSETS TRUST HEALTH CARE -- 9.0% 28,246 Abbott Laboratories......................................... $ 1,384,054 29,913 American Home Products Corp. ............................... 1,684,476 9,410 Amgen Inc. (a).............................................. 983,345 11,000 Baxter International Inc. .................................. 707,438 17,948 Bristol-Myers Squibb Co. ................................... 2,401,667 21 Crescendo Pharmaceutical Corp. (a).......................... 288 20,204 Eli Lilly & Co. ............................................ 1,795,631 8,002 Guidant Corp. (a)........................................... 882,221 22,557 HBO & Co. .................................................. 647,104 30,011 Healthsouth Corp. (a)....................................... 463,295 27,211 Johnson & Johnson........................................... 2,282,323 14,233 Medtronic Inc. ............................................. 1,056,800 21,969 Merck & Co. ................................................ 3,244,547 24,299 Pfizer Inc. ................................................ 3,048,006 9,121 Pharmacia & Upjohn, Inc. ................................... 516,477 27,068 Schering-Plough Corp. ...................................... 1,495,507 20,007 Warner-Lambert Co. ......................................... 1,504,276 5,688 Watson Pharmaceuticals, Inc. (a)............................ 357,633 4,400 Wellpoint Heath Networks, Inc. (a).......................... 382,800 - ----------------------------------------------------------------------------------------------------- 24,837,888 - ----------------------------------------------------------------------------------------------------- INSURANCE -- 0.4% 9,709 Everest Reinsurance Holdings, Inc. ......................... 378,044 9,268 Marsh & McLennan Cos., Inc. ................................ 541,599 3,580 Transatlantic Holdings, Inc. ............................... 270,514 - ----------------------------------------------------------------------------------------------------- 1,190,157 - ----------------------------------------------------------------------------------------------------- MATERIALS & PROCESSING -- 2.8% 10,535 Aluminum Co. of America..................................... 785,516 27,167 Bethlehem Steel Corp. (a)................................... 227,524 15,496 Crompton & Knowles Corp. ................................... 320,574 19,027 Dayton-Hudson Corp. ........................................ 1,032,215 18,438 E.I. du Pont de Nemours & Co. .............................. 978,366 4,511 Georgia-Pacific Corp. (Timber Group)........................ 107,418 8,042 Georgia-Pacific Group....................................... 470,960 5,002 International Paper Co. .................................... 224,152 10,788 Lyondell Chemical Co. ...................................... 194,184 22,165 Masco Corp. ................................................ 637,244 5,492 Mercury General Corp. ...................................... 240,618 9,906 Mead Corp. ................................................. 290,370 9,808 Monsanto Co. ............................................... 465,880 11,300 Praxair Inc. ............................................... 398,325 802 Raytheon Co., Class A Shares................................ 41,453 6,963 Raytheon Co., Class B Shares................................ 370,780 9,513 Sealed Air Corp. (a)........................................ 485,758 3,335 Weyerhauser Co. ............................................ 169,460 10,298 Willamette Industries, Inc. ................................ 344,983 - ----------------------------------------------------------------------------------------------------- 7,785,780 - -----------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. 11 - -------------------------------------------------------------------------------- SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998 MANAGED ASSETS TRUST OIL -- 3.9% 17,556 Amoco Corp. ................................................ $ 1,059,944 10,690 Atlantic Richfield Co. ..................................... 697,523 9,709 Burlington Resources Inc. .................................. 347,704 10,984 Chevron Corp. .............................................. 910,986 5,394 Enron Corp. ................................................ 307,795 45,017 Exxon Corp. ................................................ 3,291,868 15,442 Mobil Corp. ................................................ 1,345,384 28,834 Royal Dutch Petroleum Co. ADR............................... 1,380,428 15,300 Texaco Inc. ................................................ 808,988 18,634 Unocal Corp. ............................................... 543,880 - ----------------------------------------------------------------------------------------------------- 10,694,500 - ----------------------------------------------------------------------------------------------------- PRODUCER DURABLES -- 5.7% 16,643 Boeing Co. ................................................. 542,978 6,767 Caterpillar Inc. ........................................... 311,282 23,048 CBS Corp. .................................................. 754,822 9,709 Cordant Technologies Inc. .................................. 364,088 16,603 Crane Co. .................................................. 501,203 10,396 Deere & Co. ................................................ 344,368 4,119 Dow Chemical Co. ........................................... 374,572 17,359 EG&G Inc. .................................................. 482,797 7,454 Emerson Electric Co. ....................................... 466,341 13,927 Entergy Corp. .............................................. 433,478 8,925 General Dynamics Corp. ..................................... 523,228 65,834 General Electric Co. ....................................... 6,748,333 5,786 Honeywell Inc. ............................................. 435,758 12,259 Ingersoll-Rand Co. ......................................... 575,407 11,965 Kaufman & Broad Home Corp. ................................. 343,994 4,904 Pitney Bowes Inc. .......................................... 323,971 13,731 Pulte Corp. ................................................ 381,893 11,279 20th Century Industries..................................... 261,532 9,611 United Technologies Corp. .................................. 1,045,196 10,396 Waste Management Inc. ...................................... 484,714 - ----------------------------------------------------------------------------------------------------- 15,699,955 - ----------------------------------------------------------------------------------------------------- TECHNOLOGY -- 14.0% 11,963 Applied Materials Inc. (a).................................. 511,044 7,109 Ceridian Corp. (a).......................................... 496,297 36,082 Cisco Systems Inc. (a)...................................... 3,349,988 31,882 Compaq Computer Corp. ...................................... 1,337,051 8,844 Computer Sciences Corp. .................................... 569,885 6,767 Compuware Corp. (a)......................................... 528,460 30,242 Dell Computer Corp. (a)..................................... 2,214,281 20,988 Edison International........................................ 585,041 14,279 EMC Corp. (a)............................................... 1,213,715 2,942 Gateway 2000 Inc. (a)....................................... 150,594 16,000 Hewlett Packard Co. ........................................ 1,093,000 38,063 Intel Corp. ................................................ 4,511,655
SEE NOTES TO FINANCIAL STATEMENTS. 12 - -------------------------------------------------------------------------------- SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998 MANAGED ASSETS TRUST 20,694 International Business Machines Corp. . $ 3,823,217 28,970 Lucent Technologies Inc. ................................... 3,186,700 12,554 Meredith Corp. ............................................. 475,483 51,367 Microsoft Corp. (a)......................................... 7,115,935 10,690 Motorola Inc. .............................................. 652,758 23,877 Oracle Corp. (a)............................................ 1,030,442 16,200 PP&L Resources, Inc. ....................................... 451,575 4,200 Sun Microsystems Inc. (a)................................... 359,363 6,534 Symbol Technologies, Inc. .................................. 417,768 23,244 Sysco Corp. ................................................ 637,757 3,629 Tellabs Inc. (a)............................................ 248,813 7,667 Texas Instruments Inc. ..................................... 656,008 15,398 3Com Corp. (a).............................................. 690,504 19,223 Tyco International Ltd. .................................... 1,450,136 5,688 Xerox Corp. ................................................ 671,184 - ----------------------------------------------------------------------------------------------------- 38,428,654 - ----------------------------------------------------------------------------------------------------- TRANSPORTATION -- 1.7% 3,374 AMR Corp. (a)............................................... 200,331 8,827 CSX Corp. .................................................. 366,321 3,240 DaimlerChrysler AG (a)...................................... 311,243 29,717 Ford Motor Co. ............................................. 1,744,016 8,842 General Motors Corp. ....................................... 632,756 8,800 Lear Corp. (a).............................................. 338,800 17,323 Navistar International Corp. (a)............................ 493,706 9,200 TRW Inc. ................................................... 516,925 3,629 Union Pacific Corp. ........................................ 163,532 - ----------------------------------------------------------------------------------------------------- 4,767,630 - ----------------------------------------------------------------------------------------------------- UTILITIES -- 8.7% 14,300 AES Corp. (a)............................................... 677,463 19,713 Airtouch Communications Inc. (a)............................ 1,421,800 11,769 Alltell Corp. .............................................. 703,933 6,034 America Online Inc. ........................................ 873,422 19,223 Ameritech Corp. ............................................ 1,218,258 33,982 AT&T Corp. ................................................. 2,557,146 30,414 Bell Atlantic Corp. ........................................ 1,727,895 34,718 Bellsouth Corp. ............................................ 1,731,560 22,263 Central & South West Corp. ................................. 610,841 15,142 Clear Channel Communications Inc. (a)....................... 825,239 6,473 Columbia Energy Group....................................... 373,816 8,925 FPL Group Inc. ............................................. 550,003 14,373 GTE Corp. .................................................. 969,279 4,511 Houston Industries, Inc. ................................... 144,916 44,435 MCI WorldCom, Inc. (a)...................................... 3,189,600 22,700 Nextel Communications, Inc. (a)............................. 536,997 33,497 SBC Communications, Inc. ................................... 1,796,277 7,944 Sonat Inc. ................................................. 214,985
SEE NOTES TO FINANCIAL STATEMENTS. 13 - -------------------------------------------------------------------------------- SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998 MANAGED ASSETS TRUST 11,573 Southern Co. . $ 336,320 8,453 Sprint Corp. ............................................... 711,109 31,276 Sprint Corp. PCS Group (a).................................. 723,258 16,281 Texas Utilities Co. ........................................ 760,119 8,223 U.S. West Communications Group.............................. 531,411 22,754 Williams Cos., Inc. ........................................ 709,640 - ----------------------------------------------------------------------------------------------------- 23,895,287 - ----------------------------------------------------------------------------------------------------- TOTAL COMMON STOCK (Cost -- $126,236,101)................... 196,381,844 - ----------------------------------------------------------------------------------------------------- CONVERTIBLE PREFERRED STOCK -- 1.7% - ----------------------------------------------------------------------------------------------------- FINANCIAL -- 0.9% 6,000 Equity Office Properties Trust, 5.250%...................... 251,250 8,000 Equity Residential Properties, 2.150%....................... 212,000 18,564 Equity Residential Properties, 7.250%....................... 399,126 2,000 Finova Finance, 5.500%...................................... 148,625 12,000 General Growth Properties, 7.250%........................... 309,000 8,000 National Australia Bank, 7.875%............................. 223,000 3,720 New Plan Excel Realty Insurance, 8.500%..................... 105,904 6,000 Newell Financial Trust, 5.250%.............................. 316,500 4,000 Reckson Associates Realty Services, 7.625%.................. 84,500 5,000 Tosco Financial Trust, 5.750%............................... 238,125 2,245 Union Pacific Capital Trust, 6.250%......................... 102,989 - ----------------------------------------------------------------------------------------------------- 2,391,019 - ----------------------------------------------------------------------------------------------------- INDUSTRIAL -- 0.8% 4,000 Amcor Ltd, 7.250%........................................... 179,500 10,000 Calenergy Capital II, 6.250% (b)............................ 410,000 2,230 El Paso Energy Capital, 4.750%.............................. 106,761 12,000 International Paper Co., 5.250%............................. 589,500 10,990 News Corp. Ltd., 5.000%..................................... 964,373 - ----------------------------------------------------------------------------------------------------- 2,250,134 - ----------------------------------------------------------------------------------------------------- TOTAL CONVERTIBLE PREFERRED STOCK (Cost -- $4,731,504)...... 4,641,153 - -----------------------------------------------------------------------------------------------------
FACE AMOUNT RATING+ SECURITY VALUE - ------------------------------------------------------------------------------------------------------------------ CORPORATE BONDS -- 10.8% - ------------------------------------------------------------------------------------------------------------------ FINANCIAL -- 3.8% $5,000,000 Baa2* Nationwide Health Properties, Inc., Notes, 6.900% due 10/1/37..................................................... 5,343,750 2,500,000 Baa1* Simon Debartolo, Company Guaranteed, 6.750% due 7/15/04..... 2,478,125 2,500,000 Baa2* Spieker Properties Inc., Notes, 8.000% due 7/19/05.......... 2,609,375 - ------------------------------------------------------------------------------------------------------------------ 10,431,250 - ------------------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. 14 - -------------------------------------------------------------------------------- SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998 MANAGED ASSETS TRUST - ------------------------------------------------------------------------------------------------------------------ INDUSTRIAL -- 3.6% $2,000,000 A Cox Communications Inc., Notes, 6.875% due 6/15/05.......... $ 2,130,000 2,500,000 Baa* ProLogis Trust, Sr. Notes, 7.050% due 7/15/06............... 2,515,625 5,000,000 A Xerox Corp., Notes, 6.250% due 11/15/26..................... 5,287,500 - ------------------------------------------------------------------------------------------------------------------ 9,933,125 - ------------------------------------------------------------------------------------------------------------------ TELEPHONE -- 1.9% 5,000,000 AAA Bellsouth Capital Funding, Debentures, 6.040% due 11/15/26.................................................... 5,175,000 - ------------------------------------------------------------------------------------------------------------------ TRANSPORTATION -- 1.5% 3,000,000 Baa2* CSX Corp., Debentures, 6.950% due 5/1/27.................... 3,198,750 836,617 NR Willmington Trust, 9.250% due 1/2/07........................ 838,659 - ------------------------------------------------------------------------------------------------------------------ 4,037,409 - ------------------------------------------------------------------------------------------------------------------ TOTAL CORPORATE BONDS (Cost -- 27,520,460).................. 29,576,784 - ------------------------------------------------------------------------------------------------------------------ CONVERTIBLE CORPORATE BONDS -- 2.7% - ------------------------------------------------------------------------------------------------------------------ FINANCIAL -- 0.4% Bell Atlantic Corp., Bonds: 297,000 A+ 5.750% due 4/1/03........................................... 310,552 300,000 A1* 4.250% due 9/15/05.......................................... 311,625 400,000 BBB- Elan International Finance Ltd., Company Guaranteed, zero coupon due 12/12/18......................................... 226,500 300,000 Baa* Security Capital U.S. Realty, Bonds, 2.000% due 5/22/03..... 237,000 - ------------------------------------------------------------------------------------------------------------------ 1,085,677 - ------------------------------------------------------------------------------------------------------------------ INDUSTRIAL -- 2.1% 380,000 BBB- Alza Corp., Sub. Notes, zero coupon due 7/14/14............. 260,300 146,000 BBB- Athena Neurosciences Inc., Notes, 4.750% 11/15/04........... 172,828 321,000 A- Diamond Offshore Drilling Inc., Sub. Notes, 3.750% due 2/15/07..................................................... 289,301 300,000 NR Genzyme Corp., Sub. Notes, 5.250% due 6/1/05................ 396,375 300,000 Aa2* GVC Corp. Ltd., Bonds, zero coupon due 5/21/02 (b).......... 333,000 300,000 BBB- Inco Ltd., Debentures, 7.750% due 3/15/16................... 267,000 300,000 AA- Indian Petrochemicals Corp. Ltd., Bonds, 2.500% due 3/11/02 (b)......................................................... 302,250 600,000 BBB Ingram Micro Inc., Debenture, zero coupon due 6/9/18........ 208,500 300,000 BB+ Interim Services Inc., Sub. Notes, 4.500% due 6/1/05........ 264,375 200,000 NR Interpublic Group of Cos., Inc., Sub. Notes, 1.800% due 9/16/04..................................................... 222,250 570,000 A- Koninklijke Ahold, Sub. Notes, 3.000% 9/30/03............... 361,893 431,000 BBB- Lennar Corp., Debenture, zero coupon due 7/29/18............ 191,795 1,000,000 B2* Marriott International Inc., Debenture, zero coupon due 3/25/11..................................................... 651,250 200,000 A- Omnicon Group Inc., Sub. Debenture, 2.250% due 1/6/13....... 269,500 200,000 BBB- Rite Aid Corp., Sub. Notes, 5.250% due 9/15/02.............. 291,250 500,000 BBB Scholastic Corp., Sub. Notes, 5.000% due 8/15/05............ 483,750 238,000 BBB- STMicroelectronics NV, Sub. Notes, zero coupon due 6/10/08..................................................... 215,390 200,000 Aa1* Taiwan Semiconductor Manufacturing Co., Unsubordinated Notes, zero coupon due 7/3/02 (b).................................. 230,750 200,000 A+ Telefonica Europa, Company Guaranteed, 2.000% due 7/15/02... 297,000 100,000 A- Thermo Electron Corp., Sub. Debenture, 4.250% due 1/1/03.... 90,125 100,000 A- Thermo Instruments Inc., Company Guaranteed, 4.000% due 1/15/05..................................................... 82,000 - ------------------------------------------------------------------------------------------------------------------ 5,880,882 - ------------------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. 15 - -------------------------------------------------------------------------------- SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998 MANAGED ASSETS TRUST - ------------------------------------------------------------------------------------------------------------------ UTILITY -- ELECTRIC -- 0.2% $ 600,000 A- Potomac Electric Power, 5.000% due 9/1/02................... $ 582,000 - ------------------------------------------------------------------------------------------------------------------ TOTAL CONVERTIBLE CORPORATE BONDS (Cost -- $6,933,124)...... 7,548,559 - ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------ FACE AMOUNT SECURITY VALUE U.S. GOVERNMENT SECTOR -- 12.7% 1,500,000 U.S. Treasury Notes, 6.125% due 8/15/07..................... 1,642,110 3,100,000 U.S. Treasury Bond, 7.125% due 2/15/23...................... 3,816,007 28,000,000 U.S. Treasury Strips, zero coupon due 5/15/11............... 14,754,880 3,156,072 FHLMC, 8.000% due 9/1/04.................................... 3,252,711 186,909 FHLMC, 8.500% due 9/1/02.................................... 192,866 2,197,296 FNMA, 5.500% due 8/1/28 (c)................................. 2,118,325 3,921,708 FNMA, 6.000% due 7/1/28 (c)................................. 3,875,124 980,153 FNMA, 6.500% due 12/1/27.................................... 987,191 108,614 FNMA, 8.500% due 3/1/05..................................... 113,129 3,249,886 FNMA Dwarf, 6.000% due 1/1/13............................... 3,261,034 189,535 GNMA, 7.500% due 5/15/23 (c)................................ 195,575 273,904 GNMA, 9.000% due 11/15/19 (c)............................... 292,478 292,315 GNMA, 9.500% due 3/15/20 (c)................................ 315,700 - ------------------------------------------------------------------------------------------------------------------ TOTAL U.S. GOVERNMENT SECTOR (Cost -- $35,429,097).......... 34,817,130 - ------------------------------------------------------------------------------------------------------------------ SHORT TERM U.S. GOVERNMENT INSTRUMENTS -- 0.2% 633,000 U.S. Treasury Bill, 4.330% due 3/18/99 (Cost -- $627,214)... 627,214 - ------------------------------------------------------------------------------------------------------------------ SUB-TOTAL INVESTMENTS (Cost -- $201,477,500)................ 273,592,684 - ------------------------------------------------------------------------------------------------------------------ REPURCHASE AGREEMENT -- 0.6% 1,741,000 Morgan Stanley, Dean Witter & Co., 4.620% due 1/4/99; Proceeds at maturity -- $1,741,894; (Fully collateralized by U.S. Treasury Bonds, 8.750% due 8/15/20; Market value -- $1,776,076) (Cost -- $1,741,000)................... 1,741,000 - ------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS -- 100% (Cost -- $203,218,500**).......... $275,333,684 - ------------------------------------------------------------------------------------------------------------------
(a) Non-income producing security. (b) Security is exempt from registration under rule 144A of the Securities Act of 1933. This security may be sold in transactions that are exempt from registration, normally to qualified institutional buyers. (c) Date shown represents the last in range of maturity dates of mortgage certificates owned. + All ratings are by Standard & Poor's Ratings Services, except that those identified by an asterisk (*) are rated by Moody's Investors Service Inc. ** Aggregate cost for Federal income tax purposes is substantially the same. See page 22 for definitions of ratings. SEE NOTES TO FINANCIAL STATEMENTS. 16 - -------------------------------------------------------------------------------- SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998 HIGH YIELD BOND TRUST
FACE AMOUNT RATING+ SECURITY VALUE - --------------------------------------------------------------------------------------------------- CORPORATE BONDS AND NOTES -- 89.2% - --------------------------------------------------------------------------------------------------- CHEMICALS -- 0.6% $ 155,000 B Polymer Group Inc., Company Guaranteed, Series B, 9.000% due 7/1/07.................................................... $ 153,450 - --------------------------------------------------------------------------------------------------- CONSUMER NON-DURABLES -- 2.4% 350,000 B Grove Holdings LLC, step bond to yield 11.625% due 5/1/09... 147,000 485,000 B- Tropical Sportswear International Corp., Company Guaranteed, 11.000% due 6/15/08....................................... 511,674 - --------------------------------------------------------------------------------------------------- 658,674 - --------------------------------------------------------------------------------------------------- ENERGY -- 5.1% 360,000 B Cross Timbers Oil Co., Sr. Sub. Notes, 9.250% due 4/1/07.... 332,100 310,000 B- International Utility Structures Inc., Sr. Sub. Notes, 10.750% due 2/1/08........................................ 291,400 365,000 B+ Parker Drilling Co., Company Guaranteed, 9.750% due 11/15/06.................................................. 326,675 180,000 BB- Pride Petroleum Inc., Sr. Notes, 9.375% due 5/1/07.......... 170,100 250,000 BB+ Tuscon Electric Power Co., Collateral Trust, 7.500% due 8/1/08.................................................... 260,625 - --------------------------------------------------------------------------------------------------- 1,380,900 - --------------------------------------------------------------------------------------------------- FINANCIAL SERVICES -- 0.6% 90,000 B- B.F. Saul Real Estate Investment Trust, Sr. Notes, 9.750% due 4/1/08................................................ 82,800 120,000 B+ Pioneer Americas Acquisition, Company Guaranteed, 9.250% due 6/15/07................................................... 93,600 - --------------------------------------------------------------------------------------------------- 176,400 - --------------------------------------------------------------------------------------------------- FOOD AND DRUG -- 4.2% 120,000 B Agrilink Foods, Sr. Sub. Notes, 11.875% due 11/1/08......... 122,400 510,000 B Archibald Candy Corp., Company Guaranteed, 10.250% due 7/1/04.................................................... 517,650 490,000 B- Duane Reade Inc., Company Guaranteed, 9.250% due 2/15/08.... 501,025 - --------------------------------------------------------------------------------------------------- 1,141,075 - --------------------------------------------------------------------------------------------------- GAMING/LEISURE -- 9.5% Bally Total Fitness Holdings Corp., Sr. Sub. Notes: 420,000 B+ 9.875% due 10/15/07......................................... 411,600 120,000 B+ 9.875% due 10/15/07 (a)..................................... 117,600 400,000 Ba3* Grand Casinos Inc., 1st Mortgage Notes, 10.125% due 12/1/03................................................... 436,000 350,000 BB+ Harrah's Operating Co. Inc., Company Guaranteed, 7.875% due 12/15/05.................................................. 351,750 150,000 B Hollywood Park Inc., Sr. Sub. Notes, 9.500% due 8/1/07...... 148,875 325,000 B+ Prime Hospitality Corp., Sr. Sub. Notes, 9.750% due 4/1/07.................................................... 328,250 Regal Cinemas Inc., Sr. Notes: 140,000 B 9.500% due 6/1/08........................................... 145,950 75,000 B 9.500% due 6/1/08 (a)....................................... 78,187 Station Casinos Inc., Sr. Sub. Notes: 360,000 B+ 10.125% due 3/15/06......................................... 377,100 200,000 B+ 8.875% due 12/1/08.......................................... 201,500 - --------------------------------------------------------------------------------------------------- 2,596,812 - ---------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. 17 - -------------------------------------------------------------------------------- SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998 HIGH YIELD BOND TRUST HEALTH CARE -- 3.0% $ 250,000 B+ PSS World Medical Inc., Company Guaranteed, 8.500% due 10/1/07................................................... $ 261,563 350,000 B- Production Resource Group, Sr. Sub. Notes, 11.500% due 1/15/08................................................... 344,750 205,000 B+ Unilab Corp., Sr. Notes, 11.000% due 4/1/06................. 213,200 - -------------------------------------------------------------------------------------------------- 819,513 - -------------------------------------------------------------------------------------------------- HOUSING -- 2.2% 250,000 B+ Beazer Homes USA Inc., Company Guaranteed, 8.875% due 4/1/08.................................................... 241,250 350,000 BB+ Greystone Homes Inc., Sr. Notes, 10.750% due 3/1/04......... 371,000 - -------------------------------------------------------------------------------------------------- 612,250 - -------------------------------------------------------------------------------------------------- INFORMATION/TECHNOLOGY -- 4.5% 420,000 B- PSINet Inc., Sr. Notes, 10.000% due 2/15/05................. 415,980 160,000 BB- Unisys Corp., Sr. Notes, 12.000% due 4/15/03................ 179,600 225,000 B- Verio Inc., Sr. Notes, 11.250% due 12/1/08.................. 227,250 Viasystems Group, Sr. Sub. Notes: 120,000 B- 9.750% due 6/1/07........................................... 114,000 310,000 B- Series B 9.750% due 6/1/07.................................. 294,500 - -------------------------------------------------------------------------------------------------- 1,231,330 - -------------------------------------------------------------------------------------------------- MANUFACTURING -- 9.3% Advance Holding Corp.: 60,000 B- Step bond to yield 12.645% due 4/15/09...................... 35,400 300,000 NR Step bond to yield 12.818% due 4/15/09 (a).................. 177,000 240,000 B+ Diamond Triumph Autoglass, Sr. Notes, 9.250% due 4/1/08..... 238,200 400,000 B- Doane Pet Care Co., Sr. Sub. Notes, 9.750% due 5/15/07...... 410,000 400,000 B- Fisher Scientific International Inc., Sr. Sub. Notes, 9.000% due 2/1/08................................................ 400,000 120,000 BB- Imax Corp., Sr. Notes, 7.875% due 12/1/05................... 121,200 300,000 B- Roller Bearing Co., Company Guaranteed, 9.625% due 6/15/07................................................... 288,000 180,000 B- Special Devices Inc., Sr. Sub. Notes, 11.375% due 12/15/08 (a)....................................................... 183,150 50,000 B- Sullivan Graphics Inc., Sr. Sub. Notes, 12.750% due 8/1/05.................................................... 51,000 250,000 B- Transdigm Inc., Sr. Sub. Notes, 10.375% due 12/1/08......... 250,625 410,000 B WHX Corp., Sr. Notes, 10.500% due 4/15/05................... 377,200 - -------------------------------------------------------------------------------------------------- 2,531,775 - -------------------------------------------------------------------------------------------------- MEDIA/ENTERTAINMENT -- 15.1% 500,000 B Chancellor Media Corp., Sr. Sub. Notes, 9.000% due 10/1/08................................................... 531,250 100,000 B- Classic Cable Inc., Sr. Sub. Notes, 9.875% due 8/1/08....... 104,250 500,000 B Jacor Communication Co., Company Guaranteed, 9.750% due 12/15/06.................................................. 555,000 340,000 CCC+ Paxson Communication Corp., Sr. Sub. Notes, 11.625% due 10/1/02................................................... 345,100 Pegasus Media & Communication Corp.: 500,000 B- Notes 12.500% due 7/1/05.................................... 550,000 330,000 B- Sr. Notes, 9.625% due 10/15/05.............................. 330,000 595,000 B- SFX Entertainment Inc., Company Guaranteed, 9.125% due 2/1/08.................................................... 593,515 175,000 B Sinclair Broadcast Group Inc., Sr. Sub. Notes, 8.750% due 12/15/07.................................................. 176,750 645,000 B+ TeleWest Communications PLC, step bond to yield 10.809% due 10/1/07................................................... 538,575 200,000 B- Transwestern Publishing Co., Sr. Sub. Notes, 9.625% due 11/15/07.................................................. 208,750 340,000 B United International Holdings Inc., step bond to yield 10.767% due 2/15/08....................................... 183,600 - -------------------------------------------------------------------------------------------------- 4,116,790 - --------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. 18 - -------------------------------------------------------------------------------- SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998 HIGH YIELD BOND TRUST METALS/MINERALS -- 7.4% $ 500,000 B- Diamond Holdings PLC, Company Guaranteed, 9.125% due 2/1/08.................................................... $ 477,500 500,000 BB Great Central Mines Ltd., Sr. Notes, 8.875% due 4/1/08...... 497,500 450,000 B- La Petite Acadamy Inc., Company Guaranteed, 10.000% due 5/15/08................................................... 445,500 600,000 CCC+ Republic Engineer Steel, 1st Mortgage, 9.875% due 12/15/01.................................................. 616,500 - -------------------------------------------------------------------------------------------------- 2,037,000 - -------------------------------------------------------------------------------------------------- PAPER -- 1.5% 400,000 B Mail-Well Corp., Sr. Sub. Notes, 10.500% due 2/15/04........ 421,000 - -------------------------------------------------------------------------------------------------- RETAIL -- 3.4% 410,000 B- Advance Stores Co. Inc., Sr. Sub. Notes, 10.250% due 4/15/08 (a)....................................................... 416,150 500,000 BB K-Mart Corp., Medium Term Notes, 7.900% due 12/14/00........ 508,750 - -------------------------------------------------------------------------------------------------- 924,900 - -------------------------------------------------------------------------------------------------- SERVICES -- 6.9% 710,000 B AFC Enterprises, Sr. Sub. Notes, 10.250% due 5/15/07........ 741,950 250,000 B+ Equimar Shipholdings Ltd., Company Guaranteed, 9.875% due 7/1/07.................................................... 197,500 236,896 B FRD Acquisition, Sr. Notes, 12.500% due 7/15/04............. 241,634 450,000 B NE Restaurant Co. Inc., Sr. Notes, 10.750% due 7/15/08...... 456,750 240,000 B- Williams Scotsman Inc., Company Guaranteed, 9.875% due 6/1/07.................................................... 249,900 - -------------------------------------------------------------------------------------------------- 1,887,734 - -------------------------------------------------------------------------------------------------- TELECOMMUNICATIONS -- 7.0% 295,000 CCC+ Centennial Cellular Corp., Sr. Sub. Notes, 10.750% due 12/15/08 (a).............................................. 297,213 250,000 B- Classic Communications, Inc., step bond to yield 13.055% due 8/1/09.................................................... 151,875 260,000 B+ Jordan Telecommunications Products, step bond to yield 10.629% due 8/1/07........................................ 200,200 NTL Inc.: 120,000 B- Sr. Notes, 11.500% due 10/1/08 (a).......................... 131,100 585,000 B- Step bond to yield 10.095% due 4/1/08....................... 356,850 400,000 BB+ Qwest Communication Corp., step bond to yield 7.608% due 2/1/08.................................................... 301,000 485,000 B- T/SF Communications Corp., Company Guaranteed, 10.375% due 11/1/07................................................... 483,181 - -------------------------------------------------------------------------------------------------- 1,921,419 - -------------------------------------------------------------------------------------------------- TEXTILES -- 3.8% 550,000 B+ Avondale Mills Inc., Company Guaranteed, 10.250% due 5/1/06.................................................... 577,500 475,000 B+ Delta Mills Inc., Company Guaranteed, 9.625% due 9/1/07..... 467,875 - -------------------------------------------------------------------------------------------------- 1,045,375 - -------------------------------------------------------------------------------------------------- TRANSPORTATION -- 2.7% 474,000 B- Atlas Air Inc., Sr. Notes, 10.750% due 8/1/05............... 500,070 240,000 B- MTL Inc., Sr. Sub. Notes, 10.000% due 6/15/06 (a)........... 232,800 - -------------------------------------------------------------------------------------------------- 732,870 - -------------------------------------------------------------------------------------------------- TOTAL CORPORATE BONDS AND NOTES (Cost -- $24,656,253)....... 24,389,267 - --------------------------------------------------------------------------------------------------
SHARES SECURITY VALUE - -------------------------------------------------------------------------------------------------- STOCK -- 3.6% - -------------------------------------------------------------------------------------------------- ENERGY -- 0.2% 3,100 Niagara Mohawk Power Corp. ................................. 49,987 - --------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. 19 - -------------------------------------------------------------------------------- SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998 HIGH YIELD BOND TRUST MEDIA/ENTERTAINMENT -- 0.2% 10 Paxson Communications Corp., Preferred, Payment-in-kind, Exchangeable 12.500%...................................... $ 875 451 SFX Broadcasting Inc., Class A Shares, Preferred, 12.625%... 55,924 - -------------------------------------------------------------------------------------------------- 56,799 - -------------------------------------------------------------------------------------------------- TECHNOLOGY -- 1.3% 4,500 Eagle-Picher Holdings, Preferred, 11.750%, Expire 3/1/08.... 220,500 71 Source Media Inc., Preferred, Payment-in-kind, Exchangeable 13.500%................................................... 1,385 9,000 Viasystems Group, Inc., Preferred, Series B................. 135,000 - -------------------------------------------------------------------------------------------------- 356,885 - -------------------------------------------------------------------------------------------------- TELECOMMUNICATIONS -- 1.9% 300,000 Centaur Funding Corp., Preferred 9.080% (a)................. 309,060 2,100 Global Crossing Holding Ltd., Preferred 10.500% (a)......... 204,750 - -------------------------------------------------------------------------------------------------- 513,810 - -------------------------------------------------------------------------------------------------- TOTAL STOCK (Cost -- $650,251).............................. 977,481 - -------------------------------------------------------------------------------------------------- WARRANTS (B) -- 0.1% - -------------------------------------------------------------------------------------------------- MANUFACTURING -- 0.1% 1,600 Terex Corp., Expire 5/15/02................................. 32,000 - -------------------------------------------------------------------------------------------------- METAL PRODUCTS -- 0.0% 500 Gulf State Steel Alabama Inc., Expire 4/15/03............... 5 - -------------------------------------------------------------------------------------------------- TOTAL WARRANTS (Cost -- $44,163)............................ 32,005 - -------------------------------------------------------------------------------------------------- SUB-TOTAL INVESTMENTS (Cost -- $25,350,667)................. 25,398,753 - --------------------------------------------------------------------------------------------------
FACE AMOUNT SECURITY VALUE - -------------------------------------------------------------------------------------------------- REPURCHASE AGREEMENT -- 7.1% $1,936,000 Morgan Stanley, Dean Witter & Co., 4.620% due 1/4/99, Proceeds at Maturity -- $1,936,992 (Fully collaterized by U.S. Treasury Notes, 13.875% due 5/15/11; Market Value -- $1,979,923) (Cost -- $1,936,000)................... 1,936,000 - -------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS -- 100% (Cost -- $27,286,667**)........... $27,334,753 - --------------------------------------------------------------------------------------------------
+ All ratings are by Standard & Poor's Ratings Services, except that those identified by an asterisk (*) are rated by Moody's Investors Service Inc. (a) Security is exempt from registration under rule 144A of the Securities Act of 1933. This security may be sold in transactions that are exempt from registration, normally to qualified institutional buyers. (b) Non-income producing security. ** Aggregate cost for Federal income tax purposes is substantially the same. See page 22 for definition of bond ratings. SEE NOTES TO FINANCIAL STATEMENTS. 20 - -------------------------------------------------------------------------------- SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998 HIGH YIELD BOND TRUST SUMMARY OF BONDS BY COMBINED RATINGS
STANDARD & % OF TOTAL CORPORATE MOODY'S AND/OR POOR'S BONDS & NOTES - ------------------------------------------------- Ba BB 13.1% B B 81.0 Caa CCC 5.2 NR NR 0.7 - ------------------------------------------------- 100.0% - -------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. 21 - -------------------------------------------------------------------------------- BOND RATINGS (UNAUDITED) The definitions of the applicable rating symbols are set forth below: Standard & Poor's Ratings Services ("Standard & Poor's") -- Ratings from "AA" to "C" may be modified by the addition of a plus (+) or a minus (-) sign to show relative standings within the major rating categories. AAA -- Bonds rated "AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong. AA -- Bonds rated "AA" has a very strong capacity to pay interest and repay principal and differs from the highest rated issue only in a small degree. A -- Bonds rated "A" has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories. BBB -- Bonds rated "BBB" are regarded as having an adequate capacity to pay interest and repay principal. Whereas they normally exhibit adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for bonds in this category than for bonds in higher rated categories. BB, B -- Bonds rated "BB" and "B" are regarded, on balance, as and CCC predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. "BB" represents a lower degree of speculation than "B", and "CCC" the highest degree of speculation. While such bonds will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. C -- The rating "C" is reserved for income bonds on which no interest is being paid. D -- Bonds rated "D" are in default, and payment of interest and/or repayment of principal is in arrears.
Moody's Investors Service Inc. ("Moody's") -- Numerical modifiers 1, 2, and 3 may be applied to each generic rating from "Aa" to "C", where 1 is the highest and 3 the lowest rating within its generic category. Aaa -- Bonds rated "Aaa" are judged to be of the best quality. They carry the smallest degree of investment fisk and are generally referred to as "gilt edge." 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 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 which make the long-term risks appear somewhat larger than in "Aaa" securities. A -- Bonds 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 but elements may be present which suggest a susceptibility to impairment some time in the future. Baa -- Bonds rated "Baa" are considered to be medium grade obligations; that is, they are neither highly protected nor poorly secured. Interest payment 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. These bonds lack outstanding investment characteristics and may have speculative characteristics as well. Ba -- Bonds rated "Ba" are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B -- Bonds rated "B" generally lack characteristics of desirable investments. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa -- Bonds rated "Caa" are of poor standing. These issues may be in default, or present elements of danger may exist with respect to principal or interest. Ca -- Bonds rated "Ca" represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C -- Bonds rated "C" are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. NR -- Indicates that the bond is not rated by Standard & Poor's or Moody's.
22 - -------------------------------------------------------------------------------- SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998 CAPITAL APPRECIATION FUND
SHARES SECURITY VALUE - ---------------------------------------------------------------------------------------- COMMON STOCK -- 88.3% - ---------------------------------------------------------------------------------------- BANKING -- 0.4% 87,855 U.S. Bancorp................................................ $ 3,118,853 - ---------------------------------------------------------------------------------------- BEVERAGE -- 2.1% 206,960 Coca-Cola Co. .............................................. 13,840,450 135,965 Coca-Cola Enterprises Inc. ................................. 4,860,749 - ---------------------------------------------------------------------------------------- 18,701,199 - ---------------------------------------------------------------------------------------- CHEMICAL -- 0.7% 134,205 Monsanto Co. ............................................... 6,374,738 - ---------------------------------------------------------------------------------------- COMPUTERS -- 12.4% 805,720 Dell Computer Corp. (a)..................................... 58,968,632 137,050 International Business Machines Corp. ...................... 25,319,988 428,380 VERITAS Software Corp. (a).................................. 25,676,026 - ---------------------------------------------------------------------------------------- 109,964,646 - ---------------------------------------------------------------------------------------- COMMUNICATIONS -- 0.9% 160,645 Qwest Communications International, Inc. (a)................ 8,032,250 - ---------------------------------------------------------------------------------------- DIVERSIFIED OPERATIONS -- 8.9% 361,405 General Electric Co. ....................................... 36,885,898 676,170 Time Warner Inc. ........................................... 41,964,801 - ---------------------------------------------------------------------------------------- 78,850,699 - ---------------------------------------------------------------------------------------- DRUGS AND HEALTH CARE -- 10.8% 318,020 Eli Lilly & Co. ............................................ 28,264,028 19,350 MedImmune, Inc. (a)......................................... 1,924,116 271,190 Pfizer, Inc. ............................................... 34,017,396 430,125 Warner-Lambert Co. ......................................... 32,340,023 - ---------------------------------------------------------------------------------------- 96,545,563 - ---------------------------------------------------------------------------------------- ELECTRONICS -- 3.1% 323,376 Texas Instruments Inc. ..................................... 27,668,773 - ---------------------------------------------------------------------------------------- FINANCIAL SERVICES -- 4.5% 363,735 Charles Schwab Corp. ....................................... 20,437,360 265,520 Fannie Mae.................................................. 19,648,480 - ---------------------------------------------------------------------------------------- 40,085,840 - ---------------------------------------------------------------------------------------- MEDICAL INFORMATION SYSTEMS -- 3.6% 428,381 IMS Health Inc. ............................................ 32,315,916 - ---------------------------------------------------------------------------------------- RETAIL -- 7.7% 239,105 Costco Cos., Inc. (a)....................................... 17,260,392 309,250 Fred Meyer, Inc. (a)........................................ 18,632,312 216,395 Safeway Inc. (a)............................................ 13,186,570
SEE NOTES TO FINANCIAL STATEMENTS. 23 - -------------------------------------------------------------------------------- SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998 CAPITAL APPRECIATION FUND 219,850 Staples, Inc. (a). $ 9,604,697 157,830 Home Depot, Inc. ........................................... 9,657,223 - ---------------------------------------------------------------------------------------- 68,341,194 - ---------------------------------------------------------------------------------------- SOFTWARE -- 21.7% 566,180 America Online, Inc. (a).................................... 90,588,800 508,245 Cisco Systems, Inc. (a)..................................... 47,171,489 104,290 Intuit Inc. (a)............................................. 7,561,025 204,090 J.D. Edwards & Co. (a)...................................... 5,791,054 304,900 Microsoft Corp. (a)......................................... 42,285,819 - ---------------------------------------------------------------------------------------- 193,398,187 - ---------------------------------------------------------------------------------------- TELECOMMUNICATIONS -- 11.5% 127,820 Global TeleSystems Group, Inc. (a).......................... 7,125,965 218,710 Lucent Technologies Inc. ................................... 24,058,100 366,195 MCI WorldCom, Inc. (a)...................................... 26,274,491 369,520 Nokia Corp. Sponsored ADR................................... 44,504,065 - ---------------------------------------------------------------------------------------- 101,962,621 - ---------------------------------------------------------------------------------------- TOTAL COMMON STOCK (Cost -- $420,182,280)................... 785,360,479 - ---------------------------------------------------------------------------------------- FOREIGN STOCK -- 1.3% DRUGS AND HEALTH CARE -- 1.3% 848,713 Smithkline Beecham PLC (Cost -- $11,889,340)................ 11,911,042 - ---------------------------------------------------------------------------------------- SUB-TOTAL INVESTMENTS (Cost -- $432,071,620)................ 797,271,521 - ---------------------------------------------------------------------------------------- FACE AMOUNT SECURITY VALUE - ---------------------------------------------------------------------------------------- REPURCHASE AGREEMENT -- 10.4% $92,708,000 Morgan Stanley, Dean Witter & Co., 4.620% due 1/4/99; Proceeds at maturity -- $92,755,586; (Fully Collateralized by U.S. Treasury Notes, 7.125% to 8.750% due 8/15/20 to 2/15/23; Market Value -- $94,531,419)(Cost -- $92,708,000).................. 92,708,000 - ---------------------------------------------------------------------------------------- TOTAL INVESTMENTS -- 100% (Cost -- $524,779,620**).......... $889,979,521 - ----------------------------------------------------------------------------------------
(a) Non-income producing security. ** Aggregate cost for Federal income tax purposes is substantially the same. SEE NOTES TO FINANCIAL STATEMENTS. 24 - -------------------------------------------------------------------------------- SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998 MONEY MARKET PORTFOLIO
FACE ANNUALIZED AMOUNT SECURITY YIELD VALUE - -------------------------------------------------------------------------------------------------------------- COMMERCIAL PAPER -- 99.0% $2,000,000 AC Acquisition Holdings matures 3/12/99..................... 5.10% $ 1,980,439 2,000,000 Asset Securitization Corp. matures 2/18/99.................. 5.35 1,985,947 2,200,000 Associates Corp. of North America matures 1/12/99........... 5.18 2,196,545 2,100,000 Bayer Corp. matures 2/25/99................................. 5.10 2,083,798 2,200,000 Becton Dickinson & Co. matures 1/19/99...................... 5.32 2,194,203 2,000,000 Campbell Soup Co. matures 1/8/99............................ 5.22 1,997,978 1,530,000 Coca-Cola Co. matures 2/4/99................................ 5.13 1,522,645 2,000,000 Eastman Kodak matures 1/27/99............................... 5.17 1,992,590 2,000,000 Eaton Corp. matures 1/6/99.................................. 6.03 1,998,328 1,650,000 E.I. Dupont de Nemours matures 1/14/99...................... 5.06 1,647,020 2,000,000 Ford Motor Credit Corp. matures 1/8/99...................... 5.44 1,997,896 1,125,000 General Electric Capital Corp. matures 1/13/99.............. 5.37 1,123,005 1,000,000 H.J. Heinz Co. matures 2/2/99............................... 5.21 995,404 1,900,000 Household Finance Corp. matures 1/11/99..................... 5.39 1,897,171 1,750,000 Johnson & Johnson matures 1/4/99............................ 5.00 1,749,271 2,150,000 Marsh & McLennan Co. Inc. matures 1/28/99................... 5.15 2,141,809 2,100,000 National Rural Utilities matures 1/15/99.................... 5.06 2,095,917 1,995,000 Paccar Financial Corp. matures 1/21/99...................... 5.23 1,989,237 2,100,000 Prudential Funding Co. matures 2/5/99....................... 5.27 2,089,383 2,000,000 Teco Finance Inc. matures 2/5/99............................ 5.16 1,990,044 1,850,000 TRW Inc. matures 1/28/99.................................... 5.23 1,842,813 2,250,000 Walt Disney Co. matures 3/2/99.............................. 5.16 2,230,950 - -------------------------------------------------------------------------------------------------------------- TOTAL COMMERCIAL PAPER (Cost -- $41,742,393) 41,742,393 - -------------------------------------------------------------------------------------------------------------- REPURCHASE AGREEMENT -- 1.0% 430,000 CS First Boston Corp., 4.400% due 1/4/99; Proceeds at Maturity -- $430,210; (Fully Collateralized by U.S. Treasury Notes, 5.375% due 1/31/00; Market Value -- $438,780) (Cost -- $430,000).......................................... 430,000 - -------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS -- 100% (Cost -- $42,172,393*)............ $42,172,393 - --------------------------------------------------------------------------------------------------------------
* Aggregate cost for Federal income tax purposes is substantially the same. SEE NOTES TO FINANCIAL STATEMENTS. 25 - -------------------------------------------------------------------------------- STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 1998
MANAGED HIGH YIELD CAPITAL MONEY ASSETS BOND APPRECIATION MARKET TRUST TRUST FUND PORTFOLIO - ------------------------------------------------------------------------------------------------------------ ASSETS: Investments -- Cost.............................. $201,477,500 $25,350,667 $432,071,620 $41,742,393 Repurchase Agreements -- Cost.................... 1,741,000 1,936,000 92,708,000 430,000 - ------------------------------------------------------------------------------------------------------------ Investments, at value............................ $273,592,684 $25,398,753 $797,271,521 $41,742,393 Repurchase Agreements, at value.................. 1,741,000 1,936,000 92,708,000 430,000 Cash............................................. 520 -- 331 252 Dividends and interest receivable................ 984,220 586,988 174,941 56 Receivable for securities sold................... 165,698 252 -- -- Receivable for Fund shares sold.................. -- 232,889 1,340,964 -- - ------------------------------------------------------------------------------------------------------------ TOTAL ASSETS..................................... 276,484,122 28,154,882 891,495,757 42,172,701 - ------------------------------------------------------------------------------------------------------------ LIABILITIES: Investment advisory fees payable................. 113,433 12,014 510,482 8,632 Administration fees payable...................... 13,651 1,442 40,362 2,136 Payable to bank.................................. -- 34,095 -- -- Payable for Fund shares purchased................ 62,457 -- -- -- Payable to broker -- variation margin............ 35,700 -- -- -- Dividends payable................................ -- -- -- 74,245 Accrued expenses................................. 77,207 18,890 83,990 18,359 - ------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES................................ 302,448 66,441 634,834 103,372 - ------------------------------------------------------------------------------------------------------------ TOTAL NET ASSETS................................... $276,181,674 $28,088,441 $890,860,923 $42,069,329 - ------------------------------------------------------------------------------------------------------------ NET ASSETS: Paid-in capital.................................. $181,377,818 $27,358,407 $494,472,555 $42,069,329 Undistributed net investment income.............. 5,732,244 2,318,362 1,059,153 -- Accumulated net realized gain (loss) from security transactions, foreign currencies and futures contracts............................. 17,799,372 (1,636,414) 30,123,306 -- Net unrealized appreciation of investments, futures contracts and foreign currencies...... 71,272,240 48,086 365,205,909 -- - ------------------------------------------------------------------------------------------------------------ TOTAL NET ASSETS................................... $276,181,674 $28,088,441 $890,860,923 $42,069,329 - ------------------------------------------------------------------------------------------------------------ SHARES OUTSTANDING................................. 13,812,401 2,850,740 12,246,916 42,069,329 - ------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, PER SHARE......................... $19.99 $9.85 $72.74 $1.00 - ------------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. 26 - -------------------------------------------------------------------------------- STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998
MANAGED HIGH YIELD CAPITAL MONEY ASSETS BOND APPRECIATION MARKET TRUST TRUST FUND PORTFOLIO - ------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME: Interest............................................ $ 4,703,240 $ 2,568,670 $ 3,117,890 $1,637,680 Dividends........................................... 2,454,616 46,514 2,898,344 -- Less: Foreign withholding tax....................... (4,526) -- (26,918) -- - ------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENT INCOME............................. 7,153,330 2,615,184 5,989,316 1,637,680 - ------------------------------------------------------------------------------------------------------------- EXPENSES: Investment advisory fees (Note 3)................... 1,232,882 141,393 4,360,310 96,335 Administration fees (Note 3)........................ 147,946 16,967 380,360 19,629 Audit and legal..................................... 41,953 35,597 46,643 29,000 Shareholder communications.......................... 21,348 10,984 76,697 6,746 Custody............................................. 18,000 7,912 40,154 9,269 Shareholder and system servicing fees............... 5,113 18,586 10,665 10,114 Trustees' fees...................................... 1,000 1,000 6,091 3,288 Other............................................... 3,196 378 5,748 3,288 - ------------------------------------------------------------------------------------------------------------- TOTAL EXPENSES...................................... 1,471,438 232,817 4,926,668 177,669 - ------------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME................................. 5,681,892 2,382,367 1,062,648 1,460,011 - ------------------------------------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, FUTURES CONTRACTS AND FOREIGN CURRENCIES (NOTES 4 AND 6): Realized Gain (Loss) From: Security transactions (excluding short-term securities*)................................... 19,805,812 443,848 31,708,067 (215) Futures contracts................................ (1,800,903) -- -- -- Foreign currency transactions.................... -- -- (3,495) -- - ------------------------------------------------------------------------------------------------------------- NET REALIZED GAIN (LOSS)............................ 18,004,909 443,848 31,704,572 (215) - ------------------------------------------------------------------------------------------------------------- Change in Net Unrealized Appreciation of Investments, Futures Contracts and Foreign Currencies: Beginning of year................................ 46,559,403 1,143,573 96,460,219 -- End of year...................................... 71,272,240 48,086 365,205,909 -- - ------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET UNREALIZED APPRECIATION........................................ 24,712,837 (1,095,487) 268,745,690 -- - ------------------------------------------------------------------------------------------------------------- NET GAIN (LOSS) ON INVESTMENTS, FUTURES CONTRACTS AND FOREIGN CURRENCIES.................................. 42,717,746 (651,639) 300,450,262 (215) - ------------------------------------------------------------------------------------------------------------- INCREASE IN NET ASSETS FROM OPERATIONS................ $48,399,638 $ 1,730,728 $301,512,910 $1,459,796 - -------------------------------------------------------------------------------------------------------------
* Except for Money Market Portfolio where the net realized losses are only from the sale of short-term securities. SEE NOTES TO FINANCIAL STATEMENTS. 27 - -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEAR ENDED DECEMBER 31, 1998
MANAGED HIGH YIELD CAPITAL MONEY ASSETS BOND APPRECIATION MARKET TRUST TRUST FUND PORTFOLIO - ------------------------------------------------------------------------------------------------------------- OPERATIONS: Net investment income............................ $ 5,681,892 $ 2,382,367 $ 1,062,648 $ 1,460,011 Net realized gain (loss)......................... 18,004,909 443,848 31,704,572 (215) Increase (decrease) in net unrealized appreciation.................................. 24,712,837 (1,095,487) 268,745,690 -- - ------------------------------------------------------------------------------------------------------------- INCREASE IN NET ASSETS FROM OPERATIONS........... 48,399,638 1,730,728 301,512,910 1,459,796 - ------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS FROM (NOTE 2): Net investment income............................ (6,031,526) (1,906,452) (1,757,481) (1,459,796) Net realized gains............................... (11,032,250) -- (15,276,070) -- - ------------------------------------------------------------------------------------------------------------- DECREASE IN NET ASSETS FROM DISTRIBUTIONS TO SHAREHOLDERS................. (17,063,776) (1,906,452) (17,033,551) (1,459,796) - ------------------------------------------------------------------------------------------------------------- FUND SHARE TRANSACTIONS (NOTE 11): Net proceeds from sale of shares................. 17,716,235 7,689,311 206,554,463 103,475,184 Net asset value of shares issued for reinvestment of dividends.................................. 17,063,776 1,906,452 17,033,551 1,409,254 Cost of shares reacquired........................ (13,804,479) (6,603,776) (24,907,667) (76,308,910) - ------------------------------------------------------------------------------------------------------------- INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS.................................. 20,975,532 2,991,987 198,680,347 28,575,528 - ------------------------------------------------------------------------------------------------------------- INCREASE IN NET ASSETS............................. 52,311,394 2,816,263 483,159,706 28,575,528 NET ASSETS: Beginning of year................................ 223,870,280 25,272,178 407,701,217 13,493,801 - ------------------------------------------------------------------------------------------------------------- END OF YEAR*..................................... $276,181,674 $28,088,441 $890,860,923 $ 42,069,329 - ------------------------------------------------------------------------------------------------------------- * Includes undistributed net investment income of:.............................................. $5,732,244 $2,318,362 $1,059,153 -- - -------------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. 28 - -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) FOR THE YEAR ENDED DECEMBER 31, 1997
MANAGED HIGH YIELD CAPITAL MONEY ASSETS BOND APPRECIATION MARKET TRUST TRUST FUND PORTFOLIO - ------------------------------------------------------------------------------------------------------------- OPERATIONS: Net investment income............................ $ 6,035,045 $ 1,906,327 $ 1,757,481 $ 305,468 Net realized gain (loss)......................... 12,928,663 813,430 14,695,393 (72) Increase in net unrealized appreciation.......... 20,882,409 485,471 50,761,528 -- - ------------------------------------------------------------------------------------------------------------- INCREASE IN NET ASSETS FROM OPERATIONS........... 39,846,117 3,205,228 67,214,402 305,396 - ------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS FROM (NOTE 2): Net investment income............................ (1,469,979) (15,738) -- (305,378) Net realized gains............................... (4,813,889) -- (2,626) -- - ------------------------------------------------------------------------------------------------------------- DECREASE IN NET ASSETS FROM DISTRIBUTIONS TO SHAREHOLDERS.................................. (6,283,868) (15,738) (2,626) (305,378) - ------------------------------------------------------------------------------------------------------------- FUND SHARE TRANSACTIONS (NOTE 11): Net proceeds from sale of shares................. 7,217,202 7,500,172 143,131,359 28,240,251 Net asset value of shares issued for reinvestment of dividends.................................. 6,283,868 15,738 2,626 286,879 Cost of shares reacquired........................ (11,803,520) (2,724,265) (26,776,295) (18,576,002) - ------------------------------------------------------------------------------------------------------------- INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS.................................. 1,697,550 4,791,645 116,357,690 9,951,128 - ------------------------------------------------------------------------------------------------------------- INCREASE IN NET ASSETS............................. 35,259,799 7,981,135 183,569,466 9,951,146 NET ASSETS: Beginning of year................................ 188,610,481 17,291,043 224,131,751 3,542,655 - ------------------------------------------------------------------------------------------------------------- END OF YEAR*..................................... $223,870,280 $25,272,178 $407,701,217 $ 13,493,801 - ------------------------------------------------------------------------------------------------------------- * Includes undistributed net investment income of: ............................................. $6,032,308 $1,906,327 $1,757,481 -- - -------------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. 29 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES The Managed Assets Trust, High Yield Bond Trust, Capital Appreciation Fund and Money Market Portfolio (formerly known as the Cash Income Trust) (collectively, "Fund(s)") are each a Massachusetts business trust registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment companies. Shares of the Funds are offered only to insurance company separate accounts that fund certain variable annuity and variable life insurance contracts. The significant accounting policies consistently followed by the Funds are: (a) security transactions are accounted for on trade date; (b) securities traded on national securities markets are valued at the closing prices on such markets; securities for which no sales price were reported and U.S. government and agency obligations are valued at the mean between the last reported bid and asked prices or on the basis of quotations received from reputable brokers or other recognized sources; (c) securities for which market quotations are not available will be valued in good faith at fair value by or under the direction of the Board of Trustees; (d) securities maturing within 60 days are valued at cost plus accreted discount, or minus amortized premium, which approximates value; (e) securities that have a maturity of 60 days or more are valued at prices based on market quotations for securities of similar type, yield and maturity; (f) interest income, adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis and dividend income is recorded on the ex-dividend date; foreign dividends are recorded on the ex-dividend date or as soon as practical after the Fund determines the existence of a dividend declaration after exercising reasonable due diligence; (g) gains or losses on the sale of securities are calculated by using the specific identification method; (h) dividends and distributions to shareholders are recorded on the ex-dividend date; (i) the accounting records of the Fund are maintained in U.S. dollars. All assets and liabilities denominated in foreign currencies are translated into U.S. dollars on the date of valuation. Purchases and sales of securities and income and expenses are translated at the rate of exchange quoted on the respective date that such transactions are recorded. Differences between income and expense amounts recorded and collected or paid are adjusted when reported by the custodian; (j) the character of income and gains to be distributed are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. At December 31, 1998, reclassifications were made to the capital accounts of the Managed Assets Trust, High Yield Bond Trust and Capital Appreciation Fund to reflect permanent book/tax differences and income and gains available for distributions under income tax regulations. Accordingly, for the Managed Assets Trust, a portion of undistributed net investment income amounting to $116 and a portion of accumulated net realized gains amounting to $31,374 was reclassified to paid-in capital. In addition, for the High Yield Bond Trust, a portion of accumulated net realized loss amounting to $1,352,578 was reclassified to paid-in capital. Net investment income, net realized gains and net assets were not affected by this change; (k) the Funds intend to comply with the requirements of the Internal Revenue Code of 1986, as amended, pertaining to regulated investment companies and to make distributions of taxable income sufficient to relieve it from substantially all Federal income and excise taxes; and (l) estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ. 2. DIVIDENDS Money Market Portfolio declares and records a dividend of substantially all of its net investment income on each business day. Such dividends are paid or reinvested on the payable date. 3. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS Travelers Asset Management International Corporation ("TAMIC"), an indirect wholly owned subsidiary of Citigroup, Inc., acts as investment manager and advisor to the Managed Assets Trust ("MAT"), High Yield Bond Trust ("HYBT"), Capital Appreciation Fund ("CAF") and Money Market Portfolio ("MMP"). MAT, CAF and MMP pay TAMIC an investment management and advisory fee calculated at the annual rate of 0.50%, 0.75% and 0.3233%, respectively of its average daily net assets. HYBT pays TAMIC an investment management and advisory fee calculated at an annual rate of 0.50% on the first $50,000,000, 0.40% on the next $100,000,000, 0.30% on the next $100,000,000 and 0.25% on the amount over $250,000,000 of its average daily net assets. This fee is calculated daily and paid monthly. TAMIC has a sub-advisory agreement with The Travelers Investment Management Company, Inc. ("TIMCO"), an indirect wholly owned subsidiary of Citigroup, Inc. Pursuant to the sub-advisory agreement, TIMCO is responsible for the day-to-day portfolio operations and investment decisions for MAT. As a result, TAMIC pays TIMCO, as sub-advisor, 0.25% of the average daily net assets of MAT. 30 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) TAMIC also has a sub-advisory agreement with Janus Capital Corporation ("Janus"). Pursuant to the sub-advisory agreement, Janus is responsible for the day-to-day portfolio operations and investment decisions for CAF. As a result, TAMIC pays Janus, as sub-advisor, 0.55% of the average daily net assets of CAF. Travelers Insurance Company ("Travelers Insurance") acts as administrator to the Funds. The Funds pay Travelers Insurance an administration fee calculated at an annual rate of 0.06% of its average daily net assets. Travelers Insurance has entered into a sub-administrative services agreement with Mutual Management Corp. ("MMC"), a subsidiary of Salomon Smith Barney Holdings Inc. ("SSBH"). Travelers Insurance pays MMC, as sub-administrator, a fee calculated at an annual rate of 0.06% for the average daily net assets of each Fund. This fee is calculated daily and paid monthly. Brokerage commissions of $13,143 were received from affiliated brokers. One Trustee and all officers of the Funds are employees of Citigroup, Inc., or its subsidiaries. 4. INVESTMENTS During the year ended December 31, 1998, the aggregate cost of purchases and proceeds from sales of investments (including maturities, but excluding short-term securities) were as follows:
MANAGED HIGH CAPITAL ASSETS YIELD BOND APPRECIATION TRUST TRUST FUND - ------------------------------------------------------------------------------------------------------- Purchases................................................... $190,385,227 $35,792,135 $410,428,204 - ------------------------------------------------------------------------------------------------------- Sales....................................................... 179,263,147 33,175,676 277,800,626
- -------------------------------------------------------------------------------- At December 31, 1998, the aggregate gross unrealized appreciation and depreciation of investments for Federal income tax purposes were substantially as follows:
MANAGED HIGH CAPITAL ASSETS YIELD BOND APPRECIATION TRUST TRUST FUND - ----------------------------------------------------------------------------------------------------- Gross unrealized appreciation............................... $76,641,813 $ 457,018 $367,626,910 Gross unrealized depreciation............................... (4,526,629) (408,932) (2,427,009) - ----------------------------------------------------------------------------------------------------- Net unrealized appreciation................................. $72,115,184 $ 48,086 $365,199,901 - -----------------------------------------------------------------------------------------------------
5. REPURCHASE AGREEMENTS The Funds purchase (and its custodian takes possession of) U.S. Government securities from banks and securities dealers subject to agreements to resell the securities to the sellers at a future date (generally, the next business day) at an agreed-upon higher repurchase price. The Funds require continual maintenance of the market value of the collateral in amounts at least equal to the repurchase price. 6. FUTURES CONTRACTS Initial margin deposits made upon entering into futures contracts are recognized as assets. The initial margin is segregated by the custodian and is noted in the schedule of investments. During the period the futures contract is open, changes in the value of the contract are recognized as unrealized gains or losses by "marking-to-market" on a daily basis to reflect the market value of the contract at the end of each day's trading. Variation margin payments are made or received and recognized as assets due from or liabilities due to broker, depending upon whether unrealized gains or losses are incurred. When the contract is closed, the Funds record a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transactions and the Funds' basis in the contract. The Funds enter into such contracts to hedge portions of their respective portfolios. The Funds bear the market risk that arises from changes in the value of the financial instruments and securities indices (futures contracts). At December 31, 1998, MAT had sold 42 financial futures contracts on the Standard & Poor's 500 Index expiring in March 1999. The basis value of such contracts was $13,920,694. The market value of such contracts on December 31, 1998 was $13,077,750, resulting in an unrealized loss of $842,944. 31 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. OPTIONS CONTRACTS Premiums paid when put or call options are purchased by the Funds, represent investments, which are "marked-to-market" daily. When a purchased option expires, the Funds realize a loss in the amount of the premium paid. When the Funds enter into closing sales transactions, the Funds realize a gain or loss depending on whether the proceeds from the closing sales transaction are greater or less than the premium paid for the option. When the Funds exercise a put option, it will realize a gain or loss from the sale of the underlying security and the proceeds from such sale will be decreased by the premium originally paid. When the Funds exercise a call option, the cost of the security which the Funds purchase upon exercise will be increased by the premium originally paid. At December 31, 1998, the Funds had no open purchased call or put options contracts. 8. SECURITIES TRADED ON A TO-BE-ANNOUNCED BASIS The Funds may trade securities on a "to-be-announced" ("TBA") basis. In a TBA transaction, the Funds commit to purchasing or selling securities for which specific information is not yet known at the time of the trade, particularly the face amount and maturity date in GNMA/FNMA transactions. Securities purchased on a TBA basis are not settled until they are delivered to the Funds, normally 15 to 45 days later. These transactions are subject to market fluctuations and their current value is determined in the same manner as for other securities. At December 31, 1998, MAT held no TBA securities. 9. CAPITAL LOSS CARRYFORWARD At December 31, 1998, HYBT had, for Federal income tax purposes, approximately $1,311,000 of capital loss carryforwards available to offset future capital gains. To the extent that these carryforward losses can be used to offset realized capital gains, it is probable that such gains will not be distributed. The amount and expiration of the carryforwards are indicated below. Expiration occurs on December 31 of the year indicated:
1999 2000 2001 2002 2004 - -------------------------------------------------------------------------------------------------------- Carryforward Amounts.......................... $748,000 $48,000 $134,000 $38,000 $343,000 - --------------------------------------------------------------------------------------------------------
10. FOREIGN SECURITIES Investing in securities of foreign companies and foreign governments involves special risks and considerations not typically associated with investing in U.S. companies and the U.S. Government. These risks include revaluation of currencies and future adverse political and economic developments. Moreover, securities of many foreign companies and foreign governments and their markets may be less liquid and their prices more volatile than those of securities of comparable U.S. companies and the U.S. Government. 32 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) 11. SHARES OF BENEFICIAL INTEREST The Declaration of Trust authorizes the issuance of an unlimited number of shares of beneficial interest without par value. Transactions in shares of each Fund were as follows:
YEAR ENDED YEAR ENDED DECEMBER 31, 1998 DECEMBER 31, 1997 - --------------------------------------------------------------------------------------------------- MANAGED ASSETS TRUST Shares sold................................................. 955,576 430,658 Shares issued on reinvestment............................... 921,867 364,705 Shares redeemed............................................. (747,496) (707,124) - --------------------------------------------------------------------------------------------------- Net Increase................................................ 1,129,947 88,239 - --------------------------------------------------------------------------------------------------- HIGH YIELD BOND TRUST Shares sold................................................. 772,815 811,252 Shares issued on reinvestment............................... 196,339 1,591 Shares redeemed............................................. (673,313) (294,426) - --------------------------------------------------------------------------------------------------- Net Increase................................................ 295,841 518,417 - --------------------------------------------------------------------------------------------------- CAPITAL APPRECIATION FUND Shares sold................................................. 3,602,035 3,339,655 Shares issued on reinvestment............................... 292,021 59 Shares redeemed............................................. (448,218) (642,619) - --------------------------------------------------------------------------------------------------- Net Increase................................................ 3,445,838 2,697,095 - --------------------------------------------------------------------------------------------------- MONEY MARKET PORTFOLIO Shares sold................................................. 103,475,184 28,240,251 Shares issued on reinvestment............................... 1,409,254 286,879 Shares redeemed............................................. (76,308,910) (18,576,002) - --------------------------------------------------------------------------------------------------- Net Increase................................................ 28,575,528 9,951,128 - ---------------------------------------------------------------------------------------------------
33 - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS For a share of beneficial interest outstanding throughout each year ended December 31:
MANAGED ASSETS TRUST 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF YEAR............... $17.65 $14.98 $15.50 $12.85 $14.21 - --------------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM OPERATIONS: Net investment income.......................... 0.41 0.48 0.46 0.49 0.46 Net realized and unrealized gain (loss)........ 3.27 2.70 1.50 2.83 (0.73) - --------------------------------------------------------------------------------------------------------------- Total Income (Loss) From Operations.............. 3.68 3.18 1.96 3.32 (0.27) - --------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS FROM (1): Net investment income.......................... (0.47) (0.12) (0.89) (0.50) (0.67) Net realized gains............................. (0.87) (0.39) (1.59) (0.17) (0.42) - --------------------------------------------------------------------------------------------------------------- Total Distributions.............................. (1.34) (0.51) (2.48) (0.67) (1.09) - --------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF YEAR..................... $19.99 $17.65 $14.98 $15.50 $12.85 - --------------------------------------------------------------------------------------------------------------- TOTAL RETURN..................................... 21.44% 21.31% 13.78% 27.12% (2.24)% - --------------------------------------------------------------------------------------------------------------- NET ASSETS, END OF YEAR (000'S).................. $276,182 $223,870 $188,610 $171,276 $140,887 - --------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: Expenses....................................... 0.60% 0.63% 0.58% 0.58% 0.61% Net investment income.......................... 2.30 2.91 3.51 3.49 3.59 - --------------------------------------------------------------------------------------------------------------- PORTFOLIO TURNOVER RATE.......................... 74% 90% 108% 110% 97% - ---------------------------------------------------------------------------------------------------------------
HIGH YIELD BOND TRUST 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF YEAR............... $9.89 $8.49 $9.00 $8.49 $9.25 - --------------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM OPERATIONS: Net investment income.......................... 0.77 0.76 0.91 0.80 0.66 Net realized and unrealized gain (loss)........ (0.13) 0.65 0.41 0.41 (0.76) - --------------------------------------------------------------------------------------------------------------- Total Income (Loss) From Operations.............. 0.64 1.41 1.32 1.21 (0.10) - --------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS FROM (1): Net investment income.......................... (0.68) (0.01) (1.83) (0.70) (0.66) - --------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF YEAR..................... $9.85 $9.89 $8.49 $9.00 $8.49 - --------------------------------------------------------------------------------------------------------------- TOTAL RETURN..................................... 6.56% 16.56% 16.05% 15.47% (1.26)% - --------------------------------------------------------------------------------------------------------------- NET ASSETS, END OF YEAR (000'S).................. $28,088 $25,272 $17,291 $12,902 $11,716 - --------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: Expenses (2)................................... 0.82% 0.84% 0.97% 1.25% 1.25% Net investment income.......................... 8.42 9.04 11.01 9.37 7.71 - --------------------------------------------------------------------------------------------------------------- PORTFOLIO TURNOVER RATE.......................... 147% 137% 84% 222% 146% - ---------------------------------------------------------------------------------------------------------------
(1) Distributions from realized gains include both net realized short-term and long-term capital gains. Prior to 1996 net realized short-term capital gains were included in distributions from net investment income. (2) The ratio of expenses to average net assets reflects an expense reimbursement by The Travelers in connection with voluntary expense limitations. Without the expense reimbursement, the ratios of expenses to average net assets would have been 1.28% and 1.33% for the years ended December 31, 1995 and 1994, respectively. 34 - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (CONTINUED) For a share of beneficial interest outstanding throughout each year ended December 31:
CAPITAL APPRECIATION FUND 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF YEAR............ $46.32 $36.72 $33.18 $24.50 $25.87 - ---------------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM OPERATIONS: Net investment income....................... 0.06 0.19 0.23 0.24 0.19 Net realized and unrealized gain (loss)..... 28.07 9.41 8.49 8.61 (1.41) - ---------------------------------------------------------------------------------------------------------------- Total Income (Loss) From Operations........... 28.13 9.60 8.72 8.85 (1.22) - ---------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS FROM (1): Net investment income....................... (0.18) -- (0.41) (0.17) (0.15) Net realized gains.......................... (1.53) (0.00)* (4.77) -- -- - ---------------------------------------------------------------------------------------------------------------- Total Distributions........................... (1.71) (0.00)* (5.18) (0.17) (0.15) - ---------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF YEAR.................. $72.74 $46.32 $36.72 $33.18 $24.50 - ---------------------------------------------------------------------------------------------------------------- TOTAL RETURN.................................. 61.63% 26.14% 28.21% 36.37% (4.76)% - ---------------------------------------------------------------------------------------------------------------- NET ASSETS, END OF YEAR (000'S)............... $890,861 $407,701 $224,132 $122,155 $78,494 - ---------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: Expenses.................................... 0.85% 0.84% 0.83% 0.85% 0.89% Net investment income....................... 0.18 0.54 0.69 0.84 0.79 - ---------------------------------------------------------------------------------------------------------------- PORTFOLIO TURNOVER RATE....................... 53% 89% 84% 124% 106% - ----------------------------------------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF YEAR.............. $1.00 $1.00 $1.00 $1.00 $1.00 - ---------------------------------------------------------------------------------------------------------------- Net investment income (2)..................... 0.049 0.049 0.0412 0.0417 0.0278 Distributions from net investment income...... (0.049) (0.049) (0.0412) (0.0417) (0.0278) - ---------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF YEAR.................... $1.00 $1.00 $1.00 $1.00 $1.00 - ---------------------------------------------------------------------------------------------------------------- TOTAL RETURN.................................... 5.08% 5.03% 4.20% 4.17% 2.78% - ---------------------------------------------------------------------------------------------------------------- NET ASSETS, END OF YEAR (000'S)................. $42,069 $13,494 $3,543 $1,417 $1,203 - ---------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: Expenses (2)(3)............................... 0.65% 0.57% 0.78% 1.25% 1.25% Net investment income......................... 5.37 5.03 3.72 -- -- - ----------------------------------------------------------------------------------------------------------------
(1) Distributions from realized gains include both net realized short-term and long-term capital gains. Prior to 1996 net realized short-term capital gains were included in distributions from net investment income. (2) The Travelers reimbursed Money Market Portfolio for $31,300 and $43,376 in expenses for the years ended December 31, 1997 and December 31, 1996, respectively. If expenses were not reimbursed, the per share decreases of net investment income would have been $0.002 and $0.02, respectively, and the actual expense ratios would have been 1.39% and 1.71%, respectively. (3) The ratio of expenses to average net assets for 1995 and 1994 reflects an expense reimbursement by The Travelers in connection with voluntary expense limitations. Without the expense reimbursement, the ratios of expenses to average net assets would have been 7.37% and 6.40% for the years ended December 31, 1995 and 1994, respectively. * Amount represents less than $0.01 per share. 35 - -------------------------------------------------------------------------------- INDEPENDENT AUDITORS' REPORT THE SHAREHOLDERS AND BOARDS OF TRUSTEES OF MANAGED ASSETS TRUST, HIGH YIELD BOND TRUST, CAPITAL APPRECIATION FUND AND MONEY MARKET PORTFOLIO: We have audited the accompanying statements of assets and liabilities, including the schedules of investments, of Managed Assets Trust, High Yield Bond Trust, Capital Appreciation Fund and Money Market Portfolio as of December 31, 1998, and the related statements of operations, statements of changes in net assets, and financial highlights for the year then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The statements of changes in net assets for the year ended December 31, 1996 and the financial highlights for each of the years in the three year period then ended were audited by other auditors whose report thereon, dated February 24, 1997, expressed an unqualified opinion on those financial statements and financial highlights. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 1998, by correspondence with the custodian. As to securities purchased or sold but not yet received or delivered, we performed other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Managed Assets Trust, High Yield Bond Trust, Capital Appreciation Fund and Money Market Portfolio as of December 31, 1998, their results of their operations, changes in their net assets and their financial highlights for the year then ended, in conformity with generally accepted accounting principles. [KPMG Peat Marwick LLP Signature] New York, New York February 8, 1999 36 - -------------------------------------------------------------------------------- TAX INFORMATION (UNAUDITED) For Federal tax purposes the Trust hereby designates for the fiscal year ended December 31, 1998: - Percentages of ordinary dividends paid as qualifying for the corporate dividends received deduction: Managed Assets Trust.............................. 45.24% Capital Appreciation Fund......................... 100.00
- Total long-term capital gain distributions paid: Managed Assets Trust.............................. $ 8,710,595 Capital Appreciation Fund......................... 15,276,070
A total of 12.71% of the ordinary dividends paid by the Managed Assets Trust from net investment income are derived from Federal obligations and may be exempt from taxation at the state level. 37 ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST - -------------------------------------------------------------------------------- U.S. GOVERNMENT SECURITIES PORTFOLIO U.S. Government Securities Portfolio ("Portfolio") seeks to select investments from the point of view of an investor concerned primarily with highest credit quality, current income and total return. The assets of the Portfolio will be invested in direct obligations of the United States, its agencies and instrumentalities. For the year ended December 31, 1998, the Portfolio had a total return of 10.20%, which was above its Lipper, Inc. peer group total return average of 7.36%. (Lipper is an independent fund-tracking organization.) The key events during 1998 were predominantly mergers and acquisitions, the ongoing overseas economic crisis and the resiliency of the U.S. economy and financial markets. The broad range in interest rates and the associated higher market volatility reflected those conditions. As can be seen from the chart below, interest rates went down during the reporting period: YIELDS FROM U.S. TREASURY SECURITIES
12/31/98 12/31/97 -------- -------- 90-day Treasury Bill........................................ 4.45% 5.34% 2-Year Treasury Note........................................ 4.53 5.64 5-Year Treasury Note........................................ 4.54 5.71 10-Year Treasury Bond....................................... 4.65 5.74 30-Year Treasury Bond....................................... 5.09 5.92
The historically low level of interest rates in October 1998 was precipitated by the first Federal Reserve Board ("Fed") interest rate cut since 1996. While further cuts ensued, concerns surrounding hedge fund losses took center stage, prompting spreads between corporate bonds and mortgage-backed securities to widen versus U.S. Treasuries. Compounding the problem was considerable corporate financing as the managers headed toward the end of the year. Corporate debt issuance for 1998 on a net basis was more than the prior two years combined. The portfolio managers believe that the dominant issues in 1999 will be the advent of the Euro, the prospects for economic recovery throughout Asia and other less developed countries, the future sustainability of U.S. economic growth and the ongoing resiliency of U.S. financial markets. The Euro introduces a new variable to macroeconomic analysis that has not been faced since the demise of the Soviet empire and the advent of true global competition. Opportunities should abound in the financial markets as corporate financing expands in creative new ways. However, the implications for the U.S. dollar as the world's premier currency has now been brought into question by the Euro's introduction. The economic picture throughout Asia and Russia remains critically unclear. Rising employment, the need to dump finished goods in the face of uncertain currencies and fiscal policies that are slow to change and less than dramatic, do not bode well for the financial markets of less developed countries. According to the portfolio managers, the U.S. economy and the financial markets should continue to soul search as to its prospects for continued good fortune. The positives include such variables as low unemployment, strong productivity and the dramatic increase in defined contribution plans (i.e., 401(k) plans) and estate planning as key market influences. However, historically low savings (the traditional standard) being redefined as the "wealth effect" as measured by investment growth remains an ever-present shadow that can change with the ups and downs of the financial markets. Technical trends that have supported a decline in interest rates since 1981 remain fully intact. Minor disruptions keep markets range bound between 4.90% and 5.40% during the first quarter of 1999. However, the portfolio managers believe the more dominant longer-term force should be for rates to head toward the 4.50% level. The managers have therefore positioned the Portfolio in the coming year to benefit from these expected lower interest rates. 38 ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST - -------------------------------------------------------------------------------- SOCIAL AWARENESS STOCK PORTFOLIO The Social Awareness Stock Portfolio ("Portfolio") seeks long-term capital appreciation and retention of net investment income by selecting investments, primarily common stocks, that meet the social criteria established for the Portfolio. The Portfolio's social criteria currently excludes companies that derive a significant portion of their revenues from the production of tobacco, tobacco products, alcohol, or military defense related services or gambling services. For the year ended December 31, 1998, the Portfolio returned 32.27% and did better than the S&P 500, Index which posted a total return of 28.72% over the same period. Last year proved to be both an active and rewarding year for the Portfolio. The portfolio managers entered 1998 with about $21.0 million in assets, and through new contributions as well as appreciation they ended the fiscal year with $39.5 million (an increase of almost 88%). They were a net buyer of stock during each month of the year, investing a net of $10.4 million, and in the process reduced their starting cash reserves from 11% to 6%. In total, the managers initiated some 152 individual stock transactions, established 21 new positions, eliminated 14, added to 107 existing holdings and reduced 10. Throughout this period, the profile of the Portfolio did not change significantly. The quality grade of the stock holdings remained the same year-to-year, as did the price volatility characteristic as measured by the "beta." The dividend yield realized actually rose slightly, while the market's yield declined. The portfolio managers' sector emphasis, within the stock market stayed essentially the same, with an above benchmark weighting in the consumer cyclical, financial, transportation and utility areas. Only the technology sector dropped out of its beginning over weight status. The biggest change came in the list of their top ten stock holdings, where only three favorites at the beginning of the year remained at year end. As to the future, conventional wisdom says stocks are too expensive. Investors have realized returns that have been too high for too long. Moreover, inflation is now as good as it gets, interest rates are as low as the will go, price to earnings multiples, therefore, are as high as they can be. Worse still, earnings growth is rolling over, and may even be on the edge of a recession-style decline. But, investors have repeatedly been fooled to the upside throughout this bull cycle, and it may not be over yet. The portfolio managers have a sense that the technology revolution is still not exhausted. Good companies so far have found ways to use technology to run today's businesses better, but now they will use it to design a better business model. As long as economic policy actions do not rain on the ballpark, the game may not be over yet. In other words, the current concerns (i.e., economy, earnings, deflation, etc.) could prove to be short lived and not cause sustainable reversals. The portfolio managers remain quite positive about the prospects for financial assets over the long run. UTILITIES PORTFOLIO The Utilities Portfolio ("Portfolio") seeks to provide current income by investing in equity and debt securities of companies in the utility industries. For the year ended December 31, 1998, the Portfolio had a total return of 18.21%. In comparison, the Lipper Analytical Services, Inc. peer group total return average was 16.79%. (Lipper is an independent fund-tracking organization.) An otherwise solid stock performance by the utility sector during 1998 was overshadowed by another exceptional strong performance by the broad stock market. For the year, the Portfolio, was 92% invested in stocks, 3% in bonds and 5% in cash reserves at year end. As of December 31, 1998, the portfolio manager owned 44 stock positions and 3 bond issues. On the stock level, electric utilities dominated with almost 61% of the Portfolio's assets, followed by natural gas and telecommunications companies. Last year was an exciting one within the utility stock universe because of the extreme divergent investment results -- top performers up over 70%, and laggards down more than 20%. The defining characteristic that separated the top performers from their peers was the completion of their regulatory restructuring plans thereby outlining management's long-term strategies. Once implemented, these deregulated strategies resulted in improved earnings growth visibility and reduced risk of regulatory uncertainties for each specific utility. Thematically, 1998 was a year in which many companies seriously started positioning themselves for the deregulated energy markets. Several large utilities bought generating assets in other regions as part of a national wholesale energy strategy while others exited the generation business in order to focus on the regulated transmission and distribution business. International 39 ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST - -------------------------------------------------------------------------------- acquisitions remained the focus of many companies at a time when other electric companies were selling off international investments. In addition, the first nuclear plant acquisition was made. The portfolio managers anticipate that deregulation should accelerate in 1999 with the likely passage of restructuring legislation in key states such as New Jersey, Texas and Michigan. Additionally, they anticipate a pick up in merger and acquisition activity with small- and mid-sized utilities finding it increasingly more difficult to compete in the complex deregulated market hampered primarily by their size. As companies continue to restructure and re-deploy capital investments they have assumed earnings growth for the sector will remain in the three to five percent range and the average dividend pay out (i.e. the portion of earnings distributed as dividends) will continue to decline an average of twelve percentage points. For the successful companies, however, the redeployment should set the stage for better total investment returns in the future. In closing, we thank you for your investment in The Travelers Series Trust. We look forward to continuing to help you pursue your financial goals. Sincerely, /s/ HEATH B. MCLENDON Heath B. McLendon Chairman January 13, 1999 40 - -------------------------------------------------------------------------------- PERFORMANCE COMPARISON -- U.S. GOVERNMENT SECURITIES PORTFOLIO AS OF 12/31/98 (UNAUDITED)
AVERAGE ANNUAL TOTAL RETURNS ---------------------------- Year Ended 12/31/98 10.20% Five Years Ended 12/31/98 8.13% 1/24/92* through 12/31/98 8.36% CUMULATIVE TOTAL RETURN ---------------------------------------------- 1/24/92* through 12/31/98 74.63% * Commencement of operations
This chart assumes an initial investment of $10,000 made on January 24, 1992, assuming reinvestment of dividends, through December 31, 1998. The Lehman Government Bond Index is a broad-based Index of all public debt obligations of the U.S. Government and its agencies and has an average maturity of nine years. The Consumer Price Index is a measure of the average change in prices over time in a fixed market basket of goods and services.
Lehman Measurement Period U.S. Government Consumer (Fiscal Year Covered) Government Bond Index Price Index 1/24/92 10000 10000 10000 Dec-92 10790 10723 10275 Dec-93 11813 11866 10557 Dec-94 11147 11464 10840 Dec-95 13869 13567 11115 Dec-96 14077 13943 11484 Dec-97 15846 15280 11679 Jun-98 16630 15919 11801
- -------------------------------------------------------------------------------- Past performance is not predictive of future performance. Investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Average annual total returns are historical in nature and measure net investment income and capital gain or loss from portfolio investments assuming reinvestments of dividends. The returns do not reflect expenses associated with the subaccount such as administrative fees, account charges and surrender charges which, if reflected, would reduce the performance shown. - -------------------------------------------------------------------------------- PERFORMANCE COMPARISON -- SOCIAL AWARENESS STOCK PORTFOLIO AS OF 12/31/98 (UNAUDITED)
AVERAGE ANNUAL TOTAL RETURNS ---------------------------- Year Ended 12/31/98 32.27% Five Years Ended 12/31/98 21.26% 5/1/92* through 12/31/98 18.41% CUMULATIVE TOTAL RETURN ---------------------------------------------- 5/1/92* through 12/31/98 208.75% * Commencement of operations
This chart assumes an initial investment of $10,000 made on May 1, 1992, assuming reinvestment of dividends, through December 31, 1998. The Standard & Poor's 500 Index is an unmanaged index composed of 500 widely held common stocks listed on the New York Stock Exchange, American Stock Exchange and the over-the-counter market. The Consumer Price Index is a measure of the average change in prices over time in a fixed market basket of goods and services.
Social Awareness Standard & Measurement Period Stock Poor's 500 Consumer (Fiscal Year Covered) Portfolio Index Price Index 5/1/92 10000 10000 10000 Dec-92 10950 10673 10157 Dec-93 11777 11745 10436 Dec-94 11461 11900 10716 Dec-95 15285 14509 10988 Dec-96 18340 17838 11353 Dec-97 23343 23789 11545 Jun-98 27731 28004 11666
- -------------------------------------------------------------------------------- Past performance is not predictive of future performance. Investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Average annual total returns are historical in nature and measure net investment income and capital gain or loss from portfolio investments assuming reinvestments of dividends. The returns do not reflect expenses associated with the subaccount such as administrative fees, account charges and surrender charges which, if reflected, would reduce the performance shown. 41 - -------------------------------------------------------------------------------- PERFORMANCE COMPARISON -- UTILITIES PORTFOLIO AS OF 12/31/98 (UNAUDITED)
AVERAGE ANNUAL TOTAL RETURNS ---------------------------- Year Ended 12/31/98 18.21% 2/4/94* through 12/31/98 17.08% CUMULATIVE TOTAL RETURN ---------------------------------------------- 2/4/94* through 12/31/98 116.8% * Commencement of operations
This chart assumes an initial investment of $10,000 made on February 4, 1994, assuming reinvestment of dividends, through December 31, 1998. Standard & Poor's 500 Index is an unmanaged index composed of 500 widely held common stocks listed on the New York Stock Exchange, American Stock Exchange and over-the-counter market. The Consumer Price Index is a measure of the average change in prices over time in a fixed market basket of goods and services.
Standard & Measurement Period Utilities Poor's 500 Consumer (Fiscal Year Covered) Portfolio Index Price Index 2/4/94 10000 10000 10000 Dec-94 10170 10072 10205 Dec-95 13149 13852 10464 Dec-96 14638 17031 10811 Dec-97 18340 22712 10995 Jun-98 19825 26737 11110
- -------------------------------------------------------------------------------- Past performance is not predictive of future performance. Investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Average annual total returns are historical in nature and measure net investment income and capital gain or loss from portfolio investments assuming reinvestments of dividends. The returns do not reflect expenses associated with the subaccount such as administrative fees, account charges and surrender charges which, if reflected, would reduce the performance shown. 42 - -------------------------------------------------------------------------------- SCHEDULES OF INVESTMENTS DECEMBER 31, 1998 U.S. GOVERNMENT SECURITIES PORTFOLIO
FACE AMOUNT SECURITY VALUE - -------------------------------------------------------------------------------------- U.S. GOVERNMENT AND AGENCY OBLIGATIONS -- 90.0% $7,500,000 U.S. Treasury Bonds, 5.250% due 11/15/28.................... $ 7,682,700 4,000,000 U.S. Treasury Notes, 7.500% due 11/15/16.................... 4,970,440 7,160,000 U.S. Treasury Notes, 8.125% due 8/15/21+.................... 9,701,156 4,916,462 FHLMC Certificates, Gold 6.000% due 11/1/28................. 4,861,152 3,906,540 FHLMC Certificates, Gold 6.500% due 12/1/13................. 3,967,560 3,029,999 FHLMC Certificates, 7.500% due 9/1/24 @..................... 3,114,263 1,472,951 FNMA Certificates, 6.000% due 10/1/13....................... 1,477,974 1,734,944 FNMA Certificates, 6.500% due 1/1/13 @...................... 1,760,969 2,940,460 FNMA Certificates, 6.500% due 12/1/27....................... 2,961,572 1,146,798 FNMA Certificates, 7.000% due 1/1/10........................ 1,172,602 4,609,956 FNMA Certificates, 7.000% due 5/1/28 @...................... 4,706,441 1,978,205 GNMA Certificates, 6.000% due 4/20/28....................... 1,954,091 2,020,000 GNMA Certificates, 6.500% due 12/15/28...................... 2,042,079 858,537 GNMA Certificates, 8.500% due 7/15/18 @..................... 911,123 2,184,395 GNMA Certificates, 9.000% due 9/15/09 @..................... 2,332,518 9,000,000 GNMA Certificates, RFCO Strip, zero coupon to yield 5.743% due 10/15/13................................................ 3,915,000 2,000,000 Tennessee Valley Authority Debenture, 6.250% due 12/15/17... 2,120,000 - -------------------------------------------------------------------------------------- TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS (Cost -- $59,179,938)....................................... 59,651,640 - -------------------------------------------------------------------------------------- REPURCHASE AGREEMENT -- 10.0% 6,681,000 CS First Boston, 4.400% due 1/4/99; Proceeds at maturity -- $6,684,266; (Fully collateralized by U.S. Treasury Notes, 5.375% due 1/31/00 Market value -- $6,816,889) (Cost -- $6,681,000)................... 6,681,000 - -------------------------------------------------------------------------------------- TOTAL INVESTMENTS -- 100% (Cost -- $65,860,938*)............ $66,332,640 - --------------------------------------------------------------------------------------
+ Security is segregated by Custodian for open purchase commitments. @ Date shown represents the last in range of maturity dates of mortgage certificates owned. * Aggregate cost for federal income tax purpose is substantially the same. SEE NOTES TO FINANCIAL STATEMENTS. 43 - -------------------------------------------------------------------------------- SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998 SOCIAL AWARENESS STOCK PORTFOLIO
SHARES SECURITY VALUE - ----------------------------------------------------------------------------------------- COMMON STOCK -- 93.7% - ----------------------------------------------------------------------------------------- BASIC MATERIALS -- 3.0% 4,000 Air Products & Chemicals, Inc. ............................. $ 160,000 6,000 Alcoa Inc................................................... 447,375 15,000 Engelhard Corp. ............................................ 292,500 8,000 Praxair, Inc. .............................................. 282,000 - ----------------------------------------------------------------------------------------- 1,181,875 - ----------------------------------------------------------------------------------------- CAPITAL GOODS -- 3.4% 4,500 Belden, Inc. ............................................... 95,344 5,600 Philips Electronics N.V. ................................... 379,050 8,300 Pitney Bowes, Inc. ......................................... 548,319 14,500 U.S. Filter Corp. (a)....................................... 331,687 - ----------------------------------------------------------------------------------------- 1,354,400 - ----------------------------------------------------------------------------------------- COMMUNICATION -- 2.1% 11,836 MCI Worldcom Inc. (a) ...................................... 849,233 - ----------------------------------------------------------------------------------------- CONSUMER CYCLICALS -- 15.9% 7,000 Black & Decker Corp. ....................................... 392,437 13,593 Dollar General Corp. ....................................... 321,135 12,700 Home Depot, Inc. ........................................... 777,081 50,000 Interface, Inc. ............................................ 464,062 11,000 Kaufman and Broad Home Corp. ............................... 316,250 7,000 Liz Claiborne, Inc. ........................................ 220,937 15,000 Lowe's Cos., Inc. .......................................... 767,813 8,000 May Department Stores....................................... 483,000 10,000 Ross Stores, Inc............................................ 393,750 13,800 Staples, Inc. (a)........................................... 602,887 12,000 Sylvan Learning Systems, Inc. (a)........................... 366,000 8,600 Tribune Co.................................................. 567,600 7,400 Wal-Mart Stores, Inc. ...................................... 602,638 - ----------------------------------------------------------------------------------------- 6,275,590 - ----------------------------------------------------------------------------------------- CONSUMER STAPLES -- 12.3% 9,400 American Stores Co. ........................................ 347,213 18,000 Brinker International, Inc. (a)............................. 519,750 8,700 Kroger Co. (a).............................................. 526,350 14,800 Newell Co. ................................................. 610,500 4,800 PepsiCo, Inc. .............................................. 196,500 9,200 Rite Aid Corp. ............................................. 455,975 22,700 Sysco Corp. ................................................ 622,831 7,480 Tricon Global Restaurants, Inc. (a)......................... 374,935 8,000 Unilever N. V. ............................................. 663,500 4,800 Walt Disney Co. ............................................ 144,000 18,000 Wendy's International, Inc. ................................ 392,625 - ----------------------------------------------------------------------------------------- 4,854,179 - -----------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. 44 - -------------------------------------------------------------------------------- SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998 SOCIAL AWARENESS STOCK PORTFOLIO
SHARES SECURITY VALUE - ----------------------------------------------------------------------------------------- ENERGY -- 3.1% 9,100 AES Corp. (a) .............................................. $ 431,112 6,600 Anadarko Petroleum Corp. ................................... 203,775 6,750 Baker Hughes Inc. .......................................... 119,391 5,370 British Petroleum Co. PLC................................... 481,286 - ----------------------------------------------------------------------------------------- 1,235,564 - ----------------------------------------------------------------------------------------- FINANCIAL SERVICES -- 19.0% 9,700 ACE, Ltd. .................................................. 334,044 9,200 Allstate Corp. ............................................. 355,350 4,000 American Express Co. ....................................... 409,000 6,112 American International Group Inc. .......................... 590,572 14,400 Associates First Capital Corp. ............................. 610,200 9,962 BankAmerica Corp. .......................................... 598,965 5,400 BankBoston Corp. ........................................... 210,263 13,300 Chase Manhattan Corp. ...................................... 905,231 10,000 CIT Group Inc. ............................................. 318,125 9,400 Freddie Mac................................................. 605,713 14,000 IndyMac Mortgage Holdings, Inc. ............................ 147,875 7,000 Lincoln National Corp. ..................................... 572,687 11,800 Provident Cos., Inc. ....................................... 489,700 13,300 St. Paul Co., Inc. ......................................... 462,175 6,800 State Street Corp. ......................................... 473,025 3,000 Transamerica Corp. ......................................... 346,500 2,540 Washington Mutual, Inc. .................................... 96,996 - ----------------------------------------------------------------------------------------- 7,526,421 - ----------------------------------------------------------------------------------------- HEALTH CARE -- 11.2% 6,200 Amgen Inc. (a).............................................. 648,288 11,400 C. R. Bard, Inc. ........................................... 564,300 12,000 DENTSPLY International, Inc. ............................... 309,000 6,200 Johnson & Johnson........................................... 520,025 3,300 Merck & Co., Inc. .......................................... 487,369 10,000 Mylan Laboratories Inc. .................................... 315,000 2,400 Pfizer, Inc. ............................................... 301,050 11,200 Schering-Plough Corp. ...................................... 618,800 7,200 Stryker Corp. .............................................. 396,450 10,000 Tenet Healthcare Corp. (a).................................. 262,500 - ----------------------------------------------------------------------------------------- 4,422,782 - ----------------------------------------------------------------------------------------- TECHNOLOGY -- 17.5% 19,500 Anixter International Inc. (a).............................. 396,094 5,000 Ascend Communications, Inc. (a)............................. 328,750 5,100 Automatic Data Processing, Inc. ............................ 408,956 12,125 Caliber Learning Network, Inc. (a).......................... 51,531 10,350 Cisco Systems Inc. (a)...................................... 960,609 12,500 Compaq Computer Corp. ...................................... 524,219 10,000 Electronic Data Systems Corp................................ 502,500 14,000 EMC Corp. (a)............................................... 1,190,000 1,700 Intel Corp. ................................................ 201,556
SEE NOTES TO FINANCIAL STATEMENTS. 45 - -------------------------------------------------------------------------------- SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998 SOCIAL AWARENESS STOCK PORTFOLIO
SHARES SECURITY VALUE - ----------------------------------------------------------------------------------------- TECHNOLOGY -- 17.5% (CONTINUED) 4,400 International Business Machines Corp. ...................... $ 812,900 5,200 Lucent Technologies Corp. .................................. 572,000 3,100 Sun Microsystems Inc. (a)................................... 265,438 5,900 Xerox Corp. ................................................ 696,200 - ----------------------------------------------------------------------------------------- 6,910,753 - ----------------------------------------------------------------------------------------- TRANSPORTATION -- 3.5% 12,900 Norfolk Southern Corp. ..................................... 408,769 24,125 Southwest Airlines.......................................... 541,305 15,000 USFreightways Corp. ........................................ 436,875 - ----------------------------------------------------------------------------------------- 1,386,949 - ----------------------------------------------------------------------------------------- UTILITIES -- 2.7% 11,000 Enron Corp. ................................................ 627,687 14,700 Williams Cos., Inc. ........................................ 458,456 - ----------------------------------------------------------------------------------------- 1,086,143 - ----------------------------------------------------------------------------------------- TOTAL COMMON STOCK (Cost -- $24,610,693).................... 37,083,889 - -----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------- FACE AMOUNT SECURITY VALUE REPURCHASE AGREEMENT -- 6.3% $2,511,000 CS First Boston Corp., 4.400% due 1/4/99; Proceeds at maturity -- $2,512,225; (Fully collaterized by U.S. Treasury Notes, 5.375% due 1/31/00; Market Value -- $2,561,220) (Cost -- $2,511,000)........................................ 2,511,000 - ----------------------------------------------------------------------------------------- TOTAL INVESTMENTS -- 100% (Cost -- $27,121,693*)............ $39,594,889 - -----------------------------------------------------------------------------------------
(a) Non-income producing security. * Aggregate cost for Federal income tax purposes is substantially the same. SEE NOTES TO FINANCIAL STATEMENTS. 46 - -------------------------------------------------------------------------------- SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998 UTILITIES PORTFOLIO
SHARES SECURITY VALUE - ------------------------------------------------------------------------------------------------------- COMMON STOCK -- 91.8% - ------------------------------------------------------------------------------------------------------- BROADCASTING & CABLE -- 2.9% 20,000 MediaOne Group, Inc.+....................................... $ 940,000 - ------------------------------------------------------------------------------------------------------- ELECTRIC-UTILITY -- 61.1% 11,000 American Electric Power Co., Inc. .......................... 517,687 20,000 BEC Energy.................................................. 823,750 15,000 Cinergy Corp. .............................................. 515,625 25,000 CMS Energy Corp. ........................................... 1,210,937 13,500 Dominion Resources Inc. .................................... 631,125 30,000 DQE, Inc. .................................................. 1,318,125 20,000 Edison International........................................ 557,500 25,000 El Paso Energy, Corp. ...................................... 870,312 10,000 Energy East Corp. .......................................... 565,000 10,000 FPL Group, Inc. ............................................ 616,250 25,000 FirstEnergy Corp. .......................................... 814,063 20,000 Florida Progress Corp. ..................................... 896,250 20,000 GPU, Inc. .................................................. 883,750 10,000 Houston Industries Inc. .................................... 321,250 15,000 Illinova Corp. ............................................. 375,000 15,000 Montana Power Co. .......................................... 848,438 20,000 NIPSCO Industries, Inc. .................................... 608,750 10,000 New Century Energies, Inc. ................................. 487,500 38,000 Niagara Mohawk Power Corp.+................................. 612,750 20,000 Northern States Power Co. .................................. 555,000 30,000 PECO Energy Co. ............................................ 1,248,750 25,000 Pinnacle West Capital Corp. ................................ 1,059,375 10,000 Public Service Enterprise Group, Inc. ...................... 400,000 15,000 SCANA Corp. ................................................ 483,750 15,000 Sierra Pacific Resources.................................... 570,000 20,000 Texas Utilities Co. ........................................ 933,750 30,000 Unicom Corp. ............................................... 1,156,875 - ------------------------------------------------------------------------------------------------------- 19,881,562 - ------------------------------------------------------------------------------------------------------- NATURAL GAS -- 14.7% 16,000 Coastal Corp. .............................................. 559,000 10,000 Consolidated Natural Gas Co. ............................... 540,000 22,000 Energen Corp. .............................................. 429,000 10,000 K N Energy,Inc.............................................. 375,625 15,000 MCN Energy Group, Inc. ..................................... 285,938 15,000 MDU Resources Group, Inc. .................................. 394,687 15,000 National Fuel Gas Co. ...................................... 677,813 20,000 Sempra Energy............................................... 507,500 10,000 Southwest Gas Corp. ........................................ 268,750 24,000 Williams Cos., Inc. ........................................ 748,500 - ------------------------------------------------------------------------------------------------------- 4,786,813 - -------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. 47 - -------------------------------------------------------------------------------- SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998 UTILITIES PORTFOLIO
SHARES SECURITY VALUE - ------------------------------------------------------------------------------------------------------- TELEPHONE -- 13.1% 10,000 Bell Atlantic Corp. ........................................ $ 568,125 10,000 GTE Corp. .................................................. 674,375 20,000 MCI Worldcom, Inc.+......................................... 1,435,000 8,000 NEXTLINK Communications Inc.+............................... 227,000 6,000 Qwest Communications International Inc.+.................... 300,000 20,000 SBC Communications Inc. .................................... 1,072,500 - ------------------------------------------------------------------------------------------------------- 4,277,000 - ------------------------------------------------------------------------------------------------------- 29,885,375 TOTAL COMMON STOCK (Cost -- $23,250,344).................... - -------------------------------------------------------------------------------------------------------
FACE AMOUNT RATING (A) SECURITY VALUE - ------------------------------------------------------------------------------------------------------- CORPORATE BONDS -- 1.4% - ------------------------------------------------------------------------------------------------------- ELECTRIC-UTILITY -- 0.6% $ 200,000 A- Arizona Public Service Co., 7.250% due 8/1/23............... 205,000 - ------------------------------------------------------------------------------------------------------- TELEPHONE -- 0.8% 230,000 A- MCI Communication Corp., 7.750% due 3/23/25................. 248,113 - ------------------------------------------------------------------------------------------------------- TOTAL CORPORATE BONDS (Cost -- $404,653).................... 453,113 - ------------------------------------------------------------------------------------------------------- U.S. TREASURY OBLIGATIONS -- 1.6% 500,000 U.S. Treasury Notes, 7.750% due 11/30/99 (Cost -- $499,933).......................................... 513,750 - ------------------------------------------------------------------------------------------------------- SUB-TOTAL INVESTMENTS (Cost -- $24,154,930)................. 30,852,238 - ------------------------------------------------------------------------------------------------------- REPURCHASE AGREEMENT -- 5.2% 1,688,000 CS First Boston Corp., 4.400% due 1/4/99; Proceeds at maturity -- $1,688,825; (Fully collateralized by U.S. Treasury Note, 5.375% due 1/31/00; Market value -- $1,722,508) (Cost -- $1,688,000)................... 1,688,000 - ------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS -- 100% (Cost -- $25,842,930**)........... $32,540,238 - -------------------------------------------------------------------------------------------------------
+ Non-income producing security. (a) All ratings are by Standard & Poor's Ratings Services, except that those identified by an asterisk (*) are rated by Moody's Investors Service Inc. ** Aggregate cost for Federal income tax purposes is substantially the same. See page 49 for definitions of ratings. SEE NOTES TO FINANCIAL STATEMENTS. 48 - -------------------------------------------------------------------------------- BOND RATINGS (UNAUDITED) The definitions of the applicable rating symbols are set forth below: Standard & Poor's Ratings Services ("Standard & Poor's") -- Ratings from "AA" to "C" may be modified by the addition of a plus (+) or a minus (-) sign to show relative standings within the major rating categories. AAA -- Bonds rated "AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong. AA -- Bonds rated "AA" has a very strong capacity to pay interest and repay principal and differs from the highest rated issue only in a small degree. A -- Bonds rated "A" has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories. BBB -- Bonds rated "BBB" are regarded as having an adequate capacity to pay interest and repay principal. Whereas they normally exhibit adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for bonds in this category than for bonds in higher rated categories. BB, B -- Bonds rated "BB" and "B" are regarded, on balance, as and CCC predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. "BB" represents a lower degree of speculation than "B", and "CCC" the highest degree of speculation. While such bonds will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. C -- The rating "C" is reserved for income bonds on which no interest is being paid. D -- Bonds rated "D" are in default, and payment of interest and/or repayment of principal is in arrears.
Moody's Investors Service Inc. ("Moody's") -- Numerical modifiers 1, 2 and 3 may be applied to each generic rating from "Aa" to "C", where 1 is the highest and 3 the lowest rating within its generic category. Aaa -- Bonds 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 edge." 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 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 which make the long-term risks appear somewhat larger than in "Aaa" securities. A -- Bonds 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 but elements may be present which suggest a susceptibility to impairment some time in the future. Baa -- Bonds rated "Baa" are considered to be medium grade obligations; that is, they are neither highly protected nor poorly secured. Interest payment 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. These bonds lack outstanding investment characteristics and may have speculative characteristics as well. Ba -- Bonds rated "Ba" are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B -- Bonds rated "B" generally lack characteristics of desirable investments. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa -- Bonds rated "Caa" are of poor standing. These issues may be in default, or present elements of danger may exist with respect to principal or interest. Ca -- Bonds rated "Ca" represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C -- Bonds rated "C" are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. NR -- Indicates that the bond is not rated by Standard & Poor's or Moody's.
49 - -------------------------------------------------------------------------------- STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 1998
U.S. GOVERNMENT SOCIAL AWARENESS SECURITIES STOCK UTILITIES PORTFOLIO PORTFOLIO PORTFOLIO - ------------------------------------------------------------------------------------------------------------- ASSETS: Investments -- Cost.................................. $59,179,938 $24,610,693 $24,154,930 Repurchase Agreements -- Cost........................ 6,681,000 2,511,000 1,688,000 - ------------------------------------------------------------------------------------------------------------- Investments, at value................................ 59,651,640 37,083,889 30,852,238 Repurchase Agreements, at value...................... 6,681,000 2,511,000 1,688,000 Cash................................................. 616 961 957 Dividends and interest receivable.................... 490,711 26,064 95,622 Receivable for securities sold....................... 1,100 -- 566,534 Receivable for Fund shares sold...................... -- 96,138 34,346 - ------------------------------------------------------------------------------------------------------------- TOTAL ASSETS......................................... 66,825,067 39,718,052 33,237,697 - ------------------------------------------------------------------------------------------------------------- LIABILITIES: Payable for Fund shares purchased.................... 336,265 -- -- Investment advisory fee payable...................... 12,069 34,383 17,391 Administration fees payable.......................... 2,738 1,923 1,337 Payable for securities purchased..................... -- 172,500 280,665 Accrued expenses..................................... 19,985 26,993 29,254 - ------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES.................................... 371,057 235,799 328,647 - ------------------------------------------------------------------------------------------------------------- TOTAL NET ASSETS....................................... $66,454,010 $39,482,253 $32,909,050 - ------------------------------------------------------------------------------------------------------------- NET ASSETS: Paid-in capital...................................... $66,321,107 $25,882,430 $23,621,357 Undistributed net investment income.................. 5,474 185,510 791,288 Accumulated net realized gain (loss) from security transactions...................................... (344,273) 941,117 1,799,097 Net unrealized appreciation of investments........... 471,702 12,473,196 6,697,308 - ------------------------------------------------------------------------------------------------------------- TOTAL NET ASSETS....................................... $66,454,010 $39,482,253 $32,909,050 - ------------------------------------------------------------------------------------------------------------- SHARES OUTSTANDING..................................... 5,632,090 1,523,475 1,915,301 - ------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, PER SHARE............................. $11.80 $25.92 $17.18 - -------------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. 50 - -------------------------------------------------------------------------------- STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998
U.S. GOVERNMENT SOCIAL AWARENESS SECURITIES STOCK UTILITIES PORTFOLIO PORTFOLIO PORTFOLIO - ------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME: Interest................................................ $ 2,768,644 $ 148,059 $ 160,794 Dividends............................................... -- 284,074 841,414 Less: Foreign withholding tax........................... -- (2,485) -- - ------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENT INCOME................................. 2,768,644 429,648 1,002,208 - ------------------------------------------------------------------------------------------------------------- EXPENSES: Investment advisory fees (Note 2)....................... 156,432 189,593 168,378 Administration fees (Note 2)............................ 28,818 17,501 15,543 Audit and legal......................................... 9,588 20,192 13,270 Shareholder and system servicing fees................... 6,704 7,373 6,244 Custody................................................. 4,233 3,496 3,008 Shareholder communications.............................. 3,677 1,195 2,004 Trustees' fees.......................................... 2,806 1,435 -- Pricing service fees.................................... 2,000 -- -- Other................................................... 1,299 3,353 293 - ------------------------------------------------------------------------------------------------------------- TOTAL EXPENSES.......................................... 215,557 244,138 208,740 - ------------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME..................................... 2,553,087 185,510 793,468 - ------------------------------------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 3): Realized Gain From Security Transactions (excluding short-term securities): Proceeds from sales.................................. 155,003,524 3,739,552 12,467,141 Cost of securities sold.............................. 151,988,200 2,787,421 10,670,224 - ------------------------------------------------------------------------------------------------------------- NET REALIZED GAIN....................................... 3,015,324 952,131 1,796,917 - ------------------------------------------------------------------------------------------------------------- Change in Net Unrealized Appreciation of Investments: Beginning of year.................................... 1,707,052 5,325,740 4,788,605 End of year.......................................... 471,702 12,473,196 6,697,308 - ------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET UNREALIZED APPRECIATION...... (1,235,350) 7,147,456 1,908,703 - ------------------------------------------------------------------------------------------------------------- NET GAIN ON INVESTMENTS................................... 1,779,974 8,099,587 3,705,620 - ------------------------------------------------------------------------------------------------------------- INCREASE IN NET ASSETS FROM OPERATIONS.................... $4,333,061 $8,285,097 $4,499,088 - -------------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. 51 - -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEAR ENDED DECEMBER 31, 1998
U.S. GOVERNMENT SOCIAL AWARENESS SECURITIES STOCK UTILITIES PORTFOLIO PORTFOLIO PORTFOLIO - ------------------------------------------------------------------------------------------------------- OPERATIONS: Net investment income............................ $ 2,553,087 $ 185,510 $ 793,468 Net realized gain................................ 3,015,324 952,131 1,796,917 Increase (decrease) in net unrealized appreciation.................................. (1,235,350) 7,147,456 1,908,703 - ------------------------------------------------------------------------------------------------------- INCREASE IN NET ASSETS FROM OPERATIONS........... 4,333,061 8,285,097 4,499,088 - ------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income............................ (2,585,952) (156,005) (643,885) Net realized gains............................... (2,807,849) (535,723) (609,017) - ------------------------------------------------------------------------------------------------------- DECREASE IN NET ASSETS FROM DISTRIBUTIONS TO SHAREHOLDERS.................................. (5,393,801) (691,728) (1,252,902) - ------------------------------------------------------------------------------------------------------- FUND SHARE TRANSACTIONS (NOTE 8): Net proceeds from sale of shares................. 37,655,108 12,345,818 10,648,592 Net asset value of shares issued for reinvestment of dividends.................................. 5,393,801 691,728 1,252,902 Cost of shares reacquired........................ (10,813,602) (2,161,874) (3,651,686) - ------------------------------------------------------------------------------------------------------- INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS.................................. 32,235,307 10,875,672 8,249,808 - ------------------------------------------------------------------------------------------------------- INCREASE IN NET ASSETS............................. 31,174,567 18,469,041 11,495,994 NET ASSETS: Beginning of year................................ 35,279,443 21,013,212 21,413,056 - ------------------------------------------------------------------------------------------------------- END OF YEAR*..................................... $ 66,454,010 $39,482,253 $32,909,050 - ------------------------------------------------------------------------------------------------------- * Includes undistributed net investment income of:........................................... $5,474 $185,510 $791,288 - -------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. 52 - -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) FOR THE YEAR ENDED DECEMBER 31, 1997
U.S. GOVERNMENT SOCIAL AWARENESS SECURITIES STOCK UTILITIES PORTFOLIO PORTFOLIO PORTFOLIO - ------------------------------------------------------------------------------------------------------- OPERATIONS: Net investment income............................ $ 1,693,404 $ 156,049 $ 643,930 Net realized gain................................ 195,243 535,769 631,548 Increase in net unrealized appreciation.......... 1,522,395 2,877,071 2,917,676 - ------------------------------------------------------------------------------------------------------- INCREASE IN NET ASSETS FROM OPERATIONS........... 3,411,042 3,568,889 4,193,154 - ------------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income............................ (1,694,724) -- (19,187) Net realized gains............................... -- -- (8,193) - ------------------------------------------------------------------------------------------------------- DECREASE IN NET ASSETS FROM DISTRIBUTIONS TO SHAREHOLDERS.................................. (1,694,724) -- (27,380) - ------------------------------------------------------------------------------------------------------- FUND SHARE TRANSACTIONS (NOTE 9): Net proceeds from sale of shares................. 11,415,299 8,734,543 4,576,098 Net asset value of shares issued for reinvestment of dividends.................................. 1,694,724 -- 27,380 Cost of shares reacquired........................ (5,555,432) (2,330,215) (5,570,422) - ------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM FUND SHARE TRANSACTIONS.................................. 7,554,591 6,404,328 (966,944) - ------------------------------------------------------------------------------------------------------- INCREASE IN NET ASSETS............................. 9,270,909 9,973,217 3,198,830 NET ASSETS: Beginning of year................................ 26,008,534 11,039,995 18,214,226 - ------------------------------------------------------------------------------------------------------- END OF YEAR*..................................... $35,279,443 $21,013,212 $21,413,056 - ------------------------------------------------------------------------------------------------------- * Includes undistributed net investment income of:........................................... $23,858 $156,049 $643,930 - -------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. 53 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES The U.S. Government Securities, Social Awareness Stock and Utilities Portfolios (collectively, "Portfolio(s)") are separate investment portfolios of The Travelers Series Trust ("Trust"). The Trust is a Massachusetts business trust registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company and consists of these portfolios and 16 other separate investment portfolios: Travelers Quality Bond, Lazard International Stock, MFS Emerging Growth, Federated High Yield, Federated Stock, Large Cap, Equity Income, Disciplined Mid Cap Stock (formerly known as Mid Cap Disciplined Equity Fund), Convertible Bond, Strategic Stock, Disciplined Small Cap Stock, MFS Mid Cap Growth, MFS Research, Zero Coupon Bond Fund Portfolio Series 2000 and Zero Coupon Bond Fund Portfolio Series 2005 Portfolios. Shares of the Trust are offered only to insurance company separate accounts that fund certain variable annuity and variable life insurance contracts. The financial statements and financial highlights for the other portfolios are presented in separate semi-annual reports. The significant accounting policies consistently followed by the Portfolios are: (a) security transactions are accounted for on trade date; (b) securities traded on national securities markets are valued at the closing prices on such markets; securities for which no sales prices were reported and U.S. Government and Agency obligations are valued at the mean between the last reported bid and asked prices or on the basis of quotations received from reputable brokers or other recognized sources; (c) securities for which market quotations are not available will be valued in good faith at fair value by or under the direction of the Board of Trustees; (d) securities maturing within 60 days are valued at cost plus accreted discount, or minus amortized premium, which approximates value; (e) securities that have a maturity of 60 days or more are valued at prices based on market quotations for securities of similar type, yield and maturity; (f) interest income, adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis and dividend income is recorded on the ex-dividend date; (g) gains or losses on the sale of securities are calculated by using the specific identification method; (h) dividends and distributions to shareholders are recorded on the ex-dividend date; (i) the Portfolios intend to comply with the requirements of the Internal Revenue Code of 1986, as amended, pertaining to regulated investment companies and to make distributions of taxable income sufficient to relieve it from substantially all Federal income and excise taxes; (j) the character of income and gains to be distributed are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. At December 31, 1998, reclassifications were made to the capital accounts of the U.S. Government Securities Portfolio, Social Awareness Stock Portfolio and Utilities Portfolio to reflect permanent book/tax differences and income and gains available for distribution under income tax regulations. Accordingly, for the Social Awareness Stock Portfolio, a portion of undistributed net investment income amounting to $44 and a portion of accumulated net realized gains amounting to $23 was reclassified to paid-in capital. In addition, for the Utilities Portfolio, a portion of undistributed net investment income amounting to $45 and a portion of accumulated net realized gains amounting to $115 was reclassified to paid-in capital. Net investment income, net realized gains and net assets for each Portfolio were not affected by these changes; and (k) estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ. 2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS Travelers Asset Management International Corporation ("TAMIC"), an indirect wholly owned subsidiary of Citigroup, Inc., acts as investment manager and advisor to the U.S. Government Securities Portfolio ("USGS"). USGS pays TAMIC an investment management and advisory fee calculated at the annual rate of 0.3233% of its average daily net assets. This fee is calculated daily and paid monthly. Mutual Management Corp. ("MMC"), a subsidiary of Salomon Smith Barney Holdings Inc. ("SSBH") and an indirect wholly owned subsidiary of Citigroup, Inc., acts as investment manager and advisor to the Social Awareness Stock ("SAS") and Utilities ("Utilities") Portfolios. SAS pays MMC an investment management and advisory fee calculated at an annual rate of: 0.65% on the first $50 million, 0.55% on the next $50 million, 0.45% on the next $100 million and 0.40% on amounts over $200 million of the average daily net assets. Utilities pays MMC investment management and advisory fees calculated at an annual rate of 0.65% of the average daily net assets. These fees are calculated daily and paid monthly. 54 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) Travelers Insurance Company ("Travelers Insurance") acts as administrator to the Portfolios. The Portfolios pay Travelers Insurance an administration fee calculated at an annual rate of 0.06% of the average daily net assets. Travelers Insurance has entered into a sub-administrative services agreement with MMC. Travelers Insurance pays MMC, as sub-administrator, a fee calculated at an annual rate of 0.06% of the average daily net assets of each Portfolio. This fee is calculated daily and paid monthly. One Trustee and all officers of the Trust are employees of Citigroup, Inc., or its subsidiaries. 3. INVESTMENTS During the year ended December 31, 1998, the aggregate cost of purchases and proceeds from sales of investments (including maturities, but excluding short-term securities) were as follows:
USGS SAS UTILITIES - ------------------------------------------------------------------------------------------------------ Purchases................................................... $182,265,242 $14,110,116 $20,069,550 - ------------------------------------------------------------------------------------------------------ Sales....................................................... 155,003,524 3,739,552 12,467,141
- -------------------------------------------------------------------------------- At December 31, 1998, aggregate gross unrealized appreciation and depreciation of investments for Federal income tax purposes were substantially as follows:
USGS SAS UTILITIES - -------------------------------------------------------------------------------------------------- Gross unrealized appreciation............................... $ 628,555 $13,361,023 $7,033,982 Gross unrealized depreciation............................... (156,853) (887,827) (336,674) - -------------------------------------------------------------------------------------------------- Net unrealized appreciation................................. $ 471,702 $12,473,196 $6,697,308 - --------------------------------------------------------------------------------------------------
4. REPURCHASE AGREEMENTS The Portfolios purchase (and their custodian takes possession of) U.S. Government securities from banks and securities dealers subject to agreements to resell the securities to the sellers at a future date (generally, the next business day) at an agreed-upon higher repurchase price. The Portfolios require continual maintenance of the market value of the collateral in amounts at least equal to the repurchase price. 5. FUTURES CONTRACTS Initial margin deposits made upon entering into futures contracts are recognized as assets. The initial margin is segregated by the custodian and is noted in the schedule of investments. During the period the futures contract is open, changes in the value of the contract are recognized as unrealized gains or losses by "marking-to-market" on a daily basis to reflect the market value of the contract at the end of each day's trading. Variation margin payments are made or received and recognized as assets due from or liabilities due to broker, depending upon whether unrealized gains or losses are incurred. When the contract is closed, the Portfolios record a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transactions and the Portfolio's basis in the contract. The Portfolios enter into such contracts to hedge portions of their respective portfolios. The Portfolios bear the market risk that arises from changes in the value of the financial instruments and securities indices (futures contracts). At December 31, 1998, the Portfolios had no open futures contracts. 55 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. OPTIONS CONTRACTS Premiums paid when put or call options are purchased by the Portfolios, represent investments, which are "marked-to-market" daily. When a purchased option expires, the Portfolios will realize a loss in the amount of the premium paid. When the Portfolios enter into closing sales transactions, the Portfolios will realize a gain or loss depending on whether the proceeds from the closing sales transactions are greater or less than the premium paid for the option. When the Portfolios exercise a put option, they will realize a gain or loss from the sale of the underlying security and the proceeds from such sale will be decreased by the premium originally paid. When the Portfolios exercise a call option, the cost of the security which the Portfolios purchase upon exercise will be increased by the premium originally paid. At December 31, 1998, the Portfolios had no open purchased call or put options contracts. 7. SECURITIES TRADED ON A TO-BE-ANNOUNCED BASIS The Portfolios may trade securities on a "to-be-announced" ("TBA") basis. In a TBA transaction, the Portfolios commit to purchasing or selling securities for which specific information is not yet known at the time of the trade, particularly the face amount and maturity date in GNMA/FNMA transactions. Securities purchased on a TBA basis are not settled until they are delivered to the Portfolios, normally 15 to 45 days later. These transactions are subject to market fluctuations and their current value is determined in the same manner as for other securities. At December 31, 1998, USGS held no TBA securities. 8. SHARES OF BENEFICIAL INTEREST The Declaration of Trust authorizes the issuance of an unlimited number of shares of beneficial interest without par value. Transactions in shares of each Portfolio were as follows:
YEAR ENDED YEAR ENDED DECEMBER 31, 1998 DECEMBER 31, 1997 - --------------------------------------------------------------------------------------------------- U.S. GOVERNMENT SECURITIES PORTFOLIO Shares sold................................................. 3,036,112 978,971 Shares issued on reinvestment............................... 457,035 145,971 Shares redeemed............................................. (888,165) (491,712) - ------------------------------------------------------------------------------- Net Increase................................................ 2,604,982 633,230 - ------------------------------------------------------------------------------- SOCIAL AWARENESS STOCK PORTFOLIO Shares sold................................................. 542,975 479,843 Shares issued on reinvestment............................... 29,867 -- Shares redeemed............................................. (96,777) (132,790) - ------------------------------------------------------------------------------- Net Increase................................................ 476,065 347,053 - ------------------------------------------------------------------------------- UTILITIES PORTFOLIO Shares sold................................................. 663,583 341,896 Shares issued on reinvestment............................... 80,676 1,816 Shares redeemed............................................. (229,307) (433,506) - ------------------------------------------------------------------------------- Net Increase (Decrease)..................................... 514,952 (89,794) - -------------------------------------------------------------------------------
56 - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS For a share of beneficial interest outstanding throughout each year ended December 31:
U.S. GOVERNMENT SECURITIES PORTFOLIO 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF YEAR.................... $11.65 $10.86 $12.43 $10.58 $11.63 - ------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM OPERATIONS: Net investment income............................... 0.49 0.58 0.68 0.65 0.60 Net realized and unrealized gain (loss)............. 0.70 0.79 (0.52) 1.80 (1.23) - ------------------------------------------------------------------------------------------------------------------- Total Income (Loss) From Operations................... 1.19 1.37 0.16 2.45 (0.63) - ------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS FROM (1): Net investment income............................... (0.50) (0.58) (1.55) (0.60) (0.39) Net realized gains.................................. (0.54) -- (0.18) -- (0.03) - ------------------------------------------------------------------------------------------------------------------- Total Distributions................................... (1.04) (0.58) (1.73) (0.60) (0.42) - ------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF YEAR.......................... $11.80 $11.65 $10.86 $12.43 $10.58 - ------------------------------------------------------------------------------------------------------------------- TOTAL RETURN.......................................... 10.20% 12.62% 1.46% 24.42% (5.64)% - ------------------------------------------------------------------------------------------------------------------- NET ASSETS, END OF YEAR (000'S)....................... $66,454 $35,279 $26,009 $28,192 $24,522 - ------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: Expenses............................................ 0.45% 0.49% 0.62% 0.56% 0.71% Net investment income............................... 5.31 6.10 5.68 5.80 5.56 - ------------------------------------------------------------------------------------------------------------------- PORTFOLIO TURNOVER RATE............................... 349% 208% 501% 214% 16% - -------------------------------------------------------------------------------------------------------------------
SOCIAL AWARENESS STOCK PORTFOLIO 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF YEAR.................... $20.06 $15.76 $14.32 $11.05 $11.64 - ------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM OPERATIONS: Net investment income (2)........................... 0.10 0.15 0.31 0.12 0.16 Net realized and unrealized gain (loss)............. 6.30 4.15 2.42 3.47 (0.45) - ------------------------------------------------------------------------------------------------------------------- Total Income (Loss) From Operations................... 6.40 4.30 2.73 3.59 (0.29) - ------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS FROM (1): Net investment income............................... (0.12) -- (0.43) (0.14) (0.24) Net realized gains.................................. (0.42) -- (0.86) (0.18) (0.06) - ------------------------------------------------------------------------------------------------------------------- Total Distributions................................... (0.54) -- (1.29) (0.32) (0.30) - ------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF YEAR.......................... $25.92 $20.06 $15.76 $14.32 $11.05 - ------------------------------------------------------------------------------------------------------------------- TOTAL RETURN.......................................... 32.27% 27.28% 19.98% 33.37% (2.69)% - ------------------------------------------------------------------------------------------------------------------- NET ASSETS, END OF YEAR (000'S)....................... $39,482 $21,013 $11,040 $7,055 $3,879 - ------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: Expenses (2)(3)..................................... 0.84% 0.98% 1.25% 1.25% 1.25% Net investment income............................... 0.63 0.97 0.43 0.99 1.43 - ------------------------------------------------------------------------------------------------------------------- PORTFOLIO TURNOVER RATE............................... 14% 19% 26% 73% 137% - -------------------------------------------------------------------------------------------------------------------
(1) Distributions from realized gains include both net realized short-term and long-term capital gains. Prior to 1996 net realized short-term capital gains were included in distributions from net investment income. (2) For the year ended December 31, 1996, The Travelers reimbursed the Social Awareness Stock Portfolio for $25,093 in expenses. If such fees were not waived and expenses not reimbursed, the per share decrease of net investment income would have been $0.06 and the actual expense ratio would have been 1.69%. (3) The ratios of expenses to average net assets for the years ended December 31, 1995 and 1994 reflect an expense reimbursement by The Travelers in connection with voluntary expense limitations. Without the expense reimbursements, the ratios of expenses to average net assets would have been 1.75% and 3.34%, respectively. 57 - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (CONTINUED) For a share of beneficial interest outstanding throughout each year ended December 31:
UTILITIES PORTFOLIO 1998 1997 1996 1995 1994(1) - -------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF YEAR..................... $15.29 $12.22 $12.85 $10.17 $10.00 - -------------------------------------------------------------------------------------------------------------------- INCOME FROM OPERATIONS: Net investment income................................ 0.37 0.46 0.47 0.48 0.35 Net realized and unrealized gain (loss).............. 2.33 2.63 0.47 2.44 (0.18) - -------------------------------------------------------------------------------------------------------------------- Total Income From Operations........................... 2.70 3.09 0.94 2.92 0.17 - -------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS FROM (2): Net investment income................................ (0.42) (0.01) (0.84) (0.24) -- Net realized gains................................... (0.39) (0.01) (0.73) -- -- - -------------------------------------------------------------------------------------------------------------------- Total Distributions.................................... (0.81) (0.02) (1.57) (0.24) -- - -------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF YEAR........................... $17.18 $15.29 $12.22 $12.85 $10.17 - -------------------------------------------------------------------------------------------------------------------- TOTAL RETURN........................................... 18.21% 25.29% 7.47% 29.29% 1.70%++ - -------------------------------------------------------------------------------------------------------------------- NET ASSETS, END OF YEAR (000'S)........................ $32,909 $21,413 $18,214 $15,340 $5,757 - -------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: Expenses (3)......................................... 0.80% 1.06% 1.07% 1.25% 1.25%+ Net investment income................................ 3.06 3.58 3.88 4.29 3.86+ - -------------------------------------------------------------------------------------------------------------------- PORTFOLIO TURNOVER RATE................................ 51% 68% 39% 25% 32% - --------------------------------------------------------------------------------------------------------------------
(1) For the period from February 4, 1994 (commencement of operations) to December 31, 1994. (2) Distributions from realized gains include both net realized short-term and long-term capital gains. Prior to 1996 net realized short-term capital gains were included in distributions from net investment income. (3) The ratios of expenses to average net assets for the year ended December 31, 1995 and the period ended December 31, 1994 reflect expense reimbursements by The Travelers in connection with voluntary expense limitations. Without the expense reimbursements, the ratios of expenses to average net assets would have been 1.27% and 3.49% (annualized), respectively. ++ Total return is not annualized, as it may not be representative of the total return for the year. + Annualized 58 - -------------------------------------------------------------------------------- INDEPENDENT AUDITORS' REPORT THE SHAREHOLDERS AND BOARD OF TRUSTEES OF THE TRAVELERS SERIES TRUST: We have audited the accompanying statements of assets and liabilities, including the schedules of investments, of the U.S. Government Securities Portfolio, Social Awareness Stock Portfolio and Utilities Portfolio of The Travelers Series Trust as of December 31, 1998, and the related statements of operations, statements of changes in net assets, and the financial highlights for the year then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights for each of the years in the three-year period then ended were audited by other auditors whose report thereon, dated February 24, 1997, expressed an unqualified opinion on those financial statements and financial highlights. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 1997, by correspondence with the custodian. As to securities purchased but not yet received, we performed other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial positions of the U.S. Government Securities Portfolio, Social Awareness Stock Portfolio and Utilities Portfolio of The Travelers Series Trust as of December 31, 1998, the results of their operations, changes in their net assets and their financial highlights for the year then ended, in conformity with generally accepted accounting principles. [KPMG Peat Marwick LLP Signature] New York, New York February 8, 1999 59 - -------------------------------------------------------------------------------- TAX INFORMATION (UNAUDITED) For Federal tax purposes the Trust hereby designates for the fiscal year ended December 31, 1998: - Percentages of ordinary dividends paid as qualifying for the corporate dividends received deduction: Social Awareness Stock Portfolio.................. 91.05% Utilities Portfolio............................... 70.08
- Total long-term capital gain distributions paid: U.S. Government Securities Portfolio.............. $753,756 Social Awareness Stock Portfolio.................. 535,746 Utilities Portfolio............................... 466,835
The following percentages of ordinary dividends paid from net investment income are derived from Federal obligations and may be exempt from taxation at the state level. Utilities Portfolio.................................... 3.17% U.S. Government Securities Portfolio................... 23.83
60 Investment Advisers -------------------- MANAGED ASSETS TRUST, HIGH YIELD BOND TRUST, CAPITAL APPRECIATION FUND, MONEY MARKET PORTFOLIO AND THE TRAVELERS SERIES TRUST: U.S. GOVERNMENT SECURITIES PORTFOLIO TRAVELERS ASSET MANAGEMENT INTERNATIONAL CORPORATION Hartford, Connecticut THE TRAVELERS SERIES TRUST: SOCIAL AWARENESS STOCK PORTFOLIO AND UTILITIES PORTFOLIO MUTUAL MANAGEMENT CORP. New York, New York Independent Auditors --------------------- KPMG LLP New York, New York Custodian ---------- PNC BANK, N.A. This report is prepared for the general information of contract owners and is not an offer of shares of Managed Assets Trust, High Yield Bond Trust, Capital Appreciation Fund, Money Market Portfolio, The Travelers Series Trust: U.S. Government Securities Portfolio, Social Awareness Stock Portfolio or Utilities Portfolio. It should not be used in connection with any offer except in conjunction with the Prospectuses for the Variable Annuity and Variable Universal Life Insurance products offered by The Travelers Insurance Company or Travelers Life & Annuity Company and the Prospectuses for the underlying funds, which collectively contain all pertinent information, including the applicable sales commissions. Printed in U.S.A. VG-181 (Annual)(2-99) -----END PRIVACY-ENHANCED MESSAGE-----