-----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, IPuf7hpG4lbPfqL+USS7l2Vcg5IODoliVQ+JA1zjklsw3FpSztX7A7zuzvs4ric8 qJv5l3SQ4kSuAuFn4bLDmA== 0000950123-96-004616.txt : 19960928 0000950123-96-004616.hdr.sgml : 19960928 ACCESSION NUMBER: 0000950123-96-004616 CONFORMED SUBMISSION TYPE: N-30D/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960821 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRAVELERS GROWTH & INCOME STOCK ACCT FOR VARIABLE ANNUITIES CENTRAL INDEX KEY: 0000099444 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 060566090 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D/A SEC ACT: 1940 Act SEC FILE NUMBER: 811-01539 FILM NUMBER: 96618436 BUSINESS ADDRESS: STREET 1: ONE TOWER SQ STREET 2: C/O TRAVELERS INSURANCE CO CITY: HARTFORD STATE: CT ZIP: 06183-2020 BUSINESS PHONE: 2032770111 MAIL ADDRESS: STREET 1: ONE TOWER SQUARE STREET 2: ATTN FINANCIAL SERVICES LEGAL DIVISION CITY: HARTFORD STATE: CT ZIP: 06183-2020 FORMER COMPANY: FORMER CONFORMED NAME: TRAVELERS FUND A FOR VARIABLE ANNUITIES DATE OF NAME CHANGE: 19851103 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES CENTRAL INDEX KEY: 0000099440 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 060566090 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D/A SEC ACT: 1940 Act SEC FILE NUMBER: 811-02571 FILM NUMBER: 96618437 BUSINESS ADDRESS: STREET 1: ONE TOWER SQ STREET 2: C/O TRAVELERS INSURANCE CO 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 FORMER COMPANY: FORMER CONFORMED NAME: TRAVELERS FUND A-1 FOR VARIABLE ANNUITIES DATE OF NAME CHANGE: 19851103 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES CENTRAL INDEX KEY: 0000700871 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 060566090 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D/A SEC ACT: 1940 Act SEC FILE NUMBER: 811-03409 FILM NUMBER: 96618438 BUSINESS ADDRESS: STREET 1: ONE TOWER SQ STREET 2: C/O TRAVELERS INSURANCE CO CITY: HARTFORD STATE: CT ZIP: 06183 BUSINESS PHONE: 2032777379 MAIL ADDRESS: STREET 1: ONE TOWER SQUARE STREET 2: ATTN FINANCIAL SERVICES LEGAL DIVISION CITY: HARTFORD STATE: CT ZIP: 06183-2020 FORMER COMPANY: FORMER CONFORMED NAME: TRAVELERS FUND MM FOR VARIABLE ANNUITIES DATE OF NAME CHANGE: 19851103 N-30D/A 1 N-30D 1 UNIVERSAL ANNUITY SEMI-ANNUAL REPORTS THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES JUNE 30, 1996 [TRAVELERS LOGO] THE TRAVELERS INSURANCE COMPANY ONE TOWER SQUARE HARTFORD, CONNECTICUT 06183 2 [TIMCO LOGO] The Travelers Investment Management Company ("TIMCO") provides equity management and advisory services for The Travelers Growth and Income Stock Account for Variable Annuities. [TAMIC LOGO] Travelers Asset Management International Corporation ("TAMIC") provides fixed income management and advisory services for the following Travelers Variable Products Separate Accounts contained in this report: The Travelers Quality Bond Account for Variable Annuities and The Travelers Money Market Account for Variable Annuities. 3 [TRAVELERS LOGO] THE TRAVELERS VARIABLE PRODUCT SEPARATE ACCOUNTS INVESTMENT ADVISORY COMMENTARY AS OF JUNE 30, 1996 ECONOMIC REVIEW AND OUTLOOK The economy finished the first half of the year on a strong note. The broadest measure of the rate of growth for the U.S. economy, the Gross Domestic Product ("GDP"), is expected to be a robust 4% to 4.5% for the second quarter. This follows a stronger than expected first quarter GDP of 2.2%. Numerous economic reports released in the second quarter pointed to an accelerating trend. Most notably, consumer spending increased 5.2% during the first half of the year, despite high levels of personal debt. This appears to have been the key factor in the economy's good first half performance. Sales in both the housing and auto sectors were surprisingly strong. Employment growth continued, and unemployment declined to 5.3%. Business investment also remained strong, with first quarter capital spending increasing by approximately 14%. Furthermore, companies maintained low inventories, leaving room for future growth as inventories are rebuilt to normal levels. Finally, renewed growth was observed in major overseas economies, creating an improved outlook for the export sector of the U.S. economy. This picture of solid economic momentum increases the probability that the Federal Reserve Board ("Fed") will shift to a tighter monetary policy and raise short-term interest rates before the end of the year. In order to maintain wage and price stability, Fed policy is focused on constraining economic growth. For investors, the key issue is whether fears of future Fed tightening will drive long-term yields toward levels reached during 1994. It appears to be a foregone conclusion among private analysts that current levels of unemployment will cause wage pressures to increase. The question remains whether corporations will be able to pass these increases into consumer prices and if so, what impact it will have on inflationary expectations. On the plus side, other sources of inflation have been under control. Commodity prices have been weak lately and the dollar has been strong. Short-term interest rates are more than 2% over the Consumer Price Index ("CPI"), keeping downward pressure on inventories. Inflation expectations in the consumer sentiment surveys are still below 3%, compared to 4% in 1994. With the steep rise in long bond yields during the first half of the year, we expect housing and auto sales to slow in the second half. If demand in these sectors does not slow in the second half, we doubt that the Fed will have any choice but to raise short-term interest rates aggressively. Interest rates for both long and short maturities are unlikely to have a sustained decline until the Fed is judged to have placed an effective damper on the cyclical build-up in wage and inflation pressures. FIXED INCOME COMMENTARY Surprisingly strong consumer spending and employment growth in the first half of the year banished the slow growth expectations that dominated the bond market at year end. Interest rates rose sharply during the first half of the year, resulting in generally poor performance for bonds. The Lehman Government/Corporate Bond Index, a broad based bond index, declined 1.9% for the first six months. The bond market finally stabilized late in the second quarter, with most bond indices posting a positive price return in June. Corporate bonds returned a negative 2.1% and lagged the Treasury sector for the first six months. The best performing issuer sectors were tobacco, airlines, Canadians and sovereigns. A favorable decision in the Castano case enabled the tobacco issues to rally as yields declined relative to Treasuries. Airlines continue to post strong earnings and are buying back their debt with excess cashflow. Against the backdrop of favorable international developments, including an upgrade in Italy's credit rating, sovereign bonds also increased in price. Issuer sectors that lagged were cable, gaming, autos and banks. Credit downgrades in the media sector and new issuance in the auto sector put pressure on yield spreads in those sectors. As the market began to anticipate the need for the Fed to increase short-term interest rates, finance and bank issues declined in price. Despite recent underperformance, yields on investment grade corporate bonds remain below the normal range relative to Treasuries. -1- 4 In the mortgage backed sector, fears of consumer refinancing vanished as interest rates rose. With yield volatility reduced, mortgage backed securities outperformed similar Treasury securities. Moreover, narrow corporate yield spreads relative to Treasuries prompted a shift of investor interest to this sector. During the first half, the Lehman Mortgage Index returned 0.4%. Over the same period, the high yield market also performed relatively well. The First Boston High-Yield Index reported a return of 3.8%. The last two years have seen heavy issuance of high-yield debt, in the midst of a hot initial public offering market for equities, and active competition by banks for loan syndication. It is uncertain how well high yield securities will weather the next downturn in the credit cycle if these other sources of financing are shut down. If the stock market were to unravel, more speculative financings may find themselves in trouble. In the second quarter, municipal bonds performed relatively well as tax exempt yields continued to decline relative to Treasuries. Municipal bonds with maturities shorter than 10 years, still relatively cheap at year end, rallied in price and now trade at more normal yield spreads. EQUITY COMMENTARY Better than expected corporate earnings gains and unprecedented inflows into equity mutual funds helped stock prices to move broadly higher during the first six months of 1996. For the six-month period ending June 30, the Standard and Poor's 500 Stock Index ("S&P 500"), a broad based stock market index, recorded a total return (including dividends) of 10.1%. The Russell 2000 Stock Index, a measure of performance for the small cap sector, provided a total return of 10.4% over the same period. Against the inclement backdrop of rising interest rates and diminishing earnings momentum, liquidity factors - record mutual fund inflows and corporate stock buybacks - appeared to provide the critical catalyst for the market advance. As signs of the economy's strength emerged early in the year, investor focus shifted away from stable growth stocks and towards consumer cyclical stocks, particularly those in the department store, airline and auto groups. In the energy sector, the drilling equipment and oil field service stocks rose on strong earnings gains and expectations for increased capital spending by major global energy companies. Technology stocks rebounded somewhat after their late 1995 decline, but weaker earnings momentum continued to dampen valuations in most technology related groups. While more than half of all companies announced positive earnings surprises for the first quarter, the 6% average gain in operating earnings was the most sluggish year-over-year rate of profit growth observed during the current business expansion. Early in the second quarter, however, equity investors reversed course and began to rotate back into more defensive, growth-oriented sectors on the expectation that higher interest rates would translate into slower economic growth by year end. In the staples sector, beverage stocks performed well in response to solid revenue gains. In the consumer sector, improving sales fueled a rally in the retail and apparel groups. Energy exploration, pipeline and distribution stocks benefited from strong natural gas pricing. However, basic material stocks continued to weaken on declining prices for many industrial commodities and concern over the possibility of an economic slowdown. Within the technology sector, performance was mixed. While most of the stocks in the semiconductor group continued to trade lower, the networking and software groups were strong, reflecting continued order growth from corporate customers. We are currently somewhat cautious towards the equity market. The bear case is built upon a valuation argument that points to price-to-book and price-to-dividend ratios in excess of historical norms. There is also a growing concern that the Fed may tighten monetary policy in the near term if employment and economic reports show continued strength. Clearly, Fed action in the direction of higher interest rates will curtail the supply of liquidity that has been so important for recent stock market performance. On the other hand, optimists hold that slower economic growth, while perhaps placing earnings temporarily at risk, would forestall aggressive tightening by the Fed and eventually set the stage for lower interest rates. They also point to the fact that stocks do not appear expensive if consensus earnings forecasts are evaluated relative to interest rates and observed inflation. The second quarter earnings reports probably hold the key to short-term equity performance. If the majority of earnings announcements meet or exceed analyst estimates, the downside risk of holding stocks should be limited. -2- 5 TABLE OF CONTENTS
PAGE - --------------------------------------------------------------------------- THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES................................................ 4 THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES............. 15 THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES............. 25
-3- 6 THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES The Travelers Growth and Income Stock Account for Variable Annuities ("Account GIS") is managed by the The Travelers Investment Management Company ("TIMCO"). TIMCO's approach to equity management is designed to provide diversified exposure to the large capitalization segment of the U.S. equity market. TIMCO selects stocks with a primarily quantitative screening process that seeks attractive relative value and earnings growth. In order to achieve consistent relative performance, TIMCO manages Account GIS to mirror the overall risk, sector weightings and growth/value style characteristics of the Standard & Poor's 500 Stock Index ("S&P 500"). For the first six months of 1996, Account GIS achieved a total return of approximately 11.0%, before fees and expenses, outperforming the S&P 500 total return of 10.1%. Net of fees and expenses, Account GIS's year-to-date return of 10.1% compared favorably to the 8.9% average total return for variable annuity accounts in the Lipper Growth & Income category. During the first half of 1996, stock selection in the consumer discretionary, staples and finance sectors made the strongest positive contribution to our performance. In the consumer discretionary sector, the portfolio benefited from exposure to a number of retailing and apparel stocks, including The GAP, Price/Costco, Sears and Nike, that moved sharply higher in response to improving sales trends. Stock selection also proved to be successful in the staples sector, with the help of positions in Coca-Cola Co. and PepsiCo, which benefited from the general market rotation into stable growth issues. In the finance sector, stock selection in the consumer finance and bank groups contributed positively, most notably from positions in Green Tree Financial, Household International and Citicorp. In the technology sector, we largely stepped around a minefield of earnings disappointments in the semiconductor group and achieved a positive contribution to portfolio performance through holdings in Andrew Corp., Western Digital and Sun Microsystems. The equity market has been under selling pressure thus far in the third quarter. We expect the equity market to be volatile until investors work through a number of factors felt to be bearish for stocks, including the fear of an imminent Federal Reserve Board's tightening, a handful of highly visible second quarter earnings disappointments, a sharp selloff in the technology group and diminishing mutual fund inflows. However, we do not see the levels of overvaluation that in the past have preceded major bear markets, and therefore believe that the current pullback in the equity market is likely to be limited. Consistent with our disciplined approach to stock selection, we continue to focus on stocks that exhibit improving fundamentals (primarily gauged through analyst's earnings estimate revisions and earnings surprise trends), but which also trade at a reasonable price to earnings ratio relative to expected earnings growth rates. PORTFOLIO MANAGERS: SANDIP A. BHAGAT, CFA - JACOB E. HURWITZ, CFA - KENT A. KELLEY, CFA -4- 7 THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) JUNE 30, 1996 ASSETS: Investment securities, at market value (identified cost $361,777,820)...... $ 463,515,754 Cash....................................................................... 1,106 Receivables: Dividends............................................................... 759,332 Interest................................................................ 93,993 Purchase payments and transfers from other Travelers accounts........... 365,802 Variation on futures margin............................................. 80,625 Other assets............................................................... 26,159 -------------- Total Assets......................................................... 464,842,771 -------------- LIABILITIES: Payables: Investment securities purchased......................................... 514,368 Contract surrenders and transfers to other Travelers accounts........... 176,800 Investment management and advisory fees................................. 34,103 Accrued liabilities........................................................ 88,449 -------------- Total Liabilities.................................................... 813,720 -------------- NET ASSETS.................................................................... $ 464,029,051 ==============
See Notes to Financial Statements -5- 8 THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF OPERATIONS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, 1996 INVESTMENT INCOME: Dividends.................................................. $ 4,442,108 Interest................................................... 323,294 -------------- Total income............................................ $ 4,765,402 EXPENSES: Investment management and advisory fees.................... 997,847 Insurance charges.......................................... 2,548,640 -------------- Total expenses.......................................... 3,546,487 -------------- Net investment income................................ 1,218,915 -------------- REALIZED GAIN AND CHANGE IN UNREALIZED GAIN ON INVESTMENT SECURITIES: Realized gain from investment security transactions: Proceeds from investment securities sold................ 171,560,357 Cost of investment securities sold...................... 147,314,435 -------------- Net realized gain.................................... 24,245,922 Change in unrealized gain on investment securities: Unrealized gain at December 31, 1995.................... 84,623,392 Unrealized gain at June 30, 1996........................ 101,737,934 -------------- Net change in unrealized gain for the period......... 17,114,542 -------------- Net realized gain and change in unrealized gain .. 41,360,464 -------------- Net increase in net assets resulting from operations....... $ 42,579,379 ==============
See Notes to Financial Statements -6- 9 THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, 1996 1995 ---- ---- (UNAUDITED) OPERATIONS: Net investment income......................................... $ 1,218,915 $ 3,305,259 Net realized gain from investment security transactions....... 24,245,922 37,951,859 Net change in unrealized gain on investment securities........ 17,114,542 71,724,212 -------------- -------------- Net increase in net assets resulting from operations....... 42,579,379 112,981,330 -------------- -------------- UNIT TRANSACTIONS: Participant purchase payments (applicable to 1,393,219 and 2,505,561 units, respectively) 13,791,849 20,576,327 Participant transfers from other Travelers accounts (applicable to 1,830,248 and 2,758,216 units, respectively) 18,019,024 23,120,885 Administrative charges (applicable to 17,016 and 39,010 units, respectively)...... (174,016) (345,103) Contract surrenders (applicable to 1,385,505 and 3,134,685 units, respectively) (13,786,948) (26,235,475) Participant transfers to other Travelers accounts (applicable to 1,878,137 and 3,616,329 units, respectively) (18,564,131) (29,697,410) Other payments to participants (applicable to 94,813 and 138,390 units, respectively)..... (946,359) (1,142,807) -------------- -------------- Net decrease in net assets resulting from unit transactions (1,660,581) (13,723,583) -------------- -------------- Net increase in net assets.............................. 40,918,798 99,257,747 NET ASSETS: Beginning of period........................................... 423,110,253 323,852,506 -------------- -------------- End of period................................................. $ 464,029,051 $ 423,110,253 ============== ==============
See Notes to Financial Statements -7- 10 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES The Travelers Growth and Income Stock Account for Variable Annuities ("Account GIS") is a separate account of The Travelers Insurance Company ("The Travelers"), an indirect wholly owned subsidiary of Travelers Group Inc., and is available for funding certain variable annuity contracts issued by The Travelers. Account GIS is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company. The following is a summary of significant accounting policies consistently followed by Account GIS in the preparation of its financial statements. SECURITY VALUATION. Investments in securities traded on a national securities exchange are valued at the last-reported sale price as of the close of business of the New York Stock Exchange on the last business day of the period; securities traded on the over-the-counter market and listed securities with no reported sales are valued at the mean between the last reported bid and asked prices or on the basis of quotations received from a reputable broker or other recognized source. When market quotations are not considered to be readily available for long-term corporate bonds and notes, such investments are generally stated at fair value on the basis of valuations furnished by a pricing service. These valuations are determined for normal institutional-size trading units of such securities using methods based on market transactions for comparable securities and various relationships between securities which are generally recognized by institutional traders. Securities, including restricted securities, for which pricing services are not readily available are valued by management at prices which it deems in good faith to be fair. Short-term investments for which a quoted market price is available are valued at market. Short-term investments for which there is no reliable quoted market price are valued by computing a market value based upon quotations from dealers or issuers for securities of a similar type, quality and maturity. FUTURES CONTRACTS. Account GIS may use stock index futures contracts as a substitute for the purchase or sale of individual securities. When Account GIS enters into a futures contract, it agrees to buy or sell a specified index of stocks at a future time for a fixed price, unless the contract is closed prior to expiration. Account GIS is obligated to deposit with a broker an "initial margin" equivalent to a percentage of the face, or notional value of the contract. It is Account GIS's practice to hold cash and cash equivalents in an amount at least equal to the notional value of outstanding purchased futures contracts, less the initial margin. Cash and cash equivalents include cash on hand, securities segregated under federal and brokerage regulations, and short-term highly liquid investments with maturities generally three months or less when purchased. Generally, futures contracts are closed prior to expiration. Futures contracts purchased by Account GIS are priced and settled daily; accordingly, changes in daily prices are recorded as realized gains or losses and no asset is recorded in the Statement of Investments. However, when Account GIS holds open futures contracts, it assumes a market risk generally equivalent to the underlying market risk of change in the value of the specified indexes associated with the futures contract. OPTIONS. Account GIS may purchase index or individual equity put or call options, thereby obtaining the right to sell or buy a fixed number of shares of the underlying asset at the stated price on or before the stated expiration date. Account GIS may sell the options before expiration. Options held by Account GIS are listed on either national securities exchanges or on over-the-counter markets, and are short-term contracts with a duration of less than nine months. The market value of the options will be the latest sale price as of the close of business of the New York Stock Exchange, or in the absence of such sale, the latest bid quotation. -8- 11 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED REPURCHASE AGREEMENTS. When Account GIS enters into a repurchase agreement (a purchase of securities whereby the seller agrees to repurchase the securities at a mutually agreed upon date and price), the repurchase price of the securities will generally equal the amount paid by Account GIS plus a negotiated interest amount. The seller under the repurchase agreement will be required to provide to Account GIS securities (collateral) whose market value, including accrued interest, will be at least equal to 102% of the repurchase price. Account GIS monitors the value of collateral on a daily basis. Repurchase agreements will be limited to transactions with national banks and reporting broker dealers believed to present minimal credit risks. Account GIS's custodian will take actual or constructive receipt of all securities underlying repurchase agreements until such agreements expire. FEDERAL INCOME TAXES. The operations of Account GIS form a part of the total operations of The Travelers and are not taxed separately. The Travelers is taxed as a life insurance company under the Internal Revenue Code of 1986, as amended (the "Code"). Under existing federal income tax law, no taxes are payable on the investment income and capital gains of Account GIS. Account GIS is not taxed as a "regulated investment company" under Subchapter M of the Code. OTHER. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Security transactions are accounted for on the trade date. Dividend income is recorded on the ex-dividend date. Interest income is recorded on the accrual basis. 2. INVESTMENTS Purchases and sales of securities other than short-term investments aggregated $157,105,342 and $167,327,042 respectively, for the six months ended June 30, 1996. Realized gains and losses from security transactions are reported on an identified cost basis. Account GIS placed a portion of its security transactions with brokerage firms which are affiliates of The Travelers. The commissions paid to these affiliated firms were $44,121 and $70,759 for the six months ended June 30, 1996 and the year ended December 31, 1995, respectively. At June 30, 1996, Account GIS held 43 open S&P 500 Stock Index futures contracts with a maturity date of September 20, 1996. The underlying face value, or notional value, of these contracts at June 30, 1996, amounted to $14,551,200. In connection with these contracts, short-term investments with a par value of $605,000 had been pledged as margin deposits. Net realized gains resulting from futures contracts were $345,688 and $2,884,399 for the six months ended June 30, 1996 and the year ended December 31, 1995, respectively. These gains are included in the net realized gain from investment security transactions on both the Statement of Operations and the Statement of Changes in Net Assets. The cash settlement for June 30, 1996 is shown on the Statement of Assets and Liabilities as a receivable for variation on futures margin. -9- 12 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED 3. CONTRACT CHARGES Investment management and advisory fees are calculated daily at an annual rate of 0.45% of Account GIS's average net assets. These fees are paid to The Travelers Investment Management Company, an indirect wholly owned subsidiary of Travelers Group Inc. Insurance charges are paid to The Travelers for the mortality and expense risks assumed by The Travelers. On contracts issued prior to May 16, 1983, these charges are equivalent to 1.0017% of the average net assets of Account GIS on an annual basis. On contracts issued on or after May 16, 1983, the charges for mortality and expense risks are equivalent to 1.25% of the average net assets of Account GIS on an annual basis. Additionally, for certain contracts in the accumulation phase, a semi-annual charge of $15 (prorated for partial periods) is deducted from participant account balances and paid to The Travelers to cover administrative charges. On contracts issued prior to May 16, 1983, The Travelers retained from Account GIS sales charges of $27,677 and $40,106 for the six months ended June 30, 1996 and the year ended December 31, 1995, respectively. The Travelers generally assesses a 5% contingent deferred sales charge if a participant's purchase payment is surrendered within five years of its payment date. Contract surrender payments are stated prior to the deduction of $78,185 and $189,214 of contingent deferred sales charges for the six months ended June 30, 1996 and the year ended December 31, 1995, respectively. 4. NET ASSETS HELD BY AFFILIATE Approximately $11,595,000 and $10,733,000 of the net assets of Account GIS were held on behalf of an affiliate of The Travelers as of June 30, 1996 and December 31, 1995, respectively. Transactions with this affiliate during the six months ended June 30, 1996 and the year ended December 31, 1995, were comprised of participant purchase payments of approximately $75,000 and $427,000 and contract surrenders of approximately $286,000 and $560,000, respectively. 5. NET CONTRACT OWNERS' EQUITY
JUNE 30, 1996 ---------------------------------------- UNIT NET UNITS VALUE ASSETS ----- ----- ------ Accumulation phase of contracts issued prior to May 16, 1983............................................ 16,838,093 $ 10.653 $ 179,373,774 Annuity phase of contracts issued prior to May 16, 1983................................................ 407,976 10.653 4,346,111 Accumulation phase of contracts issued on or after May 16, 1983............................................ 27,124,646 10.311 279,670,623 Annuity phase of contracts issued on or after May 16, 1983................................................ 61,931 10.311 638,543 -------------- Net Contract Owners' Equity................................................ $ 464,029,051 ==============
-10- 13 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED 6. SUPPLEMENTARY INFORMATION (Selected data for a unit outstanding throughout each period.)
Contracts issued prior to May 16, 1983 SIX MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31, JUNE 30, (DERIVED FROM AUDITED FINANCIAL INFORMATION) -------- ---------------------------------------------- 1996 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- ---- SELECTED PER UNIT DATA: Total investment income..................... $ .108 $ .208 $ .192 $ .189 $ .192 $ .201 Operating expenses.......................... .073 .123 .100 .092 .085 .077 -------- -------- -------- --------- -------- -------- Net investment income....................... .035 .085 .092 .097 .107 .124 Unit value at beginning of period........... 9.668 7.120 7.194 6.664 6.587 5.145 Net realized and change in unrealized gains (losses)............................ .950 2.463 (.166) .433 (.030) 1.318 -------- -------- -------- --------- -------- -------- Unit value at end of period................. $10.653 $ 9.668 $ 7.120 $ 7.194 $ 6.664 $ 6.587 ======== ======== ======== ========= ======== ======== SIGNIFICANT RATIOS AND ADDITIONAL DATA: Net increase (decrease) in unit value....... $ .99 $ 2.55 $ (.07) $ .53 $ .08 $ 1.44 Ratio of operating expenses to average net assets.................................... 1.45 %* 1.45 % 1.41 % 1.33 % 1.33 % 1.33 % Ratio of net investment income to average net assets................................ .68 %* 1.02 % 1.30 % 1.40 % 1.67 % 2.11 % Number of units outstanding at end of period (thousands)........................ 17,246 17,896 19,557 21,841 22,516 24,868 Portfolio turnover rate..................... 36 % 96 % 103 % 81 % 189 % 319 % Average commission rate paid+............... $ .0470 - - - - - Contracts issued on or after May 16, 1983 SIX MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31, JUNE 30, (DERIVED FROM AUDITED FINANCIAL INFORMATION) -------- ---------------------------------------------- 1996 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- ---- SELECTED PER UNIT DATA: Total investment income..................... $ .106 $ .205 $ .189 $ .184 $ .188 $ .198 Operating expenses.......................... .084 .140 .115 .106 .098 .091 -------- -------- -------- -------- -------- -------- Net investment income....................... .022 .065 .074 .078 .090 .107 Unit value at beginning of period........... 9.369 6.917 7.007 6.507 6.447 5.048 Net realized and change in unrealized gains (losses)............................ .920 2.387 (.164) .422 (.030) 1.292 -------- -------- -------- -------- -------- -------- Unit value at end of period................. $10.311 $ 9.369 $ 6.917 $ 7.007 $ 6.507 $ 6.447 ======== ======== ======== ======== ======== ======== SIGNIFICANT RATIOS AND ADDITIONAL DATA: Net increase (decrease) in unit value....... $ .94 $ 2.45 $ (.09) $ .50 $ .06 $ 1.40 Ratio of operating expenses to average net assets.................................... 1.70 %* 1.70 % 1.65 % 1.57 % 1.58 % 1.58 % Ratio of net investment income to average net assets................................ .44 %* .79 % 1.05 % 1.15 % 1.43 % 1.86 % Number of units outstanding at end of period (thousands)........................ 27,187 26,688 26,692 28,497 29,661 26,235 Portfolio turnover rate..................... 36 % 96 % 103 % 81 % 189 % 319 % Average commission rate paid+............... $ .0470 - - - - -
* Annualized. + Calculated by dividing the total dollar amount of commissions paid for equity securities by the total number of shares purchased and sold during the period. -11- 14 THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF INVESTMENTS (UNAUDITED) JUNE 30, 1996
NO. OF MARKET SHARES VALUE ------- ------------- COMMON STOCKS (96.6%) AMUSEMENTS (1.6%) Mirage Resorts, Inc. (A) 39,800 $ 2,149,200 Walt Disney Co. 85,555 5,379,270 -------------- 7,528,470 -------------- BANKING (6.3%) Banc One Corp. 34,740 1,181,160 Bank of Boston Corp. 10,300 509,850 Bank of New York Co., Inc. 16,600 850,750 BankAmerica Corp. 33,400 2,530,050 Barnett Banks, Inc. 8,500 518,500 Chase Manhattan Corp. 60,752 4,290,610 Citicorp 65,300 5,395,412 Golden West Financial Corp. 22,700 1,271,200 Mellon Bank Corp. 11,600 661,200 NationsBank Corp. 40,000 3,305,000 Norwest Corp. 91,500 3,191,063 Star Banc Corp. 22,200 1,495,725 SunTrust Banks, Inc. 56,600 2,094,200 Wells Fargo & Co. 8,833 2,109,983 -------------- 29,404,703 -------------- CHEMICALS, PHARMACEUTICALS AND ALLIED PRODUCTS (13.2%) Abbott Laboratories 69,900 3,040,650 American Home Products Corp. 41,100 2,471,137 Amgen Inc. (A) 24,200 1,303,775 Bristol-Myers Squibb Co. 59,400 5,346,000 Cabot Corp. 15,900 389,550 Dow Chemical Co. 24,000 1,824,000 E.I. Dupont de Nemours & Co. 48,600 3,845,475 Eastman Chemical Co. 24,700 1,503,613 Eli Lilly & Co. 49,700 3,230,500 Hercules, Inc. 32,400 1,790,100 Johnson & Johnson 153,600 7,603,200 Merck & Co., Inc. 108,800 7,031,200 Monsanto Co. 53,000 1,722,500 Morton International, Inc. 46,400 1,728,400 Pfizer, Inc. 55,800 3,982,725 Pharmacia & Upjohn, Inc. 45,400 2,014,625 Procter & Gamble Co. 77,700 7,041,562 Schering-Plough Corp. 61,400 3,852,850 Warner-Lambert Co. 22,800 1,254,000 -------------- 60,975,862 -------------- COMMUNICATION (7.9%) Ameritech Corp. 49,800 2,956,875 AT&T Corp. 168,900 10,471,800 Bell Atlantic Corp. 40,100 2,556,375 BellSouth Corp. 90,100 3,817,987 GTE Corp. 74,800 3,347,300 MCI Communications Corp. 54,500 1,393,156 NYNEX Corp. 57,000 2,707,500 Pacific Telesis Group 31,200 1,053,000 Sprint Corp. 30,500 1,281,000 SBC Communications, Inc. 73,800 3,634,650 Tele-Communications Int'l (A) 28,800 520,200 360 Communications Company (A) 10,166 243,984 U S West Communications Group 16,400 522,750 U S West Media Group (A) 42,800 781,100 Viacom International, Inc. (A) 33,900 1,317,863 -------------- 36,605,540 -------------- CONSTRUCTION (0.3%) Toll Brothers, Inc. (A) 76,800 1,257,600 -------------- CONTRACTORS (0.8%) Fluor Corp. 29,500 1,928,562 Halliburton Co. 32,500 1,803,750 -------------- 3,732,312 -------------- ELECTRICAL AND ELECTRONIC MACHINERY (6.7%) Amphenol Corp. (A) 67,500 1,552,500 Andrew Corp. (A) 29,400 1,591,275 General Electric Co. 148,500 12,845,250 Intel Corp. 72,100 5,294,844 KEMET Corp. (A) 49,000 986,125 LSI Logic Corp. (A) 59,600 1,549,600 Micron Technology, Inc. 19,400 501,975 Motorola, Inc. 39,200 2,464,700 Raychem Corp. 27,550 1,980,156 Tellabs, Inc. (A) 7,700 514,938 Texas Instruments, Inc. 15,700 783,037 Time Warner, Inc. 26,700 1,047,975 -------------- 31,112,375 -------------- FINANCE (3.9%) Advanta Corp. 27,500 1,397,344 American Express Co. 43,800 1,954,575 Dean Witter Discover & Co. 26,100 1,494,225 Federal Home Loan Mortgage Corp. 16,800 1,436,400 Federal National Mortgage Association 98,000 3,283,000 Green Tree Financial Co. 102,100 3,190,625 Household International 27,900 2,120,400 Merrill Lynch & Co., Inc. 14,800 963,850 Morgan Stanley Group, Inc. 14,200 697,575 Student Loan Marketing Association 23,000 1,702,000 -------------- 18,239,994 -------------- FOOD (7.9%) Campbell Soup Co. 19,000 1,339,500 Coca-Cola Co. 214,000 10,459,250 ConAgra, Inc. 52,300 2,373,112 CPC International, Inc. 30,700 2,210,400 General Mills, Inc. 14,500 790,250 Kellogg Co. 16,050 1,175,662 PepsiCo, Inc. 219,000 7,747,125 Philip Morris, Inc. 79,000 8,216,000 Seagram Co. Ltd. 28,300 951,588 Unilever N.V. 12,100 1,756,013 -------------- 37,018,900 -------------- HOTELS & LODGING (0.9%) Hilton Hotels Corp. 17,000 1,912,500 ITT Corp. (A) 30,800 2,040,500 -------------- 3,953,000 --------------
-12- 15 STATEMENT OF INVESTMENTS (UNAUDITED) - CONTINUED
NO. OF MARKET SHARES VALUE ---------- -------------- INSURANCE (3.3%) Aetna Life & Casualty Co. 9,500 $ 679,250 Allstate Corp. 29,175 1,331,109 American International Group 42,050 4,147,181 Chubb Corp. 32,600 1,625,925 General Reinsurance Corp. 23,200 3,532,200 ITT Hartford Group, Inc. 54,400 2,896,800 U.S. Healthcare, Inc. 1,800 98,888 United HealthCare Corp. 15,300 772,650 -------------- 15,084,003 -------------- LUMBER AND WOOD PRODUCTS (0.5%) Georgia-Pacific Corp. 23,200 1,647,200 Weyerhaeuser Co. 17,700 752,250 -------------- 2,399,450 -------------- MACHINERY (5.2%) Apple Computer, Inc. 10,000 209,375 Black & Decker Corp. 32,300 1,247,588 Caterpillar, Inc. 18,000 1,219,500 Cisco Systems, Inc. (A) 70,900 4,019,143 Deere & Co. 54,500 2,180,000 Digital Equipment Corp. (A) 17,600 792,000 Harnischfeger Industries 43,400 1,443,050 Hewlett Packard Co. 44,400 4,423,350 International Business Machines Corp. 40,800 4,039,200 Silicon Graphics, Inc. (A) 60,500 1,452,000 Sun Microsystems (A) 37,900 2,231,363 Tenneco, Inc. 14,900 761,762 -------------- 24,018,331 -------------- METAL PRODUCTS (1.1%) Bethlehem Steel Corp. (A) 96,000 1,140,000 Nucor Corp. 7,800 394,875 Phelps Dodge Corp. 19,400 1,210,075 Reynolds Metals Co. 27,900 1,454,288 USX-U.S. Steel Group 24,400 692,350 -------------- 4,891,588 -------------- MINING (0.5%) Freeport-McMoRan Copper & Gold 24,900 793,687 Homestake Mining Co. 86,200 1,476,175 -------------- 2,269,862 -------------- MISCELLANEOUS MANUFACTURING (3.4%) Boston Scientific Corp. (A) 57,155 2,571,975 Eastman Kodak Co. 28,900 2,246,975 Emerson Electric Co. 36,200 3,271,575 Honeywell, Inc. 37,500 2,043,750 Mattel, Inc. 72,000 2,061,000 Medtronics, Inc. 36,800 2,060,800 Xerox Corp. 27,000 1,444,500 -------------- 15,700,575 -------------- OIL & GAS (0.8%) Anadarko Petroleum 32,100 1,861,800 Schlumberger Ltd. 22,000 1,853,500 -------------- 3,715,300 -------------- PAPER AND ALLIED PRODUCTS (1.5%) Champion International Corp. 39,700 1,657,475 Kimberly Clark Corp. 44,030 3,401,317 Mead Corp. 5,400 280,125 Willamette Industries, Inc. 28,000 1,662,500 -------------- 7,001,417 -------------- PETROLEUM REFINING AND RELATED INDUSTRIES (7.4%) Amoco Corp. 59,200 4,284,600 Atlantic Richfield Co. 14,000 1,659,000 Chevron Corp. 35,700 2,106,300 Exxon Corp. 107,600 9,347,750 Kerr McGee Corp. 38,200 2,325,425 Mobil Corp. 56,800 6,368,700 Phillips Petroleum Co. 22,200 929,625 Royal Dutch Petroleum Co. 33,500 5,150,625 Texaco, Inc. 23,300 1,954,288 -------------- 34,126,313 -------------- PRINTING, PUBLISHING AND ALLIED INDUSTRIES ( .9%) Gannet Co. 31,400 2,221,550 New York Times Co. 60,700 1,980,338 -------------- 4,201,888 -------------- RETAIL (6.3%) Federated Department Stores, Inc. (A) 75,600 2,579,850 General Nutrition Cos., Inc. (A) 103,500 1,804,781 Home Depot, Inc. 44,566 2,406,564 May Department Stores 50,500 2,209,375 McDonalds Corp. 55,800 2,608,650 OfficeMax, Inc. (A) 92,500 2,208,438 Payless ShoeSource, Inc. (A) 8,080 256,540 Price/Costco, Inc. (A) 120,100 2,582,150 Safeway, Inc. (A) 26,310 868,230 Sears Roebuck & Co. 83,000 4,035,875 The GAP, Inc. 74,200 2,383,675 Vons Cos. (A) 35,190 1,315,226 Wal-Mart Stores, Inc. 155,000 3,933,125 -------------- 29,192,479 -------------- RUBBER AND PLASTIC PRODUCTS (0.6%) Nike, Inc. 27,900 2,866,725 -------------- SERVICES (3.9%) American Online, Inc. (A) 37,900 1,653,388 Automatic Data Process 27,500 1,062,188 Columbia/HCA Healthcare Corp. 39,400 2,102,975 Computer Associates International 33,850 2,411,812 First Data Corp. 19,600 1,560,650 Microsoft Corp.(A) 52,900 6,351,306 Omnicom Group, Inc. 22,700 1,055,550 Oracle Corp. (A) 57,150 2,253,853 -------------- 18,451,722 -------------- STONE, CLAY, GLASS, AND CONCRETE PRODUCTS (0.6%) Minnesota Mining & Manufacturing Co. 37,400 2,580,600 --------------
-13- 16 STATEMENT OF INVESTMENTS (UNAUDITED) - CONTINUED
NO. OF MARKET SHARES VALUE ------- -------------- TRANSPORTATION (1.3%) AMR Corp. 20,900 $ 1,901,900 Burlington Northern Santa Fe 21,800 1,763,075 Norfolk Southern Corp. 11,400 966,150 Union Pacific Corp. 18,900 1,320,638 -------------- 5,951,763 -------------- TRANSPORTATION MANUFACTURING (4.8%) Boeing Co. 47,000 4,094,875 Chrysler Corp. 42,200 2,616,400 Eaton Corp. 24,600 1,442,175 Ford Motor Co. 101,000 3,269,875 General Motors Corp. 61,400 3,215,825 ITT Industries, Inc. 24,000 603,000 Lockheed Martin Corp. 17,639 1,481,676 McDonnell Douglas Corp. 46,200 2,240,700 United Technologies Corp. 27,700 3,185,500 -------------- 22,150,026 -------------- UTILITIES (4.3%) Baltimore Gas & Electric Co. 83,100 2,357,963 Browning-Ferris Industries 19,700 571,300 Consolidated Natural Gas Co. 60,200 3,145,450 Duke Power Co. 18,000 922,500 Duquesne Light Co. 65,500 1,801,250 Florida Power & Light Co. 61,400 2,824,400 Houston Industries 23,400 576,225 Pacific Enterprises 20,200 598,425 Southern Co. 128,300 3,159,387 Texas Utilities Co. 63,000 2,693,250 WMX Technologies, Inc. 43,500 1,424,625 -------------- 20,074,775 -------------- WHOLESALE TRADE (0.7%) Crane Co. 36,900 1,512,900 Enron Corp. 43,600 1,782,150 -------------- 3,295,050 -------------- TOTAL COMMON STOCKS (COST $346,062,320) 447,800,623 -------------- PRINCIPAL AMOUNT ------------ SHORT-TERM INVESTMENTS (3.4%) COMMERCIAL PAPER (2.3%) Dillard Investment Co., Inc., 5.38% due July 25, 1996 $ 5,000,000 4,973,927 Generale Bank, 5.24% due July 17, 1996 3,000,000 2,924,281 Pearson, Inc., 5.40% due July 24, 1996 2,500,000 2,489,181 -------------- 10,387,389 -------------- U.S. GOVERNMENT SECURITIES (0.1%) United States of America Treasury, 5.06% due September 19, 1996 (B) 100,000 97,385 United States of America Treasury, 5.11% due September 19, 1996 (B) 50,000 48,761 United States of America Treasury, 5.13% due September 19, 1996 (B) 150,000 146,317 United States of America Treasury, 5.15% due September 19, 1996 (B) 150,000 147,746 United States of America Treasury, 5.49% due September 19, 1996 (B) 50,000 47,388 United States of America Treasury, 5.51% due September 19, 1996 (B) 150,000 142,145 -------------- 629,742 -------------- REPURCHASE AGREEMENTS (1.0%) Merrill Lynch Government Securities, Inc., 5.25% Repurchase Agreement dated June 28, 1996 due July 1, 1996, collateralized by: United States of America Treasury, $4,550,000, 7.50% due November 15, 2001 4,698,000 4,698,000 -------------- TOTAL SHORT-TERM INVESTMENTS (COST $15,715,500) 15,715,131 -------------- NOTIONAL VALUE ------------ FUTURES CONTRACTS(0.0%) S&P 500 Stock Index, Exp. September, 1996 (C) $14,551,200 - -------------- TOTAL INVESTMENTS (100%) (COST $361,777,820) (D) $463,515,754 ==============
NOTES (A) Non-income Producing Security. (B) Par value of $605,000 is pledged to cover margin deposits on futures contracts. -14- 17 (C) As more fully discussed in Note 1 to the financial statements, it is Account GIS's practice to hold cash and cash equivalents (including short-term investments) at least equal to the underlying face value, or notional value, of outstanding purchased futures contracts, less the initial margin. Account GIS uses futures contracts as a substitute for holding individual securities. (D) At June 30, 1996, net unrealized appreciation for all securities was $101,737,934. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of market value over cost of $106,185,306 and aggregate gross unrealized depreciation for all securities in which there was an excess of cost over market value of $4,447,372. See Notes to Financial Statements -15- 18 THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES Surprisingly strong consumer spending and employment growth through the first half of the year erased the recessionary fears that dominated the bond market at the turn of the year. The poor performance for many bond indices during the first half of the year was the result of a strengthening economy and a rise in interest rates. The Lehman Intermediate Government/Corporate Bond Index, returned a negative 0.2% for the first six months of 1996. Bonds finally had a positive monthly price performance in June. The Quality Bond Account continued to perform well versus its peers. For the three year period ending June 30, 1996, the account ranked number one out of twenty-nine funds in the Lipper Variable Annuity Short/Intermediate Term Investment Grade Debt Category. For the one year period the account ranked number four out of fifty-six funds. Lipper Analytical Services is a leading independent variable insurance product performance analysis service. General corporate spread tightening and rolling down the yield curve provided overall performance in the first half of the year. Our Illinois Power position was particularly helped with a credit upgrade that added to the value of the holding. AT&T Capital Corporation, however was downgraded by Moody's to Baa3 from A3 on news of its spin-off to a management led group. Neither the downgrade nor the spin-off surprised us, but the magnitude of the ratings cut did. Tele-Communications, Inc. also was downgraded by Moody's from Baa3 to Ba1 last quarter. The yields on AT&T Capital Corporation increased from 0.4% over Treasuries to 0.6%. Yields on Tele-Communications, Inc. increased .15% relative to Treasuries. Our view of the downgrades is that Moody's was a bit conservative and that the current pricing of these issues present good value. We increased our percentage holdings of corporate bonds from 53% to 77%. We continue to believe that the strong earnings and improving credit trends will keep spreads stable over the near term. The overall credit quality of the holdings will remain around the A level or higher. PORTFOLIO MANAGER: F. DENNEY VOSS -16- 19 THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) JUNE 30, 1996 ASSETS: Investment securities, at market value (identified cost $175,050,568)...... $ 175,121,488 Cash....................................................................... 125,277 Receivables: Interest................................................................ 2,310,548 Purchase payments and transfers from other Travelers accounts........... 150,464 Other assets............................................................... 1,080 -------------- Total Assets......................................................... 177,708,857 -------------- LIABILITIES: Payables: Contract surrenders and transfers to other Travelers accounts........... 108,208 Investment management and advisory fees................................. 9,426 Accrued liabilities........................................................ 34,786 -------------- Total Liabilities.................................................... 152,420 -------------- NET ASSETS.................................................................... $ 177,556,437 ==============
See Notes to Financial Statements -17- 20 THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF OPERATIONS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, 1996 INVESTMENT INCOME: Interest................................................... $ 5,288,711 EXPENSES: Investment management and advisory fees.................... $ 292,858 Insurance charges.......................................... 1,069,266 -------------- Total expenses.......................................... 1,362,124 -------------- Net investment income................................ 3,926,587 -------------- REALIZED GAIN AND CHANGE IN UNREALIZED GAIN ON INVESTMENT SECURITIES: Realized gain from investment security transactions: Proceeds from investment securities sold................ 164,918,762 Cost of investment securities sold...................... 163,670,571 -------------- Net realized gain.................................... 1,248,191 Change in unrealized gain on investment securities: Unrealized gain at December 31, 1995.................... 6,087,673 Unrealized gain at June 30, 1996........................ 70,920 -------------- Net change in unrealized gain for the period......... (6,016,753) -------------- Net realized gain and change in unrealized gain... (4,768,562) -------------- Net decrease in net assets resulting from operations....... $ (841,975) ==============
See Notes to Financial Statements -18- 21 THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, 1996 1995 ---- ---- (UNAUDITED) OPERATIONS: Net investment income......................................... $ 3,926,587 $ 9,023,430 Net realized gain from investment security transactions....... 1,248,191 1,019,178 Net change in unrealized gain (loss) on investment securities. (6,016,753) 12,716,988 -------------- -------------- Net increase (decrease) in net assets resulting from operations (841,975) 22,759,596 -------------- -------------- UNIT TRANSACTIONS: Participant purchase payments (applicable to 2,151,204 and 3,283,550 units, respectively) 10,493,437 15,219,291 Participant transfers from other Travelers accounts (applicable to 2,446,706 and 4,374,714 units, respectively) 11,992,815 20,342,504 Administrative charges (applicable to 14,519 and 30,577 units, respectively)...... (70,383) (146,591) Contract surrenders (applicable to 1,343,251 and 3,514,833 units, respectively) (6,602,656) (16,280,761) Participant transfers to other Travelers accounts (applicable to 3,451,828 and 5,302,454 units, respectively) (16,805,702) (24,324,600) Other payments to participants (applicable to 42,572 and 146,460 units, respectively)..... (210,649) (686,680) -------------- -------------- Net decrease in net assets resulting from unit transactions (1,203,138) (5,876,837) -------------- -------------- Net increase (decrease) in net assets................... (2,045,113) 16,882,759 NET ASSETS: Beginning of period........................................... 179,601,550 162,718,791 -------------- -------------- End of period................................................. $ 177,556,437 $ 179,601,550 ============== ==============
See Notes to Financial Statements -19- 22 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES The Travelers Quality Bond Account for Variable Annuities ("Account QB") is a separate account of The Travelers Insurance Company ("The Travelers"), an indirect wholly owned subsidiary of Travelers Group Inc., and is available for funding certain variable annuity contracts issued by The Travelers. Account QB is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company. The following is a summary of significant accounting policies consistently followed by Account QB in the preparation of its financial statements. SECURITY VALUATION. Investments in securities traded on a national securities exchange are valued at the last-reported sale price as of the close of business of the New York Stock Exchange on the last business day of the period; securities traded on the over-the-counter market and listed securities with no reported sales are valued at the mean between the last-reported bid and asked prices or on the basis of quotations received from a reputable broker or other recognized source. When market quotations are not considered to be readily available for long-term corporate bonds and notes, such investments are generally stated at fair value on the basis of valuations furnished by a pricing service. These valuations are determined for normal institutional-size trading units of such securities using methods based on market transactions for comparable securities and various relationships between securities which are generally recognized by institutional traders. Securities, including restricted securities, for which pricing services are not readily available, are valued by management at prices which it deems in good faith to be fair. Short-term investments for which a quoted market price is available are valued at market. Short-term investments for which there is no reliable quoted market price are valued by computing a market value based upon quotations from dealers or issuers for securities of a similar type, quality and maturity. FUTURES CONTRACTS. Account QB may use interest rate futures contracts as a substitute for the purchase or sale of individual securities. When Account QB enters into a futures contract, it agrees to buy or sell specified debt securities at a future time for a fixed price, unless the contract is closed prior to expiration. Account QB is obligated to deposit with a broker an "initial margin" equivalent to a percentage of the face, or notional value of the contract. It is Account QB's practice to hold cash and cash equivalents in an amount at least equal to the notional value of outstanding purchased futures contracts, less the initial margin. Cash and cash equivalents include cash on hand, securities segregated under federal and brokerage regulations, and short-term highly liquid investments with maturities generally three months or less when purchased. Generally, futures contracts are closed prior to expiration. Futures contracts purchased by Account QB are priced and settled daily; accordingly, changes in daily prices are recorded as realized gains or losses and no asset is recorded in the Statement of Investments. However, when Account QB holds open futures contracts, it assumes a market risk generally equivalent to the underlying market risk of change in the value of the debt securities associated with the futures contract. REPURCHASE AGREEMENTS. When Account QB enters into a repurchase agreement (a purchase of securities whereby the seller agrees to repurchase the securities at a mutually agreed upon date and price), the repurchase price of the securities will generally equal the amount paid by Account QB plus a negotiated interest amount. The seller under the repurchase agreement will be required to provide to Account QB securities (collateral) whose market value, including accrued interest, will be at least equal to 102% of the repurchase price. Account QB monitors the value of collateral on a daily basis. Repurchase agreements will be limited to transactions with national banks and reporting broker dealers believed to present minimal credit risks. Account QB's custodian will take actual or constructive receipt of all securities underlying repurchase agreements until such agreements expire. -20- 23 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED FEDERAL INCOME TAXES. The operations of Account QB form a part of the total operations of The Travelers and are not taxed separately. The Travelers is taxed as a life insurance company under the Internal Revenue Code of 1986, as amended (the "Code"). Under existing federal income tax law, no taxes are payable on the investment income and capital gains of Account QB. Account QB is not taxed as a "regulated investment company" under Subchapter M of the Code. OTHER. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Security transactions are accounted for on the trade date. Interest income is recorded on the accrual basis. 2. INVESTMENTS Purchases and sales of securities other than short-term investments aggregated $84,563,660 and $92,546,641, respectively, for bonds; purchases and sales of direct and indirect U.S. government obligations were $67,191,768 and $56,419,758, respectively, for the six months ended June 30, 1996. Realized gains and losses from security transactions are reported on an identified cost basis. Account QB placed a portion of its security transactions with brokerage firms which are affiliates of The Travelers. The commission paid to these affiliated firms was $14,250 for the year ended December 31, 1995. 3. CONTRACT CHARGES Investment management and advisory fees are calculated daily at an annual rate of 0.3233% of Account QB's average net assets. These fees are paid to Travelers Asset Management International Corporation, an indirect wholly owned subsidiary of Travelers Group Inc. Insurance charges are paid to The Travelers for the mortality and expense risks assumed by The Travelers. On contracts issued prior to May 16, 1983, these charges are equivalent to 1.0017% of the average net assets of Account QB on an annual basis. On contracts issued on or after May 16, 1983, the charges for mortality and expense risks are equivalent to 1.25% of the average net assets of Account QB on an annual basis. Additionally, for certain contracts in the accumulation phase, a semi-annual charge of $15 (prorated for partial periods) is deducted from participant account balances and paid to The Travelers to cover administrative charges. On contracts issued prior to May 16, 1983, The Travelers retained from Account QB sales charges of $7,475 and $20,292 for the six months ended June 30, 1996 and the year ended December 31, 1995, respectively. The Travelers generally assesses a 5% contingent deferred sales charge if a participant's purchase payment is surrendered within five years of its payment date. Contract surrender payments are stated prior to the deduction of $33,728 and $108,615 of contingent deferred sales charges for the six months ended June 30, 1996 and the year ended December 31, 1995, respectively. -21- 24 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED 4. NET ASSETS HELD BY AFFILIATE Approximately $932,000 and $755,000 of the net assets of Account QB were held on behalf of an affiliate of The Travelers as of June 30, 1996 and December 31, 1995, respectively. Transactions with this affiliate during the six months ended June 30, 1996 and the year ended December 31, 1995, were comprised of participant purchase payments of approximately $200,000 and $17,000, and contract surrenders of approximately $20,000 and $86,000, respectively. 5. NET CONTRACT OWNERS' EQUITY
JUNE 30, 1996 --------------------------------------- UNIT NET UNITS VALUE ASSETS ----- ----- ------ Accumulation phase of contracts issued prior to May 16, 1983............................................ 8,925,085 $ 5.034 $ 44,937,649 Annuity phase of contracts issued prior to May 16, 1983................................................ 55,032 5.034 277,083 Accumulation phase of contracts issued on or after May 16, 1983........................................ 27,147,016 4.872 132,293,220 Annuity phase of contracts issued on or after May 16, 1983................................................ 9,949 4.872 48,485 ------------- Net Contract Owners' Equity................................................ $177,556,437 =============
-22- 25 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED 6. SUPPLEMENTARY INFORMATION (Selected data for a unit outstanding throughout each period.)
Contracts issued prior to May 16, 1983 SIX MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31, JUNE 30, (DERIVED FROM AUDITED FINANCIAL INFORMATION) -------- ----------------------------------------------- 1996 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- ---- SELECTED PER UNIT DATA: Total investment income..................... $ .147 $ .328 $ .318 $ .306 $ .317 $ .304 Operating expenses.......................... .033 .063 .059 .058 .050 .048 -------- ------- -------- -------- ------- ------- Net investment income....................... .114 .265 .259 .248 .267 .256 Unit value at beginning of period.................................... 5.050 4.400 4.498 4.150 3.880 3.421 Net realized and change in unrealized gains (losses)............................ (.130) .385 (.357) .100 .003 .203 -------- ------- -------- -------- ------- -------- Unit value at end of period................. $ 5.034 $5.050 $ 4.400 $ 4.498 $4.150 $ 3.880 ======== ======= ======== ======== ======= ======== SIGNIFICANT RATIOS AND ADDITIONAL DATA: Net increase (decrease) in unit value....... $ (.02) $ .65 $ (.10) $ .35 $ .27 $ .46 Ratio of operating expenses to average net assets.................................... 1.33 %* 1.33 % 1.33 % 1.33 % 1.33 % 1.33 % Ratio of net investment income to average net assets................................ 4.55 %* 5.54 % 5.87 % 5.66 % 6.61 % 7.09 % Number of units outstanding at end of period (thousands)........................ 8,980 9,325 10,694 12,489 13,416 14,629 Portfolio turnover rate..................... 85 % 138 % 27 % 24 % 23 % 21 % Contracts issued on or after May 16, 1983 SIX MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31, JUNE 30, (DERIVED FROM AUDITED FINANCIAL INFORMATION) -------- ----------------------------------------------- 1996 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- ---- SELECTED PER UNIT DATA: Total investment income..................... $ .142 $ .319 $ .310 $ .299 $ .311 $ .299 Operating expenses.......................... .038 .073 .069 .067 .061 .056 -------- ------- -------- -------- -------- -------- Net investment income....................... .104 .246 .241 .232 .250 .243 Unit value at beginning of period.................................... 4.894 4.274 4.381 4.052 3.799 3.357 Net realized and change in unrealized gains (losses)............................ (.126) .374 (.348) .097 .003 .199 -------- ------- -------- -------- -------- -------- Unit value at end of period................. $ 4.872 $ 4.894 $ 4.274 $ 4.381 $ 4.052 $ 3.799 ======== ======= ======== ======== ======== ======== SIGNIFICANT RATIOS AND ADDITIONAL DATA: Net increase (decrease) in unit value....... $ (.02) $ .62 $ (.11) $ .33 $ .25 $ .44 Ratio of operating expenses to average net assets.................................... 1.57 %* 1.57 % 1.57 % 1.57 % 1.58 % 1.57 % Ratio of net investment income to average net assets................................ 4.30 %* 5.29 % 5.62 % 5.41 % 6.38 % 6.84 % Number of units outstanding at end of period (thousands)........................ 27,157 27,066 27,033 28,472 20,250 17,211 Portfolio turnover rate..................... 85 % 138 % 27 % 24 % 23 % 21 %
* Annualized. -23- 26 THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF INVESTMENTS (UNAUDITED) JUNE 30, 1996 PRINCIPAL MARKET AMOUNT VALUE ------------ -------------- BONDS (77.1%) AMUSEMENTS (3.9%) Six Flags Entertainment, 0.00% Notes, 1999 $ 8,850,000 $ 6,903,000 -------------- BANKING (5.6%) BankAmerica Corp., 6.625% Notes, 2001 8,000,000 7,920,712 J.P. Morgan & Co., Inc., 0.00% Notes, 1998 2,000,000 1,789,736 -------------- 9,710,448 -------------- COMMUNICATION (0.9%) Tele-Communications, Inc., 9.65% Debentures, 2003 1,500,000 1,613,922 -------------- COLLATERALIZED MORTGAGE OBLIGATIONS (7.8%) American Southwest Financial Corp., 9.00% Pass Through, 2018 579,851 596,788 CFAT,1995-A Certificates, 6.45% Pass Through, 1998 2,742,730 2,731,539 GNMA Backed Trust II, 8.50% Pass Through, 2018 575,597 592,691 Grand Met Investment Corp., 0.00% Notes, 2004 10,080,000 5,799,220 GS Trust 3D, 8.00% Pass Through, 2014 219,344 222,638 Kidder Peabody Mortgage Assets Trust 23, 9.88% Pass Through, 2019 580,357 594,250 Oxford Acceptance Corp., 9.70% Pass Through, 2017 164,424 168,475 PB CMO Trust II, 9.20% Pass Through, 2018 454,510 463,236 Prudential Home Mortgage 1992-17, 8.00% Pass Through, 2007 2,000,000 2,033,358 Ryland Acceptance Corp., 9.00% Pass Through, 2015 428,114 441,625 -------------- 13,643,820 -------------- CREDIT CARD RECEIVABLES (5.3%) Chase Manhattan Credit Card Master Trust, 8.75% Pass Through, 1996 1,050,000 1,055,354 First Chicago Master Trust II, 6.25% Pass Through, 1999 1,650,000 1,654,156 Household Private Label CC MT, 1994-2 B Certificate, 8.00% Pass Through, 2003 3,500,000 3,612,032 MBNA Master Credit Card Trust 1992-1, 7.25% Pass Through, 1997 1,000,000 1,011,829 Signet Credit Card Master Trust, 1993-4 B, 5.80% Pass Through, 1999 2,000,000 1,953,378 -------------- 9,286,749 -------------- FINANCE (10.1%) AT&T Capital Corp., 6.10% Notes, 1998 7,200,000 7,146,302 Equitable Companies, Inc., 7.30% Notes, 2003 5,000,000 5,002,345 Exxon Capital, 7.875% Debentures, 1997 2,000,000 2,037,960 General Motors Acceptance Corp., 6.625% Notes, 2002 3,500,000 3,417,260 -------------- 17,603,867 -------------- FOOD (2.0%) Bacardi Martini, 5.75% Notes, 1998 3,620,000 3,558,913 -------------- FOREIGN NATIONAL GOVERNMENT (5.6%) Kingdom of Sweden, 0.00% Notes, 2000 10,000,000 7,600,000 Republic of Austria, 0.00% Debentures, 2000 3,000,000 2,243,700 -------------- 9,843,700 -------------- LUMBER AND WOOD PRODUCTS (2.6%) Boise Cascade Corp., 9.45% Notes, 1997 4,500,000 4,600,224 -------------- TOBACCO MANUFACTURERS (8.7%) Nabisco, Inc., 8.30% Notes, 1999 6,200,000 6,450,554 Philip Morris, Inc., 6.95% Notes, 2006 8,800,000 8,813,684 -------------- 15,264,238 -------------- TRANSPORTATION (2.2%) American Airlines, Inc., 1993-A4, 6.50% Notes, 1997 1,896,000 1,896,859 Delta Airlines, Inc., 9.25% Sinking Fund, 2007 1,858,510 1,912,705 -------------- 3,809,564 -------------- UTILITIES (22.4%) Boston Edison Co., 5.95% Debentures, 1998 1,000,000 983,838 Carolina Power & Light Co., 5.375% Notes, 1998 5,000,000 4,899,565 DQU II Funding, 7.23% Bonds, 1999 7,928,000 7,981,768 Florida Gas Transmission, 7.75% Notes, 1997 2,500,000 2,542,345 Hydro Quebec, 7.375% Debentures, 2003 4,000,000 4,075,000 Illinios Power Co., 6.50% Notes, 1999 7,000,000 6,910,281 NIPSCO Capital Market, Inc., 0.00% Bonds, 1997 4,500,000 4,111,042 Transco Energy Co., 9.12% Notes, 1998 4,000,000 4,177,204 United Illuminating Co., 7.375% Debentures, 1998 3,500,000 3,542,252 -------------- 39,223,295 -------------- TOTAL BONDS (COST $133,856,837) 135,061,740 --------------
-24- 27 STATEMENT OF INVESTMENTS (UNAUDITED) - CONTINUED
PRINCIPAL MARKET AMOUNT VALUE ------------ -------------- U.S. GOVERNMENT AGENCY SECURITIES (12.0%) Federal Home Loan Mortgage Corp., 5.15% Pass Through, 2012 $ 4,567,890 $ 4,428,290 Federal Home Loan Mortgage Corp., 6.50% Pass Through, 2025 1,985,823 1,865,063 Federal Home Loan Mortgage Corp., 6.50% Pass Through, 2025 11,076,800 10,391,334 Federal National Mortgage Association, 6.35% Pass Through, 2023 2,000,000 1,881,938 Federal National Mortgage Association, 6.50% Pass Through, 2000 2,482,408 2,433,453 -------------- TOTAL U.S. GOVERNMENT AGENCY SECURITIES (COST $21,583,653) 21,000,078 -------------- U.S. GOVERNMENT SECURITIES (10.9%) United States of America Treasury, 7.75% Notes, 1999 4,000,000 4,170,000 United States of America Treasury, 6.25% Notes, 2001 5,000,000 4,951,555 United States of America Treasury, 6.25% Notes, 2003 6,000,000 5,893,115 United States of America Treasury, 6.875% Notes, 2006 4,000,000 4,045,000 -------------- TOTAL U.S. GOVERNMENT SECURITIES (COST $19,610,078) 19,059,670 -------------- TOTAL INVESTMENTS (100%) (COST $175,050,568) (A) $ 175,121,488 ==============
NOTES (A) At June 30, 1996, net unrealized appreciation for all securities was $70,920. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of market value over cost of $2,608,875 and aggregate gross unrealized depreciation for all securities in which there was an excess of cost over market value of $2,537,955. See Notes to Financial Statements -25- 28 THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES The unexpected payroll numbers in the first quarter, primarily February and March, turned out to be a revelation and not an aberration. The U.S. economy which many economists believed was headed into a severe slowdown, has gained momentum and has accelerated at a growth rate of 4% to 5%. Approximately 239,000 non-farm payroll jobs were created in the month of June, and upward revisions to April and May data brought the average monthly gain for the year to a staggering 232,000 jobs. The trend growth had been between 150,000 to 155,000 jobs in 1994. Average hourly earnings spiked up to 0.8% in June after a downward revision in May from 0.3% to 0.1%. The unemployment rate fell to 5.3% breaking through a range bound of 5.4% to 5.8%. Inflation has not accelerated and continues to be extremely favorable, despite recent gains in food and energy prices. However, recent wage increases should start to filter through the pipeline translating into a higher Producer Price Index and Consumer Price Index. The Federal Reserve Board will probably look to stifle any potential increase in inflation. Recent data has shown that a hike in the federal funds rate is eminent. The Federal Reserve Board will act cautiously and probably increase the federal funds rate to 5.5% at the August meeting. The strategy in management of the account's short-term assets has changed given the expectation that short-term rates will rise. We are shortening the maturities into the 35 to 50 day area from the 60 to 90 day maturities. The portfolio should benefit from higher rates, and maximize any potential increase in the federal funds rate. The asset size of the portfolio remained stable and the average life was shortened to 66 days from the prior quarter of 69 days. PORTFOLIO MANAGER: EMIL J. MOLINARO JR. -26- 29 THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) JUNE 30, 1996 ASSETS: Investment securities, at market value (identified cost $73,059,520)....... $ 72,977,617 Cash....................................................................... 1,024,278 Receivables: Interest................................................................ 682,504 Purchase payments and transfers from other Travelers accounts........... 43,951 Other assets............................................................... 211 -------------- Total Assets......................................................... 74,728,561 -------------- LIABILITIES: Payables: Contract surrenders and transfers to other Travelers accounts........... 155,018 Investment management and advisory fees................................. 3,963 Accrued liabilities........................................................ 15,497 -------------- Total Liabilities.................................................... 174,478 -------------- NET ASSETS.................................................................... $ 74,554,083 ==============
See Notes to Financial Statements -27- 30 THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF OPERATIONS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, 1996 INVESTMENT INCOME: Interest................................................... $ 1,991,341 EXPENSES: Investment management and advisory fees.................... $ 119,960 Insurance charges.......................................... 461,464 -------------- Total expenses.......................................... 581,424 -------------- Net investment income................................ 1,409,917 -------------- Net increase in net assets resulting from operations....... $ 1,409,917 ==============
See Notes to Financial Statements -28- 31 THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, 1996 1995 ---- ---- (UNAUDITED) OPERATIONS: Net investment income......................................... $ 1,409,917 $ 3,427,447 -------------- -------------- Net increase in net assets resulting from operations....... 1,409,917 3,427,447 -------------- -------------- UNIT TRANSACTIONS: Participant purchase payments (applicable to 4,057,805 and 6,970,794 units, respectively) 8,929,077 14,864,399 Participant transfers from other Travelers accounts (applicable to 22,508,995 and 39,907,908 units, respectively).............................................. 49,524,242 85,226,642 Administrative charges (applicable to 19,736 and 44,021 units, respectively)...... (43,720) (94,696) Contract surrenders (applicable to 2,146,196 and 5,220,626 units, respectively) (4,717,237) (11,137,360) Participant transfers to other Travelers accounts (applicable to 26,706,938 and 45,205,495 units, (58,725,712) (96,405,902) respectively).............................................. Other payments to participants (applicable to 33,194 and 363,303 units, respectively)..... (73,895) (782,623) -------------- -------------- Net decrease in net assets resulting from unit transactions (5,107,245) (8,329,540) -------------- -------------- Net decrease in net assets.............................. (3,697,328) (4,902,093) NET ASSETS: Beginning of period........................................... 78,251,411 83,153,504 -------------- -------------- End of period................................................. $ 74,554,083 $ 78,251,411 ============== ==============
See Notes to Financial Statements -29- 32 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES The Travelers Money Market Account for Variable Annuities ("Account MM") is a separate account of The Travelers Insurance Company ("The Travelers"), an indirect wholly owned subsidiary of Travelers Group Inc., and is available for funding certain variable annuity contracts issued by The Travelers. Account MM is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company. The following is a summary of significant accounting policies consistently followed by Account MM in the preparation of its financial statements. SECURITY VALUATION. Short-term investments for which a quoted market price is available are valued at market. Short-term investments for which there is no reliable quoted market price are valued by computing a market value based upon quotations from dealers or issuers for securities of a similar type, quality and maturity. REPURCHASE AGREEMENTS. When Account MM enters into a repurchase agreement (a purchase of securities whereby the seller agrees to repurchase the securities at a mutually agreed-upon date and price), the repurchase price of the securities will generally equal the amount paid by Account MM plus a negotiated interest amount. The seller under the repurchase agreement will be required to provide to Account MM securities (collateral) whose market value, including accrued interest, will be at least equal to 102% of the repurchase price. Account MM monitors the value of collateral on a daily basis. Repurchase agreements will be limited to transactions with national banks and reporting broker dealers believed to present minimal credit risks. Account MM's custodian will take actual or constructive receipt of all securities underlying repurchase agreements until such agreements expire. FEDERAL INCOME TAXES. The operations of Account MM form a part of the total operations of The Travelers and are not taxed separately. The Travelers is taxed as a life insurance company under the Internal Revenue Code of 1986, as amended (the "Code"). Under existing federal income tax law, no taxes are payable on the investment income and capital gains of Account MM. Account MM is not taxed as a "regulated investment company" under Subchapter M of the Code. OTHER. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Security transactions are accounted for on the trade date. Interest income is recorded on the accrual basis. 2. CONTRACT CHARGES Investment management and advisory fees are calculated daily at an annual rate of 0.3233% of Account MM's net assets. These fees are paid to Travelers Asset Management International Corporation, an indirect wholly owned subsidiary of Travelers Group Inc. Insurance charges are paid to The Travelers for the mortality and expense risks assumed by The Travelers. On contracts issued prior to May 16, 1983, these charges are equivalent to 1.0017% of the average net assets of Account MM on an annual basis. On contracts issued on or after May 16, 1983, the charges for mortality and expense risks are equivalent to 1.25% of the average net assets of Account MM on an annual basis. Additionally, for certain contracts in the accumulation phase, a semi-annual charge of $15 (prorated for partial periods) is deducted from participant account balances and paid to The Travelers to cover administrative charges. The Travelers assesses a 5% contingent deferred sales charge if a participant's purchase payment is surrendered within five years of its payment date. Contract surrender payments are stated prior to the deduction of $51,837 and $142,783 of contingent deferred sales charges for the six months ended June 30, 1996 and the year ended December 31, 1995, respectively. -30- 33 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED 3. NET ASSETS HELD BY AFFILIATE Approximately $2,584,000 and $1,816,000 of the net assets of Account MM were held on behalf of an affiliate of The Travelers as of June 30, 1996 and December 31, 1995, respectively. Transactions with this affiliate during the six months ended June 30, 1996 and the year ended December 31, 1995, were comprised of participant purchase payments of approximately $940,000 and $965,000 and contract surrenders of approximately $205,000 and $72,000, respectively. 4. NET CONTRACT OWNERS' EQUITY
JUNE 30, 1996 --------------------------------------- UNIT NET UNITS VALUE ASSETS ----- ----- ------ Accumulation phase of contracts issued prior to May 16, 1983............................................ 113,321 $ 2.292 $ 259,849 Accumulation phase of contracts issued on or after May 16, 1983............................................ 33,398,327 2.218 74,126,474 Annuity phase of contracts issued on or after May 16, 1983................................................ 75,603 2.218 167,760 ------------- Net Contract Owners' Equity................................................ $ 74,554,083 =============
-31- 34 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED 5. SUPPLEMENTARY INFORMATION (Selected data for a unit outstanding throughout each period.)
Contracts issued prior to May 16, 1983 SIX MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31, JUNE 30, (DERIVED FROM AUDITED FINANCIAL INFORMATION) -------- ------------------------------------------------ 1996 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- ---- SELECTED PER UNIT DATA: Total investment income..................... $ .061 $ .130 $ .091 $ .067 $ .079 $ .120 Operating expenses.......................... .015 .030 .028 .027 .027 .026 -------- ------- -------- ------- ------- -------- Net investment income....................... .046 .100 .063 .040 .052 .094 Unit value at beginning of period........... 2.246 2.146 2.083 2.043 1.991 1.897 -------- ------- -------- ------- ------- -------- Unit value at end of period................. $ 2.292 $2.246 $ 2.146 $2.083 $2.043 $ 1.991 ======== ======= ======== ======= ======= ======== SIGNIFICANT RATIOS AND ADDITIONAL DATA: Net increase in unit value.................. $ .05 $ .10 $ .06 $ .04 $ .05 $ .09 Ratio of operating expenses to average net assets.................................... 1.33 %* 1.33 %# 1.33 % 1.33 % 1.33 % 1.33 % Ratio of net investment income to average net assets................................ 4.07 %* 4.61 % 2.98 % 1.93 % 2.58 % 4.90 % Number of units outstanding at end of period (thousands)........................ 113 206 206 218 227 262 Contracts issued on or after May 16, 1983 SIX MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31, JUNE 30, (DERIVED FROM AUDITED FINANCIAL INFORMATION) -------- -------------------------------------------------- 1996 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- ---- SELECTED PER UNIT DATA: Total investment income..................... $ .058 $ .127 $ .087 $ .065 $ .077 $ .118 Operating expenses.......................... .017 .034 .032 .031 .031 .030 -------- -------- -------- -------- -------- -------- Net investment income....................... .041 .093 .055 .034 .046 .088 Unit value at beginning of period........... 2.177 2.084 2.029 1.995 1.949 1.861 -------- -------- -------- -------- -------- -------- Unit value at end of period................. $ 2.218 $ 2.177 $ 2.084 $ 2.029 $ 1.995 $ 1.949 ======== ======== ======== ======== ======== ======== SIGNIFICANT RATIOS AND ADDITIONAL DATA: Net increase in unit value.................. $ .04 $ .09 $ .06 $ .03 $ .05 $ .09 Ratio of operating expenses to average net assets.................................... 1.57 %* 1.57 % 1.57 % 1.57 % 1.57 % 1.57 % Ratio of net investment income to average net assets................................ 3.82 %* 4.36 % 2.72 % 1.68 % 2.33 % 4.66 % Number of units outstanding at end of period (thousands)........................ 33,474 35,721 39,675 34,227 42,115 55,013
* Annualized -32- 35 THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF INVESTMENTS (UNAUDITED) JUNE 30, 1996 PRINCIPAL MARKET AMOUNT VALUE ------------ ------------- SHORT-TERM INVESTMENTS (100%) COMMERCIAL PAPER (96.2%) Bankers Trust NY Corp., 5.48% due November 12, 1996 $ 2,000,000 $ 1,944,396 Canadian Imperial Bank of Commerce, 5.33% due July 9, 1996 3,500,000 3,481,903 Cargill, Inc., 5.33% due July 1, 1996 3,500,000 3,468,173 Citicorp, 5.10% due November 1, 1996 3,500,000 3,533,382 Dakota Ctfs. Program, 5.41% due July 23, 1996 3,000,000 2,985,223 Eastman Kodak Co., 6.08% due April 15, 1997 3,000,000 3,043,681 First Bank FSB ND, 5.63% due October 10, 1996 3,500,000 3,500,000 General Electric Capital Corp., 5.31% due January 16, 1997 3,500,000 3,490,384 Generale Bank, 5.24% due July 17, 1996 2,000,000 1,949,521 Knight-Ridder, Inc., 5.35% due July 19, 1996 3,500,000 3,484,902 Morgan Stanley Group, Inc., 5.39% due July 22, 1996 3,500,000 3,482,783 Nationsbank Corp., 5.31% due July 16, 1996 3,500,000 3,408,731 Northern Indiana Public Service Co., 5.51% due July 25, 1996 3,500,000 3,502,100 Pacificorp, 5.26% due September 16, 1996 3,500,000 3,491,463 PACCAR Financial Corp., 5.90% due September 20, 1996 3,500,000 3,497,987 PHH Corp., 5.33% due July 11, 1996 3,500,000 3,481,897 PPG Inds., Inc., 5.35% due July 17, 1996 3,500,000 3,484,392 Progress Capital Holdings, Inc., 5.37% due July 10, 1996 2,500,000 2,492,557 Sara Lee Corp., 5.79% due January 13, 1997 3,000,000 2,985,020 Societe Generale, 5.21% due February 21, 1997 3,500,000 3,486,844 Toyota Motor Credit Corp., 5.33% due July 29, 1996 3,500,000 3,500,819 Xerox Corp., 5.33% due July 18, 1996 2,500,000 2,484,459 ------------- 70,180,617 ------------- REPURCHASE AGREEMENTS (3.8%) Merrill Lynch Government Securities, Inc., 5.25% Repurchase Agreement dated June 28, 1996 due July 1, 1996, collateralized by: United States of America Treasury, $2,710,000, 7.50% due November 15, 2001 $ 2,797,000 $ 2,797,000 ------------- TOTAL INVESTMENTS (100%) (COST $73,059,520) $ 72,977,617 =============
See Notes to Financial Statements -33- 36 Investment Advisers ------------------- THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT THE TRAVELERS INVESTMENT MANAGEMENT COMPANY Hartford, Connecticut THE TRAVELERS QUALITY BOND AND MONEY MARKET ACCOUNTS TRAVELERS ASSET MANAGEMENT INTERNATIONAL CORPORATION Hartford, Connecticut Independent Accountants ----------------------- COOPERS & LYBRAND L.L.P. Hartford, Connecticut Custodian --------- THE CHASE MANHATTAN BANK, N.A. New York, New York The financial information included herein has been taken from the records of The Travelers Growth and Income Stock, Quality Bond, and Money Market Accounts. This financial information has not been audited by the Accounts' independent accountants, who therefore express no opinion concerning its accuracy. However, it is management's opinion that all proper adjustments have been made. This report is prepared for the general information of contract owners and is not an offer of shares of The Travelers Growth and Income Stock, Quality Bond and Money Market Accounts. It should not be used in connection with any offer except in conjunction with the Universal Annuity Prospectus which contains all pertinent information, including the applicable sales commissions. VG-137 (S/A) (6-96) Printed in U.S.A. -----END PRIVACY-ENHANCED MESSAGE-----