-----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, OJHT+7Y+HsW8MM2y3i68rQIybo+rVCk3YbW5S3Kyvghf1nGsLdNPXw6JHLBiGwOT W3LX7G7/fuWFTRZsxbp2Kg== 0000950123-99-001603.txt : 19990226 0000950123-99-001603.hdr.sgml : 19990226 ACCESSION NUMBER: 0000950123-99-001603 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990225 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRAVELERS GROWTH & INCOME STOCK ACCT FOR VARIABLE ANNUITIES CENTRAL INDEX KEY: 0000099444 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 060566090 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-01539 FILM NUMBER: 99549798 BUSINESS ADDRESS: STREET 1: ONE TOWER SQ STREET 2: C/O TRAVELERS INSURANCE CO CITY: HARTFORD STATE: CT ZIP: 06183-2020 BUSINESS PHONE: 2032770111 MAIL ADDRESS: STREET 1: ONE TOWER SQUARE STREET 2: ATTN FINANCIAL SERVICES LEGAL DIVISION CITY: HARTFORD STATE: CT ZIP: 06183-2020 FORMER COMPANY: FORMER CONFORMED NAME: TRAVELERS FUND A FOR VARIABLE ANNUITIES DATE OF NAME CHANGE: 19851103 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES CENTRAL INDEX KEY: 0000099440 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 060566090 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-02571 FILM NUMBER: 99549799 BUSINESS ADDRESS: STREET 1: ONE TOWER SQ STREET 2: C/O TRAVELERS INSURANCE CO CITY: HARTFORD STATE: CT ZIP: 06183-2020 BUSINESS PHONE: 2032777379 MAIL ADDRESS: STREET 1: ONE TOWER SQUARE STREET 2: ATTN FINANCIAL SERVICES LEGAL DIVISION CITY: HARTFORD STATE: CT ZIP: 06183-2020 FORMER COMPANY: FORMER CONFORMED NAME: TRAVELERS FUND A-1 FOR VARIABLE ANNUITIES DATE OF NAME CHANGE: 19851103 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES CENTRAL INDEX KEY: 0000700871 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 060566090 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-03409 FILM NUMBER: 99549800 BUSINESS ADDRESS: STREET 1: ONE TOWER SQ STREET 2: C/O TRAVELERS INSURANCE CO CITY: HARTFORD STATE: CT ZIP: 06183 BUSINESS PHONE: 2032777379 MAIL ADDRESS: STREET 1: ONE TOWER SQUARE STREET 2: ATTN FINANCIAL SERVICES LEGAL DIVISION CITY: HARTFORD STATE: CT ZIP: 06183-2020 FORMER COMPANY: FORMER CONFORMED NAME: TRAVELERS FUND MM FOR VARIABLE ANNUITIES DATE OF NAME CHANGE: 19851103 N-30D 1 ANNUAL REPORTS 1 UNIVERSAL ANNUITY ANNUAL REPORTS DECEMBER 31, 1998 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 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 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") provides equity management and subadvisory services for The Travelers Growth and Income Stock Account for Variable Annuities. 3 THE TRAVELERS VARIABLE PRODUCT SEPARATE ACCOUNTS INVESTMENT ADVISORY COMMENTARY AS OF DECEMBER 31, 1998 ECONOMIC REVIEW AND OUTLOOK - --------------------------- The year 1998 saw a widely gyrating U.S. stock market with sector performance varying. The large-cap oriented Standard & Poor's 500 Stock Index ("S&P 500") returned 28.6% for the year. The Standard & Poor's 400 Midcap Stock Index had a gain of 19.1% while the Russell 2000 Stock Index ("Russell 2000") of smaller companies had a negative return of 2.6% for the year. Dividend-paying defensive stocks such as utilities performed better than the average small- and mid-cap stocks. While technology stocks were adversely impacted by the global financial crisis which began in late 1997, they have since rebounded, led by Internet-related names. The economies of the developed world flourished in 1998 while emerging markets generally suffered. Low interest rates, robust consumer spending and benign inflation fueled economic growth in the U.S. and Europe creating favorable conditions for corporate profitability. In contrast, Russia's economy collapsed, Asia's economies remained mired in recession and Brazil's economy faltered at year-end after $30 billion was spent to defend its currency during the year. The year 1998 was also a record for mergers and acquisitions, nearly double 1997's total. An example of this trend is the merger of oil giants Exxon and Mobil announced in December which will result in the creation of the world's largest company in terms of revenue. In the technology sector, merger activity between Internet service providers, phone companies, cable companies and telecommunications firms heated up, as "convergence" became the new mantra. We remain guardedly optimistic about the U.S. economy's resiliency in the first half of 1999 and expect interest rates to stay low and the technology - led revolution to continue. However, the risks from foreign markets cannot be discounted and future corporate earnings may come under increasing pressure. EQUITY COMMENTARY - ----------------- The deepening global financial crisis and its adverse impact on global economies and leveraged hedge funds sent the U.S. stock market into a tailspin during the third quarter of 1998. The S&P 500 fell by almost 10% in the third quarter while the Russell 2000 fared even worse with a decline of 20%. The third quarter began on a promising note as stock prices rose by almost 5% in the first half of July. From the all-time highs established on July 17, 1998, a series of bad news related to political and currency turmoil led the stock market down through the end of August. The market decline over that period was close to 20%, which qualifies under most scenarios as a bear market. The bulk of the bad news in August came from the political and economic crisis in Russia and the continuing spread of the currency contagion. The collapse of the Russian ruble and the restructuring of Russian debt triggered trading and lending losses at brokerage firms and banks. The crisis in the financial sector took a turn for the worse later in the quarter as several hedge funds disclosed losses related to the global financial turmoil. Several stocks in the financial sector saw their market value cut in half during the third quarter. -1- 4 Increased uncertainty over Clinton's presidency and the bigger question of the damage to corporate profits added to the volatility in the stock market. The increased prospects of a global and U.S. economic slowdown led to some easing of monetary policy. Japan first decreased short-term interest rates by 20 basis points and the Federal Reserve Board ("Fed") followed suit with a 25 basis point rate cut in late September. The U.S. stock market rallied in anticipation of the rate cut and stock prices rose by almost 6% in September. In the large capitalization stock universe, high quality growth stocks performed better than value stocks in the third quarter of 1998. The Utilities sector produced the only positive performance in the third quarter while the Financial Services and Energy sectors at the other end of the spectrum fell by over 20%. Large cap Technology and Health Care stocks held up reasonably well, but consumer stocks declined sharply against the likely backdrop of an economic slowdown. A proactive and aggressive stance by the Fed halted the stock market slide early in the fourth quarter of 1998 and sent stock prices soaring in November and December. The fourth quarter rally erased losses from the third quarter and most market measures reached all-time highs. The negative sentiment in the stock market persisted through the first week of October as the S&P 500 fell another 6%. Investor concerns focused on the impact of the Russian crisis, global lending and trading losses on U.S. economic and earnings growth. Sentiment reversed in the second week of October after most market indexes had declined over 20% from their all-time highs. The reversal in trend turned into a significant stock market rally when the Fed cut short term rates by an unexpected 25 basis points in the middle of October. The surprise Fed action raised hopes that a proactive stimulative monetary policy by most central banks would avert a global recession. The stock market rally, triggered by the unexpected Fed rate cut in mid-October, continued almost unabated through the months of November and December. The market was also helped by economic reports in the fourth quarter which were well ahead of expectations. Despite the strength in the economy, interest rates remained low mainly as a result of low inflation. In the large cap universe, all sectors except Energy which declined by 3%, registered strong gains in the fourth quarter. The market rally was led by the Technology and Health Care sectors which rose by over 30%. The Financial Services, Transportation and Producer Durables sectors also performed well. The performance of the U.S. stock market in 1998 proves yet again that interest rate changes and liquidity flows may have a more dominant influence on stock prices than most other factors. In a year where earnings growth was close to zero, most measures of the U.S. stock market have risen by over 20%. Declining interest rates, which fell from 5.9% to 5.1% during 1998, have triggered a significant expansion in the market price-to-earnings ratio ("P/E"). The upward pressure on stock prices has been further amplified by strong money flows as yields on alternative investments have dwindled. A notable aspect of the stock market performance in 1998 was the divergence in returns across different styles and segments of the market. While the S&P 500 rose by 28.6% in 1998, the Russell 2000 actually declined by 2.6%. The gain in large company growth stocks of 42.2% was well ahead of the 14.7% advance of large company value stocks and almost out of sight compared to small company value stocks which fell by 6.5%. With earnings growth slowing down, the market P/E multiple has now reached 23 times 1998 earnings. It appears that the biggest risk to the stock market still remains on the earnings front. Earnings estimates for 1999 remain high and it is quite likely that these earnings forecasts will be revised down. Despite the overhang of possible downward earnings revisions, we believe that support from low interest rates should limit an excessive downside. -2- 5 FIXED INCOME COMMENTARY - ----------------------- Problems that started with Asia's currency devaluations in the summer of 1997 hit the bond market hard in August and September of 1998. Bond values fell dramatically and asset-backed bonds, mortgage-backed securities, emerging-market debt and corporate bonds all were negatively affected. In 1998, the more risk a bond investor assumed, the more he or she suffered. For the year ended December 31, 1998, the Lehman Government/Corporate Index returned 9.47%. During the year, the spreads between different types of bonds and U.S. Treasuries widened at record speed as investors gravitated to safety amidst rising stock market volatility and higher investor anxiety about the global economy. The Fed then changed its monetary policy from one of vigilance against inflation to one of combating deflation during the reporting period and cut rates three times. So far in 1999, spreads have tightened, bond market liquidity has returned and the bond market has stabilized. Markets and policy makers expect real U.S. economic growth to finally slow to the 1%-2% level in 1999 after 3 years of 3% plus growth. The slowdown is expected to be led by a sharp reduction in the growth rate of investment spending and continued weakness in the export sector. The Conference Board survey of corporate sentiment indicates that capital-spending plans have not yet rebounded with the stock market and consumer sentiment. Year 2000 compliance ("Y2K") spending is temporarily boosting capital spending, yet industrial overcapacity and several years of rapid spending in technology make slower investment spending highly likely. However, a drop in the rate of consumer spending growth is essential to any meaningful forecast of 1%-2% real Gross Domestic Product growth. This has not happened yet despite two years where consumer spending has been close to consumer income. The wealth effect from three years of 20% plus stock market gains is estimated to increase spending 1.5% more than implied by income growth. Lower interest rates, lower oil and other commodity prices, and declining import prices have further boosted consumer purchasing power. The tight employment market has also been a major force behind high consumer confidence and spending plans. December brought a further sharp drop in oil prices and continued record high (which substantially exceeded expectations) auto sales and housing starts. These factors cause us to push any forecast of a consumer slowdown further out into the future which will delay any further Fed rate cuts. There are storm clouds on the horizon that could lead the consumer to retreat. Latin America has been pushed into recession by last summer's emerging market meltdown and could be subject to further pressure if a Brazilian crisis erupts. Latin America has a larger economic impact on the U.S. than Asia and Russia. A decline in the stock market could rattle the consumer, although the stock markets continued resilience means that a sustained downturn is required before spending would be significantly impacted. Japan is also a big question mark. Economic activity is now declining there after several years of flat growth. Despite three rate cuts in the second half of 1998, it would be hard to say the Fed has adopted an easy monetary policy. Short-term interest rates are still more than 3% above inflation and are high relative to nominal growth. Credit market spreads are high and banks are tightening credit standards. These factors create a downward bias for short-term rates over the long-term, but rates are likely to remain stable until the consumer slows down. With the Fed on hold, there will be some upward pressure on long-term rates. But slow growth outside the U.S. and continued low inflation should prevent rates from rising too much. The fact that so much of the U.S. Treasury curve trades below the federal-funds rate is a big factor in the continued high spreads in the investment grade corporate market. Because of this, spreads should move to offset the change in U.S. Treasury yields - narrowing when yields rise and widening when yields fall. DAVID A. TYSON, CFA, PRESIDENT & CHIEF INVESTMENT OFFICER, 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........................20 THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES........................32
-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 subadvisor. 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 twelve months ending December 31, 1998, Account GIS achieved a total return of 31.0%, before fees and expenses, ahead of the S&P 500 return of 28.6%. Net of fees and expenses, Account GIS's total return of 28.7% for the year compared favorably to the 15.6% average return for variable annuity stock accounts in the Lipper Growth & Income category. During the third quarter of 1998, stock selection in the Consumer Discretionary, Financial Services and Producer Durables sectors had an adverse impact on relative performance. Media stocks such as New York Times, Meredith Corp. and Clear Channel Communications and our holdings in the retail sector such as Jones Apparel and General Nutrition sold off sharply on concerns of future earnings weakness resulting from a possible recession. The prospect of a slower economy also hurt Producer Durable stocks like United Technologies and Deere Corp. where we had a modest overweight position. Trading and lending losses during the third quarter devastated the Financial Services sector. Our overweight positions in BankBoston, Equitable Companies, Morgan Stanley Dean Witter and Merrill Lynch hurt performance. Our stock selection in the Technology and Energy sectors contributed positively to performance in the third quarter. Our positions in higher growth Technology stocks such as Cisco Systems, EMC Corp. and Symbol Technologies performed well in the third quarter. Being underweight in several poorly performing stocks such as Computer Associates, Parametric Technologies and 3Com Corp. also helped. In the Energy sector, we gained from underweight positions in stocks such as Royal Dutch and Occidental Petroleum. During the fourth quarter of 1998, stock selection was favorable in most sectors. The biggest contributions to relative performance came from the Technology, Health Care, Consumer Discretionary, Producer Durables and Utilities sectors. In the Technology sector, a number of our overweight position in stable growth companies with rising earnings estimates such as Cisco Systems, Symbol Technologies, EMC Corp., Dell Computers and Lucent Technologies performed well. The biggest gain, however, came from America Online which rose by 70% in December alone on the heels of a frenzied pursuit of Internet stocks and its inclusion into the S&P 500 on the last day of the year. Guidant Corp., a leading manufacturer of cardiological equipment, and Amgen, the world's largest biotechnology company, were our top stock picks in the Health Care sector. Both stocks rose by almost 50% in the fourth quarter on strong revenue growth and positive earnings surprises. A strong recovery in retail and media stocks from their lows in the third quarter helped performance in the Consumer Discretionary sector. Our retail holdings in Dayton Hudson, Staples Inc. and CVS Corp. performed well and media stocks such as New York Times and Clear Channel Communications recovered from near-recession levels as investors felt reassured about economic prospects after the Federal Reserve Board action to cut interest rates. -5- 8 Our good performance in the Producer Durables sector was achieved from a combination of picking the winners in the sector and avoiding the losers. Our emphasis on Tyco International, a world leader in security systems, paid off while we avoided some of the bigger losers within the sector such as Minnesota Mining and Lockheed Martin. In the Utilities sector, we have been emphasizing long-distance and cellular telephone companies such as Airtouch Communications, Sprint PCS and MCI Worldcomm at the expense of the regional telephone companies and the electric utilities group. We were rewarded in these positions as investors paid a premium for the higher growth prospects of these companies within a relatively low growth sector. With earnings growth slowing down, the market price-to-earnings ratio has now reached 23 times 1998 earnings. It appears that the biggest risk to the stock market still remains on the earnings front. Earnings estimates for 1999 remain high and it is quite likely that these earnings forecasts will be revised down. Despite the overhang of possible downward earnings revisions, we believe that support from low interest rates should limit an excessive downside. In our disciplined approach to stock selection, we screen our research universe of over 1,000 large-cap securities for companies that offer improving earnings fundamentals at discounted stock valuations. A small sample of our current holdings is presented here to illustrate our investment approach. In the Technology sector, we focus on higher growth industries like networking and software through our positions in Symbol Technologies, EMC Corp., Cisco Systems and Oracle which are still trading at reasonable valuations. Our emphasis on Amgen and Guidant Corp., leaders in the biotechnology and medical devices industries respectively, also seeks growth at a reasonable price. PORTFOLIO MANAGER: SANDIP A. BHAGAT, CFA -6- 9 THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES [CHART] This is a comparison of The Travelers Growth and Income Stock Account for Variable Annuities ("Account GIS") versus Lipper Analytical Services' variable annuity composite index, which provides the average performance of variable annuity funds with similar objectives as of December 31, 1998. Lipper Analytical Services is a leading independent Variable Insurance Product Performance Analysis Service. The performance of the composite is net of all asset based fees such as mortality and expense charges and investment management fees. Performance reflects the charges associated with Universal Annuity, which became available on May 16, 1983. Contracts issued prior to May 16, 1983 have different contract charges that result in different performance than presented above. Account GIS performance information is net of: 1) the 1.25% annual mortality and expense risk charge, and 2) investment management fees. The deduction of the $15 semi-annual administrative charge and the contingent deferred sales charge (5% maximum) is not reflected. The deduction of those charges would reduce any percentage increase or make greater any percentage decrease. Performance data quoted represents past performance. Investment return and principal value of an investment will fluctuate so that an investor's units, when redeemed, may be worth more or less than their original cost. The following is the performance data required by SEC rules governing uniform performance reporting: one year 23.57%, five year 21.73% and ten year 14.37%. This performance is based on a $1,000 hypothetical investment and reflects deductions of all fees and charges including the semi-annual administrative charge and the maximum deferred sales charge of 5%. -7- 10 THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1998
ASSETS: Investment securities, at market value (cost $581,986,486)....................... $ 895,436,085 Cash............................................................................. 98,146 Receivables: Dividends.................................................................... 861,062 Investment securities sold................................................... 2,059,940 Purchase payments and transfers from other Travelers accounts................ 641,719 Other assets..................................................................... 107,146 ---------------- Total Assets.............................................................. 899,204,098 ---------------- LIABILITIES: Payables: Investment securities purchased.............................................. 2,145,795 Contract surrenders and transfers to other Travelers accounts................ 1,608,530 Investment management and advisory fees...................................... 118,487 Accrued liabilities.............................................................. 255,264 ---------------- Total Liabilities......................................................... 4,128,076 ---------------- NET ASSETS:.......................................................................... $ 895,076,022 ================
See Notes to Financial Statements -8- 11 THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998
INVESTMENT INCOME: Dividends ............................................................. $ 10,314,857 Interest ............................................................... 552,622 ----------------- Total income........................................................ $ 10,867,479 EXPENSES: Investment management and advisory fees................................. 4,368,784 Insurance charges....................................................... 9,084,753 ----------------- Total expenses...................................................... 13,453,537 ---------------- Net investment loss.............................................. (2,586,058) ---------------- REALIZED GAIN AND CHANGE IN UNREALIZED GAIN ON INVESTMENT SECURITIES: Realized gain from investment security transactions: Proceeds from investment securities sold............................ 436,016,135 Cost of investment securities sold.................................. 340,361,004 ----------------- Net realized gain................................................ 95,655,131 Change in unrealized gain on investment securities: Unrealized gain at December 31, 1997................................ 208,374,317 Unrealized gain at December 31, 1998................................ 313,449,599 ----------------- Net change in unrealized gain for the year....................... 105,075,282 ---------------- Net realized gain and change in unrealized gain ............. 200,730,413 ---------------- Net increase in net assets resulting from operations.................... $ 198,144,355 ================
See Notes to Financial Statements -9- 12 THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF CHANGES IN NET ASSETS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997 ---- ---- OPERATIONS: Net investment income (loss)............................................... $ (2,586,058) $ 515,301 Net realized gain from investment security transactions.................... 95,655,131 80,067,798 Net change in unrealized gain on investment securities..................... 105,075,282 80,794,664 ----------------- ---------------- Net increase in net assets resulting from operations................... 198,144,355 161,377,763 ----------------- ---------------- UNIT TRANSACTIONS: Participant purchase payments (applicable to 3,313,169 and 3,027,691 units, respectively)............ 55,597,200 40,692,594 Participant transfers from other Travelers accounts (applicable to 5,422,153 and 5,078,380 units, respectively)............ 90,631,767 68,355,384 Administrative charges (applicable to 29,915 and 30,500 units, respectively).................. (549,312) (428,591) Contract surrenders (applicable to 3,114,020 and 3,044,510 units, respectively)............ (53,155,177) (41,682,919) Participant transfers to other Travelers accounts (applicable to 4,220,307 and 4,257,243 units, respectively)............ (70,289,825) (56,815,055) Other payments to participants (applicable to 164,728 and 166,399 units, respectively)................ (2,822,777) (2,235,718) ----------------- ---------------- Net increase in net assets resulting from unit transactions............ 19,411,876 7,885,695 ----------------- ---------------- Net increase in net assets.......................................... 217,556,231 169,263,458 NET ASSETS: Beginning of year.......................................................... 677,519,791 508,256,333 ----------------- ---------------- End of year................................................................ $ 895,076,022 $ 677,519,791 ================= ================
See Notes to Financial Statements -10- 13 NOTES TO FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES The Travelers Growth and Income Stock Account for Variable Annuities ("Account GIS") is a separate account of The Travelers Insurance Company ("The Travelers"), an indirect wholly owned subsidiary of Citigroup Inc. (formerly 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 4:00 p.m. eastern standard time closing price of the New York Stock Exchange on the last business day of the year; securities traded on the over-the-counter market and listed securities with no reported sales are valued at the mean between the last reported bid and asked prices or on the basis of quotations received from a reputable broker or other recognized source. 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. -11- 14 NOTES TO FINANCIAL STATEMENTS - CONTINUED REPURCHASE AGREEMENTS. When Account GIS enters into a repurchase agreement (a purchase of securities whereby the seller agrees to repurchase the securities at a mutually agreed upon date and price), the repurchase price of the securities will generally equal the amount paid by Account GIS plus a negotiated interest amount. The seller under the repurchase agreement will be required to provide to Account GIS securities (collateral) whose market value, including accrued interest, will be at least equal to 102% of the repurchase price. Account GIS monitors the value of collateral on a daily basis. Repurchase agreements will be limited to transactions with national banks and reporting broker dealers believed to present minimal credit risks. Account GIS's custodian will take actual or constructive receipt of all securities underlying repurchase agreements until such agreements expire. FEDERAL INCOME TAXES. The operations of Account GIS form a part of the total operations of The Travelers and are not taxed separately. The Travelers is taxed as a life insurance company under the Internal Revenue Code of 1986, as amended (the "Code"). Under existing federal income tax law, no taxes are payable on the investment income and capital gains of Account GIS. Account GIS is not taxed as a "regulated investment company" under Subchapter M of the Code. OTHER. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. INVESTMENTS The aggregate costs of purchases and proceeds from sales of investments (other than short-term securities), were $414,966,535 and $385,876,369, respectively; the costs of purchases and proceeds from sales of direct and indirect U.S. government securities were $3,899,294 and $1,143,321, respectively, for the year ended December 31, 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 $97,735 and $94,251 for the years ended December 31, 1998 and 1997, respectively. Net realized gains resulting from futures contracts were $2,690,651 and $113,394 for the years ended December 31, 1998 and 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. -12- 15 NOTES TO FINANCIAL STATEMENTS - 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 Citigroup Inc. Pursuant to a subadvisory agreement between TAMIC and The Travelers Investment Management Company ("TIMCO"), an indirect wholly owned subsidiary of Citigroup 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 $24,080 and $30,718 for the years ended December 31, 1998 and 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 $246,946 and $143,351 of contingent deferred sales charges for the years ended December 31, 1998 and 1997, respectively. 4. NET ASSETS HELD ON BEHALF OF AN AFFILIATE Approximately $21,175,000 and $17,568,000 of the net assets of Account GIS were held on behalf of an affiliate of The Travelers as of December 31, 1998 and 1997, respectively. Transactions with this affiliate during the years ended December 31, 1998 and 1997, were comprised of participant purchase payments of approximately $675,000 and $425,000 and contract surrenders of approximately $1,930,000 and $466,000, respectively. 5. NET CONTRACT OWNERS' EQUITY
DECEMBER 31, 1998 ------------------------------------------------ UNIT NET UNITS VALUE ASSETS Accumulation phase of contracts issued prior to May 16, 1983.................. 13,565,168 $ 20.017 $ 271,499,729 Annuity phase of contracts issued prior to May 16, 1983....................... 329,222 20.017 6,589,212 Accumulation phase of contracts issued on or after May 16, 1983............... 31,983,964 19.253 615,702,541 Annuity phase of contracts issued on or after May 16, 1983.................... 66,728 19.253 1,284,540 --------------- Net Contract Owners' Equity........................................................................... $ 895,076,022 ===============
-13- 16 NOTES TO FINANCIAL STATEMENTS - CONTINUED 6. SUPPLEMENTARY INFORMATION (Selected data for a unit outstanding throughout each year.) Contracts issued prior to May 16, 1983
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------------------ 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- SELECTED PER UNIT DATA: Total investment income................................... $ .243 $ .233 $ .216 $ .208 $ .192 Operating expenses........................................ .272 .201 .154 .123 .100 ---------- ---------- ---------- --------- --------- Net investment income (loss).............................. (.029) .032 .062 .085 .092 Unit value at beginning of year........................... 15.510 11.763 9.668 7.120 7.194 Net realized and change in unrealized gains (losses)...... 4.536 3.715 2.033 2.463 (.166) ---------- ---------- ---------- --------- --------- Unit value at end of year................................. $ 20.017 $ 15.510 $ 11.763 $ 9.668 $ 7.120 ========== ========== ========== ========= ========= SIGNIFICANT RATIOS AND ADDITIONAL DATA: Net increase (decrease) in unit value..................... $ 4.51 $ 3.75 $ 2.10 $ 2.55 $ (.07) Ratio of operating expenses to average net assets......... 1.56% 1.45% 1.45% 1.45% 1.41% Ratio of net investment income (loss) to average net assets ................................................... (.16)% .24% .60% 1.02% 1.30% Number of units outstanding at end of year (thousands).... 13,894 15,194 16,554 17,896 19,557 Portfolio turnover rate................................... 50% 64% 85% 96% 103%
Contracts issued on or after May 16, 1983
FOR THE YEARS ENDED DECEMBER 31, --------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- SELECTED PER UNIT DATA: Total investment income................................... $ .234 $ .228 $ .212 $ .205 $ .189 Operating expenses........................................ .303 .228 .175 .140 .115 ---------- ---------- ---------- ---------- ----------- Net investment income (loss).............................. (.069) .000 .037 .065 .074 Unit value at beginning of year........................... 14.955 11.371 9.369 6.917 7.007 Net realized and change in unrealized gains (losses)...... 4.367 3.584 1.965 2.387 (.164) ---------- ---------- ---------- --------- ----------- Unit value at end of year................................. $ 19.253 $ 14.955 $ 11.371 $ 9.369 $ 6.917 ========== ========== ========== ========= =========== SIGNIFICANT RATIOS AND ADDITIONAL DATA: Net increase (decrease) in unit value..................... $ 4.30 $ 3.58 $ 2.00 $ 2.45 $ (.09) Ratio of operating expenses to average net assets......... 1.81% 1.70% 1.70% 1.70% 1.65% Ratio of net investment income (loss) to average net assets ................................................... (.41)% .00% .36% .79% 1.05% Number of units outstanding at end of year (thousands).... 32,051 29,545 27,578 26,688 26,692 Portfolio turnover rate................................... 50% 64% 85% 96% 103%
-14- 17 THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF INVESTMENTS DECEMBER 31, 1998
NO. OF MARKET SHARES VALUE --------------- --------------- COMMON STOCKS (99.6%) AEROSPACE (0.5%) Boeing Co. 75,630 $ 2,467,429 General Dynamics Corp. 40,400 2,368,450 -------------- 4,835,879 -------------- AIRLINES (0.1%) AMR Corp. (A) 15,480 919,125 -------------- AUTOMOTIVE (1.8%) Daimlerchrysler AG (A) 15,338 1,473,407 Ford Motor Co. 135,100 7,928,681 General Motors Corp. 40,200 2,876,812 Lear Corp. (A) 39,800 1,532,300 Navistar International Corp. 78,700 2,242,950 (A) -------------- 16,054,150 -------------- BANKING (7.4%) Bank One Corp. 56,664 2,893,405 BankAmerica Corp. 176,424 10,607,493 BankBoston Corp. 64,200 2,499,788 Capital One Financial Corp. 14,800 1,702,000 Chase Manhattan Corp. 93,504 6,364,116 Comerica, Inc. 35,450 2,417,247 Fifth Third Bancorp 34,800 2,482,761 First Union Corp. 25,000 1,520,312 Fleet Financial Group Inc. 81,600 3,646,500 Golden West Financial Corp. 23,500 2,154,656 M & T Bank Corp. 2,731 1,417,218 J.P. Morgan & Company 20,200 2,122,262 National City Corp. 52,200 3,784,500 PNC Bank Corp. 24,400 1,320,650 Republic New York Corp. 45,000 2,050,312 State Street Corp. 35,500 2,469,469 Summit Bancorp. 60,500 2,643,094 SunTrust Banks, Inc. 51,400 3,932,100 Washington Mutual, Inc. 50,600 1,932,288 Wells Fargo & Co. 197,830 7,900,836 -------------- 65,861,007 --------------- BEVERAGE (3.0%) Adolph Coors Co. 63,300 3,574,469 Anheuser-Busch Cos. 40,100 2,631,563 Coca-Cola Co. 208,400 13,936,750 PepsiCo, Inc. 164,600 6,738,312 ---------------- 26,881,094 ---------------- BROKERAGE (2.0%) Lehman Brothers Holdings, Inc. 73,900 3,256,219 Marsh & McLennan Cos. 42,300 2,471,906 Merrill Lynch & Co. 81,400 5,433,450 Morgan Stanley Dean Witter & Co. 94,725 6,725,475 ---------------- 17,887,050 ---------------- BUILDING MATERIALS (0.3%) Masco Corp. 100,500 2,889,375 ----------------
NO. OF MARKET SHARES VALUE -------------- ---------------- CAPITAL GOODS (5.8%) Applied Materials, Inc. (A) 54,500 $ 2,328,169 Cordant Technologies, Inc. 44,200 1,657,500 Crane Co. 75,291 2,272,847 Deere & Co. 47,400 1,570,125 Emerson Electric Co. 34,000 2,127,125 General Electric Co. 298,700 30,486,069 Honeywell, Inc. 26,200 1,973,188 Pitney Bowes, Inc. 22,500 1,486,406 Tellabs, Inc. (A) 16,500 1,131,281 TRW, Inc. 41,700 2,343,019 United Technologies Corp. 43,600 4,741,500 --------------- 52,117,229 --------------- CHEMICALS (1.4%) Crompton & Knowles Corp. 70,600 1,460,537 Dow Chemical Co. 18,800 1,709,625 E.I. Dupont de Nemours & Co. 83,800 4,446,638 Lyondell Petrochemical Co. 49,100 883,800 Monsanto Co. 44,800 2,128,000 Praxair, Inc. 51,600 1,818,900 --------------- 12,447,500 --------------- CONSTRUCTION MACHINE (0.5%) Caterpillar, Inc. 31,200 1,435,200 Ingersoll-Rand Co. 55,600 2,609,725 --------------- 4,044,925 --------------- CONSUMER (3.7%) Clorox Co. 31,400 3,667,913 Colgate-Palmolive Co. 24,900 2,312,588 Eastman Kodak Co. 26,280 1,892,160 Gillette Co. 58,984 2,849,664 Kimberly Clark Corp. 42,560 2,319,520 Maytag Corp. 41,600 2,589,600 Meredith Corp. 57,000 2,158,875 Procter & Gamble Co. 119,500 10,911,844 Unilever N.V. 56,600 4,694,262 --------------- 33,396,426 --------------- DEFENSE (0.2%) Raytheon Co. 31,500 1,677,375 --------------- ENTERTAINMENT (0.6%) Viacom, Inc. (A) 28,313 2,095,162 Walt Disney Co. 123,965 3,718,950 --------------- 5,814,112 --------------- FINANCE (2.1%) American Express Co. 58,200 5,950,950 Associates First Capital Corp. 71,020 3,009,472 Countrywide Credit Industries, Inc. 38,300 1,922,181 Household International 91,700 3,633,613 Pulte Corp. 62,300 1,732,719 Transamerica Corp. 20,000 2,310,000 --------------- 18,558,935 ---------------
-15- 18 STATEMENT OF INVESTMENTS - CONTINUED
NO. OF MARKET SHARES VALUE ---------- ------------ FOOD (2.0%) Campbell Soup Co. 39,300 $ 2,161,500 H .J. Heinz Co. 63,000 3,567,375 Interstate Bakeries Corp. 59,400 1,570,388 Kellogg Co. 32,000 1,092,000 Sara Lee Corp. 156,400 4,408,525 Suiza Foods Corp. (A) 51,500 2,623,281 Sysco Corp. 106,000 2,908,375 -------------- 18,331,444 -------------- HOME CONSTRUCTION (0.2%) Kaufman & Broad Home Corp. 54,300 1,561,125 -------------- HEALTHCARE (1.6%) Abbott Laboratories 127,900 6,267,100 Guidant Corp. 36,500 4,024,125 Healthsouth Rehabilitation Corp. (A) 136,300 2,104,131 Wellpoint Health Networks, Inc. (A) 20,200 1,757,400 -------------- 14,152,756 -------------- INDEPENDENT ENERGY (0.5%) Burlington Resources, Inc. 44,000 1,575,750 Entergy Corp. 63,300 1,970,213 Halliburton Co. 21,200 628,050 -------------- 4,174,013 -------------- INDUSTRIAL (1.7%) CBS Corp. 104,600 3,425,650 Mercury General Corp. 24,900 1,090,931 Sealed Air Corp. (A) 43,300 2,211,006 Tyco International Ltd. 87,300 6,585,694 Waste Management, Inc. 47,400 2,210,025 -------------- 15,523,306 -------------- INSURANCE (3.0%) Allstate Corp. 110,550 4,269,994 Ambac Financial Group, Inc. 28,100 1,691,269 American International Group 112,187 10,840,069 Everest Reinsurance Holdings 43,900 1,709,356 Hartford Financial Services Group 46,000 2,524,250 SunAmerica, Inc. 43,050 3,492,431 Transatlantic Holdings, Inc. 16,440 1,242,248 20th Century Industries 50,200 1,164,012 -------------- 26,933,629 -------------- INTEGRATED ENERGY (5.1%) Amoco Corp. 79,800 4,817,925 Atlantic Richfield Co. 48,800 3,184,200 Chevron Corp. 49,900 4,138,581 Exxon Corp. 204,800 14,976,000 Mobil Corp. 70,100 6,107,463 Royal Dutch Petroleum Co. 134,500 6,439,188 Texaco, Inc. 69,900 3,695,962 Union Pacific Resource Group Inc. 1 9 Unocal Corp. 84,700 2,472,181 -------------- 45,831,509 --------------
NO. OF MARKET SHARES VALUE ---------- ------------ MEDIA (2.5%) Clear Channel Communications, Inc. (A) 68,130 3,713,085 Comcast Corp. 66,800 $ 3,922,409 Gannett Company, Inc. 44,000 2,912,250 New York Times Co. 55,600 1,928,625 Tele-Communications, Inc. (A) 39,300 2,175,007 Time Warner, Inc. 87,800 5,449,088 Times Mirror Co. 33,000 1,848,000 -------------- 21,948,464 -------------- METALS (0.5%) Aluminum Company of America, Inc. 48,286 3,600,325 Bethlehem Steel Corp. (A) 123,600 1,035,150 -------------- 4,635,475 -------------- NATURAL GAS PIPELINE (0.8%) Columbia Energy Group 29,500 1,703,625 Enron Corp. 24,500 1,398,031 Sonat, Inc. 36,200 979,663 Williams Cos. 103,500 3,227,906 -------------- 7,309,225 -------------- OIL FIELD (0.2%) Schlumberger Ltd. 37,200 1,715,850 -------------- PAPER (0.8%) Georgia-Pacific Group 36,600 2,143,388 International Paper Co. 22,700 1,017,244 Mead Corp. 45,050 1,320,528 Weyerhaeuser Co. 15,300 777,431 Willamette Industries, Inc. 46,800 1,567,800 -------------- 6,826,391 -------------- PHARMACEUTICALS (10.7%) American Home Products Corp. 136,300 7,675,394 Amgen, Inc. (A) 42,900 4,483,050 Baxter International, Inc. 50,000 3,215,625 Bristol-Myers Squibb Co. 81,500 10,905,719 CVS Corp. 86,700 4,768,500 Eli Lilly & Co. 91,700 8,149,837 Johnson & Johnson 123,600 10,366,950 Merck & Co. 99,700 14,724,443 Pfizer, Inc. 110,430 13,852,063 Pharmacia & Upjohn, Inc. 41,300 2,338,613 Schering-Plough Corp. 123,400 6,817,850 Warner-Lambert Co. 90,600 6,811,987 Watson Pharmaceuticals, Inc. (A) 26,100 1,641,038 -------------- 95,751,069 -------------- RAILROADS (0.3%) CSX Corp. 40,300 1,672,450 Union Pacific Corp. 16,500 743,531 -------------- 2,415,981 --------------
-16- 19 STATEMENT OF INVESTMENTS - CONTINUED
NO. OF MARKET SHARES VALUE ------------ ------------ RETAILERS (6.0%) Costco Cos. (A) 42,100 $ 3,045,670 Dayton Hudson Corp. 86,900 4,714,325 Gap, Inc. 50,700 2,851,875 Home Depot, Inc. 155,798 9,532,890 KMart Corp. (A) 119,600 1,831,375 May Department Stores Co. 19,300 1,165,237 McDonalds Corp. 55,200 4,229,700 Nordstrom, Inc. 51,700 1,796,575 J.C. Penney Company, Inc. 20,800 975,000 Rite Aid Corp. 55,900 2,770,544 Staples, Inc. (A) 73,000 3,191,465 TJX Companies, Inc. 100,600 2,917,400 Wal-Mart Stores, Inc. 178,000 14,495,875 -------------- 53,517,931 -------------- SERVICES (4.5%) HBO & Co. 104,000 2,986,745 Medtronic, Inc. 64,600 4,796,550 Microsoft Corp. (A) 233,000 32,277,769 -------------- 40,061,064 -------------- SUPERMARKETS (0.8%) Kroger Co. (A) 50,000 3,025,000 Safeway, Inc. (A) 72,030 4,389,328 -------------- 7,414,328 -------------- TECHNOLOGY (12.8%) America Online, Inc. (A) 27,500 4,265,937 Ceridian Corp. (A) 32,300 2,254,944 Cisco Systems, Inc. (A) 163,975 15,224,046 Compaq Computer Corp. 144,569 6,062,841 Computer Sciences Corp. (A) 40,300 2,596,831 Compuware Corp. (A) 30,600 2,389,667 Dell Computer Corp. (A) 137,500 10,067,571 EG&G, Inc. 78,800 2,191,625 EMC Corp. (A) 64,700 5,499,500 Gateway 2000, Inc. (A) 13,800 706,388 Hewlett-Packard Co. 72,700 4,966,319 International Business Machines Corp. 94,000 17,366,500 Intel Corp. 172,900 20,494,044 Motorola, Inc. 48,600 2,967,638 Oracle Corp. (A) 108,425 4,679,211 Sun Microsystems, Inc. (A) 18,900 1,617,131 Symbol Technologies, Inc. 29,800 1,905,338 Texas Instruments, Inc. 34,800 2,977,575 3Com Corp. (A) 69,800 3,130,090 Xerox Corp. 25,900 3,056,200 -------------- 114,419,396 --------------
NO. OF MARKET SHARES VALUE ----------- ------------ TELECOMMUNICATIONS (10.7%) AirTouch Communications, Inc (A) 89,400 $ 6,447,975 Ameritech Corp. 86,700 5,494,612 AT&T Corp. 154,200 11,603,550 Bell Atlantic Corp. 138,158 7,849,101 BellSouth Corp. 157,000 7,830,375 GTE Corp. 65,200 4,396,925 Lucent Technologies Inc. 131,774 14,495,140 MCI WorldCom, Inc. (A) 201,651 14,474,751 MediaOne Group, Inc. (A) 74,900 3,520,300 Nextel Communications, Inc. (A) 102,900 2,434,223 SBC Communications, Inc. 152,420 8,173,523 Sprint Corp. - Fon Group 38,206 3,214,080 Sprint Corp. - PCS Group (A) 141,953 3,282,663 US West, Inc. 36,670 2,369,799 -------------- 95,587,017 -------------- TEXTILE (0.1%) Fruit of the Loom (A) 71,400 986,213 -------------- TOBACCO (1.7%) Loews Corp. 19,700 1,935,525 Philip Morris Cos. 254,900 13,637,150 -------------- 15,572,675 -------------- U.S. AGENCY (1.3%) Federal Home Loan Mortgage Corp. 58,500 3,769,594 Federal National Mortgage Association 109,600 8,110,400 -------------- 11,879,994 -------------- UTILITIES (2.4%) AES Corp. (A) 64,700 3,065,162 Alltel Corp. 53,700 3,211,931 Central & South West Corp. 101,100 2,773,931 Edison International 95,200 2,653,700 FPL Group, Inc. 40,900 2,520,462 Houston Industries 20,500 658,563 PP&L Resources, Inc. 73,500 2,048,813 Southern Co. 52,800 1,534,500 Texas Utilities Co. 73,700 3,440,869 -------------- 21,907,931 -------------- TOTAL COMMON STOCKS (COST $578,392,457) 891,840,968 --------------
-17- 20 STATEMENT OF INVESTMENTS - CONTINUED
PRINCIPAL MARKET AMOUNT VALUE ----------- --------------- SHORT-TERM INVESTMENTS (0.4%) COMMERCIAL PAPER (0.2%) Household Finance Corp., 5.12% due January 4, 1999 $ 2,147,000 $ 2,145,781 ---------------- U.S. TREASURY (0.2%) United States of America Treasury, 4.67% due May 27, 1999 1,475,000 1,449,336 ---------------- TOTAL SHORT-TERM INVESTMENTS (COST $3,594,029) 3,595,117 ---------------- TOTAL INVESTMENTS (100%) (COST $581,986,486) (B) $ 895,436,085 ================
NOTES (A) Non-income Producing Security. (B) At December 31, 1998, net unrealized appreciation for all securities was $313,449,599. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of market value over cost of $330,317,410 and aggregate gross unrealized depreciation for all securities in which there was an excess of cost over market value of $16,867,811. See Notes to Financial Statements -18- 21 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Managers and Owners of Variable Annuity Contracts of The Travelers Growth and Income Stock Account for Variable Annuities In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, as of December 31, 1998, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the selected per unit data and ratios for each of the five years in the period then ended present fairly, in all material respects, the financial position of The Travelers Growth and Income Stock Account for Variable Annuities at December 3l, 1998, and the results of their operations for the year then ended in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit, which included confirmation of securities as of December 31, 1998, by correspondence with the custodian, provides a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Hartford, Connecticut February 15, 1999 -19- 22 THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES The year 1998 began with economic momentum continuing from the year before. It seemed the next move by the Federal Reserve Board ("Fed") would be to increase rates. Asian turmoil had not yet infected our economy. Credit spreads were amongst the tightest ever, and the stock market was poised for another terrific year. This backdrop got us to July, but in early August the world changed as Russia defaulted on its foreign debt. This triggered a massive deleveraging among fixed income hedge funds, most notably Long Term Capital Management and D.E. Shaw & Co. Long Term Capital Management needed an additional $3.6 billion from a group of twelve major Wall Street investment and commercial banks to shore up its balance sheet. D.E. Shaw was absorbed by BankAmerica but not before they had to write down well over $1 billion of its investment. Most Wall Street firms also took significant trading losses. Responding to the disarray in the marketplace, the Fed cut interest rates 25 basis points on September 29, 1998. Sensing this was not enough to calm market fears, the Fed again lowered the base rate 25 basis points on October 15,1998. This was the first time the Fed decreased the rate twice between regularly scheduled meetings in more than five years, indicating the Fed's concern about a global financial meltdown. One last rate cut occurred on November 17, 1998 to get the Federal Funds rate down to the 4.75% at year-end. The Dow Jones Industrial Average declined by almost 2,000 points from July's then record highs to the mid-October lows. Corporate bond spreads almost doubled and new issuance came to a complete halt during this period. By the end of October, a nervous calm came into the market place. Corporate bond issuance began again, but at sharply discounted spreads. November, interestingly enough set a record pace for new issues with over $40 billion coming to market. Confidence that the worst was over and that the Fed would provide liquidity set the stage for a partial rebound of spread tightening. The fourth quarter performance for The Travelers Quality Bond Account for Variable Annuities ("Account QB") was 1.15% versus a .29% return for the Lehman Government/Corporate Bond Index (The Lehman Government/Corporate Bond Index is a combination of publicly issued intermediate and long - term U.S. Government Bonds and Corporate Bonds). Account QB outperformed the index by 86 basis points. Our duration was modestly long for most of the quarter. We also traded securities more actively than normal as high volumes of new corporate issuance provided many attractive purchase opportunities. PORTFOLIO MANAGER: F. DENNEY VOSS -20- 23 THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES [CHART] This is a comparison of The Travelers Quality Bond Account for Variable Annuities ("Account QB") versus Lipper Analytical Services' variable annuity composite index, which provides the average performance of variable annuity funds with similar objectives as of December 31, 1998. Lipper Analytical Services is a leading independent Variable Insurance Product Performance Analysis Service. The performance of the composite is net of all asset based fees such as mortality and expense charges and investment management fees. Performance reflects the charges associated with Universal Annuity, which became available on May 16, 1983. Contracts issued prior to May 16, 1983 have different contract charges that result in different performance than presented above. Account QB performance information is net of: 1) the 1.25% annual mortality and expense risk charge, and 2) investment management fees. The deduction of the $15 semi-annual administrative charge and the contingent deferred sales charge (5% maximum) is not reflected. The deduction of those charges would reduce any percentage increase or make greater any percentage decrease. Performance data quoted represents past performance. Investment return and principal value of an investment will fluctuate so that an investor's units, when redeemed, may be worth more or less than their original cost. The following is the performance data required by SEC rules governing uniform performance reporting: one year 1.75%, five year 4.63% and ten year 7.70%. This performance is based on a $1,000 hypothetical investment and reflects deductions of all fees and charges including the semi-annual administrative charge and the maximum deferred sales charge of 5%. -21- 24 THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1998
ASSETS: Investment securities, at market value (cost $162,402,736).................... $ 162,396,475 Cash.......................................................................... 180,812 Receivables: Interest.................................................................. 1,653,452 Investment securities sold................................................ 2,806,000 Purchase payments and transfers from other Travelers accounts............. 42,751 Other assets.................................................................. 2,305 ---------------- Total Assets........................................................... 167,081,795 ---------------- LIABILITIES: Payables: Investment securities purchased........................................... 2,984,324 Contract surrenders and transfers to other Travelers accounts............. 290,589 Investment management and advisory fees................................... 11,613 Accrued liabilities........................................................... 42,557 ---------------- Total Liabilities...................................................... 3,329,083 ---------------- NET ASSETS:....................................................................... $ 163,752,712 ================
See Notes to Financial Statements -22- 25 THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998
INVESTMENT INCOME: Interest................................................................ $ 10,019,923 EXPENSES: Investment management and advisory fees................................. $ 518,262 Insurance charges....................................................... 1,888,900 ----------------- Total expenses...................................................... 2,407,162 ---------------- Net investment income............................................ 7,612,761 ---------------- REALIZED GAIN AND CHANGE IN UNREALIZED GAIN (LOSS) ON INVESTMENT SECURITIES: Realized gain from investment security transactions: Proceeds from investment securities sold............................ 716,260,295 Cost of investment securities sold.................................. 711,436,990 ----------------- Net realized gain................................................ 4,823,305 Change in unrealized gain (loss) on investment securities: Unrealized gain at December 31, 1997................................ 1,695,113 Unrealized loss at December 31, 1998................................ (6,261) ----------------- Net change in unrealized gain (loss) for the year................ (1,701,374) ---------------- Net realized gain and change in unrealized gain (loss)....... 3,121,931 ---------------- Net increase in net assets resulting from operations.................... $ 10,734,692 ================
See Notes to Financial Statements -23- 26 THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF CHANGES IN NET ASSETS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997 ---- ---- PERATIONS: Net investment income...................................................... $ 7,612,761 $ 8,282,982 Net realized gain from investment security transactions.................... 4,823,305 692,660 Net change in unrealized gain (loss) on investment securities.............. (1,701,374) 1,496,038 ----------------- ---------------- Net increase in net assets resulting from operations................... 10,734,692 10,471,680 ----------------- ---------------- UNIT TRANSACTIONS: Participant purchase payments (applicable to 2,278,275 and 2,595,588 units, respectively)............ 12,701,859 13,459,247 Participant transfers from other Travelers accounts (applicable to 3,679,128 and 1,981,335 units, respectively)............ 20,644,939 10,315,973 Administrative charges (applicable to 17,717 and 21,863 units, respectively).................. (100,331) (116,102) Contract surrenders (applicable to 2,743,477 and 2,897,282 units, respectively)............ (15,435,681) (15,167,293) Participant transfers to other Travelers accounts (applicable to 4,063,248 and 5,631,496 units, respectively)............ (22,650,450) (29,216,683) Other payments to participants (applicable to 206,656 and 175,168 units, respectively)................ (1,173,615) (923,875) ----------------- ---------------- Net decrease in net assets resulting from unit transactions............ (6,013,279) (21,648,733) ----------------- ---------------- Net increase (decrease) in net assets............................... 4,721,413 (11,177,053) NET ASSETS: Beginning of year.......................................................... 159,031,299 170,208,352 ----------------- ---------------- End of year................................................................ $ 163,752,712 $ 159,031,299 ================= ================
See Notes to Financial Statements -24- 27 NOTES TO FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES The Travelers Quality Bond Account for Variable Annuities ("Account QB") is a separate account of The Travelers Insurance Company ("The Travelers"), an indirect wholly owned subsidiary of Citigroup Inc. (formerly 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 4:00 p.m. eastern standard time closing price of the New York Stock Exchange on the last business day of the year; securities traded on the over-the-counter market and listed securities with no reported sales are valued at the mean between the last-reported bid and asked prices or on the basis of quotations received from a reputable broker or other recognized source. When market quotations are not considered to be readily available for long-term corporate bonds and notes, such investments are generally stated at fair value on the basis of valuations furnished by a pricing service. These valuations are determined for normal institutional-size trading units of such securities using methods based on market transactions for comparable securities and various relationships between securities which are generally recognized by institutional traders. Securities, including restricted securities, for which pricing services are not readily available, are valued by management at prices which it deems in good faith to be fair. Short-term investments for which a quoted market price is available are valued at market. Short-term investments for which there is no reliable quoted market price are valued at amortized cost which approximates market. 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. -25- 28 NOTES TO FINANCIAL STATEMENTS - CONTINUED FEDERAL INCOME TAXES. The operations of Account QB form a part of the total operations of The Travelers and are not taxed separately. The Travelers is taxed as a life insurance company under the Internal Revenue Code of 1986, as amended (the "Code"). Under existing federal income tax law, no taxes are payable on the investment income and capital gains of Account QB. Account QB is not taxed as a "regulated investment company" under Subchapter M of the Code. OTHER. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. INVESTMENTS The aggregate costs of purchases and proceeds from sales of investments (other than short-term securities) were $641,925,937 and $653,531,313, respectively; the costs of purchases and proceeds from sales of direct and indirect U.S. government securities were $332,913,812 and $322,406,151, respectively, for the year ended December 31, 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 Citigroup 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 $8,940 and $12,423 for the years ended December 31, 1998 and 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 $70,717 and $86,884 of contingent deferred sales charges for the years ended December 31, 1998 and 1997, respectively. -26- 29 NOTES TO FINANCIAL STATEMENTS - CONTINUED 4. NET ASSETS HELD ON BEHALF OF AN AFFILIATE Approximately $457,000 and $966,000 of the net assets of Account QB were held on behalf of an affiliate of The Travelers as of December 31, 1998 and 1997, respectively. Transactions with this affiliate during the years ended December 31, 1998 and 1997, were comprised of participant purchase payments of approximately $112,000 and $106,000 and contract surrenders of approximately $74,000 and $120,000, respectively. 5. NET CONTRACT OWNERS' EQUITY
DECEMBER 31, 1998 ------------------------------------------------ UNIT NET UNITS VALUE ASSETS Accumulation phase of contracts issued prior to May 16, 1983............... 6,747,213 $ 5.994 $ 40,442,990 Annuity phase of contracts issued prior to May 16, 1983.................... 132,358 5.994 793,361 Accumulation phase of contracts issued on or after May 16, 1983............ 21,242,577 5.765 122,466,909 Annuity phase of contracts issued on or after May 16, 1983................. 8,578 5.765 49,452 --------------- Net Contract Owners' Equity.......................................................................... $ 163,752,712 ===============
-27- 30 NOTES TO FINANCIAL STATEMENTS - CONTINUED 6. SUPPLEMENTARY INFORMATION (Selected data for a unit outstanding throughout each year.) Contracts issued prior to May 16, 1983
FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- SELECTED PER UNIT DATA: Total investment income.............................. $ .363 $ .353 $ .379 $ .328 $ .318 Operating expenses................................... .076 .071 .067 .063 .059 ---------- ----------- ---------- ---------- ----------- Net investment income................................ .287 .282 .312 .265 .259 Unit value at beginning of year...................... 5.593 5.234 5.050 4.400 4.498 Net realized and change in unrealized gains (losses). .114 .077 (.128) .385 (.357) ---------- ----------- ---------- ---------- ----------- Unit value at end of year............................ $ 5.994 $ 5.593 $ 5.234 $ 5.050 $ 4.400 ========== =========== ========== ========== =========== SIGNIFICANT RATIOS AND ADDITIONAL DATA: Net increase (decrease) in unit value................ $ .40 $ .36 $ .18 $ .65 $ (.10) Ratio of operating expenses to average net assets.... 1.33% 1.33% 1.33% 1.33% 1.33% Ratio of net investment income to average net assets. 4.96% 5.25% 6.12% 5.54% 5.87% Number of units outstanding at end of year (thousands).......................................... 6,880 7,683 8,549 9,325 10,694 Portfolio turnover rate.............................. 438% 196% 176% 138% 27%
Contracts issued on or after May 16, 1983
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- SELECTED PER UNIT DATA: Total investment income.............................. $ .350 $ .342 $ .368 $ .319 $ .310 Operating expenses................................... .088 .082 .078 .073 .069 ---------- ---------- ---------- ----------- ----------- Net investment income................................ .262 .260 .290 .246 .241 Unit value at beginning of year...................... 5.393 5.060 4.894 4.274 4.381 Net realized and change in unrealized gains (losses). .110 .073 (.124) .374 (.348) ---------- ---------- ---------- ----------- ----------- Unit value at end of year............................ $ 5.765 $ 5.393 $ 5.060 $ 4.894 $ 4.274 ========== ========== ========== =========== =========== SIGNIFICANT RATIOS AND ADDITIONAL DATA: Net increase (decrease) in unit value................ $ .37 $ .33 $ .17 $ .62 $ (.11) Ratio of operating expenses to average net assets.... 1.57% 1.57% 1.57% 1.57% 1.57% Ratio of net investment income to average net assets. 4.71% 5.00% 5.87% 5.29% 5.62% Number of units outstanding at end of year (thousands).......................................... 21,251 21,521 24,804 27,066 27,033 Portfolio turnover rate.............................. 438% 196% 176% 138% 27%
-28- 31 THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF INVESTMENTS DECEMBER 31, 1998
PRINCIPAL MARKET AMOUNT VALUE ------------- -------------- BONDS (59.5%) AIRLINES (1.0%) Delta Air Lines, Inc., 9.25% Sinking Fund, 2007 (A) $ 1,673,236 $ 1,677,318 -------------- BANKING (2.0%) Popular, Inc., 6.38% Debentures, 2003 3,200,000 3,182,851 -------------- DEFENSE (4.6%) Raytheon Co., 6.00% Debentures, 2010 7,500,000 7,509,503 -------------- FOREIGN AGENCY (3.1%) Province of Ontario, 5.50% Bonds, 2008 5,000,000 5,036,000 -------------- FINANCE (9.3%) Finova Capital Corp., 6.25% Debentures, 2002 7,500,000 7,525,567 Marlin Water Trust, 7.09% Debentures, 2001 7,500,000 7,540,838 -------------- 15,066,405 -------------- HEALTHCARE (4.5%) Columbia HCA/Healthcare Corp., 8.70% Debentures, 2010 2,250,000 2,430,169 Columbia HCA/Healthcare Corp., 6.87% Debentures, 2003 5,000,000 4,917,080 -------------- 7,347,249 -------------- INDUSTRIAL (3.1%) Halliburton Co., 5.63% Debentures, 2008 5,000,000 5,064,410 -------------- INTERGRATED ENERGY (4.6%) Noram Energy Corp., 7.50% Debentures, 2000 7,250,000 7,485,654 -------------- OIL FIELD (4.3%) Petroleum Geo-Services, Inc., 6.25% Debentures, 2003 7,000,000 6,976,102 -------------- PAPER (2.5%) Noranda Forest, Inc., 8.88% Debentures, 1999 4,000,000 4,040,799 --------------
PRINCIPAL MARKET AMOUNT VALUE ------------- -------------- REAL ESTATE (7.3%) CarrAmerica Realty Corp., 6.63% Debentures, 2000 $ 5,200,000 $ 5,159,258 Nationwide Health Properties, Inc. 6.90% Debentures, 2037 7,000,000 6,731,123 -------------- 11,890,381 -------------- TELECOMMUNICATIONS (4.7%) Telecom New Zealand Finance Corp., 6.25% Debentures, 2003 7,500,000 7,640,040 -------------- TOBACCO (4.9%) Nabisco, Inc., 6.70% Debentures, 2002 7,800,000 7,905,261 -------------- UTILITIES (3.6%) Indiana Michigan Power, 6.45% Debentures, 2008 5,750,000 5,858,008 -------------- TOTAL BONDS (COST $96,479,524) 96,679,981 -------------- U.S. GOVERNMENT AGENCY SECURITIES (12.2%) Federal Home Loan Mortgage Corp., 4.75% Debentures, 2001 20,000,000 19,832,480 -------------- TOTAL U.S. GOVERNMENT AGENCY SECURITIES (COST $19,968,507) 19,832,480 -------------- U.S. GOVERNMENT SECURITIES (17.9%) United States of America Treasury, 6.63% Notes, 2002 16,000,000 16,934,992 United States of America Treasury, 5.88% Notes, 2002 5,000,000 5,200,000 United States of America Treasury, 5.88% Notes, 2005 6,500,000 6,936,715 -------------- TOTAL U.S. GOVERNMENT SECURITIES (COST $29,141,216) 29,071,707 --------------
-29- 32 STATEMENT OF INVESTMENTS - CONTINUED
PRINCIPAL MARKET AMOUNT VALUE ------------ ------------ SHORT-TERM INVESTMENTS (10.4%) COMMERCIAL PAPER (10.4%) E.I. Dupont de Nemours & Co., 5.12% due February 25, 1999 $ 2,205,000 $ 2,187,949 GE Capital Corp., 6.11% due January 7, 1999 6,000,000 5,994,060 Household Finance Corp., 5.12% due January 4, 1999 2,986,000 2,984,304 Prudential Funding Corp., 5.39% due January 5, 1999 5,650,000 5,645,994 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $16,813,489) 16,812,307 ------------- TOTAL INVESTMENTS (100%) (COST $162,402,736) $ 162,396,475 =============
NOTES (A) Restricted Security. (B) At December 31, 1998, net unrealized depreciation for all securities was $6,261. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of market value over cost of $535,063 and aggregate gross unrealized depreciation for all securities in which there was an excess of cost over market value of $541,324. See Notes to Financial Statements -30- 33 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Managers and Owners of Variable Annuity Contracts of The Travelers Quality Bond Account for Variable Annuities In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, as of December 31, 1998, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the selected per unit data and ratios for each of the five years in the period then ended present fairly, in all material respects, the financial position of The Travelers Quality Bond Account for Variable Annuities at December 3l, 1998, and the results of their operations for the year then ended in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit, which included confirmation of securities as of December 31, 1998, by correspondence with the custodian, provides a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Hartford, Connecticut February 15, 1999 -31- 34 THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES The year 1998 was turbulent for the global financial markets as Asian economies and currencies imploded, other emerging markets were badly shaken, and fears spread that a global recession was underway. By year-end however, the Asian turmoil had lessened and the United States and European economies had weathered the storm. In fact, it is estimated that the U.S. will have experienced Gross Domestic Product growth of 3.75%. The year ended with the 30-year Treasury Bond yield at 5.09% and the Federal Reserve Board ("Fed") funds rate at 4.75%. The 30-year Treasury Bond was up 12 basis points from the September 30th level of 4.97%, but down 81 basis points from the beginning of the year. During the fourth quarter, the Fed lowered the federal funds rate twice by 25 basis points each time, the first time on October 15, 1998 in between it's meetings and the second time at the November 17, 1998 meeting. Further decreases in the Federal funds rate appear unlikely in the first quarter of 1999, as the Fed changed its stance to neutral at the meeting. The strategy in management of The Travelers Money Market Account for Variable Annuities, will be to extend maturities from the current average life of 31 days, to between 60 and 90 days. At December 31, 1998, the asset size of the portfolio was $103.1 million, with an average yield of 5.20%. PORTFOLIO MANAGER: EMIL J. MOLINARO JR. [ -32- 35 THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES [CHART] This is a comparison of The Travelers Money Market Account for Variable Annuities ("Account MM") versus Lipper Analytical Services' variable annuity composite index, which provides the average performance of variable annuity funds with similar objectives as of December 31, 1998. Lipper Analytical Services is a leading independent Variable Insurance Product Performance Analysis Service. The performance of the composite is net of all asset based fees such as mortality and expense charges and investment management fees. Performance reflects the charges associated with Universal Annuity, which became available on May 16, 1983. Contracts issued prior to May 16, 1983, have different contract charges that result in different performance than presented above. Account MM performance information is net of: 1) the 1.25% annual mortality and expense risk charge, and 2) investment management fees. The deduction of the $15 semi-annual administrative charge and the contingent deferred sales charge (5% maximum) is not reflected. The deduction of those charges would reduce any percentage increase or make greater any percentage decrease. Performance data quoted represents past performance. Investment return and principal value of an investment will fluctuate so that an investor's units, when redeemed, may be worth more or less than their original cost. An investment in The Travelers Money Market Account for Variable Annuities is neither insured nor guaranteed by the U.S. Government. The following is the performance data required by SEC rules governing uniform performance reporting: one year -1.12%, five year 2.78% and ten year 4.58%. This performance is based on a $1,000 hypothetical investment and reflects deductions of all fees and charges including the semi-annual administrative charge and the maximum deferred sales charge of 5%. -33- 36 THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1998 ASSETS: Investment securities, at market value (cost $103,064,491)......................... $ 103,060,851 Cash............................................................................... 1,515,722 Receivables: Interest....................................................................... 17,879 Investments securities sold.................................................... 4,119,000 Purchase payments and transfers from other Travelers accounts.................. 837,913 Other assets....................................................................... 249 ---------------- Total Assets................................................................ 109,551,614 ---------------- LIABILITIES: Payables: Investments securities purchased............................................... 5,632,754 Contract surrenders and transfers to other Travelers accounts.................. 1,747,536 Investment management and advisory fees........................................ 7,349 Accrued liabilities................................................................ 28,439 ---------------- Total Liabilities........................................................... 7,416,078 ---------------- NET ASSETS:............................................................................ $ 102,135,536 ================
See Notes to Financial Statements -34- 37 THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 INVESTMENT INCOME: Interest................................................................ $ 5,521,001 EXPENSES: Investment management and advisory fees................................. $ 324,122 Insurance charges....................................................... 1,246,712 ----------------- Total expenses...................................................... 1,570,834 ---------------- Net investment income............................................ 3,950,167 ---------------- Net increase in net assets resulting from operations.................... $ 3,950,167 ================
See Notes to Financial Statements -35- 38 THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF CHANGES IN NET ASSETS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997 ---- ---- OPERATIONS: Net investment income...................................................... $ 3,950,167 $ 3,600,931 ---------------- --------------- Net increase in net assets resulting from operations................... 3,950,167 3,600,931 ---------------- --------------- UNIT TRANSACTIONS: Participant purchase payments (applicable to 6,095,251 and 14,166,450 units, respectively)........... 14,649,623 32,465,312 Participant transfers from other Travelers accounts (applicable to 118,152,715 and 94,992,947 units, respectively)......... 284,523,651 219,247,840 Administrative charges (applicable to 37,011 and 37,992 units, respectively).................. (89,783) (88,495) Contract surrenders (applicable to 8,681,249 and 6,094,352 units, respectively)............ (20,899,693) (14,060,055) Participant transfers to other Travelers accounts (applicable to 109,964,438 and 104,773,969 units, respectively)........ (265,042,626) (241,734,934) Other payments to participants (applicable to 143,957 and 170,332 units, respectively)................ (346,736) (395,081) ---------------- --------------- Net increase (decrease) in net assets resulting from unit transactions. 12,794,436 (4,565,413) ---------------- --------------- Net increase (decrease) in net assets............................... 16,744,603 (964,482) NET ASSETS: Beginning of year.......................................................... 85,390,933 86,355,415 ---------------- --------------- End of year................................................................ $ 102,135,536 $ 85,390,933 ================ ===============
See Notes to Financial Statements -36- 39 NOTES TO FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES The Travelers Money Market Account for Variable Annuities ("Account MM") is a separate account of The Travelers Insurance Company ("The Travelers"), an indirect wholly owned subsidiary of Citigroup Inc. (formerly 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. -37- 40 NOTES TO FINANCIAL STATEMENTS - 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 Citigroup 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 $153,043 and $90,325 of contingent deferred sales charges for the years ended December 31, 1998 and 1997, respectively. 3. NET ASSETS HELD ON BEHALF OF AN AFFILIATE Approximately $3,434,000 and $2,883,000 of the net assets of Account MM were held on behalf of an affiliate of The Travelers as of December 31, 1998 and 1997, respectively. Transactions with this affiliate during the years ended December 31, 1998 and 1997, were comprised of participant purchase payments of approximately $2,874,000 and $320,000 and contract surrenders of approximately $2,269,000 and $1,367,000, respectively. 4. NET CONTRACT OWNERS' EQUITY
DECEMBER 31, 1998 -------------------------------------------- UNIT NET UNITS VALUE ASSETS Accumulation phase of contracts issued prior to May 16, 1983.................. 23,994 $ 2.548 $ 61,152 Annuity phase of contracts issued prior to May 16, 1983....................... 67,130 2.548 171,086 Accumulation phase of contracts issued on or after May 16, 1983............... 41,453,984 2.450 101,620,194 Annuity phase of contracts issued on or after May 16, 1983.................... 115,487 2.450 283,104 --------------- Net Contract Owners' Equity........................................................................... $ 102,135,536 ===============
-38- 41 NOTES TO FINANCIAL STATEMENTS - CONTINUED 5. SUPPLEMENTARY INFORMATION (Selected data for a unit outstanding throughout each year.) Contracts issued prior to May 16, 1983
FOR THE YEARS ENDED DECEMBER 31, --------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- SELECTED PER UNIT DATA: Total investment income.............................. $ .138 $ .134 $ .125 $ .130 $ .091 Operating expenses................................... .033 .032 .030 .030 .028 ---------- ---------- --------- --------- ---------- Net investment income................................ .105 .102 .095 .100 .063 Unit value at beginning of year...................... 2.443 2.341 2.246 2.146 2.083 ---------- ---------- --------- --------- ---------- Unit value at end of year............................ $ 2.548 $ 2.443 $ 2.341 $ 2.246 $ 2.146 ========== ========== ========= ========= ========== SIGNIFICANT RATIOS AND ADDITIONAL DATA: Net increase in unit value........................... $ .11 $ .10 $ .10 $ .10 $ .06 Ratio of operating expenses to average net assets.... 1.33% 1.33% 1.33% 1.33% 1.33% Ratio of net investment income to average net assets. 4.20% 4.27% 4.10% 4.61% 2.98% Number of units outstanding at end of year (thousands).......................................... 91 105 112 206 206
Contracts issued on or after May 16, 1983
FOR THE YEARS ENDED DECEMBER 31, --------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- SELECTED PER UNIT DATA: Total investment income.............................. $ .133 $ .128 $ .121 $ .127 $ .087 Operating expenses................................... .038 .036 .035 .034 .032 ---------- ---------- --------- --------- ---------- Net investment income................................ .095 .092 .086 .093 .055 Unit value at beginning of year...................... 2.355 2.263 2.177 2.084 2.029 ---------- ---------- --------- --------- ---------- Unit value at end of year............................ $ 2.450 $ 2.355 $ 2.263 $ 2.177 $ 2.084 ========== ========== ========= ========= ========== SIGNIFICANT RATIOS AND ADDITIONAL DATA: Net increase in unit value........................... $ .10 $ .09 $ .09 $ .09 $ .06 Ratio of operating expenses to average net assets.... 1.57% 1.57% 1.57% 1.57% 1.57% Ratio of net investment income to average net assets. 3.95% 4.02% 3.84% 4.36% 2.72% Number of units outstanding at end of year (thousands).............................................. 41,570 36,134 38,044 35,721 39,675
-39- 42 THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF INVESTMENTS DECEMBER 31, 1998
PRINCIPAL MARKET AMOUNT VALUE ------------ ------------ SHORT-TERM INVESTMENTS (100%) COMMERCIAL PAPER (100%) AC Acquisition Holding Co., 5.18% due January 14, 1999 $ 6,400,000 $ 6,387,417 Asset Securitization Corp., 5.86% due January 19, 1999 5,300,000 5,285,918 Chrysler Financial Corp., 5.33% due January 8, 1999 5,000,000 4,994,345 Coca-Cola Co., 5.18% due February 5, 1999 5,200,000 5,174,109 E.I. Dupont de Nemours & Co., 5.40% due January 12, 1999 3,466,000 3,460,146 Eastman Kodak Co., 5.30% due February 8, 1999 3,000,000 2,983,824 Eaton Corp., 5.38% due January 22, 1999 5,200,000 5,184,046 Ford Motor Credit Co., 5.25% due June 1, 1999 1,000,000 1,001,231 GE Capital Corp., 5.44% due January 15, 1999 5,000,000 4,989,475 Gillette Co., 5.38% due January 4, 1999 3,000,000 2,998,296 H.J. Heinz Co., 5.21% due February 3, 1999 5,000,000 4,976,485 Household Finance Corp., 5.12% due January 4, 1999 2,636,000 2,634,503 J.C. Penney Company, Inc., 5.35% due February 19, 1999 5,500,000 5,462,006 Johnson & Johnson, 5.21% due January 20, 1999 5,900,000 5,883,515 Marsh & McLennan Cos., 5.22% due January 28, 1999 6,000,000 5,976,696 National Rural Utilities Coop Finance Corp., 5.14% due March 17, 1999 5,200,000 5,145,556 PepsiCo, Inc., 5.65% due August 19, 1999 2,000,000 1,997,452 Procter & Gamble Co., 5.22% due February 26, 1999 1,200,000 1,190,555 Progress Capital Holdings, Inc. 5.39% due January 26, 1999 5,200,000 5,181,212 Prudential Funding Corp., 5.13% due March 12, 1999 3,000,000 2,970,639 Prudential Funding Corp., 5.15% due March 15, 1999 2,285,000 2,261,700 Rubbermaid, Inc., 5.29% due January 21, 1999 4,660,000 4,646,342 Transamerica Financial Corp., 5.11% due February 22, 1999 6,000,000 5,956,074 Xerox Corp., 5.08% due January 12, 1999 6,330,000 6,319,309 ------------- TOTAL INVESTMENTS (100%) (COST $103,064,491) $ 103,060,851 =============
See Notes to Financial Statements -40- 43 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Managers and Owners of Variable Annuity Contracts of The Travelers Money Market Account for Variable Annuities In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, as of December 31, 1998, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the selected per unit data and ratios for each of the five years in the period then ended present fairly, in all material respects, the financial position of The Travelers Money Market Account for Variable Annuities at December 3l, 1998, and the results of their operations for the year then ended in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit, which included confirmation of securities as of December 31, 1998, by correspondence with the custodian, provides a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Hartford, Connecticut February 15, 1999 -41- 44 This page intentionally left blank. 45 This page intentionally left blank. 46 This page intentionally left blank. 47 Investment Adviser ------------------ THE 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 ---------------------- THE TRAVELERS INVESTMENT MANAGEMENT COMPANY Hartford, Connecticut THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES Independent Accountants ----------------------- PRICEWATERHOUSECOOPERS LLP Hartford, Connecticut Custodian --------- THE CHASE MANHATTAN BANK, N.A. New York, New York This report is prepared for the general information of contract owners and is not an offer of units of The Travelers Growth and Income Stock Account for Variable Annuities, The Travelers Quality Bond Account for Variable Annuities or 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. -45- -----END PRIVACY-ENHANCED MESSAGE-----