-----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, QnRK0Jbbu4csMqba6C/aENSy3ukaxSBdgHnwnIHMJG+t006e8LiYkVMyig/YJ6Y0 NQ94GhTk946AXc4slwEV3g== 0000950123-98-007849.txt : 19980824 0000950123-98-007849.hdr.sgml : 19980824 ACCESSION NUMBER: 0000950123-98-007849 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980821 SROS: NONE 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: SEC FILE NUMBER: 811-02571 FILM NUMBER: 98695392 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 N-30D 1 TRAVELERS QUALITY BOND ACCT FOR VARIABLE ANNUITIES 1 UNIVERSAL ANNUITY SEMI-ANNUAL REPORTS JUNE 30, 1998 [UMBRELLA LOGO] 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 TRAVELERS LIFE & ANNUITY A Member of Travelers Group [LOGO] The Travelers Insurance Company The Travelers Life and Annuity Company One Tower Square Hartford, CT 06183 2 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 [TAMIC LOGO] Travelers Quality Bond Account for Variable Annuities, The Travelers Money Market Account for Variable Annuities and The Travelers Growth and Income Stock Account for Variable Annuities. The Travelers Investment Management Company ("TIMCO") [TIMCO LOGO] provides equity management and subadvisory services for The Travelers Growth and Income Stock Account for Variable Annuities. 3 [TRAVELERS LIFE & ANNUITY LOGO] THE TRAVELERS VARIABLE PRODUCT SEPARATE ACCOUNTS INVESTMENT ADVISORY COMMENTARY AS OF JUNE 30, 1998 ECONOMIC REVIEW AND OUTLOOK The U.S. economy continues to provide the domestic capital markets with the almost ideal conditions of low interest rates, lower inflation and steady economic growth. First quarter Gross Domestic Product ("GDP") growth was well ahead of expectations and led to the prospect of a Federal Reserve Board ("Fed") tightening midway through the first half of 1998. Reported inflation, however, remained low and the Asian currency crisis caused the Fed to lean towards a more neutral stance. Despite the strong first quarter, the U.S. economy recently showed signs of slowing down. While industrial production and retail sales trended lower, the most compelling evidence of the slowdown comes from the bond market. For the first time since 1990, the portion of the Treasury yield curve showing the spread between the 2-year and 10-year Treasury yields is now slightly inverted. In the past, an inverted yield curve has been a harbinger of an economic downturn. Fed Chairman Alan Greenspan notes in his testimony on July 21, 1998 that the Fed remains more concerned about inflation rather than an economic recession. We see no indications of either an economic or earnings recession in the near future and the risk in the stock market is largely mitigated by this outlook. The U.S. stock market posted handsome returns in the first half of 1998. On a year-to-date basis, the Dow Jones Industrial Average ("DJIA") rose 13.2% while the broader Standard & Poor's 500 Stock Index ("S&P 500") gained 16.8%. At this pace, the stock market would yet again produce another year of 30% or more of appreciation, a 3 year run unprecedented in the history of equity markets. The bond market produced healthy returns as yields on 30-year Treasury bonds fell to their lowest level since the introduction of these securities in 1977. We look ahead to a slower economy in the second half of 1998. The absence of inflationary pressure should keep bond yields below 6% while the combination of lofty valuations and slower earnings growth in 1998 could find stocks at the upper end of a trading range for the rest of the year. -1- 4 EQUITY COMMENTARY After three remarkable years of market appreciation averaging over 30% annually, the first quarter's total return of the S&P 500 of almost 15% was that much more impressive. Since 1995, the stock market's climb has also been supported by a dramatic increase in money flows by domestic and foreign investors, as well as corporate buybacks and merger activity. Low domestic inflation and steady revenue gains have also contributed to the expansion in the price-to-earnings multiple. Consumer cyclical and technology stocks led the market higher during the first quarter. Low interest rates, low stable inflation, and healthy economic growth combined to support consumer confidence and generated strong sales growth and stock price appreciation in the retail, housing, auto and airline industries. Many technology stocks rebounded from a late 1997 decline, as investors grew confident that the Asian economic crisis would not lead to a global economic slowdown. Telecommunications equipment and software stocks performed the best, while semiconductor stocks lagged due to ongoing oversupply and price weakness. Stock market volatility increased significantly in the second quarter of 1998. Investor focus shifted from the prospects of Fed monetary policy tightening to the Asian crisis and eventually to hopes of reasonable corporate earnings growth for the second quarter. Large cap stocks posted a gain for the second quarter while small cap stocks declined to fall farther behind their large cap counterparts. A seesaw pattern in stock prices persisted at the beginning of the second quarter, as stock prices remained almost unchanged at the end of April from a month earlier. Interest rate concerns took center stage towards the end of April as the Fed publicly discussed a shift to a tightening bias. Long-term interest rates shot up above 6% while the S&P 500 fell 4.3% from April 23 to April 27. Despite a strong first quarter GDP report, and continued low inflation a slowdown in the second half of 1998 has become apparent. Bond prices stabilized as a result of such evidence in late April and early May and stock prices recovered to the levels established at the end of the first quarter. Renewed concerns over Asia and slowing earnings growth rocked the stock market in May. The S&P 500 index declined by almost 2% while the Russell 2000 Stock Index fell nearly 5%. Several companies provided early guidance about lower second quarter earnings during the month of May. Investors, already worried about record valuations in the stock market, showed no mercy in their response to such disappointments as some stock prices tumbled down by as much as 50%. Growth stocks performed better than value stocks in the second quarter of 1998 in the large cap universe. In particular, the technology, health care and consumer discretionary sectors performed quite well while the energy sector underperformed significantly in the wake of falling oil prices. The widely anticipated earnings pre-announcement season at the end of June, when companies confess to upcoming earnings shortfalls, was not as severe as in prior quarters. The stock market appears to have drawn a positive inference from this event and the current outlook for second half earnings seems favorable. Corporate earnings growth, however, is clearly slowing down and the recent market strength and current valuations are both predicated on a healthy earnings rebound in the second half of the year and into 1999. Besides the historically high valuations for large cap stocks, we think the principal risk to the U.S. stock market remains on the earnings front. If Asia remains in a protracted recession, which is a likely scenario at this point, a slowdown in the global economy could take its toll on U.S. corporate profits. A prolonged period of anemic earnings growth would trigger a correction in the stock market through a contraction in the price-to-earnings multiple. We remain cautious about the U.S. stock market in the short term but bullish over the intermediate to long term. -2- 5 FIXED INCOME COMMENTARY Just when many investors were getting somewhat more comfortable with risk again, the Asian financial crisis re-erupted in May and June. Unrest in Indonesia and further weakness in the Japanese yen were some of the latest highlights in the latest chapter of the Asian crisis. The region's turmoil sent Asia's stock markets down again and caused major setbacks in most emerging country stock and bond markets. In addition, heightened investor concerns about greater risk triggered yet another crisis in Russia's fragile markets. In reaction to the renewed troubles in Asia, the U.S. bond market rallied as many global investors sought refuge in U.S. Treasury securities during the reporting period. Combined with the United States and Japanese intervention to stabilize the yen, the rally in U.S. Treasuries helped to support the U.S. stock and bond markets by the end of the second quarter of 1998. Within the U.S. bond markets, investment grade bonds barely performed better than U.S. Treasuries. Many longer-maturity bonds could not keep pace with the strong performance of the 30-year U.S. Treasury bond. Mortgage-backed security spreads widened and discount bonds performed better than premium bonds, as mortgage prepayments remained high. Corporate bond spreads widened due to heavy issuance (i.e., more supply) with the most widening occurring in bonds issued by corporations that were more impacted by the Asian crisis. Municipal bonds performed poorly as heavy issuance and investor "sticker shock" kept tax-exempt bond yields from declining as much as U.S. Treasuries. High yield bonds and emerging market bonds also lagged U.S. Treasuries during the second quarter of 1998, although high yield bonds are still ahead of U.S. Treasuries for the first six months of 1998. We continue to believe that interest rates in the U.S. will slowly move lower as the crisis in Asia pushes U.S. GDP down to a 1%-2% annual range in the second half of 1998. Exports from the U.S. have declined sharply and the trade deficit has widened rapidly. We expect even greater deterioration in the U.S. trade deficit as Asian imports accelerate in the second half of the year. Inventory growth in the U.S. was strong in the first half of 1998, and that condition should slow projected U.S. economic growth in the second half of the year. In addition, we expect that corporate profits will continue to be flat, which combined with inventories and weak commodity prices, should help to weaken capital spending during the next several quarters. Within the U.S. bond market, we anticipated that the yield curve will be steeper six to twelve months from now (The yield curve shows the difference between short-and-long-term yields). However, we think that the yield curve will likely stay flat until it becomes clearer that the inflationary risks from currently tight U.S. labor markets have passed. As rates decline, bond spreads are likely to widen. In addition, bond spreads should widen more because of a continuation of the flight to quality as well as the fact that the supply of bonds should remain high at these rate levels. The overall low inflationary environment and the expected economic slowdown, along with the increased volatility in the stock market, have created a favorable backdrop for fixed income investments. DAVID A. TYSON, CFA, TRAVELERS ASSET MANAGEMENT INTERNATIONAL CORPORATION SANDIP A. BHAGAT, CFA, PRESIDENT & CHIEF INVESTMENT OFFICER, THE TRAVELERS INVESTMENT MANAGEMENT COMPANY -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................... 27
-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 Travelers Asset Management International Corporation ("TAMIC") with The Travelers Investment Management Company ("TIMCO") serving as subadvisory. Account GIS is managed 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 shares 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 six months ended June 30, 1998, Account GIS achieved a total return of 19.0%, before fees and expenses, well ahead of the S&P 500's return of 16.8%. Net of fees and expenses, Account GIS's total return of 17.7% for the first half of 1998 compared favorably to the 11.6% average return for variable annuity stock accounts in the Lipper Growth & Income Category. On a trailing twelve month basis as of June 30, 1998, Account GIS had a total return of 29.4%, net of fees and expenses, compared to the Lipper Growth & Income average of 21.6%. During the first half of 1998, stock selection in the health care, consumer discretionary, producer durables, autos and transportation sectors made the strongest positive contribution to Account GIS's overall relative performance. In the health care sector, Account GIS benefited from positions in companies with strong diversified sources of earnings such as American Home Products, Schering-Plough and Warner-Lambert. In the consumer discretionary sector, we were helped by overweighted positions in media companies such as Chancellor Media, New York Times, Meredith Corp. and a number of different retailers such as Costco, Albertsons and Jones Apparel. In the producer durables sector, our positions in Textron and United Technologies helped performance in the first quarter. In the transportation sector, our emphasis on the better performing airline and automobile industries also made a positive contribution to performance. Our individual stock picks here such as Delta Air Lines, AMR Corp. and Ford Motor all performed well during the period. Our positions in The Equitable Companies and Morgan Stanley Dean Witter helped performance in the financial services sector towards the end of the second quarter. We lost ground relative to the benchmark primarily in the technology sector. In the technology sector, our relative performance was penalized by not holding a number of better performing stocks such as EMC Corp. and Digital Equipment. We were also hurt by overweighted positions in VLSI Technology and Oracle, which both reported earnings disappointments. Our disciplined approach to stock selection emphasizes stocks, that offer improving fundamentals and relative earnings gains at discounted stock valuations. In the technology sector, we focus on higher growth industries like networking and software through our positions in Cisco and Intuit. We maintain an underweight position in the weak performing semiconductor group by excluding stocks such as Motorola which have produced a string of negative earnings surprises. In the health care sector, we continue to emphasize Guidant, a leading manufacturer of medical devices that regulate heart activity through chest implants. Our focus among the financial services sector remains on the securities industry where we have positions in Merrill Lynch, Morgan Stanley Dean Witter and The Equitable Companies. -5- 8 We believe that the current economic expansion has further to go and that inflation will remain low. These factors argue in favor of a continuation of the current bull market. Earnings growth, however, is clearly slowing down and the recent market strength and current valuations are both predicated on a healthy earnings rebound in the second half of the year and into 1999. Besides the historically high valuations for large capitalization stocks, the principal risk to the U.S. stock market remains on the earnings front. A prolonged period of anemic earnings growth would trigger a correction in the stock market through a contraction in the price-to-earnings multiple. We remain cautious about the U.S. stock market over the short term. In this environment, we believe that it is particularly important to identify companies with sustainable earnings growth at attractive valuations across a wide variety of industries. PORTFOLIO MANAGER: SANDIP A. BHAGAT, CFA [TAMIC LOGO] [TIMCO LOGO] -6- 9 THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) JUNE 30, 1998 ASSETS: Investment securities, at market value (cost $530,365,501)................. $ 819,605,553 Cash....................................................................... 565,958 Receivables: Dividends............................................................. 677,030 Investment securities sold............................................ 47,390,512 Purchase payments and transfers from other Travelers accounts......... 1,379,867 Other assets............................................................... 37,849 --------------- Total Assets..................................................... 869,656,769 --------------- LIABILITIES: Payables: Investment securities purchased....................................... 47,996,472 Contract surrenders and transfers to other Travelers accounts......... 760,972 Investment management and advisory fees............................... 68,481 Variation on futures margin........................................... 31,875 Accrued liabilities........................................................ 167,552 -------------- Total Liabilities................................................ 49,025,352 -------------- NET ASSETS...................................................................... $ 820,631,417 ==============
See Notes to Financial Statements -7- 10 THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF OPERATIONS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, 1998 INVESTMENT INCOME: Dividends.................................................................. $ 4,974,968 Interest................................................................... 324,438 -------------- Total income.......................................................... $ 5,299,406 EXPENSES: Investment management and advisory fees.................................... 1,911,548 Insurance charges.......................................................... 4,391,432 -------------- Total expenses........................................................ 6,302,980 --------------- Net investment loss.............................................. (1,003,574) --------------- REALIZED GAIN AND CHANGE IN UNREALIZED GAIN ON INVESTMENT SECURITIES: Realized gain from investment security transactions: Proceeds from investment securities sold.............................. 221,535,420 Cost of investment securities sold.................................... 179,053,209 -------------- Net realized gain................................................ 42,482,211 Change in unrealized gain on investment securities: Unrealized gain at December 31, 1997.................................. 208,374,317 Unrealized gain at June 30, 1998...................................... 289,240,052 -------------- Net change in unrealized gain for the period..................... 80,865,735 --------------- Net realized gain and change in unrealized gain ............ 123,347,946 --------------- Net increase in net assets resulting from operations....................... $ 122,344,372 ===============
See Notes to Financial Statements -8- 11 THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, 1998 1997 ---- ---- (UNAUDITED) OPERATIONS: Net investment income (loss).................................................... $ (1,003,574) $ 515,301 Net realized gain from investment security transactions......................... 42,482,211 80,067,798 Net change in unrealized gain on investment securities.......................... 80,865,735 80,794,664 ----------------- ----------------- Net increase in net assets resulting from operations....................... 122,344,372 161,377,763 ----------------- ----------------- UNIT TRANSACTIONS: Participant purchase payments (applicable to 1,744,979 and 3,027,691 units, respectively)................ 28,854,055 40,692,594 Participant transfers from other Travelers accounts (applicable to 2,936,816 and 5,078,380 units, respectively)................ 48,102,686 68,355,384 Administrative charges (applicable to 14,871 and 30,500 units, respectively)...................... (261,352) (428,591) Contract surrenders (applicable to 1,505,713 and 3,044,510 units, respectively)................ (25,242,943) (41,682,919) Participant transfers to other Travelers accounts (applicable to 1,768,968 and 4,257,243 units, respectively)................ (29,343,160) (56,815,055) Other payments to participants (applicable to 79,593 and 166,399 units, respectively)..................... (1,342,032) (2,235,718) ----------------- ----------------- Net increase in net assets resulting from unit transactions................ 20,767,254 7,885,695 ----------------- ----------------- Net increase in net assets............................................ 143,111,626 169,263,458 NET ASSETS: Beginning of period............................................................. 677,519,791 508,256,333 ----------------- ----------------- End of period................................................................... $ 820,631,417 $ 677,519,791 ================= =================
See Notes to Financial Statements -9- 12 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES The Travelers Growth and Income Stock Account for Variable Annuities ("Account GIS") is a separate account of The Travelers Insurance Company ("The Travelers"), an indirect wholly owned subsidiary of Travelers Group Inc., and is available for funding certain variable annuity contracts issued by The Travelers. Account GIS is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company. The following is a summary of significant accounting policies consistently followed by Account GIS in the preparation of its financial statements. SECURITY VALUATION. Investments in securities traded on a national securities exchange are valued at the last-reported sale price as of the close of business of the New York Stock Exchange on the last business day of the period; securities traded on the over-the-counter market and listed securities with no reported sales are valued at the mean between the last reported bid and asked prices or on the basis of quotations received from a reputable broker or other recognized source. When market quotations are not considered to be readily available for long-term corporate bonds and notes, such investments are generally stated at fair value on the basis of valuations furnished by a pricing service. These valuations are determined for normal institutional-size trading units of such securities using methods based on market transactions for comparable securities and various relationships between securities which are generally recognized by institutional traders. Securities, including restricted securities, for which pricing services are not readily available are valued by management at prices which it deems in good faith to be fair. Short-term investments for which a quoted market price is available are valued at market. Short-term investments for which there is no reliable quoted market price are valued at amortized cost which approximates market. SECURITY TRANSACTIONS. 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. Premiums and discounts are amortized to interest income utilizing the constant yield method. 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 (UNAUDITED) - CONTINUED REPURCHASE AGREEMENTS. When Account GIS enters into a repurchase agreement (a purchase of securities whereby the seller agrees to repurchase the securities at a mutually agreed upon date and price), the repurchase price of the securities will generally equal the amount paid by Account GIS plus a negotiated interest amount. The seller under the repurchase agreement will be required to provide to Account GIS securities (collateral) whose market value, including accrued interest, will be at least equal to 102% of the repurchase price. Account GIS monitors the value of collateral on a daily basis. Repurchase agreements will be limited to transactions with national banks and reporting broker dealers believed to present minimal credit risks. Account GIS's custodian will take actual or constructive receipt of all securities underlying repurchase agreements until such agreements expire. FEDERAL INCOME TAXES. The operations of Account GIS form a part of the total operations of The Travelers and are not taxed separately. The Travelers is taxed as a life insurance company under the Internal Revenue Code of 1986, as amended (the "Code"). Under existing federal income tax law, no taxes are payable on the investment income and capital gains of Account GIS. Account GIS is not taxed as a "regulated investment company" under Subchapter M of the Code. OTHER. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. YEAR 2000. In 1996, The Travelers began the process of identifying, evaluating and implementing changes to computer programs necessary to address the year 2000 issue. This issue involves the ability of computer systems that have time-sensitive programs to properly recognize the year 2000. The inability to do so could result in major failures or miscalculations. The Travelers has a comprehensive plan in progress to address its internal year 2000 issue with modifications to existing programs and conversions to new programs to bring all of its critical business systems into year 2000 compliance by year-end 1998. The total cost associated with the required modifications and conversions, which are expensed as incurred, is not expected to have a material effect on The Travelers financial position, results of operations or liquidity. The Travelers also has third party customers, financial institutions, vendors and others with which it conducts business and is in the process of confirming their plans to address year 2000 issues. While The Travelers has been advised that these efforts by third party vendors and customers will be successfully completed in a timely manner, it is possible that a series of failures by third parties could have a material adverse effect on The Travelers results of operations in future periods. 2. INVESTMENTS The costs of purchases and proceeds from sales of investments (other than short-term securities), were $225,053,696 and $197,107,557, respectively; the costs of purchases and proceeds from sales of direct and indirect U.S. government securities were $120,953 and $314,740, respectively, for the six months ended June 30, 1998. Realized gains and losses from investment 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 $54,063 and $94,251 for the six months ended June 30, 1998 and the year ended December 31, 1997, respectively. At June 30, 1998, Account GIS held 15 open S&P 500 Stock Index futures contracts expiring in September, 1998. The underlying face value, or notional value, of these contracts at June 30, 1998 amounted to $4,286,250. In connection with these contracts, short-term investments with a par value of $670,000 had been pledged as margin deposits. Net realized gains resulting from futures contracts were $1,229,629 and $113,394 for the six months ended June 30, 1998 and the year ended December 31, 1997, respectively. These gains are included in the net realized gain from investment security transactions on both the Statement of Operations and the Statement of Changes in Net Assets. The cash settlement for June 30, 1998 is shown on the Statement of Assets and Liabilities as a payable for variation on futures margin. -11- 14 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED 3. CONTRACT CHARGES Effective May 1, 1998, investment management and advisory fees are calculated daily at annual rates which start at 0.65% and decrease, as net assets increase, to 0.40% of Account GIS's average net assets. These fees are paid to Travelers Asset Management International Corporation ("TAMIC"), an indirect wholly owned subsidiary of Travelers Group Inc. Pursuant to a subadvisory agreement between TAMIC and The Travelers Investment Management Company ("TIMCO"), an indirect wholly owned subsidiary of Travelers Group Inc., TAMIC pays TIMCO a subadvisory fee calculated daily at annual rates which start at 0.45% and decrease, as net assets increase, to 0.20% of Account GIS's average net assets. Prior to May 1, 1998, investment management and advisory fees were calculated daily at an annual rate of 0.45% of Account GIS's average net assets. These fees were paid to TIMCO. 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 $14,475 and $30,718 for the six months ended June 30, 1998 and the year ended December 31, 1997, 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 $100,043 and $143,351 of contingent deferred sales charges for the six months ended June 30, 1998 and the year ended December 31, 1997, respectively. 4. NET ASSETS HELD ON BEHALF OF AN AFFILIATE Approximately $20,662,000 and $17,568,000 of the net assets of Account GIS were held on behalf of an affiliate of The Travelers as of June 30, 1998 and December 31, 1997, respectively. Transactions with this affiliate during the six months ended June 30, 1998 and the year ended December 31, 1997 were comprised of participant purchase payments of approximately $353,000 and $425,000 and contract surrenders of approximately $354,000 and $466,000, respectively. 5. NET CONTRACT OWNERS' EQUITY
JUNE 30, 1998 ---------------------------------------------- UNIT NET UNITS VALUE ASSETS ----- ----- ------ Accumulation phase of contracts issued prior to May 16, 1983.................... 14,265,104 $ 18.280 $ 260,785,012 Annuity phase of contracts issued prior to May 16, 1983......................... 344,007 18.280 6,288,904 Accumulation phase of contracts issued on or after May 16, 1983................. 31,374,959 17.604 552,372,473 Annuity phase of contracts issued on or after May 16, 1983...................... 67,310 17.604 1,185,028 --------------- Net Contract Owners' Equity.......................................................................... $ 820,631,417 ===============
-12- 15 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED 6. SUPPLEMENTARY INFORMATION (Selected data for a unit outstanding throughout each period.)
Contracts issued prior to May 16, 1983 SIX MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31, JUNE 30, (DERIVED FROM AUDITED FINANCIAL INFORMATION) ------------ ------------------------------------------------------------- 1998 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- ---- SELECTED PER UNIT DATA: Total investment income........................ $ .118 $ .233 $ .216 $ .208 $ .192 $ .189 Operating expenses............................. .128 .201 .154 .123 .100 .092 -------- ---------- --------- --------- --------- -------- Net investment income (loss)................... (.010) .032 .062 .085 .092 .097 Unit value at beginning of period.............. 15.510 11.763 9.668 7.120 7.194 6.664 Net realized and change in unrealized gains (losses)..................................... 2.780 3.715 2.033 2.463 (.166) .433 --------- ---------- --------- --------- --------- -------- Unit value at end of period.................... $ 18.280 $ 15.510 $ 11.763 $ 9.668 $ 7.120 $ 7.194 ========= ========== ========= ========= ========= ======== SIGNIFICANT RATIOS AND ADDITIONAL DATA: Net increase (decrease) in unit value.......... $ 2.77 $ 3.75 $ 2.10 $ 2.55 $ (.07) $ .53 Ratio of operating expenses to average net assets....................................... 1.50%* 1.45% 1.45% 1.45% 1.41% 1.33% Ratio of net investment income (loss) to average net assets........................... (.11)%* .24% .60% 1.02% 1.30% 1.40% Number of units outstanding at end of period (thousands)........................... 14,609 15,194 16,554 17,896 19,557 21,841 Portfolio turnover rate........................ 26% 64% 85% 96% 103% 81% Average commission rate paid+.................. $ .052 $ .051 $ .047 - - -
Contracts issued on or after May 16, 1983 SIX MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31, JUNE 30, (DERIVED FROM AUDITED FINANCIAL INFORMATION) ---------- ------------------------------------------------------------ 1998 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- ---- SELECTED PER UNIT DATA: Total investment income........................ $ .113 $ .228 $ .212 $ .205 $ .189 $ .184 Operating expenses............................. .143 .228 .175 .140 .115 .106 --------- --------- --------- ---------- --------- --------- Net investment income (loss)................... (.030) .000 .037 .065 .074 .078 Unit value at beginning of period.............. 14.955 11.371 9.369 6.917 7.007 6.507 Net realized and change in unrealized gains (losses)............................... 2.679 3.584 1.965 2.387 (.164) .422 --------- --------- --------- ---------- --------- --------- Unit value at end of period.................... $ 17.604 $ 14.955 $ 11.371 $ 9.369 $ 6.917 $ 7.007 ========= ========= ========= ========== ========= ========= SIGNIFICANT RATIOS AND ADDITIONAL DATA: Net increase (decrease) in unit value.......... $ 2.65 $ 3.58 $ 2.00 $ 2.45 $ (.09) $ .50 Ratio of operating expenses to average net assets....................................... 1.75%* 1.70% 1.70% 1.70% 1.65% 1.57% Ratio of net investment income (loss) to average net assets........................... (.36)%* .00% .36% .79% 1.05% 1.15% Number of units outstanding at end of period (thousands)........................... 31,442 29,545 27,578 26,688 26,692 28,497 Portfolio turnover rate........................ 26% 64% 85% 96% 103% 81% Average commission rate paid+.................. $ .052 $ .051 $ .047 - - -
* Annualized. + 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 (UNAUDITED) JUNE 30, 1998
NO. OF MARKET SHARES VALUE ------------ ------------- COMMON STOCKS (99.4%) AEROSPACE (1.2%) Boeing Co. 82,730 $ 3,686,656 General Dynamics Corp. 44,200 2,055,300 United Technologies Corp. 47,600 4,403,000 ------------- 10,144,956 ------------- AIRLINES (1.5%) AMR Corp. (A) 49,180 4,094,235 Continental Airlines (A) 50,600 3,080,275 Delta Air Lines 21,600 2,791,800 US Airways Group Inc. (A) 30,500 2,417,125 ------------- 12,383,435 ------------- AUTOMOTIVE (2.4%) Chrysler Corp. 58,100 3,275,388 Ford Motor Co. 147,600 8,708,400 General Motors Corp. 65,300 4,362,856 Navistar International Corp. (A) 120,800 3,488,100 ------------- 19,834,744 ------------- BANKING (9.2%) Banc One Corp. 27,064 1,510,509 BankAmerica Corp. 78,500 6,785,344 BankBoston Corp. 70,200 3,904,875 Bankers Trust Corp. 19,400 2,251,612 Chase Manhattan Corp. 73,804 5,572,202 Citicorp 39,300 5,865,525 Comerica Inc. 38,650 2,560,563 First Union Corp. 27,300 1,590,225 Fleet Financial Group Inc. 44,600 3,724,100 Golden West Financial Corp. 25,800 2,742,863 M & T Bank Corp. 3,031 1,679,174 J.P. Morgan & Company 15,500 1,815,437 NationsBank Corp. 103,612 7,926,318 Norwest Corp. 111,300 4,159,837 PNC Bank Corp. 26,700 1,436,794 Republic New York Corp. 49,200 3,096,525 State Street Corp. 38,800 2,696,600 Summit Bancorp. 66,200 3,144,500 SunTrust Banks Inc. 47,600 3,870,475 Washington Mutual 89,600 3,889,196 Wells Fargo & Co. 14,433 5,325,777 ------------- 75,548,451 ------------- BEVERAGE (2.4%) Adolph Coors Co. 69,200 2,361,450 Anheuser-Busch Cos. 600 28,312 Coca-Cola Co. 203,400 17,390,700 ------------- 19,780,462 ------------- BROKERAGE (2.2%) MGIC Investment Corp. 45,000 2,567,813 Marsh & McLennan Cos. 46,200 2,792,212 Merrill Lynch & Co. 54,600 5,036,850 Morgan Stanley Dean Witter & Co. 83,525 7,632,097 ------------- 18,028,972 ------------- BUILDING MATERIALS (0.6%) Kaufman & Broad Home Corp. 59,400 1,885,950 Masco Corp. 54,900 3,321,450 ------------- 5,207,400 ------------- CAPITAL GOODS (2.2%) Cordant Technologies Inc. 48,300 2,227,838 Crane Co. 54,861 2,664,187 Deere & Co. 51,800 2,738,925 Emerson Electric Co. 37,200 2,245,950 Pitney Bowes, Inc. 56,500 2,719,062 Tellabs, Inc. (A) 38,900 2,784,995 Thomas & Betts Corp. 57,500 2,831,875 ------------- 18,212,832 ------------- CHEMICALS (1.8%) Crompton & Knowles Corp. 77,100 1,941,956 Dow Chemical Co. 20,500 1,982,094 DuPont Co. 91,500 6,828,187 Lyondell Petrochemical 53,700 1,634,494 Monsanto Co. 48,900 2,732,288 ------------- 15,119,019 ------------- CONSTRUCTION MACHINERY (0.6%) Caterpillar, Inc. 34,100 1,803,038 Ingersoll-Rand Co. 60,800 2,679,000 ------------- 4,482,038 ------------- CONSUMER (5.7%) Colgate-Palmolive Co. 44,200 3,889,600 General Electric Cop. 256,500 23,341,500 Gillette Co. 64,384 3,649,768 Procter & Gamble Co. 116,300 10,590,569 Unilever N.V. 45,800 3,615,338 Whirlpool Corp. 29,300 2,014,375 ------------- 47,101,150 ------------- CONSUMER SERVICES (0.3%) Kimberly-Clark Corp. 46,460 2,131,352 ------------- CONTAINERS (0.3%) Owens-Illinois, Inc. (A) 49,200 2,201,700 ------------- DEFENSE (0.3%) Raytheon Co. Class B 34,400 2,033,900 ------------- ENTERTAINMENT (1.1%) Time Warner, Inc. 47,900 4,092,456 Walt Disney Co. 45,155 4,744,097 ------------- 8,836,553 ------------- FINANCE (1.4%) American Express Co. 41,600 4,742,400 Associates First Capital Corp. 38,710 2,975,831 Countrywide Credit Industries, Inc. 41,800 2,121,350 Pulte Corp. 68,000 2,031,500 ------------- 11,871,081 -------------
-14- 17 STATEMENT OF INVESTMENTS (UNAUDITED) - CONTINUED
NO. OF MARKET SHARES VALUE ------------ -------------- FOOD (3.7%) Dean Foods Co. 33,780 $ 1,855,789 H. J. Heinz Co. 76,800 4,310,400 Interstate Bakeries Corp. 64,800 2,150,550 Kellogg Co. 34,900 1,310,931 McDonalds Corp. 60,400 4,167,600 PepsiCo, Inc. 131,700 5,424,394 Sara Lee Corp. 85,400 4,777,063 Suiza Foods Corp. (A) 56,300 3,360,406 Sysco Corp. 115,900 2,969,937 -------------- 30,327,070 -------------- HEALTHCARE (1.9%) Abbott Laboratories 139,700 5,710,237 Guidant Corp. 50,200 3,579,888 HEALTHSOUTH Corp. (A) 148,800 3,971,100 Health Management Associates, Inc. (A) 61,950 2,071,453 -------------- 15,332,678 -------------- INDEPENDENT ENERGY (0.6%) Burlington Resources, Inc. 48,100 2,071,306 Entergy Corp. 69,100 1,986,625 Halliburton Co. 23,200 1,033,850 -------------- 5,091,781 -------------- INDUSTRIAL (1.2%) AccuStaff, Inc. (A) 61,500 1,921,875 Mercury General Corp. 27,200 1,752,700 Tyco International Ltd. 95,300 6,003,900 -------------- 9,678,475 -------------- INSURANCE (4.0%) Allstate Corp. 60,375 5,528,086 Ambac Financial Group, Inc. 30,600 1,790,100 American International Group 73,125 10,676,250 Equitable Companies, Inc. 42,500 3,184,844 Everest Reinsurance Holdings 48,000 1,845,000 Hartford Financial Services Group 25,100 2,870,813 SunAmerica, Inc. 67,850 3,897,134 Transatlantic Holdings, Inc. 17,940 1,386,986 20th Century Industries 54,900 1,574,944 -------------- 32,754,157 -------------- INTEGRATED ENERGY (6.2%) Amoco Corp. 142,400 5,927,400 Atlantic Richfield Co. 28,000 2,187,500 Chevron Corp. 54,500 4,526,906 Exxon Corp. 223,700 15,952,606 Mobil Corp. 90,500 6,934,563 Royal Dutch Petroleum Co. 147,000 8,057,438 Texaco, Inc. 76,400 4,560,125 Unocal Corp. 64,400 2,302,300 -------------- 50,448,838 -------------- MEDIA (2.4%) A.H. Belo Corp. 900 21,937 Chancellor Media Corp. (A) 43,000 2,135,217 Clear Channel Communications, Inc. (A) 37,215 4,061,087 Gannett Co., Inc. 48,100 3,418,106 Meredith Corp. 62,300 2,924,206 New York Times Co. 42,800 3,391,900 Tele-Communications, Inc. (A) 43,000 1,651,467 Viacom, Inc. (A) 30,813 1,794,857 -------------- 19,398,777 -------------- METALS (1.3%) Aeroquip-Vickers, Inc. 27,909 1,629,188 Alumax Inc. 53,600 2,485,700 Bethlehem Steel Corp. (A) 135,100 1,680,306 Illinois Tool Works 44,800 2,987,600 USX-U.S. Steel Group 53,100 1,752,300 -------------- 10,535,094 -------------- NATURAL GAS PIPELINE (1.1%) Columbia Energy Group 32,400 1,802,250 Enron Corp. 26,800 1,448,875 Sonat, Inc. 39,600 1,529,550 Williams Cos. 113,100 3,817,125 -------------- 8,597,800 -------------- OIL FIELD (0.5%) BJ Services Co. (A) 43,560 1,265,962 Schlumberger Ltd. 40,600 2,773,488 Union Pacific Resources Group 1 18 -------------- 4,039,468 -------------- PAPER (0.9%) Georgia-Pacific Group 40,000 2,357,500 International Paper Co. 24,800 1,066,400 Mead Corp. 49,250 1,563,688 Weyerhaeuser Co. 16,700 771,331 Willamette Industries, Inc. 51,200 1,638,400 -------------- 7,397,319 -------------- PHARMACEUTICALS (9.6%) American Home Products Corp. 148,800 7,700,400 Bristol-Myers Squibb Co. 99,900 11,482,256 CVS Corp. 94,700 3,687,381 Eli Lilly & Co. 100,300 6,626,069 Johnson & Johnson 98,400 7,257,000 Merck & Co. 85,200 11,395,500 Pfizer, Inc. 115,530 12,556,667 Schering-Plough Corp. 88,300 8,090,488 Warner-Lambert Co. 99,000 6,868,125 Watson Pharmaceuticals, Inc. (A) 58,700 2,740,556 -------------- 78,404,442 -------------- RAILROADS (0.3%) CSX Corp. 44,100 2,006,550 Union Pacific Corp. 18,000 794,250 -------------- 2,800,800 --------------
-15- 18 STATEMENT OF INVESTMENTS (UNAUDITED) - CONTINUED
NO. OF MARKET SHARES VALUE ------------ ------------- RETAILERS (6.1%) Borders Group, Inc. (A) 44,900 $ 1,661,300 Costco Cos. (A) 64,600 4,075,853 Dayton Hudson Corp. 94,900 4,602,650 Federated Department Stores, Inc.,(A) 47,700 2,566,856 Gap Inc. 37,000 2,280,125 General Nutrition Cos., Inc. (A) 107,900 3,365,131 Home Depot, Inc. 85,049 7,064,383 Jones Apparel Group Inc. (A) 47,200 1,725,750 Kmart Corp. (A) 130,700 2,515,975 Office Depot, Inc. (A) 82,600 2,607,062 J. C. Penney Co., Inc. 22,700 1,641,494 Ross Stores, Inc. 37,200 1,604,250 Stride Rite Corp. 1,400 21,087 TJX Companies, Inc. 110,000 2,653,750 Wal-Mart Stores, Inc. 194,500 11,815,875 ------------- 50,201,541 ------------- SERVICES (4.3%) HBO & Co. 112,400 3,965,607 Lincare Holdings, Inc. (A) 52,700 2,215,044 Medtronic, Inc. 42,200 2,690,250 Microsoft Corp. (A) 228,200 24,738,295 Oracle Corp. (A) 81,525 1,999,906 ------------- 35,609,102 ------------- SUPERMARKETS (0.7%) Kroger Co. (A) 54,600 2,340,975 Safeway Inc. (A) 78,730 3,203,327 ------------- 5,544,302 ------------- TECHNOLOGY (9.0%) Berg Electronics Corp. (A) 37,300 729,681 Ceridian Corp. (A) 48,000 2,820,000 Cisco Systems, Inc. (A) 119,650 11,019,011 Compaq Computer Corp. 182,569 5,180,381 Computer Associates International 29,462 1,636,982 Compuware Corp. (A) 33,500 1,711,639 Dell Computer Corp. (A) 60,400 5,603,984 EMC Corp. (A) 95,200 4,266,150 Eastman Kodak Co. 28,780 2,102,739 Hewlett-Packard Co. 67,300 4,029,588 Intel Corp. 145,600 10,788,043 International Business Machines Corp. 102,600 11,779,762 Intuit Inc. (A) 33,400 2,046,792 Sun Microsystems Inc. (A) 64,100 2,786,344 Symbol Technologies, Inc. 67,400 2,544,350 Texas Instruments, Inc. 33,300 1,941,806 Xerox Corp. 28,300 2,875,988 ------------- 73,863,240 ------------- TELECOMMUNICATIONS (8.4%) AT&T Corp. 131,100 7,489,088 AirTouch Communications, Inc. (A) 44,300 2,588,781 Ameritech Corp. 94,700 4,249,662 Bell Atlantic Corp. 134,058 6,116,396 BellSouth Corp. 85,700 5,752,613 GTE Corp. 83,100 4,622,438 Lucent Technologies Inc. 144,074 11,985,156 MCI Communications Corp. 57,800 3,357,816 MediaOne Group, Inc. (A) 50,200 2,205,662 Northern Telecom Ltd. 43,000 2,440,250 SBC Communications, Inc. 166,520 6,660,800 Sprint Corp. 37,106 2,615,973 U S West, Inc. 40,071 1,883,335 WorldCom Inc. (A) 142,400 6,884,143 ------------- 68,852,113 ------------- TEXTILE (0.3%) Fruit of The Loom (A) 78,000 2,588,625 ------------- TOBACCO (1.1%) Loews Corp. 21,500 1,873,187 Philip Morris Cos. 176,900 6,965,438 ------------- 8,838,625 ------------- U.S. AGENCY (0.8%) Federal Home Loan Mortgage Corp. 63,900 3,007,294 Federal National Mortgage Association 62,600 3,802,950 ------------- 6,810,244 ------------- UTILITIES (1.8%) Duke Energy Corp. 300 17,775 Edison International 104,000 3,074,500 FPL Group Inc. 44,700 2,816,100 Houston Industries 22,400 691,600 MidAmerican Energy Holdings Co. 114,200 2,469,575 PacifiCorp 23,600 533,950 Southern Co. 57,600 1,594,800 Texas Utilities Co. 80,500 3,350,812 ------------- 14,549,112 ------------- TOTAL COMMON STOCKS (COST $525,341,597) 814,581,648 -------------
-16- 19 STATEMENT OF INVESTMENTS (UNAUDITED) - CONTINUED
PRINCIPAL MARKET AMOUNT VALUE -------------- ------------- SHORT-TERM INVESTMENTS (0.6%) COMMERCIAL PAPER (0.5%) J.P. Morgan & Company, 5.64% due July 21, 1998 $ 1,266,000 $ 1,261,869 PepsiCo Inc., 6.08% due July 1, 1998 3,089,000 3,089,000 ------------- 4,350,869 ------------- U.S. TREASURY (0.1%) United States of America Treasury, 5.42% due July 23, 1998 (B) 675,000 673,036 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $5,023,904) 5,023,905 ------------- NOTIONAL VALUE -------------- FUTURES CONTRACTS (0.0%) S&P 500 Stock Index, Exp. September, 1998 (C) $ 4,286,250 - ------------- TOTAL INVESTMENTS (100%) (COST $530,365,501) (D) $ 819,605,553 =============
NOTES (A) Non-income Producing Security. (B) Par value of $670,000 pledged to cover margin deposits on futures contracts. (C) As more fully discussed in Note 1 to the financial statements, it is Account GIS's practice to hold cash and cash equivalents (including short-term investments) at least equal to the underlying face value, or notional value, of outstanding purchased futures contracts, less the initial margin. Account GIS uses futures contracts as a substitute for holding individual securities. (D) At June 30, 1998, net unrealized appreciation for all securities was $289,240,052. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of market value over cost of $295,136,809 and aggregate gross unrealized depreciation for all securities in which there was an excess of cost over market value of $5,896,757. See Notes to Financial Statements -17- 20 THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES For the six months ended June 30, 1998, The Travelers Quality Bond Account for Variable Annuities ("Account QB") posted a 3.86% return before expenses versus The Lehman Government / Corporate Bond Index of 3.47%, (The Lehman Government / Corporate Bond Index is a combination of publicly issued intermediate and long-term U.S. government bonds and corporate bonds). Our long duration position had a positive effect as the 5-year Treasury yield fell 9 basis points and the 10-year Treasury yield dropped by 11 basis points, thereby increasing the value of Account QB's portfolio. Yield spread widening in the corporate sector negated our duration benefits as corporate bond yields increased by 5-15 basis points. While we continue to see reasonable value in the corporate sector, a huge supply of new issue products could keep yield spreads from narrowing dramatically. The Federal Reserve Board's ("Fed") policy remains neutral. The Fed continues to weigh the dilemma of too rapid economic growth as Gross Domestic Product ("GDP") grew by 5.4% in the first quarter, versus continued economic weakness in Asia. Recently, evidence has surfaced to indicate that the Pacific Rim is starting to create some drag on our economy. The trade deficit jumped to $14.5 billion in April, for example, and the unemployment rate inched up to 4.5% from 4.3%. Our current estimate at this time is that these factors should help second quarter GDP to slow to a more sustainable 2%. We expect inflation to remain muted, but will watch closely for upward pressures on wages and prices in the service sector. We also will monitor the activities of Asia closely. Stability in that area should enable the Fed to more closely follow U.S. economic activity. Lastly, Japan's ability to deal with its banking crisis could stem the flow of assets out of that country thereby reducing their demand for U.S. Treasury securities. PORTFOLIO MANAGER: F. DENNEY VOSS [TAMIC LOGO] -18- 21 THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) JUNE 30, 1998 ASSETS: Investment securities, at market value (cost $157,091,039)................. $ 157,950,974 Cash ...................................................................... 8,907 Receivables: Interest.............................................................. 1,630,113 Investment securities sold............................................ 62,238,294 Purchase payments and transfers from other Travelers accounts......... 52,084 Other assets............................................................... 8,951 ---------------- Total Assets..................................................... 221,889,323 ---------------- LIABILITIES: Payables: Investment securities purchased....................................... 64,317,038 Contract surrenders and transfers to other Travelers accounts......... 320,136 Investment management and advisory fees............................... 6,997 Accrued liabilities........................................................ 25,485 ---------------- Total Liabilities................................................ 64,669,656 ---------------- NET ASSETS...................................................................... $ 157,219,667 ================
See Notes to Financial Statements -19- 22 THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF OPERATIONS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, 1998 INVESTMENT INCOME: Interest............................................................ $ 5,291,286 EXPENSES: Investment management and advisory fees............................. $ 255,231 Insurance charges................................................... 929,221 ---------------- Total expenses................................................. 1,184,452 --------------- Net investment income..................................... 4,106,834 --------------- REALIZED GAIN AND CHANGE IN UNREALIZED GAIN ON INVESTMENT SECURITIES: Realized gain from investment security transactions: Proceeds from investment securities sold....................... 298,481,994 Cost of investment securities sold............................. 296,926,106 ---------------- Net realized gain......................................... 1,555,888 Change in unrealized gain on investment securities: Unrealized gain at December 31, 1997........................... 1,695,113 Unrealized gain at June 30, 1998............................... 859,935 ---------------- Net change in unrealized gain for the period.............. (835,178) --------------- Net realized gain and change in unrealized gain...... 720,710 --------------- Net increase in net assets resulting from operations................ $ 4,827,544 ===============
See Notes to Financial Statements -20- 23 THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, 1998 1997 ---- ---- (UNAUDITED) OPERATIONS: Net investment income................................................................ $ 4,106,834 $ 8,282,982 Net realized gain from investment security transactions.............................. 1,555,888 692,660 Net change in unrealized gain on investment securities............................... (835,178) 1,496,038 --------------- --------------- Net increase in net assets resulting from operations............................ 4,827,544 10,471,680 --------------- --------------- UNIT TRANSACTIONS: Participant purchase payments (applicable to 1,076,475 and 2,595,588 units, respectively)..................... 5,909,419 13,459,247 Participant transfers from other Travelers accounts (applicable to 1,200,661 and 1,981,335 units, respectively)..................... 6,587,389 10,315,973 Administrative charges (applicable to 9,208 and 21,863 units, respectively)............................ (51,389) (116,102) Contract surrenders (applicable to 1,351,348 and 2,897,282 units, respectively)..................... (7,478,073) (15,167,293) Participant transfers to other Travelers accounts (applicable to 2,024,876 and 5,631,496 units, respectively)..................... (11,099,143) (29,216,683) Other payments to participants (applicable to 91,707 and 175,168 units, respectively).......................... (507,379) (923,875) --------------- --------------- Net decrease in net assets resulting from unit transactions..................... (6,639,176) (21,648,733) --------------- --------------- Net decrease in net assets................................................. (1,811,632) (11,177,053) NET ASSETS: Beginning of period.................................................................. 159,031,299 170,208,352 --------------- --------------- End of period........................................................................ $ 157,219,667 $ 159,031,299 =============== ===============
See Notes to Financial Statements -21- 24 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES The Travelers Quality Bond Account for Variable Annuities ("Account QB") is a separate account of The Travelers Insurance Company ("The Travelers"), an indirect wholly owned subsidiary of Travelers Group Inc., and is available for funding certain variable annuity contracts issued by The Travelers. Account QB is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company. The following is a summary of significant accounting policies consistently followed by Account QB in the preparation of its financial statements. SECURITY VALUATION. Investments in securities traded on a national securities exchange are valued at the last-reported sale price as of the close of business of the New York Stock Exchange on the last business day of the period; securities traded on the over-the-counter market and listed securities with no reported sales are valued at the mean between the last-reported bid and asked prices or on the basis of quotations received from a reputable broker or other recognized source. When market quotations are not considered to be readily available for long-term corporate bonds and notes, such investments are generally stated at fair value on the basis of valuations furnished by a pricing service. These valuations are determined for normal institutional-size trading units of such securities using methods based on market transactions for comparable securities and various relationships between securities which are generally recognized by institutional traders. Securities, including restricted securities, for which pricing services are not readily available, are valued by management at prices which it deems in good faith to be fair. Short-term investments for which a quoted market price is available are valued at market. Short-term investments for which there is no reliable quoted market price are valued at amortized cost which approximates market. SECURITY TRANSACTIONS. Security transactions are accounted for on the trade date. Interest income is recorded on the accrual basis. Premiums and discounts are amortized to interest income utilizing the constant yield method. 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. -22- 25 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED FEDERAL INCOME TAXES. The operations of Account QB form a part of the total operations of The Travelers and are not taxed separately. The Travelers is taxed as a life insurance company under the Internal Revenue Code of 1986, as amended (the "Code"). Under existing federal income tax law, no taxes are payable on the investment income and capital gains of Account QB. Account QB is not taxed as a "regulated investment company" under Subchapter M of the Code. OTHER. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. YEAR 2000. In 1996, The Travelers began the process of identifying, evaluating and implementing changes to computer programs necessary to address the year 2000 issue. This issue involves the ability of computer systems that have time-sensitive programs to properly recognize the year 2000. The inability to do so could result in major failures or miscalculations. The Travelers has a comprehensive plan in progress to address its internal year 2000 issue with modifications to existing programs and conversions to new programs to bring all of its critical business systems into year 2000 compliance by year-end 1998. The total cost associated with the required modifications and conversions, which are expensed as incurred, is not expected to have a material effect on The Travelers financial position, results of operations or liquidity. The Travelers also has third party customers, financial institutions, vendors and others with which it conducts business and is in the process of confirming their plans to address year 2000 issues. While The Travelers has been advised that these efforts by third party vendors and customers will be successfully completed in a timely manner, it is possible that a series of failures by third parties could have a material adverse effect on The Travelers results of operations in future periods. 2. INVESTMENTS The costs of purchases and proceeds from sales of investments (other than short-term securities) were $175,103,243 and $182,358,416, respectively; the costs of purchases and proceeds from sales of direct and indirect U.S. government obligations were $110,263,258 and $106,591,908, respectively, for the six months ended June 30, 1998. Realized gains and losses from investment security transactions are reported on an identified cost basis. 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 $5,239 and $12,423 for the six months ended June 30, 1998 and the year ended December 31, 1997, 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 $30,449 and $86,884 of contingent deferred sales charges for the six months ended June 30, 1998 and the year ended December 31, 1997, respectively. -23- 26 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED 4. NET ASSETS HELD ON BEHALF OF AN AFFILIATE Approximately $480,000 and $966,000 of the net assets of Account QB were held on behalf of an affiliate of The Travelers as of June 30, 1998 and December 31, 1997, respectively. Transactions with this affiliate during the six months ended June 30, 1998 and the year ended December 31, 1997 were comprised of participant purchase payments of approximately $83,000 and $106,000 and contract surrenders of approximately $6,000 and $120,000, respectively. 5. NET CONTRACT OWNERS' EQUITY
JUNE 30, 1998 ----------------------------------------------------- UNIT NET UNITS VALUE ASSETS ----- ----- ------ Accumulation phase of contracts issued prior to May 16, 1983........... 7,185,952 $ 5.771 $ 41,474,753 Annuity phase of contracts issued prior to May 16, 1983................ 142,056 5.771 819,898 Accumulation phase of contracts issued on or after May 16, 1983........ 20,667,569 5.557 114,875,879 Annuity phase of contracts issued on or after May 16, 1983............. 8,841 5.557 49,137 ----------------- Net Contract Owners' Equity...................................................................... $ 157,219,667 =================
-24- 27 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED 6. SUPPLEMENTARY INFORMATION (Selected data for a unit outstanding throughout each period.)
Contracts issued prior to May 16, 1983 SIX MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31, JUNE 30, (DERIVED FROM AUDITED FINANCIAL INFORMATION) ----------- ------------------------------------------------------- 1998 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- ---- SELECTED PER UNIT DATA: Total investment income........................ $ .189 $ .353 $ .379 $ .328 $ .318 $ .306 Operating expenses............................. .037 .071 .067 .063 .059 .058 -------- -------- -------- --------- -------- -------- Net investment income.......................... .152 .282 .312 .265 .259 .248 Unit value at beginning of period.............. 5.593 5.234 5.050 4.400 4.498 4.150 Net realized and change in unrealized gains (losses)............................... .026 .077 (.128) .385 (.357) .100 -------- -------- -------- --------- -------- -------- Unit value at end of period.................... $ 5.771 $ 5.593 $ 5.234 $ 5.050 $ 4.400 $ 4.498 ======== ======== ======== ========= ======== ======== SIGNIFICANT RATIOS AND ADDITIONAL DATA: Net increase (decrease) in unit value.......... $ .18 $ .36 $ .18 $ .65 $ (.10) $ .35 Ratio of operating expenses to average net assets................................... 1.33%* 1.33% 1.33% 1.33% 1.33% 1.33% Ratio of net investment income to average net assets................................... 5.39%* 5.25% 6.12% 5.54% 5.87% 5.66% Number of units outstanding at end of period (thousands).................................. 7,328 7,683 8,549 9,325 10,694 12,489 Portfolio turnover rate........................ 195% 196% 176% 138% 27% 24%
Contracts issued on or after May 16, 1983 SIX MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31, JUNE 30, (DERIVED FROM AUDITED FINANCIAL INFORMATION) ----------- ----------------------------------------------------- 1998 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- ---- SELECTED PER UNIT DATA: Total investment income........................ $ .182 $ .342 $ .368 $ .319 $ .310 $ .299 Operating expenses............................. .043 .082 .078 .073 .069 .067 -------- --------- -------- --------- --------- -------- Net investment income.......................... .139 .260 .290 .246 .241 .232 Unit value at beginning of period.............. 5.393 5.060 4.894 4.274 4.381 4.052 Net realized and change in unrealized gains (losses)..................................... .025 .073 (.124) .374 (.348) .097 -------- --------- -------- --------- --------- -------- Unit value at end of period.................... $ 5.557 $ 5.393 $ 5.060 $ 4.894 $ 4.274 $ 4.381 ======== ========= ======== ========= ========= ======== SIGNIFICANT RATIOS AND ADDITIONAL DATA: Net increase (decrease) in unit value.......... $ .16 $ .33 $ .17 $ .62 $ (.11) $ .33 Ratio of operating expenses to average net assets................................... 1.57%* 1.57% 1.57% 1.57% 1.57% 1.57% Ratio of net investment income to average net assets................................... 5.14%* 5.00% 5.87% 5.29% 5.62% 5.41% Number of units outstanding at end of period (thousands).................................. 20,676 21,521 24,804 27,066 27,033 28,472 Portfolio turnover rate........................ 195% 196% 176% 138% 27% 24%
* Annualized. -25- 28 THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF INVESTMENTS (UNAUDITED) JUNE 30, 1998
PRINCIPAL MARKET AMOUNT VALUE -------------- ------------ BONDS (67.3%) AIRLINES (1.1%) Delta Air Lines 9.25% Sinking Fund, 2007 (A) $ 1,673,236 $ 1,695,088 -------------- CHEMICALS (3.3%) Praxair, Inc., 6.15% Debentures, 2003 5,250,000 5,249,895 -------------- FOREIGN AGENCY (9.6%) Province of Manitoba, 6.75% Bonds, 2003 7,500,000 7,751,400 Republic of Panama, 7.88% Notes, 2002 7,500,000 7,378,447 -------------- 15,129,847 -------------- FINANCE (4.7%) Telecom New Zealand Finance Corp., 6.25% Debentures, 2003 7,500,000 7,502,392 -------------- FOOD (5.0%) Nabisco Inc., 6.70% Notes, 2002 7,800,000 7,899,310 -------------- HEALTHCARE (4.6%) Columbia/HCA Healthcare Corp., 8.70% Notes, 2010 2,250,000 2,409,464 Columbia/HCA Healthcare Corp., 6.87% Notes, 2003 5,000,000 4,806,145 -------------- 7,215,609 -------------- NATURAL GAS PIPELINE (4.8%) The Australian Gas Light Co., 6.40% Debentures, 2008 7,500,000 7,618,808 -------------- RAILROADS (4.9%) CSX Corp., 7.25% Debentures, 2004 7,350,000 7,710,297 -------------- REAL ESTATE (4.6%) Nationwide Health Properties, Inc., 6.90% Debentures, 2037 7,000,000 7,204,309 -------------- RETAILERS (4.7%) Tommy Hilfiger Corp., 6.50% Debentures, 2003 7,500,000 7,517,528 -------------- TOBACCO (5.8%) Philip Morris Cos., 6.95% Debentures, 2006 8,800,000 9,096,938 -------------- UTILITIES (14.2%) Niagara Mohawk Power Corp., 7.63% Debentures, 2005 7,250,000 7,395,000 SCANA Corp., 6.25% Debentures, 2003 7,100,000 7,100,000 United Utilities PLC, 6.45% Debentures, 2008 7,800,000 7,928,591 -------------- 22,423,591 -------------- TOTAL BONDS (COST $105,421,721) 106,263,612 -------------- U.S. GOVERNMENT SECURITIES (26.0%) United States of America Treasury, 5.63% Notes, 1999 41,000,000 41,064,042 -------------- TOTAL U.S. GOVERNMENT SECURITIES (COST $41,044,770) 41,064,042 -------------- SHORT-TERM INVESTMENTS (6.7%) COMMERCIAL PAPER (6.7%) Merrill Lynch & Co., 5.69% due July 7, 1998 6,900,000 6,892,320 Mobil Corp., 6.14% due July 1, 1998 3,731,000 3,731,000 -------------- TOTAL SHORT-TERM INVESTMENTS (COST $10,624,548) 10,623,320 -------------- TOTAL INVESTMENTS (100%) (COST $157,091,039) (B) $ 157,950,974 ==============
NOTES (A) Restricted Security. (B) At June 30, 1998, net unrealized appreciation for all securities was $859,935. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of market value over cost of $1,064,208 and aggregate gross unrealized depreciation for all securities in which there was an excess of cost over market value of $204,273. See Notes to Financial Statements -26- 29 THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES For the six months ended June 30, 1998 the economy continued to expand at a greater than expected pace. However, growth slowed somewhat in the second quarter as the result of dislocations produced by the ongoing crisis in Asia, and more recently by the impact of the General Motors strike. Inflation for the most part continued to be nonexistent. As a result, the financial markets rallied and the 30-year Treasury bond yield ended at 5.62%, down 30 basis points from year-end. In addition, the federal funds rate remained unchanged at 5.50%. It is anticipated that Gross Domestic Product growth will approximate 2% for the second quarter after a sizzling 5.4% rate for the first quarter. Accordingly, the Federal Reserve Board ("Fed") appears to be remaining on the sidelines for the foreseeable future. However, if there is any significant change in the economy the Fed will take the necessary action. The strategy in management of The Travelers Money Market Account For Variable Annuities' short-term assets will be to extend maturates from the current average of 26 days to between 60 and 90 days. At June 30, 1998 the asset size of the portfolio was $92.6 million with an average yield of 5.58%. PORTFOLIO MANAGER: EMIL J. MOLINARO JR. [TAMIC LOGO] -27- 30 THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) JUNE 30, 1998 ASSETS: Investment securities, at market value (cost $92,595,079)............ $ 92,579,411 Receivables: Interest........................................................ 71,645 Investment securities sold...................................... 1,016,000 Purchase payments and transfers from other Travelers accounts... 956,878 Other assets......................................................... 2,918 --------------- Total Assets............................................... 94,626,852 --------------- LIABILITIES: Cash overdraft....................................................... 16,314 Payables: Investment securities purchased................................. 997,783 Contract surrenders and transfers to other Travelers accounts... 1,717,584 Investment management and advisory fees......................... 4,120 Accrued liabilities.................................................. 15,847 --------------- Total Liabilities.......................................... 2,751,648 --------------- NET ASSETS................................................................ $ 91,875,204 ===============
See Notes to Financial Statements -28- 31 THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF OPERATIONS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, 1998 INVESTMENT INCOME: Interest ................................................... $ 2,476,964 EXPENSES: Investment management and advisory fees...................... $ 143,802 Insurance charges............................................ 553,166 -------------- Total expenses.......................................... 696,968 -------------- Net investment income.............................. 1,779,996 -------------- Net increase in net assets resulting from operations......... $ 1,779,996 ==============
See Notes to Financial Statements -29- 32 THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, 1998 1997 ---- ---- (UNAUDITED) OPERATIONS: Net investment income.............................................................. $ 1,779,996 $ 3,600,931 ---------------- ---------------- Net increase in net assets resulting from operations.......................... 1,779,996 3,600,931 ---------------- ---------------- UNIT TRANSACTIONS: Participant purchase payments (applicable to 3,017,430 and 14,166,450 units, respectively).................. 7,175,482 32,465,312 Participant transfers from other Travelers accounts (applicable to 44,672,013 and 94,922,947 units, respectively)................. 106,353,931 219,247,840 Administrative charges (applicable to 18,413 and 37,992 units, respectively)......................... (44,230) (88,495) Contract surrenders (applicable to 3,522,129 and 6,094,352 units, respectively)................... (8,378,597) (14,060,055) Participant transfers to other Travelers accounts (applicable to 42,071,282 and 104,773,969 units, respectively)................ (100,177,269) (241,734,934) Other payments to participants (applicable to 94,254 and 170,332 units, respectively)........................ (225,042) (395,081) ---------------- ---------------- Net increase (decrease) in net assets resulting from unit transactions........ 4,704,275 (4,565,413) ---------------- ---------------- Net increase (decrease) in net assets.................................... 6,484,271 (964,482) NET ASSETS: Beginning of period................................................................ 85,390,933 86,355,415 ---------------- ---------------- End of period...................................................................... $ 91,875,204 $ 85,390,933 ================ ================
See Notes to Financial Statements -30- 33 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES The Travelers Money Market Account for Variable Annuities ("Account MM") is a separate account of The Travelers Insurance Company ("The Travelers"), an indirect wholly owned subsidiary of Travelers Group Inc., and is available for funding certain variable annuity contracts issued by The Travelers. Account MM is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company. The following is a summary of significant accounting policies consistently followed by Account MM in the preparation of its financial statements. SECURITY VALUATION. Short-term investments for which a quoted market price is available are valued at market. Short-term investments for which there is no reliable quoted market price are valued at amortized cost which approximates market. SECURITY TRANSACTIONS. Security transactions are accounted for on the trade date. Interest income is recorded on the accrual basis. Premiums and discounts are amortized to interest income utilizing the constant yield method. 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. YEAR 2000. In 1996, The Travelers began the process of identifying, evaluating and implementing changes to computer programs necessary to address the year 2000 issue. This issue involves the ability of computer systems that have time-sensitive programs to properly recognize the year 2000. The inability to do so could result in major failures or miscalculations. The Travelers has a comprehensive plan in progress to address its internal year 2000 issue with modifications to existing programs and conversions to new programs to bring all of its critical business systems into year 2000 compliance by year-end 1998. The total cost associated with the required modifications and conversions, which are expensed as incurred, is not expected to have a material effect on The Travelers financial position, results of operations or liquidity. The Travelers also has third party customers, financial institutions, vendors and others with which it conducts business and is in the process of confirming their plans to address year 2000 issues. While The Travelers has been advised that these efforts by third party vendors and customers will be successfully completed in a timely manner, it is possible that a series of failures by third parties could have a material adverse effect on The Travelers results of operations in future periods. -31- 34 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED 2. CONTRACT CHARGES Investment management and advisory fees are calculated daily at an annual rate of 0.3233% of Account MM'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 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 $49,882 and $90,325 of contingent deferred sales charges for the six months ended June 30, 1998 and the year ended December 31, 1997, respectively. 3. NET ASSETS HELD ON BEHALF OF AN AFFILIATE Approximately $3,381,000 and $2,883,000 of the net assets of Account MM were held on behalf of an affiliate of The Travelers as of June 30, 1998 and December 31, 1997, respectively. Transactions with this affiliate during the six months ended June 30, 1998 and the year ended December 31, 1997 were comprised of participant purchase payments of approximately $1,120,000 and $320,000 and contract surrenders of approximately $498,000 and $1,367,000, respectively. 4. NET CONTRACT OWNERS' EQUITY
JUNE 30, 1998 ---------------------------------------------- UNIT NET UNITS VALUE ASSETS ----- ----- ------ Accumulation phase of contracts issued prior to May 16, 1983.......... 23,895 $ 2.495 $ 59,632 Annuity phase of contracts issued prior to May 16, 1983............... 72,822 2.495 181,735 Accumulation phase of contracts issued on or after May 16, 1983....... 38,005,795 2.403 91,345,095 Annuity phase of contracts issued on or after May 16, 1983............ 120,137 2.403 288,742 ------------- Net Contract Owners' Equity................................................................. $ 91,875,204 =============
-32- 35 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED 5. SUPPLEMENTARY INFORMATION (Selected data for a unit outstanding throughout each period.)
Contracts issued prior to May 16, 1983 SIX MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31, JUNE 30, (DERIVED FROM AUDITED FINANCIAL INFORMATION) ----------- ------------------------------------------------------- 1998 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- ---- SELECTED PER UNIT DATA: Total investment income............................ $ .06 $ .13 $ .12 $ .130 $ .091 $ .067 Operating expenses................................. .01 .03 .03 .030 .028 .027 ------- ------ ------- --------- -------- -------- Net investment income.............................. .05 .10 .09 .100 .063 .040 Unit value at beginning of period.................. 2.44 2.34 2.24 2.146 2.083 2.043 ------- ------ ------- -------- -------- -------- Unit value at end of period........................ $ 2.49 $ 2.44 $ 2.34 $ 2.246 $ 2.146 $ 2.083 ======= ======= ======= ======== ======== ======== SIGNIFICANT RATIOS AND ADDITIONAL DATA: Net increase in unit value......................... $ .05 $ .10 $ .10 $ .10 $ .06 $ .04 Ratio of operating expenses to average net assets....................................... 1.33%* 1.33% 1.33% 1.33% 1.33% 1.33% Ratio of net investment income to average net assets....................................... 4.29%* 4.27% 4.10% 4.61% 2.98% 1.93% Number of units outstanding at end of period (thousands)................ 97 105 112 206 206 218
Contracts issued on or after May 16, 1983 SIX MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31, JUNE 30, (DERIVED FROM AUDITED FINANCIAL INFORMATION) --------- --------------------------------------------------------- 1998 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- ---- SELECTED PER UNIT DATA: Total investment income............................ $ .066 $ .128 $ .121 $ .127 $ .087 $ .065 Operating expenses................................. .018 .036 .035 .034 .032 .031 ------- -------- -------- -------- -------- ------- Net investment income.............................. .048 .092 .086 .093 .055 .034 Unit value at beginning of period.................. 2.355 2.263 2.177 2.084 2.029 1.995 ------- -------- -------- -------- -------- ------- Unit value at end of period........................ $ 2.403 $ 2.355 $ 2.263 $ 2.177 $ 2.084 $ 2.029 ======= ======== ======== ======== ======== ======= SIGNIFICANT RATIOS AND ADDITIONAL DATA: Net increase in unit value......................... $ .05 $ .09 $ .09 $ .09 $ .06 $ .03 Ratio of operating expenses to average net assets....................................... 1.57%* 1.57% 1.57% 1.57% 1.57% 1.57% Ratio of net investment income to average net assets....................................... 4.04%* 4.02% 3.84% 4.36% 2.72% 1.68% Number of units outstanding at end of period (thousands)...................................... 38,126 36,134 38,044 35,721 39,675 34,227
* Annualized. -33- 36 THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF INVESTMENTS (UNAUDITED) JUNE 30, 1998
PRINCIPAL MARKET AMOUNT VALUE --------------- --------------- SHORT-TERM INVESTMENTS (100%) COMMERCIAL PAPER (100%) American Home Products Corp., 5.64% due August 21, 1998 $ 1,367,000 $ 1,356,068 Bell Atlantic Financial Services Inc., 5.63% due July 10, 1998 1,345,000 1,342,875 BellSouth Capital Funding, 5.61% due July 1, 1998 2,460,000 2,459,601 Corporate Asset Funding Co., 5.64% due July 7, 1998 4,315,000 4,310,197 Dakota Certificates Program, 5.66% due August 14, 1998 3,610,000 3,584,997 Deutsche Bank Financial, Inc., 5.62% due July 7, 1998 1,385,000 1,383,459 Diageo PLC, 5.64% due July 13, 1998 5,000,000 4,989,805 E.I. Dupont de Nemours & Co., 5.65% due August 25, 1998 2,950,000 2,924,606 General Electric Capital Corp., 5.60% due July 6, 1998 4,500,000 4,495,694 J.P. Morgan & Company, 5.64% due July 21, 1998 4,500,000 4,485,317 Marsh & McLennan Cos., 5.70% due July 28, 1998 2,080,000 2,071,006 May Department Stores, 5.64% due July 24, 1998 4,075,000 4,059,845 Merrill Lynch & Co., 5.67% due August 24, 1998 3,190,000 3,163,029 Motorola, Inc., 5.62% due July 23, 1998 2,165,000 2,157,277 National Rural Utilities Co-Op Financial Corp., 5.62% due July 16, 1998 1,807,000 1,802,490 National Rural Utilities Co-Op Financial Corp., 5.64% due August 6, 1998 2,140,000 2,127,802 Norwest Financial, Inc., 5.78% due September 1, 1998 3,450,000 3,452,471 Potomac Electric Power Co., 5.64% due July 28, 1998 4,104,000 4,086,254 Private Export Funding Corp., 5.64% due July 7, 1998 4,100,000 4,095,437 Procter & Gamble Co., 5.61% due July 20, 1998 4,500,000 4,486,005 Progress Capital Holdings, Inc., 5.79% due July 14, 1998 1,000,000 997,809 Prudential Funding Corp., 5.63% due July 22, 1998 2,927,000 2,917,004 Rubbermaid Inc., 5.65% due July 30, 1998 4,500,000 4,479,183 Sherwin Williams Co., 5.63% due August 7, 1998 5,000,000 4,970,735 Southern New England Telephone, 5.65% due July 20, 1998 4,338,000 4,324,509 TECO Financial, Inc., 5.63% due July 28, 1998 2,100,000 2,090,920 Transamerica Financial Corp., 5.64% due July 24, 1998 3,930,000 3,915,384 Tribune Co., 5.65% due August 26, 1998 2,170,000 2,150,991 TRW, Inc., 5.66% due July 17, 1998 3,909,000 3,898,641 --------------- TOTAL INVESTMENTS (100%) (COST $92,595,079) $ 92,579,411 ===============
See Notes to Financial Statements -34- 37 This page intentionally left blank. 38 This page intentionally left blank. 39 Investment Adviser ------------------ TRAVELERS ASSET MANAGEMENT INTERNATIONAL CORPORATION Hartford, Connecticut 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 Investment Sub-Adviser ---------------------- TRAVELERS INVESTMENT MANAGEMENT COMPANY Hartford, Connecticut THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES Independent Accountants ----------------------- COOPERS & LYBRAND L.L.P. Hartford, Connecticut Custodian --------- THE CHASE MANHATTAN BANK, N.A. New York, New York The financial information included herein has been taken from the records of The Travelers Growth and Income Stock Account for Variable Annuities, The Travelers Quality Bond Account for Variable Annuities, and The Travelers Money Market Account for Variable Annuities. This financial information has not been audited by the Accounts' independent accountants, who therefore express no opinion concerning its accuracy. However, it is management's opinion that all proper adjustments have been made. This report is prepared for the general information of contract owners and is not an offer of units 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 (Semi-Annual) (6-98) Printed in U.S.A. -----END PRIVACY-ENHANCED MESSAGE-----