-----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, M10JVkS5KkdQpZHAoxozCmOx3BPKqLikkDZvFYLX06zIzZEXRI8Tm/wOXIP24UfX 0H709qDWkDQcSiz9FU1okA== 0000950123-97-001785.txt : 19970303 0000950123-97-001785.hdr.sgml : 19970303 ACCESSION NUMBER: 0000950123-97-001785 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970228 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 SEC ACT: 1940 Act SEC FILE NUMBER: 811-01539 FILM NUMBER: 97547343 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 SEC ACT: 1940 Act SEC FILE NUMBER: 811-02571 FILM NUMBER: 97547344 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 SEC ACT: 1940 Act SEC FILE NUMBER: 811-03409 FILM NUMBER: 97547345 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 1 ANNUAL REPORT 1 UNIVERSAL ANNUITY ANNUAL REPORTS DECEMBER 31, 1996 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 [TRAVELERSLIFE AND ANNUITY LOGO] The Travelers Insurance The Travelers Life and Annuity Company One Tower Square Hartford, CT 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 [TRAVELERSLIFE AND ANNUITY LOGO] THE TRAVELERS VARIABLE PRODUCT SEPARATE ACCOUNTS INVESTMENT ADVISORY COMMENTARY AS OF DECEMBER 31, 1996 ECONOMIC REVIEW AND OUTLOOK As 1996 began, the Federal Government found itself paralyzed by a prolonged budget dispute. In the financial markets, investors were focused on signs of a slowing economy. With two-year Treasury notes priced to yield less than the federal funds rate, the bond market clearly expected the Federal Reserve Board ("Fed") to cut interest rates significantly. The Fed lowered the federal funds rate by 0.25% in January, but strong employment growth over the next several months sent the bond market into a tailspin reminiscent of 1994. Interest rates hit their highest levels for the year in the June to September period as investors prepared for the Fed to raise interest rates at their September meeting. The policymakers at the Fed decided to hold steady at their September meeting and interest rates declined through the autumn as economic growth once again slowed. The financial markets also responded positively to the Republicans' success in retaining control of Congress in the November election. Going into December, the bond and stock markets reflected a "best of all worlds" scenario of moderate economic growth with low inflation, low unemployment and a benign to positive political landscape. Interest rates started to move back up again in December as some economic indicators strengthened, but ended the year well below the levels seen in the second and third quarters. We expect real economic growth to average around 2% in 1997. The consumer sector, which makes up two thirds of Gross Domestic Product ("GDP"), should show modest growth. The factors that would otherwise contribute to strong consumer spending -- low unemployment, high consumer confidence, and the wealth effects from the strong stock market -- should be muted by high consumer debt levels (particularly at lower income levels) and lack of pent-up demand. The export sector should continue to grow 5% to 10% in 1997, helped by the United States' strong competitive position and continued robust growth in emerging markets. Growth should improve slightly in Europe and Japan, helped by the recent strengthening of the dollar against those currencies. The stronger dollar is likely to be a mixed blessing, by making the prices of foreign imports more attractive and thereby helping to dampen inflation. The capital goods sector has slowed in recent quarters, but is still expected to grow faster than overall U.S. economy. The government sector should continue to be a drag on GDP growth. Overall, we believe that the U.S. economy is likely to remain on a path of moderate non-inflationary growth in 1997. However, because of the current low level of unemployment, we also expect that the Fed will remain cautious and biased towards a tighter monetary policy. Whether the Fed acts may depend in part on market psychology. Upward shifts in long-term bond yields have served to moderate economic growth in recent years and reduced the need for any major changes in Fed policy. -1- 4 FIXED INCOME COMMENTARY The U.S. bond market had its best quarter of the year in the fourth quarter. The Lehman Intermediate Government/Corporate Index returned 2.5% for the quarter and 4.1% for the full year. For the year, the Lehman Long Government/Corporate Index provided a total return of only 0.1%. Treasury bonds with maturities longer than 10 years had negative total returns. Within the fixed income market, all private issuer sectors outperformed Treasury bonds as quality spreads continued to narrow. While Treasuries performed almost as poorly in 1996 as in 1994, the effect on other sectors was relatively neutral, unlike 1994 when there were problems with mortgage-backed derivatives, Mexico, and Orange County. The yield curve was also remarkably stable in 1996, unlike 1994 when short-term interest rates rose considerably. The mortgage-backed, high yield, and municipal sectors were the best performing areas in 1996 on a duration-adjusted basis. Within the corporate sector, lower quality and foreign issues were the best performers based on both higher coupons and spread tightening. We expect interest rates to stay in the trading range established in 1996 (the yield of the 30-year Treasury bond ranged between 6.0% and 7.2%). On one hand, investors are concerned that low unemployment will eventually give rise to inflationary wage growth. We believe this sets a floor for long-term bond yields at about 6.0%. At the upper end of the range, the 7.2% level has proved to be sufficient to generate increased demand for bonds and depress high risk asset classes and interest sensitive sectors of the economy. We feel that central bank vigilance against inflation, globalization, and productivity improvements will keep inflation under control, preventing interest rates from rising much above their 1996 high. Within the fixed income markets, demand for corporate, mortgage-backed and asset-backed issue continues to be high. Yield spreads (relative to Treasury issues) for lower and higher quality corporate bonds are quite narrow. The mortgage-backed and asset-backed markets are similarly compressed, with investors digging for yield. There is nothing in our economic outlook that is likely to change the tight spread environment in the near future. We are being careful, however, to weed out riskier credits and issues that do not offer enough yield premium to offset their potential for negative surprises. The foreign area continues to offer opportunities, particularly foreign corporate bonds that sometimes have very strong balance sheets but are capped by the rating of their home country. Foreign sovereign credits are also continuing to improve based on solid global economic growth and increased acceptance of the need for sound fiscal and monetary policy. EQUITY COMMENTARY During 1996, financial markets were repeatedly jolted by changes in sentiment about the strength of the U.S. economy and the direction of Fed policy. When investors gained confidence that the economy was continuing on a track of moderate, non-inflationary growth, the stock market advanced strongly and posted another year of outstanding performance. For the twelve-month period ending December 31, 1996, the Standard & Poor's 500 Stock Index ("S&P 500") provided a total return of 23.0%. Over the same period, the Russell 2000 Stock Index, a measure of the performance of the small company segment of the equity market, provided a total return of 16.5%. After a weak start in January, the stock market moved broadly higher through the first months of spring. Small company shares advanced strongly in April and May, led by the technology sector. In late June and July, when long-term bond yields moved back over 7%, the stock market traded back down to where it began the year. Recent initial public offerings and more speculative issues were particularly hard hit during the reversal. Large company stocks quickly recovered their losses when the bond market stabilized at the end of July. However, small company stocks continued to struggle. During the autumn, against the backdrop of lower bond yields, low inflation and surprisingly resilient corporate earnings, the stock market made its strongest advance of the year, with large company issues leading the way. -2- 5 As measured by the S&P 500, the U.S. stock market has provided a cumulative total return of nearly 70% over the past two years, capping a six-year bull market that began in October of 1990. Notwithstanding the strong overall environment for equities, 1996 marked the third consecutive year of underperformance by small and mid sized company stocks relative to "blue chip" indices. The underperformance of small company stocks can be explained in part by the sharper falloff in earnings growth experienced by smaller companies in the 1995-96 period. The performance lag also reflected a backing away by investors from higher risk growth stocks, in an environment of rising interest rates and market volatility. Given the frequent alarms raised in 1996 about slowing earnings growth, investors showed an understandable preference for industry sectors with visible earnings momentum. In the energy sector, analysts' earnings estimates and share prices moved sharply higher in response to firmer prices for oil and natural gas. Stocks in the finance sector also performed exceptionally well despite emerging credit quality concerns. In the consumer sector, specialty and broad-line retail stocks were up strongly in response to higher than expected levels of consumer spending. The technology sector provided superior returns for investors last year, led by Intel and Microsoft. Within the technology sector, software, semiconductor and computer product stocks had the strongest relative performance. Industrial cyclical stocks underperformed, as soft domestic and export demand led to declining commodity prices for paper, copper, aluminum, steel and fertilizer products. The health care sector was mixed. Drug stocks kept pace with the market due to strong earnings gains, while the HMO group declined sharply on repeated earnings disappointments. Utilities were the weakest overall sector during the year, held back by the relatively poor performance of local telephone carriers and electrical companies. We are taking a more cautious position toward the U.S. stock market at this point. Over the past year, the price-to-earnings ratio of the S&P 500 on 12-month forward earnings has increased from 15 to 17 times earnings per share. This level of valuation is consistent with earlier periods of moderate growth and low inflation, but leaves no cushion for earnings or inflation disappointments. After a prolonged period of underperformance, relative valuations for small company stocks are becoming more attractive. However, we believe that caution should still be exercised since the small capitalization segment of the equity market has a relatively high exposure to cyclical industries and would be vulnerable to any combination of higher interest rates and slower profit growth. KENT A. KELLEY, CFA, THE TRAVELERS INVESTMENT MANAGEMENT COMPANY DAVID A. TYSON, CFA, TRAVELERS ASSET MANAGEMENT INTERNATIONAL CORPORATION -3- 6 TABLE OF CONTENTS
PAGE - ------------------------------------------------------------------- THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES ..................................... 5 THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES .. 18 THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES .. 30
-4- 7 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 Travelers Investment Management Company ("TIMCO") to provide diversified exposure to the large company segment of the U.S. equity market. Stock selection is based on a quantitative screening process favoring companies that achieve earnings growth above consensus expectations and whose stocks offer attractive relative value. In order to achieve consistent relative performance, we manage 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"). The S&P 500 is a value-weighted equity index comprised primarily of large company stocks. For the year ended December 31, 1996, Account GIS achieved a total return of 23.4%, before fees and expenses, outperforming the S&P 500 total return of 23.1%. Net of fees and expenses, Account GIS had a total return of 21.4% for the year, which compared favorably to the 19.9% average return for variable annuity stock accounts in the Lipper Growth & Income category. During the second half of 1996, stock selection in the energy and producer durables sectors made the strongest positive contribution to the portfolio's overall relative performance. In the energy sector, the portfolio benefited from holdings in better performing stocks in the oilfield services group, such as Ensco International and Cooper Cameron. In the exploration and production group, an overweighted position in Anadarko Petroleum also helped performance. In the producer durables sector, our largest relative gain came from holdings in Harnischfeger, United Technologies and Honeywell. We lost ground relative to the benchmark in the technology and consumer staples sectors. In the technology sector, we were penalized by being underweight in a number of computer and networking stocks that moved up sharply after reporting surprisingly strong sales and earnings, including Compaq, Dell and 3COM. In the consumer staples sector, performance was hurt by our position in PepsiCo. which traded lower in reaction to weak international soft drink sales. We continue to focus on stocks that exhibit improving earnings (primarily measured by changes in analysts' earnings estimates and the trend of recent earnings surprises), and which trade at a reasonable price-to-earnings ratios relative to expected earnings growth rates. In the technology sector, we have emphasized market leaders that are currently benefiting from strong pricing and product demand, such as Intel in the semiconductor group and Cisco in the client/server networking group. In the health care sector, we have an overweight in Bristol-Myers Squibb which has improved earnings momentum from its new drug therapy to combat high blood cholesterol. In the consumer sectors, we are focusing on a number of retailers that have good sales momentum and whose shares still trade at a reasonable multiple of earnings, such as The Gap and Borders Group. In financial services, we have overweighted positions in a number of banks and specialty insurance companies that combine above-average earnings growth and low relative valuations, including BankAmerica, Ambac and Transatlantic Holdings. PORTFOLIO MANAGERS: SANDIP A. BHAGAT, CFA - JACOB E. HURWITZ, CFA - KENT A. KELLEY, CFA [TIMCO LOGO] -5- 8 THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES
NON-TIMED 12/96 1 YEAR 3 YEAR 5 YEAR The Travelers Growth and Income Stock Account for Variable Annuities 21.37% 17.52% 12.02% Lipper Growth and Income Category Average 19.92% 15.44% 12.82%
This is a comparison of The Travelers Growth and Income Stock Account for Variable Annuities versus Lipper Analytical Services' variable annuity composite index, which provides the average performance of variable annuity funds with similar objectives as of December 31, 1996. Lipper Analytical Services is a leading independent Variable Insurance Product Performance Analysis Service. The performance of the composite is net of all asset based fees such as mortality and expense charges and portfolio management fees. Performance reflects the charges associated with Universal Annuity, which became available on May 16, 1983. Contracts issued prior to May 16, 1983, have different contract charges that result in different performance than presented above. Universal Annuity fund performance information is net of: 1) the 1.25% annual mortality and expense risk charge, and 2) portfolio management fees. The deduction of the $15 semi-annual administrative charge and the contingent deferred sales charge (5% maximum) is not reflected. The deduction of those charges would reduce any percentage increase or make greater any percentage decrease. Performance data quoted represents past performance. Investment return and principal value of an investment will fluctuate so that an investor's units, when redeemed, may be worth more or less than their original cost. The following is the performance data required by SEC rules governing uniform performance reporting: one year 16.16%, five year 11.07% and ten year 11.45%. This performance is based on a $1,000 hypothetical investment and reflects deductions of all fees and charges including the semi-annual administrative charge and the maximum deferred sales charge of 5%. -6- 9 THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1996 ASSETS: Investment securities, at market value (cost $380,011,106)...... $ 507,590,759 Cash............................................................ 2,623 Receivables: Dividends.................................................... 546,452 Interest..................................................... 577 Investment securities sold................................... 2,034,612 Purchase payments and transfers from other Travelers accounts................................................... 486,574 Other assets.................................................... 26,456 -------------- Total Assets............................................. 510,688,053 -------------- LIABILITIES: Payables: Investment securities purchased.............................. 2,059,125 Contract surrenders and transfers to other Travelers accounts................................................... 275,701 Investment management and advisory fees...................... 25,507 Accrued liabilities............................................. 71,387 -------------- Total Liabilities......................................... 2,431,720 -------------- NET ASSETS......................................................... $ 508,256,333 ==============
See Notes to Financial Statements -7- 10 THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 INVESTMENT INCOME: Dividends...................................................... $ 8,866,836 Interest ...................................................... 598,573 -------------- Total income............................................... $ 9,465,409 EXPENSES: Investment management and advisory fees........................ 2,079,020 Insurance charges.............................................. 5,316,715 -------------- Total expenses............................................. 7,395,735 ------------- Net investment income................................... 2,069,674 ------------- REALIZED GAIN AND CHANGE IN UNREALIZED GAIN ON INVESTMENT SECURITIES: Realized gain from investment security transactions: Proceeds from investment securities sold................... 408,860,943 Cost of investment securities sold......................... 363,866,404 -------------- Net realized gain....................................... 44,994,539 Change in unrealized gain on investment securities: Unrealized gain at December 31, 1995....................... 84,623,392 Unrealized gain at December 31, 1996....................... 127,579,653 -------------- Net change in unrealized gain for the year.............. 42,956,261 ------------- Net realized gain and change in unrealized gain..... 87,950,800 ------------- Net increase in net assets resulting from operations........... $ 90,020,474 =============
See Notes to Financial Statements -8- 11 THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF CHANGES IN NET ASSETS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995 ---- ---- OPERATIONS: Net investment income............................................. $ 2,069,674 $ 3,305,259 Net realized gain from investment security transactions........... 44,994,539 37,951,859 Net change in unrealized gain on investment securities............ 42,956,261 71,724,212 --------------- --------------- Net increase in net assets resulting from operations.......... 90,020,474 112,981,330 --------------- --------------- UNIT TRANSACTIONS: Participant purchase payments (applicable to 2,813,343 and 2,505,561 units, respectively).... 28,931,829 20,576,327 Participant transfers from other Travelers accounts (applicable to 3,490,521 and 2,758,216 units, respectively).... 35,759,376 23,120,885 Administrative charges (applicable to 32,900 and 39,010 units, respectively).......... (358,274) (345,103) Contract surrenders (applicable to 3,057,943 and 3,134,685 units, respectively).... (31,680,018) (26,235,475) Participant transfers to other Travelers accounts (applicable to 3,458,474 and 3,616,329 units, respectively).... (35,315,088) (29,697,410) Other payments to participants (applicable to 207,886 and 138,390 units, respectively)........ (2,212,219) (1,142,807) --------------- --------------- Net decrease in net assets resulting from unit transactions.... (4,874,394) (13,723,583) --------------- --------------- Net increase in net assets................................. 85,146,080 99,257,747 NET ASSETS: Beginning of year................................................. 423,110,253 323,852,506 --------------- --------------- End of year....................................................... $ 508,256,333 $ 423,110,253 =============== ===============
See Notes to Financial Statements -9- 12 NOTES TO FINANCIAL STATEMENTS 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 year; 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 at amortized cost which approximates market. 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. -10- 13 NOTES TO FINANCIAL STATEMENTS - 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. Effective July 1, 1996, premiums and discounts are amortized to interest income utilizing the constant yield method. 2. INVESTMENTS The aggregate costs of purchases and proceeds from sales of investments (other than short-term securities) for the year ended December 31, 1996, were $383,843,522 and $384,169,009, respectively. 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 $125,284 and $70,759 for the years ended December 31, 1996 and 1995, respectively. Net realized gains resulting from futures contracts were $504,688 and $2,884,399 for the years ended December 31, 1996 and 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. At December 31, 1996, Account GIS did not hold any open futures contracts. -11- 14 NOTES TO FINANCIAL STATEMENTS - 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 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 $43,814 and $40,106 for the years ended December 31, 1996 and 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 include $163,657 and $189,214 of contingent deferred sales charges for the years ended December 31, 1996 and 1995, respectively. 4. NET ASSETS HELD BY AFFILIATE Approximately $11,931,000 and $10,733,000 of the net assets of Account GIS were held on behalf of an affiliate of The Travelers as of December 31, 1996 and 1995, respectively. Transactions with this affiliate during the years ended December 31, 1996 and 1995, were comprised of participant purchase payments of approximately $1,077,000 and $427,000 and contract surrenders of approximately $694,000 and $560,000, respectively. 5. NET CONTRACT OWNERS' EQUITY
DECEMBER 31, 1996 --------------------------------------------------- UNIT NET UNITS VALUE ASSETS ----- ----- ------ Accumulation phase of contracts issued prior to May 16, 1983...... 16,167,393 $ 11.763 $ 190,162,991 Annuity phase of contracts issued prior to May 16, 1983........... 386,135 11.763 4,541,766 Accumulation phase of contracts issued on or after May 16, 1983... 27,510,470 11.371 312,786,250 Annuity phase of contracts issued on or after May 16, 1983........ 67,313 11.371 765,326 -------------- Net Contract Owners' Equity........................................ $ 508,256,333 ==============
-12- 15 NOTES TO FINANCIAL STATEMENTS - CONTINUED 6. SUPPLEMENTARY INFORMATION (Selected data for a unit outstanding throughout each year.) Contracts issued prior to May 16, 1983
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- SELECTED PER UNIT DATA: Total investment income..................... $ .216 $ .208 $ .192 $ .189 $ .192 Operating expenses.......................... .154 .123 .100 .092 .085 ---------- ---------- --------- -------- ---------- Net investment income....................... .062 .085 .092 .097 .107 Unit value at beginning of year............. 9.668 7.120 7.194 6.664 6.587 Net realized and change in unrealized gains (losses)............................ 2.033 2.463 (.166) .433 (.030) ---------- ---------- --------- -------- ---------- Unit value at end of year................... $ 11.763 $ 9.668 $ 7.120 $ 7.194 $ 6.664 ========== ========== ========= ======== ========== SIGNIFICANT RATIOS AND ADDITIONAL DATA: Net increase (decrease) in unit value....... $ 2.10 $ 2.55 $ (.07) $ .53 $ .08 Ratio of operating expenses to average net assets................................ 1.45 % 1.45 % 1.41 % 1.33 % 1.33 % Ratio of net investment income to average net assets................................ .60 % 1.02 % 1.30 % 1.40 % 1.67 % Number of units outstanding at end of year (thousands).......................... 16,554 17,896 19,557 21,841 22,516 Portfolio turnover rate..................... 85 % 96 % 103 % 81 % 189 % Average commission rate paid+............... $ .047 - - - -
Contracts issued on or after May 16, 1983
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- SELECTED PER UNIT DATA: Total investment income...................... $ .212 $ .205 $ .189 $ .184 $ .188 Operating expenses........................... .175 .140 .115 .106 .098 --------- ----------- ---------- -------- ---------- Net investment income........................ .037 .065 .074 .078 .090 Unit value at beginning of year.............. 9.369 6.917 7.007 6.507 6.447 Net realized and change in unrealized gains (losses)............................. 1.965 2.387 (.164) .422 (.030) --------- ----------- ---------- -------- ---------- Unit value at end of year.................... $ 11.371 $ 9.369 $ 6.917 $ 7.007 $ 6.507 ========= =========== ========== ======== ========== SIGNIFICANT RATIOS AND ADDITIONAL DATA: Net increase (decrease) in unit value........ $ 2.00 $ 2.45 $ (.09) $ .50 $ .06 Ratio of operating expenses to average net assets................................. 1.70 % 1.70 % 1.65 % 1.57 % 1.58 % Ratio of net investment income to average net assets................................. .36 % .79 % 1.05 % 1.15 % 1.43 % Number of units outstanding at end of year (thousands)................................ 27,578 26,688 26,692 28,497 29,661 Portfolio turnover rate...................... 85 % 96 % 103 % 81 % 189 % Average commission rate paid+................ $ .047 - - - -
+ The average commission rate paid is a required disclosure for fiscal years beginning after September 1, 1995. It is calculated by dividing the total dollar amount of commissions paid for equity securities by the total number of shares purchased and sold during the year. -13- 16 THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF INVESTMENTS DECEMBER 31, 1996
NO. OF MARKET SHARES VALUE -------- ----------- COMMON STOCKS (99.3%) AGRICULTURE (0.5%) Pioneer Hi Bred International 33,500 $ 2,345,000 ------------- AMUSEMENTS (0.8%) Walt Disney Co. 61,555 4,285,767 ------------- BANKING (7.9%) Banc One Corp. 35,740 1,536,820 Bank of Boston Corp. 35,800 2,300,150 BankAmerica Corp. 51,100 5,097,225 Barnett Banks Inc. 17,500 719,687 Chase Manhattan Corp. 62,552 5,582,766 Citicorp 67,200 6,921,600 First Bank Systems, Inc. 12,500 853,125 First Chicago NBD 29,200 1,569,500 Golden West Financial Corp. 23,400 1,477,125 Mellon Bank Corp. 40,900 2,903,900 NationsBank Corp. 29,800 2,912,950 Northern Trust Corp. 41,400 1,503,338 Norwest Corp. 79,600 3,462,600 SunTrust Banks, Inc. 19,900 980,075 Wells Fargo & Co. 9,133 2,463,627 ------------- 40,284,488 ------------- CHEMICALS, PHARMACEUTICALS AND ALLIED PRODUCTS (13.0%) Abbott Laboratories 44,700 2,268,525 American Home Products Corp. 34,400 2,016,700 Amgen (A) 49,000 2,667,438 Bristol-Myers Squibb Co. 64,400 7,003,500 Colgate-Palmolive 13,700 1,263,825 Cytec Industries, Inc. (A) 43,100 1,750,937 E.I. Dupont de Nemours & Co. 50,000 4,718,750 Eli Lilly & Co. 31,200 2,277,600 Johnson & Johnson 145,400 7,233,650 Merck & Co. 127,100 10,072,675 Monsanto Co. 88,500 3,440,438 Morton International 47,700 1,943,775 Pfizer, Inc. 57,500 4,765,312 Procter & Gamble Co. 63,900 6,869,250 Schering-Plough Corp. 56,000 3,626,000 Union Carbide Corp. 50,900 2,080,538 Warner-Lambert Co. 24,600 1,845,000 ------------- 65,843,913 ------------- COMMUNICATION (6.9%) Ameritech Corp. 51,300 3,110,063 AT&T Corp. 108,100 4,702,350 Bell Atlantic Corp. 41,300 2,674,175 BellSouth Corp. 92,800 3,746,800 Clear Channel Communications (A) 51,600 1,864,050 GTE Corp. 77,000 3,503,500 MCI Communications Corp. 111,700 3,651,194 NYNEX Corp. 40,800 1,963,500 Pacific Telesis Group 32,100 1,179,675 Sprint Corp. 31,400 1,252,075 SBC Communications, Inc. 76,000 3,933,000 TCI Satellite Entertainment (A) 6,120 60,817 Tele-Communications Inc. (A) 61,200 799,425 U.S. West Communications Group 16,900 545,025 WorldCom, Inc. (A) 74,100 1,931,231 ------------- 34,916,880 ------------- CONTRACTORS (0.8%) Fluor Corp. 30,300 1,901,325 Halliburton Co. 33,400 2,012,350 ------------- 3,913,675 ------------- ELECTRICAL AND ELECTRONIC MACHINERY (8.1%) Andrew Corp. (A) 30,200 1,602,486 Atmel Corp. (A) 54,600 1,815,450 Duracell International, Inc. 25,600 1,788,800 General Electric Corp. 152,900 15,117,988 Intel Corp. 85,600 11,208,250 Motorola, Inc. 52,100 3,197,638 Raychem Corp. 23,150 1,854,894 Texas Instruments, Inc. 16,200 1,032,750 Time Warner, Inc. 49,200 1,845,000 U.S. Robotics, Inc. (A) 24,000 1,729,500 ------------- 41,192,756 ------------- FINANCE (3.3%) American Express Co. 45,100 2,548,150 Federal Home Loan Mortgage Corp. 17,300 1,905,162 Federal National Mortgage Association 100,900 3,758,525 HFS Inc. (A) 43,200 2,581,200 Household International 24,100 2,223,225 Merrill Lynch & Co. 15,200 1,238,800 Morgan Stanley Group, Inc. 14,600 834,025 Student Loan Marketing Association 17,200 1,601,750 ------------- 16,690,837 ------------- FOOD (8.0%) Anheuser-Busch Cos. 45,200 1,808,000 Campbell Soup Co. 9,600 770,400 Coca-Cola Co. 220,300 11,593,287 ConAgra, Inc. 68,400 3,402,900 CPC International, Inc. 31,600 2,449,000 Dean Foods Co. 57,500 1,854,375 General Mills, Inc. 14,400 912,600 PepsiCo, Inc. 142,700 4,173,975 Philip Morris, Inc. 88,700 9,989,838 Sara Lee Corp. 44,300 1,650,175 Unilever N.V. 12,400 2,173,100 ------------- 40,777,650 ------------- FURNITURE AND FIXTURES (0.3%) Lear Corp. (A) 38,300 1,306,987 ------------- HOTELS & LODGING (0.4%) Hilton Hotels Corp. 67,500 1,763,438 ------------- INSURANCE (4.4%) Allstate Corp. 40,575 2,348,278 Ambac, Inc. 40,100 2,661,638 American International Group 43,350 4,692,638 Chubb Corp. 33,500 1,800,625 Cigna Corp. 17,600 2,404,600 General Reinsurance Corp. 7,300 1,151,575 ITT Hartford Group, Inc. 35,400 2,389,500 MedPartners, Inc. (A) 62,100 1,304,100 SunAmerica, Inc. 33,900 1,504,312 Transatlantic Holdings, Inc. 26,500 2,133,250 ------------- 22,390,516 ------------- LUMBER AND WOOD PRODUCTS (0.5%) Georgia-Pacific Corp. 23,900 1,720,800 Weyerhaeuser Co. 18,200 862,225 ------------- 2,583,025 -------------
-14- 17 STATEMENT OF INVESTMENTS - CONTINUED NO. OF MARKET SHARES VALUE -------- ---------- MACHINERY (6.5%) Black & Decker Corp. 63,200 $ 1,903,900 Caterpillar, Inc. 18,500 1,392,125 Cisco Systems, Inc. (A) 92,500 5,891,094 Compaq Computer Corp. (A) 26,600 1,975,050 Deere & Co. 56,100 2,279,063 Gateway 2000, Inc. (A) 27,600 1,478,325 Hewlett-Packard Co. 91,400 4,592,850 International Business Machines Corp. 46,800 7,066,800 Lucent Technologies 56,323 2,604,939 Sun Microsystems (A) 95,800 2,460,862 3Com Corp. (A) 15,500 1,136,344 ------------- 32,781,352 ------------- METAL PRODUCTS (1.5%) Aluminum Co. of America 24,800 1,581,000 Gillette Co. 62,300 4,843,825 Nucor Corp. 8,100 413,100 USX-U.S. Steel Group 25,200 790,650 ------------- 7,628,575 ------------- MINING (0.7%) Freeport-McMoRan Copper & Gold 68,500 2,046,437 Homestake Mining Co. 88,700 1,263,975 ------------- 3,310,412 ------------- MISCELLANEOUS MANUFACTURING (2.3 %) American Brands 15,200 754,300 Eastman Kodak Co. 29,700 2,383,425 Emerson Electric Co. 20,100 1,944,675 Guidant Corp. 33,500 1,909,500 Honeywell, Inc. 32,900 2,163,175 Medtronics, Inc. 21,900 1,489,200 Xerox Corp. 27,900 1,468,238 ------------- 12,112,513 ------------- OIL & GAS (0.9%) Chesapeake Energy Corp. (A) 28,100 1,563,062 Louisiana Land & Exploration 31,300 1,678,463 Schlumberger Ltd. 13,600 1,358,300 Union Pacific Resources Group 1 29 ------------- 4,599,854 ------------- PAPER AND ALLIED PRODUCTS (0.9%) Kimberly Clark Corp. 25,730 2,450,782 Willamette Industries, Inc. 28,800 2,005,200 ------------- 4,455,982 ------------- PETROLEUM REFINING AND RELATED INDUSTRIES (8.2%) Amerada Hess 34,900 2,019,838 Amoco Corp. 44,200 3,558,100 Ashland Oil, Inc. 39,600 1,737,450 Atlantic Richfield Co. 10,500 1,391,250 Chevron Corp. 58,900 3,828,500 Exxon Corp. 95,700 9,378,600 Mobil Corp. 48,300 5,904,675 Royal Dutch Petroleum Co. 38,600 6,590,950 Texaco, Inc. 50,000 4,906,250 Unocal Corp. 54,600 2,218,125 ------------- 41,533,738 ------------- PRINTING, PUBLISHING AND ALLIED INDUSTRIES (0.8%) Gannet Co. 32,300 2,418,462 New York Times Co. 48,300 1,835,400 ------------- 4,253,862 ------------- RETAIL (4.5%) American Stores 50,100 2,047,837 Borders Group, Inc. (A) 40,500 1,452,938 Dollar General Corp. 47,400 1,516,800 Federated Department Stores, Inc. (A) 59,500 2,030,437 Home Depot, Inc. 45,966 2,304,046 Lowe's Cos. 55,200 1,959,600 McDonalds Corp. 57,500 2,601,875 Sears Roebuck & Co. 34,300 1,582,088 The GAP, Inc. 76,200 2,295,525 Tiffany & Co. 42,600 1,560,225 Wal-Mart Stores, Inc. 159,700 3,653,137 ------------- 23,004,508 ------------- RUBBER AND PLASTIC PRODUCTS (1.4%) Armstrong World Industries 24,600 1,709,700 Illinois Tool Works 31,300 2,500,088 Nike, Inc. 52,500 3,136,875 ------------- 7,346,663 ------------- SERVICES (5.2%) AccuStaff, Inc. (A) 75,600 1,597,050 Automatic Data Process 28,400 1,217,650 Columbia/HCA Healthcare Corp. 60,900 2,481,675 Computer Associates International 56,675 2,819,581 Corrections Corp. of America (A) 49,000 1,500,625 First Data Corp. 40,400 1,474,600 HBO & Co. 38,900 2,309,688 Microsoft (A) 109,000 9,012,937 Oracle Corp. (A) 58,850 2,453,309 Vencor, Inc. (A) 47,000 1,486,375 ------------- 26,353,490 ------------- STONE, CLAY, GLASS, AND CONCRETE PRODUCTS (0.6%) Minnesota Mining & Manufacturing Co. 38,500 3,190,687 ------------- TEXTILE MILL PRODUCTS (0.4%) V.F. Corp. 28,100 1,896,750 ------------- TRANSPORTATION (1.2%) Burlington Northern Santa Fe 31,100 2,686,262 Conrail, Inc. 7,241 721,384 Continental Air, Inc. (A) 54,900 1,550,925 Union Pacific Corp. 19,500 1,172,438 ------------- 6,131,009 ------------- TRANSPORTATION MANUFACTURING (4.3%) Allied Signal, Inc. 25,400 1,701,800 Boeing Co. 48,400 5,148,550 Chrysler Corp. 86,900 2,867,700 Ford Motor Co. 104,100 3,318,187 General Motors Corp. 63,300 3,528,975 Lockheed Martin Corp. 18,139 1,659,719 United Technologies Corp. 53,400 3,524,400 ------------- 21,749,331 -------------
-15- 18 STATEMENT OF INVESTMENTS - CONTINUED
NO. OF MARKET SHARES VALUE -------- ----------- UTILITIES (4.0%) AES Corp. (A) 41,200 $ 1,915,800 Allegheny Power Systems 47,500 1,442,812 Baltimore Gas & Electric Co. 48,900 1,308,075 CalEnergy Co. (A) 49,600 1,667,800 Columbia Gas Systems, Inc. 29,200 1,857,850 Consolidated Natural Gas Co. 35,700 1,972,425 CMS Energy Corp. 31,700 1,065,913 Duke Power Co. 18,500 855,625 Florida Power & Light Co. 15,900 731,400 Houston Industries 24,100 545,263 Pacific Enterprises 20,800 631,800 Sonat, Inc. 38,900 2,003,350 Southern Co. 99,600 2,253,450 Texas Utilities Co. 55,900 2,277,925 -------------- 20,529,488 -------------- WHOLESALE TRADE (1.0%) Crane Co. 68,700 1,992,300 Enron Corp. 23,100 996,188 Grainger (W.W.) 24,500 1,966,125 -------------- 4,954,613 -------------- TOTAL COMMON STOCKS (COST $376,548,106) 504,127,759 -------------- PRINCIPAL AMOUNT --------- SHORT-TERM INVESTMENTS (0.7%) REPURCHASE AGREEMENTS (0.7%) Merrill Lynch Government Securities, Inc., 6.00% Repurchase Agreement dated December 31, 1996 due January 2, 1997, collateralized by: United States of America Treasury, $3,200,000, 7.875% due November 15, 2004 $ 3,463,000 3,463,000 -------------- TOTAL SHORT-TERM INVESTMENTS (COST $3,463,000) 3,463,000 -------------- TOTAL INVESTMENTS (100%) (COST $380,011,106) (B) $ 507,590,759 ==============
NOTES (A) Non-income Producing Security. (B) At December 31, 1996, net unrealized appreciation for all securities was $127,579,653. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of market value over cost of $130,553,071 and aggregate gross unrealized depreciation for all securities in which there was an excess of cost over market value of $2,973,418. See Notes to Financial Statements -16- 19 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Managers and Owners of Variable Annuity Contracts of The Travelers Growth and Income Stock Account for Variable Annuities: We have audited the accompanying statement of assets and liabilities of The Travelers Growth and Income Stock Account for Variable Annuities including the statement of investments as of December 31, 1996, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the per unit data for each of the five years in the period then ended. These financial statements and per unit data are the responsibility of management. Our responsibility is to express an opinion on these financial statements and per unit data based on our audits. 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 per unit data 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, 1996, by correspondence with the custodian and brokers. 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 per unit data referred to above present fairly, in all material respects, the financial position of The Travelers Growth and Income Stock Account for Variable Annuities as of December 31, 1996, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the per unit data for each of the five years in the period then ended, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Hartford, Connecticut February 12, 1997 -17- 20 THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES The year 1996 started out with the Federal Government shut down and investor concerns about a possible recession. The bond market clearly expected the Federal Reserve Board ("Fed") to cut interest rates significantly as the two year Treasury yield was lower than the federal funds rate. The Fed did cut their federal funds rate target 0.25% in January but then strong employment growth over the next several months sent bonds into a tailspin reminiscent of 1994. Rates hit their highest levels for the year in the June to September period as investors prepared for the Fed to raise interest rates at their September meeting. The Fed decided to hold steady at the September meeting and interest rates declined from then until December as economic growth slowed in the fourth quarter. The market also responded positively to the election results as the Republicans maintained control of Congress despite President Clinton's re-election. Going into December, the markets were reflecting a best case scenario of moderate economic growth with low inflation and low unemployment coupled with a benign to positive political landscape. Rates started rising again in December as some economic indicators strengthened but ended the year well below the levels seen in the second and third quarters. U.S. bonds had their best quarter of the year in the fourth quarter. The Lehman Intermediate Government/Corporate Index returned 2.45% for the quarter and 4.06% for the full year. The Travelers Quality Bond Account for Variable Annuities ("Account QB") had a 2.34% return in the quarter which was 0.11 ahead of the index. For the full year, Treasuries with maturities longer than 10 years had negative total returns. Returns were worse the longer the average duration with the Salomon 1 month CD index returning 5.51%, the Lehman Intermediate Government/Corporate Index returning 4.06%, and the Lehman Long Government/Corporate Index returning 0.13%. For the full year Account QB returned 4.95%, before fees and expenses, 89 basis points better than the Lehman Intermediate Government/Corporate Index, which is its benchmark. Net of fees and expenses, total return of Account QB was 3.38% for the year. Account QB was helped by the strong performance of its position in corporate and asset backed securities relative to Treasuries. We expect interest rates to stay in the trading range established in 1996 (the 30 year ranged between 5.95% and 7.19%). Low unemployment creates the potential for strong consumer spending growth and for cyclical upward inflation pressure through wages, putting a lower limit on where rates can go. On the higher rate side, the 7% level has proven to be a sufficient level to draw increased interest in bonds and depress high risk asset classes and interest sensitive sectors of the economy. We feel that central bank vigilance against inflation, globalization, and productivity improvements will keep inflation under control, preventing interest rates from rising much above their 1996 high. The yield curve was fairly steady at average slopes throughout 1996. We do not see anything that would cause that to change significantly. We are keeping Account QB's duration and maturity structure relatively close to that of the index. Within the fixed income markets, demand for spread product continued to be high in 1996. Along with tight spreads against Treasuries, spreads for lower quality corporates are compressed with the spreads on higher quality corporates. The mortgage backed and asset backed markets are similarly compressed, with previous opportunities in B-piece credit cards, commercial mortgage backed securities, and seasoned mortgage product squeezed by investors digging for yield. There is nothing in our economic outlook which is likely to change the tight spread environment in the near future. We are being careful, however, to weed out riskier credits and issues that don't offer enough yield premium to offset their potential for negative surprises. The foreign area continues to offer opportunities, particularly foreign corporates that sometimes have very strong balance sheets but are capped by the rating of their home country. PORTFOLIO MANAGER: F. DENNEY VOSS [TAMIC LOGO] -18- 21 THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES
NON-TIMED 12/96 1 YEAR 3 YEAR 5 YEAR The Travelers Quality Bond Account for Variable Annuities 3.38% 4.92% 5.9% Lipper Short Intermediate Investment Grade Debt Category Average 2.84% 3.74% 4.58%
This is a comparison of The Travelers Quality Bond Account for Variable Annuities versus Lipper Analytical Services' variable annuity composite index, which provides the average performance of variable annuity funds with similar objectives as of December 31, 1996. Lipper Analytical Services is a leading independent Variable Insurance Product Performance Analysis Service. The performance of the composite is net of all asset based fees such as mortality and expense charges and portfolio management fees. Performance reflects the charges associated with Universal Annuity, which became available on May 16, 1983. Contracts issued prior to May 16, 1983, have different contract charges that result in different performance than presented above. Universal Annuity fund performance information is net of: 1) the 1.25% annual mortality and expense risk charge, and 2) portfolio management fees. The deduction of the $15 semi-annual administrative charge and the contingent deferred sales charge (5% maximum) is not reflected. The deduction of those charges would reduce any percentage increase or make greater any percentage decrease. Performance data quoted represents past performance. Investment return and principal value of an investment will fluctuate so that an investor's units, when redeemed, may be worth more or less than their original cost. The following is the performance data required by SEC rules governing uniform performance reporting: one year -1.80%, five year 4.80% and ten year 6.46%. This performance is based on a $1,000 hypothetical investment and reflects deductions of all fees and charges including the semi-annual administrative charge and the maximum deferred sales charge of 5%. -19- 22 THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1996 ASSETS: Investment securities, at market value (cost $168,903,822).......... $ 169,102,897 Receivables: Interest......................................................... 1,310,828 Purchase payments and transfers from other Travelers accounts.... 46,873 Other assets........................................................ 1,519 -------------- Total Assets................................................. 170,462,117 -------------- LIABILITIES: Cash overdraft...................................................... 4,052 Payables: Contract surrenders and transfers to other Travelers accounts.... 213,078 Investment management and advisory fees.......................... 6,078 Accrued liabilities................................................. 30,557 -------------- Total Liabilities............................................ 253,765 -------------- NET ASSETS............................................................. $ 170,208,352 ==============
See Notes to Financial Statements -20- 23 THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996
INVESTMENT INCOME: Interest................................................... $ 13,160,431 EXPENSES: Investment management and advisory fees.................... $ 576,329 Insurance charges.......................................... 2,103,316 --------------- Total expenses.......................................... 2,679,645 --------------- Net investment income................................ 10,480,786 --------------- REALIZED GAIN AND CHANGE IN UNREALIZED GAIN ON INVESTMENT SECURITIES: Realized gain from investment security transactions: Proceeds from investment securities sold................ 343,310,465 Cost of investment securities sold...................... 342,244,839 --------------- Net realized gain.................................... 1,065,626 Change in unrealized gain on investment securities: Unrealized gain at December 31, 1995.................... 6,087,673 Unrealized gain at December 31, 1996.................... 199,075 --------------- Net change in unrealized gain for the year........... (5,888,598) --------------- Net realized gain and change in unrealized gain... (4,822,972) --------------- Net increase in net assets resulting from operations $ 5,657,814 ===============
See Notes to Financial Statements -21- 24 THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF CHANGES IN NET ASSETS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995 ----------------- ---------------- OPERATIONS: Net investment income.............................................. $ 10,480,786 $ 9,023,430 Net realized gain from investment security transactions............ 1,065,626 1,019,178 Net change in unrealized gain (loss) on investment securities...... (5,888,598) 12,716,988 ----------------- ---------------- Net increase in net assets resulting from operations............ 5,657,814 22,759,596 ----------------- ---------------- UNIT TRANSACTIONS: Participant purchase payments (applicable to 3,643,171 and 3,283,550 units, respectively)..... 17,905,073 15,219,291 Participant transfers from other Travelers accounts (applicable to 3,024,146 and 4,374,714 units, respectively)..... 14,870,447 20,342,504 Administrative charges (applicable to 27,353 and 30,577 units, respectively)........... (135,785) (146,591) Contract surrenders (applicable to 2,968,208 and 3,514,833 units, respectively)..... (14,715,900) (16,280,761) Participant transfers to other Travelers accounts (applicable to 6,532,400 and 5,302,454 units, respectively)..... (32,090,166) (24,324,600) Other payments to participants (applicable to 177,391 and 146,460 units, respectively)......... (884,681) (686,680) ----------------- ---------------- Net decrease in net assets resulting from unit transactions..... (15,051,012) (5,876,837) ----------------- ---------------- Net increase (decrease) in net assets........................ (9,393,198) 16,882,759 NET ASSETS: Beginning of year................................................. 179,601,550 162,718,791 ----------------- ---------------- End of year....................................................... $ 170,208,352 $ 179,601,550 ================= ================
See Notes to Financial Statements -22- 25 NOTES TO FINANCIAL STATEMENTS 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 year; 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 at amortized cost which approximates market. 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. -23- 26 NOTES TO FINANCIAL STATEMENTS - 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. Effective July 1, 1996, premiums and discounts are amortized to interest income utilizing the constant yield method. 2. INVESTMENTS The costs of purchases and proceeds from sales of bonds (other than short-term securities) were $183,257,990 and $192,416,249, respectively; the costs of purchases and proceeds from sales of direct and indirect U.S. government obligations were $116,946,574 and $114,368,811, respectively, for the year ended December 31, 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. There were no commissions paid to affiliated firms for the year ended December 31, 1996. 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 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 $13,748 and $20,292 for the years ended December 31, 1996 and 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 include $70,089 and $108,615 of contingent deferred sales charges for the years ended December 31, 1996 and 1995, respectively. -24- 27 NOTES TO FINANCIAL STATEMENTS - CONTINUED 4. NET ASSETS HELD BY AFFILIATE Approximately $760,000 and $755,000 of the net assets of Account QB were held on behalf of an affiliate of The Travelers as of December 31, 1996 and 1995, respectively. Transactions with this affiliate during the years ended December 31, 1996 and 1995, were comprised of participant purchase payments of approximately $276,000 and $17,000, and contract surrenders of approximately $141,000 and $86,000, respectively. 5. NET CONTRACT OWNERS' EQUITY
DECEMBER 31, 1996 ----------------------------------------------- UNIT NET UNITS VALUE ASSETS ----- ----- ------ Accumulation phase of contracts issued prior to May 16, 1983......... 8,497,114 $ 5.234 $ 44,465,564 Annuity phase of contracts issued prior to May 16, 1983.............. 52,065 5.234 272,458 Accumulation phase of contracts issued on or after May 16, 1983...... 24,794,468 5.060 125,421,467 Annuity phase of contracts issued on or after May 16, 1983........... 9,660 5.060 48,863 -------------- Net Contract Owners' Equity.................................................................. $ 170,208,352 ==============
-25- 28 NOTES TO FINANCIAL STATEMENTS - CONTINUED 6. SUPPLEMENTARY INFORMATION (Selected data for a unit outstanding throughout each year.) Contracts issued prior to May 16, 1983
FOR THE YEARS ENDED DECEMBER 31, --------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- SELECTED PER UNIT DATA: Total investment income..................... $ .379 $ .328 $ .318 $ .306 $ .317 Operating expenses.......................... .067 .063 .059 .058 .050 ----------- ---------- ----------- ----------- ------------ Net investment income....................... .312 .265 .259 .248 .267 Unit value at beginning of year............. 5.050 4.400 4.498 4.150 3.880 Net realized and change in unrealized gains (losses)............................ (.128) .385 (.357) .100 .003 ----------- ---------- ----------- ----------- ------------ Unit value at end of year................... $ 5.234 $ 5.050 $ 4.400 $ 4.498 $ 4.150 =========== ========== =========== =========== ============ SIGNIFICANT RATIOS AND ADDITIONAL DATA: Net increase (decrease) in unit value....... $ .18 $ .65 $ (.10) $ .35 $ .27 Ratio of operating expenses to average net assets................................ 1.33 % 1.33 % 1.33 % 1.33 % 1.33 % Ratio of net investment income to average net assets................................ 6.12 % 5.54 % 5.87 % 5.66 % 6.61 % Number of units outstanding at end of year (thousands)............................... 8,549 9,325 10,694 12,489 13,416 Portfolio turnover rate..................... 176 % 138 % 27 % 24 % 23 %
Contracts issued on or after May 16, 1983
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- SELECTED PER UNIT DATA: Total investment income....................... $ .368 $ .319 $ .310 $ .299 $ .311 Operating expenses............................ .078 .073 .069 .067 .061 ---------- ---------- ---------- ------------ ----------- Net investment income......................... .290 .246 .241 .232 .250 Unit value at beginning of year............... 4.894 4.274 4.381 4.052 3.799 Net realized and change in unrealized gains (losses).............................. (.124) .374 (.348) .097 .003 ---------- ---------- ---------- ------------ ----------- Unit value at end of year..................... $ 5.060 $ 4.894 $ 4.274 $ 4.381 $ 4.052 ========== ========== ========== ============ =========== SIGNIFICANT RATIOS AND ADDITIONAL DATA: Net increase (decrease) in unit value......... $ .17 $ .62 $ (.11) $ .33 $ .25 Ratio of operating expenses to average net assets.................................. 1.57 % 1.57 % 1.57 % 1.57 % 1.58 % Ratio of net investment income to average net assets.................................. 5.87 % 5.29 % 5.62 % 5.41 % 6.38 % Number of units outstanding at end of year (thousands)................................. 24,804 27,066 27,033 28,472 20,250 Portfolio turnover rate....................... 176 % 138 % 27 % 24 % 23 %
-26- 29 THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF INVESTMENTS DECEMBER 31, 1996
PRINCIPAL MARKET AMOUNT VALUE ----------- ---------- BONDS (75.4%) AMUSEMENTS (4.2%) Six Flags Entertainment, 0.00% Notes, 1999 $ 8,850,000 $ 7,168,500 -------------- COMMUNICATION (16.0%) BellSouth Capital Funding, 6.04% Debentures, 2026 4,500,000 4,479,062 Continental Cablevision, Inc., 11.00% Debentures, 2007 5,000,000 5,715,165 MCI Communications Corp., 7.125% Debentures, 2027 8,500,000 8,811,627 Tele-Communications, Inc., 9.65% Debentures, 2003 7,500,000 7,993,980 -------------- 26,999,834 -------------- COLLATERALIZED MORTGAGE OBLIGATIONS (5.3%) Grand Met Investment Corp., 0.00% Notes, 2004 10,000,000 6,194,550 Kidder Peabody Mortgage Asset Trust 23, 9.88% Pass Through, 2019 349,856 354,096 PB CMO Trust II, 9.20% Pass Through, 2018 390,595 393,279 Prudential Home Mortgage 1992-17, 8.00% Pass Through, 2007 2,000,000 2,028,504 -------------- 8,970,429 -------------- CREDIT CARD RECEIVABLES (3.3%) Household Private Label CC MT 1994-2 B Certificate, 8.00% Pass Through, 1999 3,500,000 3,637,298 Signet Credit Card Master Trust, 1993-4 B, 5.80% Pass Through, 1999 2,000,000 1,983,240 -------------- 5,620,538 -------------- FINANCE (7.7%) Alco Capital Resources, 7.33% Notes, 1998 6,000,000 6,091,020 New Plan Realty Trust, 5.95% Notes, 2026 7,000,000 6,988,282 -------------- 13,079,302 -------------- FOREIGN NATIONAL GOVERNMENT (6.1%) Kingdom of Sweden, 0.00% Notes, 2000 10,000,000 8,056,250 Republic of Austria, 0.00% Debentures, 2000 3,000,000 2,336,250 -------------- 10,392,500 -------------- MACHINERY (5.0%) Hewlett-Packard Co., 6.50% Notes, 1999 8,425,000 8,503,984 -------------- TOBACCO MANUFACTURERS (9.1%) Philip Morris, Inc., 6.95% Notes, 2006 8,800,000 8,925,294 RJR Nabisco, Inc., 8.30% Notes, 1999 6,200,000 6,440,157 -------------- 15,365,451 -------------- TRANSPORTATION (2.3%) American Airlines, Inc., 1993-A4, 6.50% Notes, 1997 1,896,000 1,898,840 Delta Airlines, Inc., 9.25% Sinking Fund, 2007 1,858,510 1,920,752 -------------- 3,819,592 -------------- UTILITIES (16.4%) DQU II Funding, 7.23% Bonds, 1999 5,692,000 5,756,451 Gulf States Utilities Co., 7.35% Notes, 1998 7,000,000 7,107,870 Illinois Power Co., 6 .50% Notes, 1999 7,000,000 6,995,856 NIPSCO Capital Market, Inc., 0.00% Bonds, 1997 4,500,000 4,260,150 United Illuminating Company 7.375% Debentures, 1998 3,500,000 3,544,713 -------------- 27,665,040 -------------- TOTAL BONDS (COST $127,502,319) 127,585,170 -------------- U.S. GOVERNMENT AGENCY SECURITIES (9.4%) FHLMC Gold 24yr ZC, 5.15% Pass Through, 2012 4,686,782 4,617,886 FNMA Principal Strip, 0.00% Debentures, 2002 5,000,000 4,950,440 GNMA 1996-22 Va, 7.00% Pass Through, 2005 4,284,069 4,338,978 GNMA 30yr Single Family Issue, 7.00% Pass Through, 2023 1,957,284 1,917,526 -------------- TOTAL U.S. GOVERNMENT AGENCY SECURITIES (COST $15,621,363) 15,824,830 -------------- U.S. GOVERNMENT SECURITIES (14.7%) United States of America Treasury, 5.625% Notes, 2000 1,000,000 982,187 United States of America Treasury, 5.875% Notes, 2000 16,500,000 16,381,398 United States of America Treasury, 6.25% Notes, 2003 7,500,000 7,495,312 -------------- TOTAL U.S. GOVERNMENT SECURITIES (COST $24,946,140) 24,858,897 -------------- SHORT-TERM INVESTMENTS (0.5%) REPURCHASE AGREEMENTS (0.5%) Merrill Lynch Government Securities, Inc., 6.00% Repurchase Agreement dated December 31, 1996 due January 2, 1997, collateralized by: United States of America Treasury, $775,000, 7.875% due November 15, 2004 834,000 834,000 -------------- TOTAL SHORT-TERM INVESTMENTS (COST $834,000) 834,000 -------------- TOTAL INVESTMENTS (100%) (COST $168,903,822) (A) $ 169,102,897 ==============
-27- 30 STATEMENT OF INVESTMENTS - CONTINUED NOTES (A) At December 31, 1996, net unrealized appreciation for all securities was $199,075. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of market value over cost of $983,140 and aggregate gross unrealized depreciation for all securities in which there was an excess of cost over market value of $784,065. See Notes to Financial Statements -28- 31 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Managers and Owners of Variable Annuity Contracts of The Travelers Quality Bond Account for Variable Annuities: We have audited the accompanying statement of assets and liabilities of The Travelers Quality Bond Account for Variable Annuities including the statement of investments as of December 31, 1996, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the per unit data for each of the five years in the period then ended. These financial statements and per unit data are the responsibility of management. Our responsibility is to express an opinion on these financial statements and per unit data based on our audits. 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 per unit data 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, 1996, by correspondence with the custodian. 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 per unit data referred to above present fairly, in all material respects, the financial position of The Travelers Quality Bond Account for Variable Annuities as of December 31, 1996, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the per unit data for each of the five years in the period then ended, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Hartford, Connecticut February 12, 1997 -29- 32 THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES The year 1996 started out with investor concerns about a possible recession. The market expected the Federal Reserve Board ("Fed") to cut interest rates significantly and in January there was a 0.25% reduction to 5.25%. However, strong employment growth in the first and second quarters shifted concerns from recession to inflation. Due to mixed economic data for the balance of 1996, the Fed maintained a steady course and inacted no other rate changes. A "Do Not Disturb" sign hung over the financial markets for most of the fourth quarter. The federal funds rate remained unchanged at 5.25% and for most of the quarter economic data exhibited modest growth and subdued inflation. Long-term bond yields started the quarter at 6.97% and ended the quarter at 6.64%. However, the January, 1997 release of December, 1996 employment data reflected the creation of 262,000 new jobs which was significantly above estimates, an increase in the average work week and the average hours worked index increased .9% created further inflation concerns. Our expectation is for the Fed to continue to stifle any potential increase in inflation and if economic data continues to reflect above average growth the Fed will take action and increase the federal funds rate. In light of this the strategy in the management of The Travelers Money Market Account for Variable Annuities' short-term assets will be to maintain maturities in the 30 to 60 day range. At year end the asset size of the portfolio was $84.7 million with an average yield of 5.47% and an average life of 50.4 days. PORTFOLIO MANAGER: EMIL J. MOLINARO JR. [TAMIC LOGO] -30- 33 THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES
NON-TIMED 12/96 1 YEAR 3 YEAR 5 YEAR The Travelers Money Market Account for Variable Annuities 3.94% 3.71% 3.03% Lipper Money Market Category Average 3.82% 3.60% 2.94%
This is a comparison of The Travelers Money Market Account for Variable Annuities versus Lipper Analytical Services' variable annuity composite index, which provides the average performance of variable annuity funds with similar objectives as of December 31, 1996. Lipper Analytical Services is a leading independent Variable Insurance Product Performance Analysis Service. The performance of the composite is net of all asset based fees such as mortality and expense charges and portfolio management fees. Performance reflects the charges associated with Universal Annuity, which became available on May 16, 1983. Contracts issued prior to May 16, 1983, have different contract charges that result in different performance than presented above. Universal Annuity fund performance information is net of: 1) the 1.25% annual mortality and expense risk charge, and 2) portfolio management fees. The deduction of the $15 semi-annual administrative charge and the contingent deferred sales charge (5% maximum) is not reflected. The deduction of those charges would reduce any percentage increase or make greater any percentage decrease. Performance data quoted represents past performance. Investment return and principal value of an investment will fluctuate so that an investor's units, when redeemed, may be worth more or less than their original cost. An investment in The Travelers Money Market Account for Variable Annuities is neither insured nor guaranteed by the U.S. Government. The following is the performance data required by SEC rules governing uniform performance reporting: one year -1.25%, five year 1.84% and ten year 4.32%. This performance is based on a $1,000 hypothetical investment and reflects deductions of all fees and charges including the semi-annual administrative charge and the maximum deferred sales charge of 5%. -31- 34 THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1996 ASSETS: Investment securities, at market value (cost $84,682,870).......... $ 84,664,467 Cash............................................................... 1,455 Receivables: Interest........................................................ 568,428 Purchase payments and transfers from other Travelers accounts... 1,495,715 Other assets....................................................... 380 ------------- Total Assets................................................. 86,730,445 ------------- LIABILITIES: Payables: Contract surrenders and transfers to other Travelers accounts... 360,210 Investment management and advisory fees......................... 3,027 Accrued liabilities................................................ 11,793 ------------- Total Liabilities............................................ 375,030 ------------- NET ASSETS............................................................ $ 86,355,415 =============
See Notes to Financial Statements -32- 35 THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 INVESTMENT INCOME: Interest.................................................. $ 4,217,448 EXPENSES: Investment management and advisory fees................... $ 253,092 Insurance charges......................................... 973,645 ---------- Total expenses......................................... 1,226,737 ------------ Net investment income............................... 2,990,711 ------------ Net increase in net assets resulting from operations...... $ 2,990,711 ============
See Notes to Financial Statements -33- 36 THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF CHANGES IN NET ASSETS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995 ---- ---- OPERATIONS: Net investment income....................................................... $ 2,990,711 $ 3,427,447 ----------------- ---------------- Net increase in net assets resulting from operations..................... 2,990,711 3,427,447 ----------------- ---------------- UNIT TRANSACTIONS: Participant purchase payments (applicable to 9,424,587 and 6,970,794 units, respectively).............. 20,964,777 14,864,399 Participant transfers from other Travelers accounts (applicable to 55,407,340 and 39,907,908 units, respectively)............ 123,185,617 85,226,642 Administrative charges (applicable to 39,967 and 44,021 units, respectively).................... (89,466) (94,696) Contract surrenders (applicable to 4,688,797 and 5,220,626 units, respectively).............. (10,410,253) (11,137,360) Participant transfers to other Travelers accounts (applicable to 57,859,014 and 45,205,495 units, respectively)............ (128,506,136) (96,405,902) Other payments to participants (applicable to 14,133 and 363,303 units, respectively)................... (31,246) (782,623) ----------------- ---------------- Net increase (decrease) in net assets resulting from unit transactions... 5,113,293 (8,329,540) ----------------- ---------------- Net increase (decrease) in net assets................................. 8,104,004 (4,902,093) NET ASSETS: Beginning of year........................................................... 78,251,411 83,153,504 ----------------- ---------------- End of year................................................................. $ 86,355,415 $ 78,251,411 ================= ================
See Notes to Financial Statements -34- 37 NOTES TO FINANCIAL STATEMENTS 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 at amortized cost which approximates market. 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. Effective July 1, 1996, premiums and discounts are amortized to interest income utilizing the constant yield method. 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 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 include $77,935 and $142,783 of contingent deferred sales charges for the years ended December 31, 1996 and 1995, respectively. -35- 38 NOTES TO FINANCIAL STATEMENTS - CONTINUED 3. NET ASSETS HELD BY AFFILIATE Approximately $4,150,000 and $1,816,000 of the net assets of Account MM were held on behalf of an affiliate of The Travelers as of December 31, 1996 and 1995, respectively. Transactions with this affiliate during the years ended December 31, 1996 and 1995, were comprised of participant purchase payments of approximately $3,085,000 and $965,000 and contract surrenders of approximately $826,000 and $72,000, respectively. 4. NET CONTRACT OWNERS' EQUITY
DECEMBER 31, 1996 ------------------------------------------------- NET UNITS UNIT VALUE ASSETS ----- ---------- ------ Accumulation phase of contracts issued prior to May 16, 1983........ 112,316 $ 2.341 $ 262,867 Accumulation phase of contracts issued on or after May 16, 1983..... 37,952,473 2.263 85,884,938 Annuity phase of contracts issued on or after May 16, 1983.......... 91,743 2.263 207,610 ------------- Net Contract Owners' Equity..................................................................... $ 86,355,415 =============
-36- 39 NOTES TO FINANCIAL STATEMENTS - CONTINUED 5. SUPPLEMENTARY INFORMATION (Selected data for a unit outstanding throughout each year.) Contracts issued prior to May 16, 1983
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------ 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- SELECTED PER UNIT DATA: Total investment income..................... $ .125 $ .130 $ .091 $ .067 $ .079 Operating expenses.......................... .030 .030 .028 .027 .027 ---------- ---------- ---------- ---------- ---------- Net investment income....................... .095 .100 .063 .040 .052 Unit value at beginning of year............. 2.246 2.146 2.083 2.043 1.991 ---------- ---------- ---------- ---------- ---------- Unit value at end of year................... $ 2.341 $ 2.246 $ 2.146 $ 2.083 $ 2.043 ========== ========== ========== ========== ========== SIGNIFICANT RATIOS AND ADDITIONAL DATA: Net increase in unit value.................. $ .10 $ .10 $ .06 $ .04 $ .05 Ratio of operating expenses to average net assets................................ 1.33 % 1.33 % 1.33 % 1.33 % 1.33 % Ratio of net investment income to average net assets................................ 4.10 % 4.61 % 2.98 % 1.93 % 2.58 % Number of units outstanding at end of year (thousands)............................... 112 206 206 218 227
Contracts issued on or after May 16, 1983
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ----- SELECTED PER UNIT DATA: Total investment income.................... $ .121 $ .127 $ .087 $ .065 $ .077 Operating expenses......................... .035 .034 .032 .031 .031 ---------- ---------- ---------- ---------- ---------- Net investment income...................... .086 .093 .055 .034 .046 Unit value at beginning of year............ 2.177 2.084 2.029 1.995 1.949 ---------- ---------- ---------- ---------- ---------- Unit value at end of year.................. $ 2.263 $ 2.177 $ 2.084 $ 2.029 $ 1.995 ========== ========== ========== ========== ========== SIGNIFICANT RATIOS AND ADDITIONAL DATA: Net increase in unit value................. $ .09 $ .09 $ .06 $ .03 $ .05 Ratio of operating expenses to average net assets............................... 1.57 % 1.57 % 1.57 % 1.57 % 1.57 % Ratio of net investment income to average net assets............................... 3.84 % 4.36 % 2.72 % 1.68 % 2.33 % Number of units outstanding at end of year (thousands).............................. 38,044 35,721 39,675 34,227 42,115
-37- 40 THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF INVESTMENTS DECEMBER 31, 1996
PRINCIPAL MARKET AMOUNT VALUE ----------- ---------- SHORT-TERM INVESTMENTS (100%) COMMERCIAL PAPER (95.5%) Abbott Laboratories, 5.34% due January 3, 1997 $ 3,500,000 $ 3,498,058 Allied Signal, Inc., 5.53% due January 22, 1997 2,500,000 2,491,302 American Express Credit Corp., 5.37% due February 6, 1997 2,000,000 1,988,748 Bankers Trust NY Corp., 5.55% due February 19, 1997 1,400,000 1,389,448 BHP Finance (USA), Inc., 5.39% due February 4, 1997 3,000,000 2,984,016 Chase Manhattan Bank, 5.37% due January 31, 1997 2,885,901 2,873,148 Ciesco LP, 5.40% due January 9, 1997 3,000,000 2,995,314 Cincinnati Gas & Electric, 6.21% due September 1, 1997 2,000,000 1,992,916 CIT Group Holdings, Inc., 5.20% due September 30, 1997 500,000 502,187 Eastman Kodak Co., 6.08% due April 15, 1997 3,000,000 3,020,535 Engelhard Corp., 5.38% due February 14, 1997 3,500,000 3,476,179 Federal Home Loan Banks, 5.93% due October 2, 1997 400,000 400,458 General Electric Capital Corp., 5.31% due January 16, 1997 3,500,000 3,499,776 Heinz H. J. Co., 5.43% due January 6, 1997 1,600,000 1,598,280 Heinz H. J. Co., 5.54% due January 30, 1997 2,000,000 1,990,806 Household Finance Corp., 5.45% due January 7, 1997 2,500,000 2,496,898 PacifiCorp, 5.61% due January 27, 1997 2,000,000 2,002,542 Penney JC Funding Corp., 5.74% due October 15, 1997 2,000,000 2,064,970 Phillip Morris, Inc., 5.34% due January 15, 1997 2,700,000 2,693,423 Potomac Electric Power Co., 5.61% due January 15, 1997 3,500,000 3,491,474 Potomac Electric Power Co., 5.66% due January 15, 1997 500,000 498,782 Prudential Funding Corp., 5.35% due January 6, 1997 3,000,000 2,996,775 PACCAR Financial Corp., 5.40% due January 2, 1997 3,500,000 3,498,691 Raytheon Co., 5.37% due January 14, 1997 3,500,000 3,491,954 Sara Lee Corp., 5.79% due January 13, 1997 3,000,000 2,999,445 Seagram Joseph E. & Sons Inc., 5.44% due January 8, 1997 3,500,000 3,495,086 Societe Generale, 5.21% due February 21, 1997 3,500,000 3,498,988 Southern California Edison Co., 5.36% due January 28, 1997 3,000,000 2,987,025 Toyota Motor Credit Corp., 5.35% due February 12, 1997 3,000,000 2,980,464 Weyerhaeuser Co., 5.35% due February 13, 1997 3,500,000 3,476,693 Xerox Corp., 5.34% due January 8, 1997 3,500,000 3,495,086 ------------- 80,869,467 ------------- REPURCHASE AGREEMENTS (4.5%) Merrill Lynch Government Securities, Inc., 6.00% Repurchase Agreement dated December 31, 1996 due January 2, 1997, collateralized by: United States of America Treasury, $3,510,000, 7.875% due November 15, 2004 3,795,000 3,795,000 ------------- TOTAL INVESTMENTS (100%) (COST $84,682,870) $ 84,664,467 =============
See Notes to Financial Statements -38- 41 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Managers and Owners of Variable Annuity Contracts of The Travelers Money Market Account for Variable Annuities: We have audited the accompanying statement of assets and liabilities of The Travelers Money Market Account for Variable Annuities including the statement of investments as of December 31, 1996, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the per unit data for each of the five years in the period then ended. These financial statements and per unit data are the responsibility of management. Our responsibility is to express an opinion on these financial statements and per unit data based on our audits. 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 per unit data 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, 1996, by correspondence with the custodian. 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 per unit data referred to above present fairly, in all material respects, the financial position of The Travelers Money Market Account for Variable Annuities as of December 31, 1996, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the per unit data for each of the five years in the period then ended, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Hartford, Connecticut February 12, 1997 -39- 42 This page intentionally left blank. 43 Investment Advisers THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES THE TRAVELERS INVESTMENT MANAGEMENT COMPANY Hartford, Connecticut THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES 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 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 Account for Variable Annuities, The Travelers Quality Bond Account for Variable Annuities and The Travelers Money Market Account for Variable Annuities. 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 (Annual) (12-96) Printed in U.S.A. -----END PRIVACY-ENHANCED MESSAGE-----