<PAGE> 1
Registration Statement No. 2-76639
811-3428
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 23
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 23
HIGH YIELD BOND TRUST
---------------------
(Exact name of Registrant)
ONE TOWER SQUARE, HARTFORD, CONNECTICUT 06183
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(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (203) 277-0111
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ERNEST J. WRIGHT
Secretary to the Board of Trustees
High Yield Bond Trust
One Tower Square
Hartford, Connecticut 06183
---------------------------
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering:
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It is proposed that this filing will become effective (check appropriate box):
immediately upon filing pursuant to paragraph (b).
---
X on May 1, 1997 pursuant to paragraph (b).
---
60 days after filing pursuant to paragraph (a)(1).
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on pursuant to paragraph (a)(1)
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75 days after filing pursuant to paragraph (a)(2).
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on pursuant to paragraph (a)(2) of Rule 485.
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If appropriate, check the following box:
this post-effective amendment designates a new effective date for
------ a previously filed post-effective amendment.
AN INDEFINITE NUMBER OF SHARES OF BENEFICIAL INTEREST OF THE REGISTRANT WERE
REGISTERED PURSUANT TO RULE 24f-2 OF THE INVESTMENT COMPANY ACT OF 1940. A
RULE 24f-2 NOTICE FOR REGISTRANT'S FISCAL YEAR ENDED DECEMBER 31, 1996 WAS
FILED WITH THE COMMISSION ON FEBRUARY 28, 1997.
<PAGE> 2
HIGH YIELD BOND TRUST
Cross-Reference Sheet pursuant to Rule 495 under the Securities Act of 1933
<TABLE>
<CAPTION>
ITEM
NO. CAPTION IN PROSPECTUS
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<S> <C> <C>
1. Cover Page Cover Page
2. Synopsis Not Applicable
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Cover Page; Fund Description; Investment
Objective and Policies
5. Management of the Fund Board of Trustees; Investment Adviser;
Securities Transactions; Fund Expenses;
Additional Information
6. Capital Stock and Other Securities Fund Description; Dividends and
Distributions; Shareholder Rights; Net
Asset Value
7. Purchase of Securities Being Offered Shareholder Rights
8. Redemption or Repurchase Net Asset Value
9. Legal Proceedings Legal Proceedings
CAPTION IN STATEMENT OF ADDITIONAL
INFORMATION
--------------------------------------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Not Applicable
13. Investment Objectives and Investment Objectives and Policies;
Policies Investment Restrictions; Appendix
14. Management of the Registrant Trustees and Officers
15. Control Persons and Principal Additional Information
Holders of Securities
16. Investment Advisory and Investment Adviser; Additional Information
Other Services
17. Brokerage Allocation Brokerage
18. Capital Stock and Other Securities Declaration of Trust
19. Purchase, Redemption and Pricing Valuation of Securities
of Securities Being Offered
20. Tax Status Distributions and Taxes
21. Underwriters Not Applicable
22. Calculation of Performance Data Not Applicable
23. Financial Statements Additional Information
</TABLE>
<PAGE> 3
PART A
INFORMATION REQUIRED IN A PROSPECTUS
<PAGE> 4
PART A
INFORMATION REQUIRED IN A PROSPECTUS
<PAGE> 5
HIGH YIELD BOND TRUST
ONE TOWER SQUARE
HARTFORD, CONNECTICUT 06183
TELEPHONE 860-422-3985
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High Yield Bond Trust (the "Fund") is a diversified open-end management
investment company (mutual fund) whose objective is to provide generous income
to the investor. The Fund invests primarily in corporate bonds and its portfolio
ordinarily includes a substantial number of bonds which, as a class, sell at
discounts from par value and are typically high risk securities. The generous
income sought by the Fund is ordinarily associated with high yield bonds and
similar securities in the lower rating categories of the recognized rating
agencies or with securities that are unrated ("high yield bonds"). Such high
yield securities are commonly known as "junk bonds." High yield bonds generally
involve greater volatility of price and risk of principal and income than bonds
in the higher rating categories and are, on balance, considered predominantly
speculative.
Shares of the Fund are currently offered without a sales charge only to separate
accounts of The Travelers Insurance Company and The Travelers Life and Annuity
Company (the "Company" or "The Travelers"). The Fund serves as one of the
investment vehicles for certain variable annuity and variable life insurance
contracts issued by the Company. The term "shareholder" as used herein refers to
any insurance company separate account that may use shares of the Fund as an
investment vehicle now or in the future.
This Prospectus concisely sets forth the information about the Fund that you
should know before investing. Please read it and retain it for future reference.
Additional information about the Fund is contained in a Statement of Additional
Information ("SAI") dated May 1, 1997 which has been filed with the Securities
and Exchange Commission ("SEC") and is incorporated by reference into this
Prospectus. A copy may be obtained, without charge, by writing to The Travelers,
Annuity Services, One Tower Square, Hartford, Connecticut 06183-5030, or by
calling 860-422-3985.
HIGH YIELD BONDS INVOLVE SUBSTANTIAL RISKS. INVESTORS SHOULD REFER TO "RISK
FACTORS" ON PAGE 5 FOR A DESCRIPTION OF THE RISKS ASSOCIATED WITH AN INVESTMENT
IN THE FUND.
THIS PROSPECTUS MUST BE ACCOMPANIED BY A CURRENT PROSPECTUS FOR A VARIABLE
ANNUITY OR VARIABLE LIFE INSURANCE CONTRACT ISSUED BY THE TRAVELERS. BOTH THIS
PROSPECTUS AND THE CONTRACT PROSPECTUS SHOULD BE READ CAREFULLY AND RETAINED FOR
FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1997.
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<S> <C>
FINANCIAL HIGHLIGHTS.................................................................. 3
FUND DESCRIPTION...................................................................... 4
INVESTMENT OBJECTIVE AND POLICIES..................................................... 4
INVESTMENT RESTRICTIONS............................................................... 5
RISK FACTORS.......................................................................... 5
BOARD OF TRUSTEES..................................................................... 6
INVESTMENT ADVISER.................................................................... 6
Portfolio Manager................................................................... 7
FUND ADMINISTRATION................................................................... 7
SECURITIES TRANSACTIONS............................................................... 7
FUND EXPENSES......................................................................... 7
TRANSFER AGENT........................................................................ 8
SHAREHOLDER RIGHTS.................................................................... 8
NET ASSET VALUE....................................................................... 8
TAX STATUS............................................................................ 9
DIVIDENDS AND DISTRIBUTIONS........................................................... 9
LEGAL PROCEEDINGS..................................................................... 9
ADDITIONAL INFORMATION................................................................ 9
EXHIBIT A............................................................................. 10
EXHIBIT B............................................................................. 15
</TABLE>
HYBT-2
<PAGE> 7
FINANCIAL HIGHLIGHTS
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HIGH YIELD BOND TRUST
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
The following information on per share data for the seven years ended December
31, 1996, has been audited by Coopers & Lybrand L.L.P., Independent Accountants.
All other periods presented have been audited by the Fund's prior auditors.
Coopers & Lybrand L.L.P.'s report on the per share data for each of the five
years in the period ended December 31, 1996 is contained in the Fund's Annual
Report which should be read along with this report and which is incorporated by
reference into the SAI.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
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1996 1995 1994 1993 1992 1991 1990(3)
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<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value, beginning
of year................... $ 9.00 $ 8.49 $ 9.25 $ 8.91 $ 8.75 $ 7.87 $ 9.33
Income from operations
Net investment income....... 0.91 0.80 0.66 0.68 0.88 0.94 1.02
Net gains or losses on
securities (realized and
unrealized)............... 0.41 0.41 (0.76) 0.47 0.18 0.88 (1.81)
------- ------- ------- ------- ------ ------ -------
Total from investment
operations.............. 1.32 1.21 (0.10) 1.15 1.06 1.82 (0.79)
Less distributions from
Net investment income....... (1.83) (0.70) (0.66) (0.81) (0.90) (0.94) (0.67)
------- ------- ------- ------- ------ ------ -------
NET ASSET VALUE, END OF
YEAR...................... $ 8.49 $ 9.00 $ 8.49 $ 9.25 $ 8.91 $ 8.75 $ 7.87
======= ======= ======= ======= ====== ====== =======
TOTAL RETURN (1).............. 16.05% 15.47% (1.26)% 14.01% 13.16% 26.11% (9.12)%
NET ASSETS, END OF YEAR
(000'S)..................... $17,291 $12,902 $11,716 $12,765 $10,289 $7,724 $ 6,238
RATIOS TO AVERAGE NET ASSETS
Expenses (2)................ 0.97% 1.25% 1.25% 0.99% 0.56% 0.56% 0.92%
Net investment income....... 11.01% 9.37% 7.71% 7.69% 10.24% 11.93% 12.33%
Portfolio turnover rate..... 84% 222% 146% 19% 52% 35% 29%
<CAPTION>
1989 1988 1987
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<S> <C<C> <C> <C>
PER SHARE DATA
Net asset value, beginning
of year................... $ 10.12 $ 9.94 $ 11.41
Income from operations
Net investment income....... 1.28 1.21 1.22
Net gains or losses on
securities (realized and
unrealized)............... (1.11) 0.20 (1.21)
------- ------- -------
Total from investment
operations.............. 0.17 1.41 0.01
Less distributions from
Net investment income....... (0.96) (1.23) (1.48)
------- ------- -------
NET ASSET VALUE, END OF
YEAR...................... $ 9.33 $ 10.12 $ 9.94
======= ======= =======
TOTAL RETURN (1).............. 1.40% 14.57% (0.34)%
NET ASSETS, END OF YEAR
(000'S)..................... $ 10,607 $59,637 $51,540
RATIOS TO AVERAGE NET ASSETS
Expenses (2)................ 1.67% 1.00% 0.96%
Net investment income....... 13.37% 11.65% 10.90%
Portfolio turnover rate..... 87% 67% 81%
</TABLE>
(1) Total return is determined by dividing the increase (decrease) in value of a
share during the year, after reflecting the reinvestment of dividends
declared during the year, by the beginning of year share price. Shares in
Fund HYBT are only sold to The Travelers separate accounts in connection
with the issuance of variable annuity and variable life insurance contracts.
Total return does not reflect the deduction of any contract charges or fees
assessed by The Travelers separate accounts.
(2) The ratios of expenses to average net assets for 1990 and later years
reflect an expense reimbursement by The Travelers in connection with
voluntary expense limitations. Without the expense reimbursement, the ratio
of operating expenses to average net assets would have been 1.28%, 1.33%,
1.31%, 1.28%, 1.87% and 2.13% for the years ended December 31, 1995, 1994,
1993, 1992, 1991 and 1990, respectively. For the fiscal year ended December
31, 1996, there were no expense reimbursements by the Travelers in
connection with the voluntary expense limitations.
(3) On May 1, 1990, TAMIC replaced Keystone Custodian Funds, Inc. as the
investment adviser for Fund HYBT.
HYBT-3
<PAGE> 8
FUND DESCRIPTION
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High Yield Bond Trust (the "Fund") is registered with the SEC as a diversified
open-end management investment company, commonly known as a mutual fund. The
Fund was created under Massachusetts law as a Massachusetts business trust on
March 18, 1982.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund's investment objective is to provide generous income. To achieve this
objective the Fund invests primarily in corporate bonds and its portfolio
ordinarily includes a substantial number of bonds which, as a class, sell at
discounts from par value. These bonds are generally below investment grade, for
example, bonds rated BB or lower by Standard & Poor's Corporation or Ba or lower
by Moody's Investors Service, Inc. These bonds are commonly known as "junk
bonds" and are typically high risk securities. (For a description of the
averaged credit quality ratings of the Fund's assets for the twelve months ended
December 31, 1996, please refer to Exhibit B to the Prospectus.)
While the Fund's investment adviser performs its own credit analyses of the
Fund's investments and does not rely on ratings assigned by rating services,
bonds rated below investment grade generally involve greater volatility of price
and risk of principal and income than bonds in the higher rating categories and
are, on balance, considered predominantly speculative. While such bonds will
likely have some quality and protective characteristics, these characteristics
are outweighed by uncertainties of major risk exposures to adverse conditions.
The Fund considers potential for growth of capital in selecting securities. The
Fund's investments may include fixed and adjustable rate or stripped bonds,
including zero coupon and pay-in-kind ("PIK") bonds, debentures, notes,
equipment trust certificates, U.S. government securities and debt securities
convertible into or exchangeable for preferred or common stock. The Fund may
continue to hold preferred or common stock received in connection with
convertible or exchangeable securities. The Fund may also invest in units which
are debt securities with stock or warrants to buy stock attached. The Fund may,
from time to time, purchase new-issue or government or agency securities on a
"when-issued" or "to-be-announced" basis. The Fund may invest in both domestic
and foreign securities. At least 65% of the Fund's assets normally will be
invested in bonds and debentures.
When market conditions warrant, the Fund may adopt a defensive position to
preserve shareholders' capital by investing in money market instruments. Money
market securities must mature within one year of their purchase and consist of
U.S. government securities; certificates of deposit, demand and time deposits
and bankers' acceptances of banks which are members of the Federal Deposit
Insurance Corporation and which have assets of at least $1 billion, including
master demand notes; and repurchase agreements secured by U.S. government
securities.
The Fund may write covered call options on securities which it owns. Such an
option on an underlying security would obligate the Fund to sell, and give the
purchaser of the option the right to buy, that security at a stated exercise
price at any time until a stated expiration date of the option.
The Fund may also invest up to 35% of its total assets in preferred stocks,
including adjustable rate preferred and common stocks and other equity
securities, and convertible securities and warrants which may be used to create
other permissible investments. Such investments must be consistent with the
Fund's objective of providing shareholders with generous income and may be
acquired as part of a unit combining income and equity securities.
For further information about the types of investments and investment techniques
available to the Fund, including the risks associated with such investments and
investment techniques, see Exhibit A to this Prospectus.
HYBT-4
<PAGE> 9
INVESTMENT RESTRICTIONS
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The Fund has adopted the following fundamental restrictions which may not be
changed without a vote of a majority of the outstanding voting securities of the
Fund, as defined in the Investment Company Act of 1940, as amended (the "1940
Act"). Certain other fundamental restrictions are set forth in the Statement of
Additional Information. Unless otherwise stated, all references to the Fund's
assets are in terms of current market value.
The Fund will not: (1) invest more than 5% of its assets in the securities of
any one issuer; (2) borrow money, except to facilitate redemptions or borrow
money for temporary or emergency purposes and then only from banks and in
amounts of up to 10% of its gross assets computed at cost; assets pledged to
secure borrowings shall be no more than the lesser of the amount borrowed or 10%
of the Fund's gross assets computed at cost; (3) invest more than 25% of its
assets in the securities of issuers in the same industry; and (4) invest more
than 10% of its assets in repurchase agreements maturing in more than seven days
and other securities for which market quotations are not readily available.
RISK FACTORS
- --------------------------------------------------------------------------------
The general risk inherent in investing in the Fund is that the net asset value
will fluctuate in response to changes in economic conditions, interest rates and
the market's perception of the underlying portfolio securities of the Fund.
There can be no assurance that the Fund will achieve its investment objective
since there is uncertainty in every investment. Income and yields on high yield
securities, as on all securities, will fluctuate over time.
In addition, there are special considerations relating to high yield securities.
The Fund invests aggressively and seeks to maximize return over time from a
combination of many factors, including high current income, and capital
appreciation from high yielding bonds and other similar securities ("high yield
securities," also commonly known as "junk bonds"). Such aggressive investing
involves risks which are greater than the risks of investing in higher quality
debt securities. These risks include (1) changes in credit status, including
weaker overall credit conditions of issuers and risks of default; (2) industry
market and economic risk; (3) interest rate fluctuations; (4) volatility of net
asset value resulting from broad and rapid changes in the value of underlying
securities; (5) possible legislation having adverse effects on high yield bond
prices; and (6) greater price variability and credit risks of certain high yield
securities such as zero coupon and PIK securities. While these risks provide the
opportunity for maximizing return over time, they may result in greater upward
and downward movement of the net asset value per share of the Fund. As a result,
they should be carefully considered by investors.
Investors should be aware of the following market, economic and credit factors
influencing high yield securities: (1) securities rated BB or lower by Standard
& Poor's Corporation ("S&P") or Ba or lower by Moody's Investors Service, Inc.
("Moody's") are considered predominantly speculative with respect to the ability
of the issuer to meet principal and interest payments; (2) the value of high
yield securities may be more susceptible to real or perceived adverse economic,
company or industry conditions than is the case for higher quality securities;
(3) a widespread economic downturn could result in increased defaults in the
high yield market; (4) adverse market, credit or economic conditions could make
it difficult at certain times to sell certain high yield securities held by the
Fund; (5) the secondary market for high yield securities may be less liquid than
the secondary market for higher quality securities which may affect the value of
certain high yield securities held by the Fund at certain times; (6) there may
not always be readily available market quotations for certain securities; (if
this occurs, the investment adviser will use its best judgment to assign values
to those securities); and (7) zero coupon and PIK securities may be subject to
greater changes in value due to market conditions, the absence of a cash
interest payment and the tendency of issuers of such securities to have weaker
overall credit
HYBT-5
<PAGE> 10
conditions than other high yield securities. These characteristics of high yield
securities make them generally more appropriate for long-term investment.
The generous income sought by the Fund is ordinarily associated with securities
in the lower rating categories of the recognized rating agencies or with
securities that are unrated. Such high yield securities are generally rated BB
or lower by S&P or Ba or lower by Moody's. The Fund may invest in securities
that are rated as low as D by S&P and C- by Moody's. The Fund intends to invest
in D rated debt only in cases where the investment adviser determines that there
is a distinct prospect of improvement in the issuer's financial position as a
result of the completion of reorganization or otherwise. The Fund may also
invest in unrated securities which offer comparable yields and risks as
securities which are rated, as well as in non-investment quality zero coupon and
PIK securities. (For a description of these rating categories, please refer to
the Statement of Additional Information.)
Since the Fund takes an aggressive approach to investing, the investment adviser
tries to maximize the return by controlling risk through diversification, credit
analysis, review of sector and industry trends, interest rate forecasts and
economic analysis. Travelers Asset Management International Corporation's
("TAMIC") analysis of securities focuses on values based on factors such as
interest or dividend coverage, asset values, earnings prospects and the quality
of management of the company. In making investment recommendations, TAMIC also
considers current income, potential for capital appreciation, maturity
structure, quality guidelines, coupon structure, average yield, percentage of
zero coupon and PIK securities, percentage of non-accruing items, and yield to
maturity. TAMIC also considers the ratings of Moody's and S&P assigned to
various securities but does not rely solely on ratings assigned by Moody's and
S&P because (1) Moody's and S&P assigned ratings are based largely on historical
financial data and may not accurately reflect the current financial outlook of
companies, and (2) there can be large differences among the current financial
conditions of issuers within the same rating category. Achievement of the Fund's
investment objective is more dependent upon TAMIC's own credit analysis than is
the case for higher quality bonds.
BOARD OF TRUSTEES
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Under Massachusetts law, the Fund's Board of Trustees has absolute and exclusive
control over the management and disposition of all assets of the Fund. Subject
to the provisions of the Declaration of Trust, the business and affairs of the
Fund shall be managed by the Trustees or other parties so designated by the
Trustees. Information relating to the Board of Trustees, including its members
and their compensation, is contained in the SAI.
INVESTMENT ADVISER
- --------------------------------------------------------------------------------
TAMIC provides investment advice and, in general, supervises the management and
investment program of the Fund.
TAMIC is a registered investment adviser which has provided investment advisory
services since its incorporation in 1978. TAMIC is an indirect wholly owned
subsidiary of Travelers Group Inc., a financial services holding company, and
its principal offices are located at One Tower Square, Hartford, Connecticut
06183.
In addition to providing investment advice to the Fund, TAMIC acts as investment
adviser for other investment companies which fund variable contracts issued by
the Company, as well as for individual and pooled pension and profit-sharing
accounts, domestic insurance companies affiliated with The Travelers, and
nonaffiliated insurance companies.
HYBT-6
<PAGE> 11
For furnishing investment management and advisory services to the Fund, TAMIC is
paid an amount equivalent on an annual basis to the advisory fee schedule set
forth in the table below. The fee is computed daily and paid weekly.
<TABLE>
<CAPTION>
ANNUAL AGGREGATE NET ASSET
MANAGEMENT FEE VALUE OF THE FUND
- -------------- -------------------
<C> <S> <C>
0.50% of the first $ 50,000,000, plus
0.40% of the next $ 100,000,000, plus
0.30% of the next $ 100,000,000, plus
0.25% of amounts over $ 250,000,000
</TABLE>
For the fiscal year ended December 31, 1996, TAMIC received a fee equal to .42%
of the Fund's average net assets for its services as investment adviser.
PORTFOLIO MANAGER
The High Yield Bond Trust is managed by Thomas L. Hajdukiewicz. Mr. Hajdukiewicz
joined The Travelers Insurance Company as a Vice President and Portfolio Manager
in January of 1997. Prior to coming to The Travelers, Mr. Hajdukiewicz served as
an Analyst/Portfolio Manager with MacKay Shields Financial Corporation and as a
Financial Analyst with America Capital Asset Management.
FUND ADMINISTRATION
- --------------------------------------------------------------------------------
The Fund has entered into an Administrative Services Agreement, whereby
Travelers Insurance will be responsible for the pricing and bookkeeping services
for the Fund at an annualized rate of 0.06% of the daily net assets of the Fund.
The Travelers Insurance Company, at its expense, may appoint a sub-administrator
to perform these services. The sub-administrator may be affiliated with The
Travelers Insurance Company.
SECURITIES TRANSACTIONS
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Under policies established by the Board of Trustees, TAMIC selects
broker-dealers to execute transactions for the Fund, subject to the receipt of
best execution. When selecting broker-dealers to execute portfolio transactions
for the Fund, TAMIC may consider the number of Fund shares sold by such
broker-dealers. In addition, broker-dealers may from time to time be affiliated
with the Fund, TAMIC, or their affiliates.
The Fund may pay higher commissions to broker-dealers that provide research
services. TAMIC may use these services in advising the Fund as well as in
advising its other clients.
FUND EXPENSES
- --------------------------------------------------------------------------------
In addition to the investment advisory fees discussed above, the other expenses
of the Fund include the charges and expenses of the transfer agent, the
custodian, the independent auditors, and any outside legal counsel employed by
either the Fund or the Board of Trustees; the compensation for the disinterested
members of the Board of Trustees; the costs of printing and mailing the Fund's
prospectuses, proxy solicitation materials, and annual, semi-annual and periodic
reports; brokerage commissions, interest charges and taxes; and any
registration, filing and other fees payable to government agencies in connection
with the registration of the Fund and its shares under federal and state
securities laws. Additionally, high portfolio turnover may involve
correspondingly greater brokerage commissions and other transaction costs, which
will be borne directly by the Fund, as well as additional gains or losses to
shareholders.
HYBT-7
<PAGE> 12
Pursuant to a Management Agreement dated May 1, 1993 between the Fund and The
Travelers Insurance Company, the Company has agreed to reimburse the Fund for
the amount by which the Fund's aggregate annual expenses, including investment
advisory fees but excluding brokerage commissions, interest charges and taxes,
exceed 1.25% of the Fund's average net assets for any fiscal year. For the
fiscal year ended December 31, 1996, the Fund paid .97% of its average net
assets in expenses.
TRANSFER AGENT
- --------------------------------------------------------------------------------
First Data Investor Services Group, Inc., Exchange Place, Boston, MA 02109,
serves as the Fund's transfer agent and dividend disbursing agent.
SHAREHOLDER RIGHTS
- --------------------------------------------------------------------------------
Shares of the Fund are currently sold only to insurance company separate
accounts in connection with variable annuity and variable life insurance
contracts issued by the Company. Shares of the Fund are not sold to the general
public. Fund shares are sold on a continuing basis, without a sales charge, at
the net asset value next computed after payment is made by the insurance company
to the Fund's custodian. However, the separate accounts to which shares are sold
may impose sales and other charges, as described in the appropriate contract
prospectus.
The Fund currently issues one class of shares which participate equally in
dividends and distributions and have equal voting, liquidation and other rights.
When issued and paid for, the shares will be fully paid and nonassessable by the
Fund and will have no preference, conversion, exchange or preemptive rights.
Shareholders are entitled to one vote for each full share owned and fractional
votes for fractional shares. Shares are redeemable, transferable and freely
assignable as collateral. There are no sinking fund provisions. (See the
accompanying separate account prospectus for a discussion of voting rights
applicable to purchasers of variable annuity and variable life insurance
contracts.)
Although the Fund is not currently aware of any disadvantages to contract owners
of either variable annuity or variable life insurance contracts because the
Fund's shares are available with respect to both products, an irreconcilable
material conflict may conceivably arise between contract owners of different
separate accounts investing in the Fund due to differences in tax treatment,
management of the Fund's investments, or other considerations. The Fund's Board
of Trustees will monitor events in order to identify any material conflicts
between variable annuity contract owners and variable life insurance policy
owners, and will determine what action, if any, should be taken in the event of
such a conflict.
NET ASSET VALUE
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The net asset value of a Fund share is computed as of the close of trading on
each day on which the New York Stock Exchange ("Exchange") is open, except on
days when changes in the value of the Fund's securities do not affect the
current net asset value of its shares. The net asset value per share of the Fund
is arrived at by determining the value of the Fund's assets, subtracting its
liabilities, and dividing the result by the number of shares outstanding.
The Fund values short-term money market instruments with maturities of sixty
days or less at amortized cost (original purchase cost as adjusted for
amortization of premium or accretion of discount) which, when combined with
accrued interest approximates market. All other investments are valued at market
value or where market quotations are not readily available, at fair value as
determined in good faith by the Fund's Board of Trustees.
HYBT-8
<PAGE> 13
Fund shares are redeemed at the redemption value next determined after the Fund
receives a redemption request. The redemption value is the net asset value
adjusted for fractions of a cent and may be more or less than the shareholder's
cost depending upon changes in the value of the Fund's portfolio between
purchase and redemption.
The Fund computes the redemption value at the close of the Exchange at the end
of the day on which it has received all proper documentation from the
shareholder. Redemption proceeds are normally wired or mailed either the same or
the next business day, but in no event later than seven days thereafter.
The Fund may temporarily suspend the right to redeem its shares when: (1) the
Exchange is closed, other than customary weekend and holiday closings; (2)
trading on the Exchange is restricted; (3) an emergency exists as determined by
the SEC so that disposal of the Fund's investments or determination of its net
asset value is not reasonably practicable; or (4) the SEC, for the protection of
shareholders, so orders.
TAX STATUS
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The Fund has qualified, and intends to qualify in the future, as a regulated
investment company under Subchapter M of the Internal Revenue Code. The Fund
qualifies if, among other things, it distributes to its shareholders at least
90% of its net investment income for each fiscal year.
DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------
The distribution requirements described above may have an adverse effect on the
Fund to the extent it invests in high yield securities structured as zero coupon
and PIK bonds. An investment company typically accrues income on those
securities prior to the receipt of cash payments. Therefore, the Fund may have
to dispose of its portfolio securities under disadvantageous circumstances to
generate cash, or leverage itself by borrowing cash, to satisfy distribution
requirements.
Capital gains and dividends are distributed in cash or reinvested in additional
shares of the Fund, without a sales charge. Although purchasers of variable
contracts are not subject to federal income taxes on distributions by the Fund,
they may be subject to state and local taxes and should review the accompanying
contract prospectus for a discussion of the tax treatment applicable to
purchasers of variable annuity and variable life insurance contracts.
LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
There are no pending material legal proceedings affecting the Fund.
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Except as otherwise stated in this Prospectus or as required by law, the Fund
reserves the right to change the terms of the offer stated in this Prospectus
without shareholder approval, including the right to impose or change fees for
services provided.
HYBT-9
<PAGE> 14
EXHIBIT A
- --------------------------------------------------------------------------------
DESCRIPTION OF CERTAIN TYPES OF INVESTMENTS AND
INVESTMENT TECHNIQUES AVAILABLE TO THE FUND
ZERO COUPON BONDS
Zero coupon bonds do not pay interest for several years, then they pay a full
coupon interest until maturity. They are sold at a substantial original issue
discount that equals the missing interest payment compounded at the coupon rate.
Additionally, zero coupon bonds give the issuer the flexibility of reduced cash
interest expense for several years, and they give the purchaser the potential
advantage of compounding the coupons at a higher rate than might otherwise be
available.
However, zero coupon bonds are very risky for the investor. Because the cash
flows from the bonds are deferred and because zero coupon bonds often represent
very subordinated debt, their prices are subject to more volatility than most
other bonds.
A variant of zero coupon bonds are step-up bonds. These bonds pay a low initial
interest rate for several years and then a higher rate until maturity. They are
also issued at an original issue discount.
For federal income tax purposes, a purchaser of zero coupon bonds (either
initially or in the secondary market) is treated as if the buyer had purchased a
corporate obligation issued on the purchase date with an original issue
discount. The purchaser is required to take into income each year as ordinary
income an allocable portion of such discounts determined on a "constant yield"
method. Any such income increases the holder's tax basis for the zero coupon
bond, and any gain or loss on a sale of the zero coupon bonds relative to the
holder's basis, as so adjusted, is a capital gain or loss. Certain federal tax
law income and capital gain distribution requirements may have an adverse effect
on the Fund to the extent the Fund invests in zero coupon bonds. See "Dividends
and Tax Status."
PAY-IN-KIND BONDS
Pay-in-kind (PIK) bonds pay interest either in cash or in additional securities
at the issuer's option for a specified period. Like zero coupon bonds, PIK bonds
are designed to give the issuer flexibility in managing cash flow. Unlike zero
coupon bonds, however, PIK bonds offer the investor the opportunity to sell the
additional securities issued in lieu of interest and thus obtain current income
on the original investment. Certain federal tax law income and capital gain
distribution requirements may have an adverse effect on the Fund to the extent
that the Fund invests in PIK bonds. See "Dividends and Tax Status."
RESET BONDS
The interest rate on reset bonds is adjusted periodically to a level which
should allow the bonds to trade at a specified dollar level, generally par or
$101. The rate can usually be raised, but the bonds have a low call premium,
limiting the opportunity for capital gains. Some resets have a maximum rate,
generally 2.5% or 3% above the initial rate.
INCREASING RATE NOTES
Increasing rate notes (IRNs) have interest rates that increase periodically (by
1/4% per quarter, for example). IRNs are generally used as a temporary
financing instrument since the increasing rate is an incentive for the issuer to
refinance with longer term debt.
HYBT-10
<PAGE> 15
UNITED STATES (U.S.) GOVERNMENT SECURITIES
Securities issued or guaranteed by the U.S. Government include a variety of
Treasury securities that differ only in their interest rates, maturities and
dates of issuance. Treasury bills have maturities of one year or less; Treasury
notes have maturities of one to ten years; and Treasury bonds generally have
maturities of greater than ten years at the date of issuance.
Securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities include direct obligations of the U.S. Treasury and securities
issued or guaranteed by the Federal Housing Administration, Farmers Home
Administration, Export-Import Bank of the U.S., Small Business Administration,
Government National Mortgage Association, General Services Administration,
Central Bank for Cooperatives, Federal Home Loan Banks, Federal Loan Mortgage
Corporation, Federal Intermediate Credit Banks, Federal Land Banks, Maritime
Administration, The Tennessee Valley Authority, District of Columbia Armory
Board, Student Loan Marketing Association and Federal National Mortgage
Association.
Some obligations of U.S. Government agencies and instrumentalities, such as
Treasury bills and Government National Mortgage Association pass-through
certificates, are supported by the full faith and credit of the U.S.; others,
such as securities of Federal Home Loan Banks, are supported by the right of the
issuer to borrow from the Treasury; still others, such as bonds issued by the
Federal National Mortgage Association, a private corporation, are supported only
by the credit of the instrumentality. Because the U.S. Government is not
obligated by law to provide support to an instrumentality it sponsors, the Fund
will invest in the securities issued by such an instrumentality only when TAMIC
determines that the credit risk with respect to the instrumentality does not
make its securities unsuitable investments. U.S. Government securities will not
include international agencies or instrumentalities in which the U.S.
Government, its agencies or instrumentalities participate, such as the World
Bank, the Asian Development Bank or the Inter-American Development Bank, or
issues insured by the Federal Deposit Insurance Corporation.
WHEN-ISSUED SECURITIES
The Fund may, from time to time, purchase new-issue Government or Agency
securities on a "when-issued" or "to-be-announced" ("TBA") basis ("when-issued
securities"). The prices of such securities will be fixed at the time the
commitment to purchase is made, and may be expressed in either dollar price or
yield maintenance terms. Delivery and payment may be at a future date beyond
customary settlement time. It is the customary practice of the Fund to make
when-issued or TBA purchases for settlement no more than 90 days beyond the
commitment date.
The commitment to purchase a when-issued security may be viewed as a senior
security, and will be marked to market and reflected in the Fund's net asset
value daily from the commitment date. While it is TAMIC's intention to take
physical delivery of these securities, offsetting transactions may be made prior
to settlement, if it is advantageous to do so. The Fund does not make payment or
begin to accrue interest on these securities until settlement date. In order to
invest its assets pending settlement, the Fund will normally invest in
short-term money market instruments and other securities maturing no later than
the scheduled settlement date.
The Fund does not intend to purchase when-issued securities for speculative or
"leverage" purposes. Consistent with Section 18 of the 1940 Act and the General
Policy Statement of the SEC thereunder, when the Fund commits to purchase a
security on a when-issued or TBA basis, it will identify and place in a
segregated account high-grade money market instruments and other liquid
securities equal in value to the purchase cost of the when-issued securities.
TAMIC believes that purchasing securities in this manner will be advantageous to
the Fund. However, this practice does entail certain additional risks, namely
the default of the counterparty on its obligations to deliver the security as
scheduled. In this event, the Fund would experience a gain or loss equal to the
appreciation or depreciation in value from the commitment date. TAMIC employs a
rigorous credit quality procedure in determining the counterparties with which
it will
HYBT-11
<PAGE> 16
deal in when-issued securities, and in some circumstances, will require the
counterparty to post cash or some other form of security as margin to protect
the value of its delivery obligation pending settlement.
WRITING COVERED CALL OPTIONS
The Fund may write or sell covered call options. By writing a call option, the
Fund becomes obligated during the term of the option to deliver the securities
underlying the option upon payment of the exercise price.
The Fund may only write "covered" options. This means that as long as the Fund
is obligated as the writer of a call option, it will own the underlying
securities subject to the option or in the case of call options on U.S. Treasury
bills, the Fund might own substantially similar U.S. Treasury bills.
The principal reason for writing call options is to obtain, through a receipt of
premiums, a greater current return than would be realized on the underlying
securities alone. The Fund receives a premium from writing a call option which
it retains whether or not the option is exercised. By writing a call option, the
Fund might lose the potential for gain on the underlying security while the
option is open.
Options on some securities are relatively new and it is impossible to predict
the amount of trading interest that will exist in such options. There can be no
assurance that viable markets will develop or continue. The failure of such
markets to develop or continue could impair the Fund's ability to use such
options to achieve its investment objectives.
MONEY MARKET INSTRUMENTS
Money market securities are instruments with remaining maturities of one year or
less, such as bank certificates of deposit, bankers' acceptances, commercial
paper (including master demand notes) and obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities, some of which may be
subject to repurchase agreements.
CERTIFICATES OF DEPOSIT
Certificates of deposit are receipts issued by a bank in exchange for the
deposit of funds. The issuer agrees to pay the amount deposited plus interest to
the bearer of the receipt on the date specified on the certificate. The
certificate can usually be traded in the secondary market prior to maturity.
Certificates of deposit will be limited to U.S. dollar-denominated certificates
of U.S. banks which have at least $1 billion in deposits as of the date of their
most recently published financial statements (including foreign branches of U.S.
banks, U.S. branches of foreign banks which are members of the Federal Reserve
System or the Federal Deposit Insurance Corporation, and savings and loan
associations which are insured by the Federal Deposit Insurance Corporation).
The Fund will not acquire time deposits or obligations issued by the
International Bank for Reconstruction and Development, the Asian Development
Bank or the Inter-American Development Bank. Additionally, the Fund does not
currently intend to purchase such foreign securities (except to the extent that
certificates of deposit of foreign branches of U.S. banks may be deemed foreign
securities) or purchase certificates of deposit, bankers' acceptances or other
similar obligations issued by foreign banks.
OBLIGATIONS OF FOREIGN BRANCHES OF U.S. BANKS
The obligations of foreign branches of U.S. banks may be general obligations of
the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by government regulation. Payment of interest
and principal upon these obligations may also be affected by governmental action
in the country of domicile of the branch (generally referred to as
HYBT-12
<PAGE> 17
sovereign risk). In addition, evidences of ownership of such securities may be
held outside the U.S. and the Fund may be subject to the risks associated with
the holding of such property overseas. Various provisions of federal law
governing domestic branches do not apply to foreign branches of domestic banks.
OBLIGATIONS OF U.S. BRANCHES OF FOREIGN BANKS
Obligations of U.S. branches of foreign banks may be general obligations of the
parent bank in addition to the issuing branch, or may be limited by the terms of
a specific obligation and by federal and state regulation as well as by
governmental action in the country in which the foreign bank has its head
office. In addition, there may be less publicly available information about a
U.S. branch of a foreign bank than about a domestic bank.
BANKERS' ACCEPTANCES
Bankers' acceptances typically arise from short-term credit arrangements
designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by the bank which, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
Bankers' acceptances acquired by the Fund must have been accepted by U.S.
commercial banks, including foreign branches of U.S. commercial banks, having
total deposits at the time of purchase in excess of $1 billion and must be
payable in U.S. dollars.
COMMERCIAL PAPER RATINGS
The Fund's investments in commercial paper are limited to those rated A-1 by
Standard & Poor's Corporation (S&P) or Prime-1 by Moody's Investors Service,
Inc. (Moody's). These ratings and other money market instruments are described
as follows.
Commercial paper rated A-1 by S&P has the following characteristics: Liquidity
ratios are adequate to meet cash requirements. The issuer's long-term senior
debt is rated "A" or better, although in some cases "BBB" credits may be
allowed. The issuer has access to at least two additional channels of borrowing.
Basic earnings and cash flow have an upward trend with allowance made for
unusual circumstances. Typically, the issuer's industry is well established and
the issuer has a strong position within the industry.
The rating Prime-1 is the highest commercial paper rating assigned by Moody's.
Among the factors considered by Moody's in assigning ratings are the following:
(1) evaluation of the management of the issuer; (2) economic evaluation of the
issuer's industry or industries and an appraisal of speculative-type risks which
may be inherent in certain areas; (3) evaluation of the issuer's products in
relation to competition and customer acceptance; (4) liquidity; (5) amount and
quality of long-term debt; (6) trend of earnings over a period of ten years; (7)
financial strength of a parent company and the relationships which exist with
the issuer; and (8) recognition by the management of obligations which may be
present or may arise as a result of public preparations to meet such
obligations. Relative strength or weakness of the above factors determines how
the issuer's commercial paper is rated within various categories.
FOREIGN SECURITIES
Investing in the securities of foreign companies involves special risks and
considerations not typically associated with investing in U.S. companies. These
risks include differences in accounting, auditing and financial reporting
standards, generally higher commission rates on foreign portfolio
HYBT-13
<PAGE> 18
transactions, the possibility of expropriation or confiscatory taxation, adverse
changes in investment or exchange control regulations, political instability
which could affect U.S. investments in foreign countries and potential
restrictions on the flow of international capital. Additionally, dividends
payable on foreign securities may be subject to foreign taxes withheld prior to
distribution. Foreign securities often trade with less frequency and volume than
domestic securities and therefore may exhibit greater price volatility. Changes
in foreign exchange rates will affect the value of those securities which are
denominated or quoted in currencies other than the U.S. dollar. Many of the
foreign securities held by the Portfolio will not be registered with, nor will
the issuers thereof be subject to the reporting requirements of, the SEC.
Accordingly, there may be less publicly available information about the
securities and the foreign company or government issuing them than is available
about a domestic company of government entity. Moreover, individual foreign
economies may differ favorably or unfavorably from the U.S. economy in such
respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payment positions.
HYBT-14
<PAGE> 19
EXHIBIT B
- --------------------------------------------------------------------------------
CORPORATE BOND RATINGS
High Yield Bond Trust invests primarily in corporate bonds rated below
Investment Grade. For Moody's Investors Service (Moody's), this means bonds
rated Ba or lower; other rating agencies, including Standard & Poor's
Corporation, Duff & Phelps, Fitch Investors Service, Inc. have similar rating
categories.
MOODY'S CORPORATE BOND RATINGS
1. Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes are not likely to impair the fundamentally strong
position of such issues.
2. Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities, or there may be other
elements present which make the long term risks appear somewhat larger than in
Aaa securities.
3. A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
4. Baa -- Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
5. Ba -- Bonds which are rated Ba are judged to have speculative elements. Their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
6. B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or maintenance of other
terms of the contract over any long period of time may be small.
7. Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
8. Ca -- Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other market
shortcomings.
9. C -- Bonds which are rated as C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
HYBT-15
<PAGE> 20
S&P CORPORATE BOND RATINGS
A Standard & Poor's Corporation (S&P) corporate bond rating is a current
assessment of the creditworthiness of an obligor, including obligors outside the
U.S., with respect to a specific obligation. This assessment may take into
consideration obligors such as guarantors, insurers, or lessees. Ratings of
foreign obligors do not take into account currency exchange and related
uncertainties. The ratings are based on current information furnished by the
issuer or obtained by S&P from other sources it considers reliable.
The ratings are based, in varying degrees, on the following considerations:
a. Likelihood of default -- capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation;
b. Nature of and provisions of the obligation; and
c. Protection afforded by and relative position of the obligation in the event
of bankruptcy, reorganization or other arrangement under the laws of bankruptcy
and other laws affecting creditors' rights.
PLUS (+) OR MINUS (-): To provide more detailed indications of credit quality,
ratings from "AA" to "A" may be modified by the addition of a plus or minus sign
to show relative standing within the major rating categories.
Bond ratings are as follows:
1. AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
2. AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
3. A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
4. BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Although it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
5. BB, B, CCC, CC and C -- Debt rated BB, B, CCC, CC and C is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation, and C the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
HYBT-16
<PAGE> 21
The table below shows the averaged credit quality ratings of the Fund's assets
for the twelve months ended December 31, 1996:
<TABLE>
<CAPTION>
S&P OR
MOODY'S RATING PERCENTAGE
----------------- ----------
<S> <C>
AAA....................................................... 17.42%
AA1....................................................... %
AA2....................................................... %
AA3....................................................... %
A1........................................................ %
A2........................................................ %
A3........................................................ %
BAA1...................................................... %
BAA2...................................................... %
BAA3...................................................... %
BA1....................................................... 0.64%
BA2....................................................... %
BA3....................................................... 2.98%
B1........................................................ 8.26%
B2........................................................ 15.64%
B3........................................................ 41.63%
CAA....................................................... 12.17%
CA........................................................ 0.68%
C......................................................... %
D......................................................... %
NR........................................................ 0.58%
-------
100.00%
=======
</TABLE>
HYBT-17
<PAGE> 22
HIGH YIELD BOND TRUST
PROSPECTUS
TIC Ed. 5-97
Printed in U.S.A.
L-11173
<PAGE> 23
PART B
INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
<PAGE> 24
STATEMENT OF ADDITIONAL INFORMATION
HIGH YIELD BOND TRUST
MAY 1, 1997
This Statement of Additional Information ("SAI") is not a prospectus but
relates to, and should be read in conjunction with, the Fund's prospectus dated
May 1, 1997. A copy of the prospectus is available from The Travelers Insurance
Company, Annuity Services, One Tower Square, Hartford, Connecticut 06183-5030 or
by calling 860-422-3985. This SAI should be read in conjunction with the
accompanying 1996 Annual Report for the Fund.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
INVESTMENT OBJECTIVE AND POLICIES. . . . . . . . . . . . . . . . . . . . . . . . . 1
INVESTMENT RESTRICTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
VALUATION OF SECURITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
DISTRIBUTIONS AND TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
PORTFOLIO TURNOVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
TRUSTEES AND OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
DECLARATION OF TRUST. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
INVESTMENT ADVISER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Advisory Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
REDEMPTIONS IN KIND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
BROKERAGE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ADDITIONAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
</TABLE>
<PAGE> 25
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the High Yield Bond Trust (the "Fund") is to
provide generous income. To achieve this objective the Fund invests primarily in
corporate bonds, and its portfolio ordinarily includes a substantial number of
bonds which, as a class, sell at discounts from par value and which are rated by
Standard & Poor's Corporation as below investment grade (BBB). The Fund
considers potential for growth of capital in selecting securities. The Fund's
investments may include fixed and adjustable rate or stripped bonds, including
zero coupon and pay-in-kind bonds, debentures, notes, equipment trust
certificates, U.S. government securities and debt securities convertible into or
exchangeable for preferred or common stock. The Fund may also invest in units
which are debt securities with stock or warrants to buy stock attached. At least
65% of the Fund's assets will normally be invested in bonds and debentures.
While Travelers Asset Management International Corporation ("TAMIC") performs
its own credit analyses of the Fund's investments and does not rely on ratings
assigned by rating services, bonds rated below investment grade are, on balance,
considered predominantly speculative.
INVESTMENT RESTRICTIONS
None of the restrictions enumerated in this paragraph may be changed
without a vote of the holders of a majority of the Fund's outstanding shares, as
defined in the Investment Company Act of 1940 (the "1940 Act"). The Fund will
not:
(1) invest more than 5% of its total assets, computed at market
value, in the securities of any one issuer;
(2) invest in more than 10% of any class of securities (as
defined in the Declaration of Trust) of any one issuer;
(3) invest more than 5% of the value of its total assets in companies
which have been in operation for less than three years;
(4) borrow money, except to facilitate redemptions or for emergency or
extraordinary purposes and then only from banks and in amounts of
up to 10% of its gross assets computed at cost; while outstanding,
according to the 1940 Act, a borrowing may not exceed one-third of
the value of the Fund's net assets, including the amount borrowed;
the Fund has no intention of attempting to increase its net income
by borrowing and all borrowings will be repaid before additional
investments are made; assets pledged to secure borrowings shall be
no more than the lesser of the amount borrowed or 10% of the Fund's
gross assets computed at cost;
(5) underwrite securities, except that the Fund may purchase securities
from issuers thereof or others and dispose of such securities in a
manner consistent with its other investment policies; in the
disposition of restricted securities the Fund may be deemed to be
an underwriter, as defined in the Securities Act of 1933 (the "1933
Act");
(6) purchase real estate or interests in real estate, except through
the purchase of securities of a type commonly purchased by
financial institutions which do not include direct interests in
real estate or mortgages, or commodities or commodity contracts;
(7) invest for the primary purpose of control or management;
(8) make margin purchases or short sales of securities;
1
<PAGE> 26
(9) make loans, except that the Fund may purchase money market
securities, buy publicly and privately distributed debt securities
and lend limited amounts of its portfolio securities to
broker-dealers; all such investments must be consistent with the
Fund's investment objective and policies;
(10) invest more than 25% of its total assets in the securities of
issuers in any single industry; or
(11) purchase the securities of any other investment company except in
the open market and at customary brokerage rates and in no event
more than 3% of the voting securities of any investment company.
When consistent with its investment objectives, the Fund may
purchase securities of brokers, dealers, underwriters or investment
advisers. The Fund is subject to restrictions in the sale of
portfolio securities to, and in its purchase or retention of
securities of, companies in which the management personnel of TAMIC
have a substantial interest.
(12) The Fund may make investments in an amount of up to 10% of the
value of the Fund's net assets in illiquid securities.
VALUATION OF SECURITIES
Current value for the Fund's portfolio securities is determined as
follows: Securities traded on national securities markets are valued at the
closing prices on such markets; securities for which no sales prices were
reported and U.S. Government and Agency obligations are valued at the mean
between the last reported bid and ask prices and on the basis of quotations
received from reputable brokers or other recognized sources; securities maturing
within 60 days are valued at cost plus accreted discount and, or minus amortized
premium, which approximates market value; and securities that have a maturity of
60 days or more are valued at prices based on market quotations for securities
of similar type, yield and maturity.
DISTRIBUTIONS AND TAXES
The Fund has qualified and intends to qualify in the future as a
regulated investment company under Subchapter M of the Internal Revenue Code.
Thus, the Fund is relieved of any federal income tax liability by distributing
all of its net investment income and net capital gains, if any, to its
shareholders.
When the Fund makes a distribution, it intends to distribute only its
net capital gains and such income as has been predetermined to the best of the
Fund's ability to be taxable as ordinary income. Therefore, net investment
income distributions will not be made on the basis of distributable income as
computed on the Fund's books, but will be made on a federal taxation basis.
2
<PAGE> 27
As of December 31, 1996, the Fund had capital loss carryovers of
approximately $4,751,000 which expires in 1997-2004. The Fund intends not to
distribute realized gains until the carryovers are exhausted. The Fund may not
realize gains sufficient to use the carryovers before they expire.
PORTFOLIO TURNOVER
The Fund's portfolio turnover for the fiscal years ended December 31,
1994, 1995 and 1996 were 146%, 222%, and 84%, respectively. High portfolio
turnover involves correspondingly greater brokerage commissions and other
transaction costs, which will be borne directly by the Fund.
<TABLE>
<CAPTION>
TRUSTEES AND OFFICERS
<S> <C>
Name Present Position and Principal Occupation During Last Five Years
*Heath B. McLendon Managing Director (1993-present), Smith Barney Inc. ("Smith Barney");
Chairman and Member Chairman (1993-present), Smith Barney Strategy Advisors, Inc.; President
388 Greenwich Street (1994-present), Smith Barney Mutual Funds Management Inc.; Chairman and
New York, New York Director of forty-one investment companies associated with Smith Barney;
Age 63 Chairman, Board of Trustees, Drew University; Trustee, The East New York
Savings Bank; Advisory Director, First Empire State Corporation; Chairman,
Board of Managers, seven Variable Annuity Separate Accounts of The
Travelers Insurance Company+; Chairman, Board of Trustees, five Mutual
Funds sponsored by The Travelers Insurance Company++; prior to July 1993,
Senior Executive Vice President of Shearson Lehman Brothers Inc.
Knight Edwards Of Counsel (1988-present), Partner (1956-1988), Edwards & Angell,
Member Attorneys; Member, Advisory Board (1973-1994), thirty-one mutual funds
2700 Hospital Trust Tower sponsored by Keystone Group, Inc.; Member, Board of Managers, seven
Providence, Rhode Island Variable Annuity Separate Accounts of The Travelers Insurance Company+;
Age 73 Trustee, five Mutual Funds sponsored by The Travelers Insurance Company.++
Robert E. McGill, III Retired manufacturing executive. Director (1983-1995), Executive Vice
Member President (1989-1994) and Senior Vice President, Finance and
295 Hancock Street Administration (1983-1989), The Dexter Corporation (manufacturer of
Williamstown, Massachusetts specialty chemicals and materials); Vice Chairman (1990-1992), Director
Age 65 (1983-1995), Life Technologies, Inc. (life science/biotechnology
products); Director, (1994-present), The Connecticut Surety Corporation
(insurance); Director (1995-present), Calbiochem Novachem International
(life science/biotechnology products); Director (1995-present), Chemfab
Corporation (specialty materials manufacturer); Member, Board of Managers,
seven Variable Annuity Separate Accounts of The Travelers Insurance
Company+; Trustee, five Mutual Funds sponsored by The Travelers Insurance
Company.++
Lewis Mandell Dean, College of Business Administration (1995-present), Marquette
Member University; Professor of Finance (1980-1995) and Associate Dean
606 N. 13th Street (1993-1995), School of Business Administration, and Director, Center for
Milwaukee, WI 53233 Research and Development in Financial Services (1980-1995), University of
Age 54 Connecticut; Director (1992-present), GZA Geoenvironmental Tech,
</TABLE>
3
<PAGE> 28
<TABLE>
<S> <C>
Inc. (engineering services); Member, Board of Managers, seven Variable Annuity
Separate Accounts of The Travelers Insurance Company+; Trustee, five
Mutual Funds sponsored by The Travelers Insurance Company.++
Frances M. Hawk Portfolio Manager (1992-present), HLM Management Company, Inc. (investment
Member management); Assistant Treasurer, Pensions and Benefits. Management
222 Berkeley Street (1989-1992), United Technologies Corporation (broad-based designer and
Boston, Massachusetts manufacturer of high technology products); Member, Board of Managers,
Age 49 seven Variable Annuity Separate Accounts of The Travelers Insurance
Company+; Trustee, five Mutual Funds sponsored by The Travelers Insurance
Company.++
Ernest J. Wright Assistant Secretary (1994-present), Counsel (1987-present), The Travelers
Secretary to the Board Insurance Company; Secretary, Board of Managers, seven Variable Annuity
One Tower Square Separate Accounts of The Travelers Insurance Company+; Secretary, Board of
Hartford, Connecticut Trustees, five Mutual Funds sponsored by The Travelers Insurance Company.++
Age 56
Kathleen A. McGah Assistant Secretary and Counsel (1995-present), The Travelers Insurance
Assistant Secretary to the Board Company; Assistant Secretary, Board of Managers, seven Variable Annuity
One Tower Square Separate Accounts of The Travelers Insurance Company+; Assistant
Hartford, Connecticut Secretary, Board of Trustees, five Mutual Funds sponsored by The Travelers
Age 46 Insurance Company.++ Prior to January 1995, Counsel, ITT Hartford Life
Insurance Company.
Lewis E. Daidone Managing Director of Smith Barney, Senior Vice President and Treasurer of
Treasurer 41 investment companies associated with Smith Barney since January 1990,
388 Greenwich Street and Director and Vice President of SBMFM and TIA; Treasurer, Board of Trustees,
New York, New York five Mutual Funds sponsored by The Travelers Insurance Company.++
Age 38
Irving David Vice President of Smith Barney, Asset Management Division (March
Controller 1994-present); Controller, Board of Trustees, five Mutual Funds sponsored
388 Greenwich Street by The Travelers Insurance Company.++ Prior to March, 1994, Director of
New York, NY Smith Barney, Controller adn Assistant Treasurer of 41 investment companies
Age 35 associated with Smith Barney.
Thomas M. Reynolds Director of Smith Barney, Asset Management Division; Controller and
Controller Assistant Secretary of 35 investment companies associated with Smith
388 Greenwich Street Barney, (September 1991-present); Controller, Board of Trustees, five
New York, NY Mutual Funds sponsored by The Travelers Insurance Company.++
Age 36
</TABLE>
+ These seven Variable Annuity Separate Accounts are: 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 Timed Growth and Income Stock Account for
Variable Annuities, The Travelers Timed Short-Term Bond Account for
Variable Annuities, The Travelers Timed Aggressive Stock Account for
Variable Annuities and The Travelers Timed Bond Account for Variable
Annuities.
++ These five Mutual Funds are: Capital Appreciation Fund, Cash Income
Trust, High Yield Bond Trust, Managed Assets Trust and The Travelers Series
Trust.
4
<PAGE> 29
* Mr. McLendon is an "interested person" within the meaning of the 1940
Act by virtue of his position as Managing Director of Smith Barney Inc., an
indirect wholly owned subsidiary of Travelers Group Inc. and also owns shares
and options to purchase shares of Travelers Group Inc., the indirect parent of
The Travelers Insurance Company.
Members of the Board of Trustees who are also officers or employees of
Travelers Group Inc. or its subsidiaries are not entitled to any fee. Members of
the Board of Trustees who are not affiliated as employees of Travelers Group
Inc. or its subsidiaries receive an aggregate retainer of $19,000 for service on
the Boards of the five Mutual Funds sponsored by The Travelers Insurance Company
and the seven Variable Annuity Separate Accounts established by The Travelers
Insurance Company. Once a Board Member retires, 50% of the retainer amount will
be paid annually. They also receive an aggregate fee of $2,500 for each meeting
of such Boards attended.
DECLARATION OF TRUST
The Fund is organized as a Massachusetts business trust. Pursuant to
certain decisions of the Supreme Judicial Court of Massachusetts, shareholders
of such a trust may, under certain circumstances, be held personally liable as
partners for the obligations of the trust. However, even if the Fund were held
to be a partnership, the possibility of its shareholders incurring financial
loss for that reason appears remote because the Fund's Declaration of Trust
contains an express disclaimer of shareholder liability for obligations of the
Fund and requires that notice of such disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Fund or the Trustees,
and because the Declaration of Trust provides for indemnification out of Fund
property for any shareholder held personally liable for the obligations of the
Fund.
The Declaration of Trust provides that a Trustee shall be liable only
for his own willful defaults and, if reasonable care has been exercised in the
selection of officers, agents, employees or investment advisers, a Trustee shall
not be liable for the neglect or wrongdoing of any such person; provided,
however, that nothing in the Declaration of Trust shall protect a Trustee
against any liability for his willful misfeasance, bad faith, gross negligence
or the reckless disregard of his duties.
Shareholders first elected Trustees at a meeting held on September 23,
1985, and most recently elected Trustees on April 23, 1993. No further meetings
of shareholders for the purpose of electing Trustees will be held, unless
required by law, and unless and until such time as less than a majority of the
Trustees holding office have been elected by shareholders, at which time the
Trustees then in office will call a shareholders' meeting for the election of
Trustees.
Except as set forth above, the Trustees shall continue to hold office,
unless required by law, and may appoint successor Trustees. Trustees may
voluntarily resign from office, or a Trustee may be removed from office: (1) at
any time by two-thirds vote of the Trustees; (2) by a majority vote of Trustees
where any Trustee becomes mentally or physically incapacitated; and (3) either
by declaration in writing or at a meeting called for such purpose by the holders
of not less than two-thirds of the outstanding shares or other voting interests
of the Fund. The Trustees are required to call a meeting for the purpose of
considering the removal of a person serving as trustee, if requested in writing
to do so by the holders of not less than 10% of the outstanding shares or other
voting interests of the Fund. The Fund is required to assist in Shareholders'
communications. In accordance with current laws, insurance companies using the
Fund as an underlying investment option within their variable contracts will
request voting instructions from contract owners participating in such contracts
and will vote shares of the Fund in the same proportion as the voting
instructions received.
Voting rights are not cumulative, so that the holders of more than 50%
of the shares voting in the election of Trustees can, if they choose to do so,
elect all of the Trustees of the Fund, in which event the holders of the
remaining shares will be unable to elect any person as a Trustee.
5
<PAGE> 30
No amendment may be made to the Declaration of Trust without a "vote of
a majority of the outstanding voting securities" of the Fund (as defined in the
1940 Act).
INVESTMENT ADVISER
Travelers Asset Management International Corporation ("TAMIC"), an
indirect wholly owned subsidiary of Travelers Group Inc., furnishes investment
management and advisory services to the Fund in accordance with the terms of an
Investment Advisory Agreement which was approved by shareholders on April 23,
1993.
As required by the 1940 Act, the Advisory Agreement will continue in
effect for a period more than two years from the date of its execution only so
long as its continuance is specifically approved at least annually (i) by a vote
of a majority of the Board of Trustees, or (ii) by a vote of a majority of the
outstanding voting securities of the Fund. In addition, and in either event, the
terms of the Advisory Agreement must be approved annually by a vote of a
majority of the Board of Trustees who are not parties to, or interested persons
of any party to, the Advisory Agreement, cast in person at a meeting called for
the purpose of voting on such approval and at which the Board of Trustees is
furnished such information as may be reasonably necessary to evaluate the terms
of the Advisory Agreement. The Advisory Agreement further provides that it will
terminate automatically upon assignment; may be amended only with prior approval
of a majority of the outstanding voting securities of the Fund; may be
terminated without the payment of any penalty at any time upon sixty days'
notice by the Board of Trustees or by a vote of a majority of the outstanding
voting securities of the Fund; and may not be terminated by TAMIC without prior
approval of a new investment advisory agreement by a vote of a majority of the
outstanding voting securities of the Fund.
Under the terms of the Advisory Agreement, TAMIC shall:
(1) obtain and evaluate pertinent economic, statistical and financial
data and other information relevant to the investment policy of
the Fund, affecting the economy generally and individual
companies or industries, the securities of which are included in
the Fund's portfolio or are under consideration for inclusion
therein;
(2) be authorized to purchase supplemental research and other
services from brokers at an additional cost to the Fund;
(3) regularly furnish recommendations to the Board of Trustees with
respect to an investment program for approval, modification or
rejection by the Board of Trustees;
(4) take such steps as are necessary to implement the investment
program approved by the Board of Trustees; and
(5) regularly report to the Board of Trustees with respect to
implementation of the approved investment program and any other
activities in connection with the administration of the assets of
the Fund.
ADVISORY FEES
For furnishing investment management and advisory services to the Fund,
TAMIC is paid an amount equivalent on an annual basis to the advisory fee
schedule set forth in the table below. The fee is computed daily and paid
weekly.
<TABLE>
<CAPTION>
AGGREGATE NET ASSET
ANNUAL MANAGEMENT FEE VALUE OF THE FUND
<S> <C> <C> <C>
0.50% of the first $ 50,000,000, plus
</TABLE>
6
<PAGE> 31
<TABLE>
<S> <C> <C> <C>
0.40% of the next $100,000,000, plus
0.30% of the next $100,000,000, plus
0.25% of amounts over $250,000,000.
</TABLE>
For the three years ended December 31, 1994, 1995 and 1996 the
advisory fees were $61,647, $62,591 and $72,800, respectively.
REDEMPTIONS IN KIND
If conditions arise that would make it undesirable for the Fund to pay
for all redemptions in cash, the Fund may authorize payment to be made in
portfolio securities or other property.
However, the Fund has obligated itself under the 1940 Act to redeem for
cash all shares presented for redemption by any one shareholder up to $250,000,
or 1% of the Fund's net assets if that is less, in any 90-day period. Securities
delivered in payment of redemptions would be valued at the same value assigned
to them in computing the net asset value per share. Shareholders receiving such
securities would incur brokerage costs when these securities are sold.
BROKERAGE
Subject to approval of the Board of Trustees, it is the policy of TAMIC,
in executing transactions in portfolio securities, to seek best execution of
orders at the most favorable prices. The determination of what may constitute
best execution and price in the execution of a securities transaction by a
broker involves a number of considerations, including, without limitation, the
overall direct net economic result to the Fund, involving both price paid or
received and any commissions and other cost paid, the efficiency with which the
transaction is effected, the ability to effect the transaction at all where a
large block is involved, the availability of the broker to stand ready to
execute potentially difficult transactions in the future, and the financial
strength and stability of the broker. Such considerations are judgmental and are
weighed by management in determining the overall reasonableness of brokerage
commissions paid. Subject to the foregoing, a factor in the selection of brokers
is the receipt of research services, analyses and reports concerning issuers,
industries, securities, economic factors and trends, and other statistical and
factual information. Any such research and other statistical and factual
information provided by brokers is considered to be in addition to and not in
lieu of services required to be performed by TAMIC under its Investment Advisory
Agreements. The cost, value and specific application of such information are
indeterminable and hence are not practicably allocable among the Fund and other
clients of TAMIC who may indirectly benefit from the availability of such
information. Similarly, the Fund may indirectly benefit from information made
available as a result of transactions for such clients.
Purchases and sales of bonds and money market instruments will usually
be principal transactions and will normally be purchased directly from the
issuer or from the underwriter or market maker for the securities. There usually
will be no brokerage commissions paid for such purchases. Purchases from the
underwriters will include the underwriting commission or concession, and
purchases from dealers serving as market makers will include the spread between
the bid and asked prices. Where transactions are made in the over-the-counter
market, the Fund will deal with primary market makers unless more favorable
prices are otherwise obtainable. Brokerage fees will be incurred in connection
with futures transactions, and the Fund will be required to deposit and maintain
funds with brokers as margin to guarantee performance of future obligations.
TAMIC may follow a policy of considering the sale of shares of the Fund
a factor in the selection of broker-dealers to execute portfolio transactions,
subject to the requirements of best execution described above.
The policy of TAMIC with respect to brokerage is and will be reviewed by
the Board of Trustees periodically. Because of the possibility of further
regulatory developments affecting the securities exchanges and brokerage
practices generally, the foregoing practices may be changed, modified or
eliminated. Because the purchase and sale of bonds is a principal transaction
there are no brokerage commissions to report.
7
<PAGE> 32
ADDITIONAL INFORMATION
On April 1, 1997, The Travelers Insurance Company and its affiliates
owned 100% of the Fund's outstanding shares. The Travelers Insurance Company is
a stock insurance company chartered in 1864 in Connecticut and has been
continuously engaged in the insurance business since that time. It is a wholly
owned subsidiary of The Travelers Insurance Group Inc., which is an indirect
wholly owned subsidiary of Travelers Group Inc., a financial services holding
company. The Company's Home Office is located at One Tower Square, Hartford,
Connecticut 06183, telephone number 860-422-3985.
First Data Investor Services Group, Inc., Exchange Place, Boston, MA,
02109, acts as transfer agent and dividend disbursing agent for the Fund.
PNC Bank NA, 200 Stevens Drive, Lester, PA, 19113 and Barclay's Bank,
PLC, 75 Wall Street, New York, NY, 10265 are the custodians of all securities
and cash of the Fund.
The Fund terminated its audit relationship with its former principal
accountant, Coopers & Lybrand L.L.P. on January 31, 1997. On that same day, KPMG
Peat Marwick, LLP, independent certified public accountants, 345 Park Ave., New
York, NY 10154, was engaged as principal accountant for the Fund. KPMG Peat
Marwick LLP serves as the principal accountant for several other affiliated
mutual funds.
The report by Coopers & Lybrand L.L.P. on the financial statements for
fiscal years ended December 31, 1996 and 1995, did not contain an adverse
opinion or disclaimer of opinion, and was not qualified or modified as to
uncertainty, audit scope, or accounting principles.
The decision to change principal accountants was approved by the Board
of Trustees on January 31, 1997, where it was decided to engage KPMG Peat
Marwick LLP as the principal accountant to audit the Fund's financial statements
since it would promote consistency among affiliated mutual funds.
During the past two years and any subsequent interim period preceding
such termination, there were no disagreements with Coopers & Lybrand L.L.P. on
any matters of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not resolved
to the satisfaction of the former accountant would have caused it to make
reference to the subject matter of disagreement in connection with its report.
The services provided to the Fund by Coopers & Lybrand L.L.P. included
primarily the examination of the Fund's financial statements. The financial
statements for the year ended December 31, 1996 have been audited by Coopers &
Lybrand L.L.P., as indicated in their report thereon, and are included in the
Fund's Annual Report which is incorporated herein by reference, in reliance upon
the authority of said firm as experts in accounting and auditing.
Except as otherwise stated in its prospectus or as required by law, the
Fund reserves the right to change the terms of the offer stated in its
prospectus without shareholder approval, including the right to impose or change
fees for services provided.
No dealer, salesman or other person is authorized to give any
information or to make any representation not contained in the Fund's
prospectus, this SAI or any supplemental sales literature issued by the Fund,
and no person is entitled to rely on any information or representation not
contained therein.
The Fund's prospectus and this SAI omit certain information contained in
the Fund's registration statement filed with the Securities and Exchange
Commission which may be obtained from the Commission's principal office in
Washington, D.C. upon payment of the fee prescribed by the Rules and Regulations
promulgated by the Commission.
8
<PAGE> 33
9
<PAGE> 34
HIGH YIELD BOND TRUST
STATEMENT OF ADDITIONAL INFORMATION
10
<PAGE> 35
THE TRAVELERS VARIABLE
PRODUCTS FUNDS
ANNUAL REPORTS
December 31, 1996
MANAGED ASSETS TRUST
HIGH YIELD BOND TRUST
CAPITAL APPRECIATION FUND
CASH INCOME TRUST
THE TRAVELERS SERIES TRUST:
U.S. Government Securities Portfolio
Social Awareness Stock Portfolio
Utilities Portfolio
[TRAVELERSLIFE LOGO]
The Travelers Insurance Company
The Travelers Life and Annuity Company
One Tower Square
Hartford, CT 06183
<PAGE> 36
ANNUAL REPORT FOR THE TRAVELERS VARIABLE PRODUCTS FUNDS
- --------------------------------------------------------------------------------
ECONOMIC REVIEW AND OUTLOOK
As 1996 began, the federal government found itself paralyzed by a prolonged
budget dispute. In the financial markets, investors were focused on signs of a
slowing economy. With two-year Treasury notes priced to yield less than the
federal funds rate, the bond market clearly expected the Federal Reserve Board
(the "Fed") to cut interest rates significantly. The Fed lowered the federal
funds rate by 0.25% in January, but strong employment growth over the next
several months sent the bond market into a tailspin reminiscent of 1994.
Interest rates hit their highest levels for the year in the June to September
period as investors prepared for the Fed to raise interest rates at their
September meeting.
The policy makers at the Fed decided to hold interest rates steady at their
September meeting and interest rates declined through the autumn as economic
growth once again slowed. The financial markets also responded positively to the
Republicans' success in retaining control of Congress in the November election.
Going into December, the bond and stock markets reflected a "best of all worlds"
scenario of moderate economic growth with low inflation, low unemployment and a
benign to positive political landscape. Interest rates started to move back up
again in December as some economic indicators strengthened, but ended the year
well below the levels seen in the second and third quarters.
We expect real economic growth to average around 2% in 1997. The consumer
sector, which makes up two-thirds of Gross Domestic Product ("GDP"), should show
modest growth. The factors that would otherwise contribute to strong consumer
spending -- low unemployment, high consumer confidence, and the wealth effects
from the strong stock market -- should be muted by high consumer debt levels
(particularly at lower income levels) and lack of pent-up demand. The export
sector should continue to grow 5% to 10% in 1997, helped by the United States'
strong competitive position and continued robust growth in emerging markets.
Growth should improve slightly in Europe and Japan, helped by the recent
strengthening of the dollar against those currencies. The stronger dollar is
likely to be a mixed blessing, by making the prices of foreign imports more
attractive and thereby helping to dampen inflation. The capital goods sector has
slowed in recent quarters, but is still expected to grow faster than the overall
U.S. economy. The government sector should continue to be a drag on GDP growth.
Overall, we believe that the U.S. economy is likely to remain on a path of
moderate non-inflationary growth in 1997. However, because of the current low
level of unemployment, we also expect that the Fed will remain cautious and
biased towards a tighter monetary policy. Whether the Fed acts may depend in
part on market psychology. Upward shifts in long-term bond yields have served to
moderate economic growth in recent years and reduced the need for any major
changes in Fed policy.
FIXED INCOME COMMENTARY
The U.S. bond market had its best quarter of the year in the fourth quarter. The
Lehman Intermediate Government/Corporate Index returned 2.5% for the quarter and
4.1% for the full year. For the year, the Lehman Long Government/Corporate Index
provided a total return of only 0.1%. Treasury bonds with maturities longer than
10 years had negative total returns.
Within the fixed income market, all private issuer sectors outperformed Treasury
bonds as quality spreads continued to narrow. While Treasuries performed almost
as poorly in 1996 as in 1994, the effect on other sectors was relatively
neutral, unlike 1994 when there were problems with mortgage-backed derivatives,
Mexico, and Orange County. The yield curve was also remarkably stable in 1996,
unlike 1994 when short-term interest rates rose considerably. The
mortgage-backed, high yield, and municipal sectors were the best performing
areas in 1996 on a duration-adjusted basis. Within the corporate sector, lower
quality and foreign issues were the best performers based on both higher coupons
and spread tightening.
We expect interest rates to stay in the trading range established in 1996 (the
yield of the 30-year Treasury bond ranged between 6.0% and 7.2%). On one hand,
investors are concerned that low unemployment will eventually give rise to
inflationary wage growth. We believe this sets a floor for long-term bond yields
at about 6.0%. At the upper end of the range, the 7.2% level has proved to be
sufficient to generate increased demand for bonds and depress high risk asset
classes and interest sensitive sectors of the economy. We feel that central bank
vigilance against inflation, globalization, and productivity improvements will
keep inflation under control, preventing interest rates from rising much above
their 1996 high.
1
<PAGE> 37
ANNUAL REPORT FOR THE TRAVELERS VARIABLE PRODUCTS FUNDS
- --------------------------------------------------------------------------------
Within the fixed income markets, demand for corporate, mortgage-backed and
asset-backed issue continues to be high. Yield spreads (relative to Treasury
issues) for lower and higher quality corporate bonds are quite narrow. The
mortgage-backed and asset-backed markets are similarly compressed, with
investors digging for yield. There is nothing in our economic outlook that is
likely to change the tight spread environment in the near future. We are being
careful, however, to weed out riskier credits and issues that do not offer
enough yield premium to offset their potential for negative surprises. The
foreign area continues to offer opportunities, particularly foreign corporate
bonds that sometimes have very strong balance sheets but are capped by the
rating of their home country. Foreign sovereign credits are also continuing to
improve based on solid global economic growth and increased acceptance of the
need for sound fiscal and monetary policy.
EQUITY COMMENTARY
During 1996, financial markets were repeatedly jolted by changes in sentiment
about the strength of the U.S. economy and the direction of Fed policy. When
investors gained confidence that the economy was continuing on a track of
moderate, non-inflationary growth, the stock market advanced strongly and posted
another year of outstanding performance. For the year ended December 31, 1996,
the Standard & Poor's 500 Stock Index ("S&P 500") (a capitalization-weighted
index of 500 widely held common stocks) provided a total return of 22.95%. Over
the same period, the Russell 2000 Stock Index, a measure of the performance of
the small company segment of the equity market, provided a total return of
16.5%.
After a weak start in January, the stock market moved broadly higher through the
first months of spring. Small company shares advanced strongly in April and May,
led by the technology sector. In late June and July, when long-term bond yields
moved back over 7%, the stock market traded back down to where it began the
year. Recent initial public offerings and more speculative issues were
particularly hard hit during the reversal. Large company stocks quickly
recovered their losses when the bond market stabilized at the end of July.
However, small company stocks continued to struggle. During the autumn, against
the backdrop of lower bond yields, low inflation and surprisingly resilient
corporate earnings, the stock market made its strongest advance of the year,
with large company issues leading the way.
As measured by the S&P 500, the U.S. stock market has provided a cumulative
total return of nearly 70% over the past two years, capping a six-year bull
market that began in October of 1990. Notwithstanding the strong overall
environment for equities, 1996 marked the third consecutive year of
underperformance by small and mid-sized company stocks relative to "blue chip"
indices. The underperformance of small company stocks can be explained in part
by the sharper falloff in earnings growth experienced by smaller companies in
the 1995-96 period. The performance lag also reflected a backing away by
investors from higher risk growth stocks, in an environment of rising interest
rates and market volatility.
Given the frequent alarms raised in 1996 about slowing earnings growth,
investors showed an understandable preference for industry sectors with visible
earnings momentum. In the energy sector, analysts' earnings estimates and share
prices moved sharply higher in response to firmer prices for oil and natural
gas. Stocks in the finance sector also performed exceptionally well despite
emerging credit quality concerns. In the consumer sector, specialty and
broad-line retail stocks were up strongly in response to higher than expected
levels of consumer spending. The technology sector provided superior returns for
investors last year, led by Intel and Microsoft. Within the technology sector,
software, semiconductor and computer product stocks had the strongest relative
performance. Industrial cyclical stocks underperformed, as soft domestic and
export demand led to declining commodity prices for paper, copper, aluminum,
steel and fertilizer products. The health care sector was mixed. Drug stocks
kept pace with the market due to strong earnings gains, while the HMO group
declined sharply on repeated earnings disappointments. Utilities were the
weakest overall sector during the year, held back by the relatively poor
performance of local telephone carriers and electrical companies.
We are taking a more cautious position toward the U.S. stock market at this
point. Over the past year, the price-to-earnings ratio of the S&P 500 on
12-month forward earnings has increased from 15 to 17 times earnings per share.
This level of valuation is consistent with earlier periods of moderate growth
and low inflation, but leaves no cushion for earnings or inflation
disappointments. After a prolonged period of underperformance, relative
valuations for small company stocks are becoming more attractive. However, we
believe that caution should still be exercised since the small capitalization
segment of the equity market has a relatively high exposure to cyclical
industries and would be vulnerable to any combination of higher interest rates
and slower profit growth.
2
<PAGE> 38
ANNUAL REPORT FOR THE TRAVELERS VARIABLE PRODUCTS FUNDS
- --------------------------------------------------------------------------------
MANAGED ASSETS TRUST
The first nine months of 1996 were almost as bad as 1994 for bonds in general.
U.S. Treasuries performed poorly but there were much fewer problems in other
types of bonds. Stocks performed well through May of 1996, but suffered a slight
correction in June and July. Large capitalization stocks rebounded smartly from
the summer correction and reached new highs by November. Small capitalization
stocks, which clearly were doing well in May, recovered much more slowly and
still had not reached new highs by the end of 1996.
The fourth quarter of 1996 was the best quarter of the year for both the stock
and bond markets. Bonds rallied as the U.S. economy slowed down and the
Republicans maintained control of the U.S. Congress. Stocks benefited from the
decline in interest rates as well as ongoing expectations for high corporate
earnings growth.
Managed Assets Trust's total return was 13.78% gross for 1996, 0.23% behind the
60% S&P 500 and 40% Lehman Government/Corporate blended benchmark. However, for
the fourth quarter, Managed Assets Trust outperformed the blended benchmark by
0.05% (6.29% versus 6.24%). Managed Assets Trust was helped by its stock portion
outperforming the S&P 500 three out of four quarters and the biggest drag on its
performance was its underweighting in stocks during the first half of 1996.
Looking ahead at 1997, we expect interest rates to stay in the relatively narrow
trading range established in 1996. In our view, low unemployment is the biggest
risk of higher interest rates but a 7% yield has proven to be sufficient in
attracting more investors to bonds and has helped to cool interest-sensitive
sectors of the economy. In our opinion, the biggest risk ahead for stocks is if
interest rates go above 7%. While stock valuations are high, corporate earnings
growth is expected to be slightly faster in 1997. In addition, we also expect
the U.S. dollar to be strong in 1997 and that could pose a risk to future
earnings growth. We plan on increasing the duration of the bond portion of
Managed Assets Trust if rates get closer to their 1996 highs and reduce its
duration if rates go down. Moreover, we continue to hold convertible bonds to
provide some defensive characteristics and in keeping with our relatively
neutral stance regarding stocks.
HIGH YIELD BOND TRUST
High Yield Bond Trust closed out the year successfully, ending with a
particularly strong fourth quarter performance. For the year ended December 31,
1996, the High Yield Bond Trust generated a total return of 16.05%, exceeding
both the First Boston High-Yield Index and the Bear Stearns High-Yield Index,
both of which had a total return of approximately 12.40% for the same period.
Investor interest in high yield bonds remained strong for the first three
quarters of the year. As mutual fund inflows into high yield bond funds
continued at a brisk pace, we viewed the fixed-income market in general as
skittish. Lower interest rate expectations and investor uncertainty of
lower-quality bonds caused many investors to gravitate toward the higher-rated
issues. We remained especially cautious toward lower-quality issues and
telecommunications issues that we believed may have disappointing earnings
reports. Our cautious stance with respect to these sectors allowed us to avoid
the heavy losses incurred in the fourth quarter by many high-profile and
high-yield issues such as Marvel Entertainment, MobileMedia, and CAI Wireless.
Although we maintained a relatively high cash position of 23%, this position
proved to be prudent during this volatile period.
The Trust's biggest winners of the year include Renaissance Cosmetics and
Transamerican Refining bonds. Renaissance Cosmetics recently announced a very
attractive tender offer for bonds that we hold and Transamerican Refining
appears to be nearing completion of a successful refinancing effort. Among the
Trust's other significant winners during 1996 were U.S. Banknote, Fleming, Gulf
States Steel, and Sheffield Steel. In addition, we are pleased by the
performance of K mart, Great Dane bonds, and the FRD Acquisition notes, all of
which produced handsome returns by year's end.
Our biggest disappointments in the past year were Alliance Entertainment and
Trump Castle. Alliance Entertainment suffered a sharp decline following a
lower-than-expected earnings report in the third quarter. We were initially
attracted to the Trump Castle issues because of its proposed partnership with
Hard Rock Cafe to "re-theme" Trump Castle. With much new development coming to
the Atlantic City marina area, we were also attracted by Trump Castle's
underlying asset value. However, after the proposed partnership with Hard Rock
Cafe fell apart, the bonds experienced a loss. Nevertheless, despite our
disappointments, we remain confident in the Trump Castle high-yield bonds and
believe that they will make a strong contribution to the High Yield Bond Trust
going forward.
3
<PAGE> 39
ANNUAL REPORT FOR THE TRAVELERS VARIABLE PRODUCTS FUNDS
- --------------------------------------------------------------------------------
We remain bullish on the prospects for high-yield bonds for 1997. In the year
ahead, we also believe that many investors will probably avoid the more
speculative issues. Given the lack of progress among wireless cable companies,
on-going capital expenditure concerns among paging companies, and the uncertain
prospect of lower-quality cable companies to fulfill their debt obligations, we
do, however, expect more higher volatility in the telecommunications sector. In
our view, although many high-yield sectors will continue to experience
volatility, our investment strategy of careful security selection should provide
investors with competitive total returns in the year ahead.
CAPITAL APPRECIATION FUND
Stocks moved ahead in the fourth quarter of 1996, ending the year near record
highs. The S&P 500 gained 8.34% for the fourth quarter. For the year ended
December 31, 1996, the Capital Appreciation Fund appreciated 28.21% versus a
22.95% gain for the S&P 500 over the same period.
While the Capital Appreciation Fund's fourth quarter performance was
respectable, we are especially proud of the Janus research team's performance
this past year. Of course, the powerful performance of the stock market deserves
some credit, as do nearly ideal economic conditions and record corporate
profits, all of which have lifted stock valuations. While moderate economic
growth, mild inflation and low interest rates have made business conditions
healthy, our research team's solid fundamental research have contributed to the
Capital Appreciation Fund's stock selection process.
In terms of individual holdings, the Capital Appreciation Fund has a substantial
weighting in financial services stocks. We believe companies such as Wells
Fargo, Citicorp and Chase Manhattan should continue to enjoy excellent lending
margins and should be able to extend their domination in select markets. Low
interest rates and a mild economic climate tend to boost profits at dominant
franchise competitors across a broad spectrum of industries.
The Capital Appreciation Fund holds a number of familiar technology names such
as International Business Machines, Microsoft, Cisco Systems and Intel to
established drug manufacturers such as Pfizer, Eli Lilly and Monsanto (an
organization that is transforming itself from an old-line chemical producer into
a far more dynamic life sciences company). These stocks performed well during
the fourth quarter. The Capital Appreciation Fund also benefited from the
excellent returns of UAL (parent company to United Airlines), which gained
roughly more than 30%. We believe the employee management at UAL has done a good
job. In our view, UAL (and the airline industry in general) have attractive
valuations. For example, UAL is currently selling at 6 1/2 times our 1998
earnings estimate. In general, the airlines industry has undergone huge changes
in the last few years, becoming more rational with fewer overlapping and
unprofitable competitors. Instead of adding capacity, many airline managements
have focused on pulling back from unprofitable routes and increasing loads in
existing routes. In addition, average airline ticket prices are up as well. In
our view, the only negative for the industry is rising fuel prices but most, if
not all, of the increase is probably already factored into their stock prices.
During the fourth quarter, we trimmed Microsoft and long-time holding Merrill
Lynch when both reached high valuations. Moreover, we sold sports apparel
manufacturer Fila at a profit due to valuation concerns and because its products
have begun to lose momentum in the branded sportswear industry. Lastly, Centocor
and Trans World Airlines were sold at losses. With respect to Centocor, we had
to revise our earnings and revenues estimates downward due to a
slower-than-anticipated sales upturn of Reopro, the company's new drug to fight
cardiovascular disease. As many of you know, Trans World Airlines was a far more
tragic situation. In addition to the crash of Flight 800 which may affect
bookings for some time to come, management turnover at TWA has also raised some
concerns. Although we expect greater stock market volatility in 1997, we
continue to be very excited about the stock market for all of the reasons
outlined at the beginning of this market commentary. We stayed the course in
1996 and, unless there is a radical change in the current economic and business
environment, we intend to do the same in 1997. We believe the Capital
Appreciation Fund's focus on primarily large, high-quality growth companies
should continue to serve our shareholders well in the days ahead.
4
<PAGE> 40
ANNUAL REPORT FOR THE TRAVELERS VARIABLE PRODUCTS FUNDS
- --------------------------------------------------------------------------------
CASH INCOME TRUST
Cash Income Trust seeks to provide shareholders with high current income from
short-term money market investments while emphasizing preservation of capital
and maintaining a high degree of liquidity. Cash Income Trust pursues this
objective by investing in securities maturing in one year or less.
For the year ended December 31, 1996, Cash Income Trust generated an annual
effective yield of 4.20% and as of December 31, 1996 had an average maturity of
38.8 days. Cash Income Trust continues to invest primarily in U.S. Treasuries
and government agency securities. This investment strategy has provided Cash
Income Trust with safety, liquidity, and stability.
Sincerely,
/s/ HEATH B. MCLENDON
Heath B. McLendon
Chairman
January 15, 1997
5
<PAGE> 41
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON -- MANAGED ASSETS TRUST AS OF 12/31/96 (UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------------------------
<S> <C>
Year Ended 12/31/96 13.78%
Five Years Ended 12/31/96 8.83%
Ten Years Ended 12/31/96 9.76%
</TABLE>
This chart assumes an initial investment of $10,000 made on December 31, 1986
assuming reinvestment of dividends through December 31, 1996. The Lehman
Government/Corporate Bond Index is a weighted composite of the Lehman
Government Bond Index, which is a broad-based index of all public debt
obligations of the U.S. Government and its agencies and has an average maturity
of nine years and the Lehman Corporate Bond Index, which is comprised of all
public fixed-rate non-convertible investment-grade domestic corporate debt,
excluding collateralized mortgage obligations. The Consumer Price Index is a
measure of the average change in prices over time in a fixed market basket of
goods and services. The Standard & Poor's 500 Index is an unmanaged index
composed of 500 widely held common stocks listed on the New York Stock
Exchange, American Stock Exchange and over-the-counter market.
<TABLE>
<CAPTION>
Lehman
Measurement Govern-
Period Managed ment/Corporate Consumer Standard
(Fiscal Year Assets Bond Price & Poor's
Covered) Trust Index Index 500 Index
<S> <C> <C> <C> <C>
12/86 10000 10000 10000 10000
12/87 11905 10229 10441 10525
12/88 12134 11004 10903 12269
12/89 13247 12570 11410 16150
12/90 16840 13612 12106 15648
12/91 17256 15807 12476 20406
12/92 21001 17006 12838 21960
12/93 22080 18883 13191 24167
12/94 24140 18218 13544 24485
12/95 23599 21725 13888 29853
12/96 26837 22354 14348 36704
</TABLE>
- --------------------------------------------------------------------------------
Past performance is not predictive of future performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Average annual total returns are historical in nature and measure net investment
income and capital gain or loss from portfolio investments assuming reinvestment
of dividends. The returns do not reflect expenses associated with the subaccount
such as administrative fees, account charges and surrender charges which, if
reflected, would reduce the performance shown.
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON -- HIGH YIELD BOND TRUST AS OF 12/31/96 (UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------------------------
<S> <C>
Year Ended 12/31/96 16.05%
Five Years Ended 12/31/96 9.90%
Ten Years Ended 12/31/96 7.21%
</TABLE>
This chart assumes an initial investment of $10,000 made on
December 31, 1986 assuming reinvestment of dividends through
December 31, 1996. The Lehman Aggregate Bond Index, an unmanaged
index, is composed of the Lehman Intermediate Government/Corporate
Bond Index and the Mortgage Backed Securities Index and includes
treasury issues, agency issued, corporate bond issues and
mortgage-backed securities. The Consumer Price Index is a measure
of the average change in prices over time in a fixed market basket
of goods and services. The First Boston High Yield Index Top Tier
is a broad-based market measure of high yield bonds, commonly known
as "junk bonds."
<TABLE>
<CAPTION>
First
Boston
Measurement High Lehman High
Period Yield Aggre- Consumer Yield
(Fiscal Year Bond gate Bond Price Index Top
Covered) Trust Index Index Tier
<S> <C> <C> <C> <C>
12/86 10000 10000 10000 10000
12/87 10798 10276 10441 11254
12/88 10761 11086 10903 12630
12/89 12329 12698 11410 14296
12/90 12502 13835 12106 14429
12/91 11361 16050 12476 17731
12/92 14328 17236 12838 19279
12/93 16214 18918 13191 22290
12/94 18485 18365 13544 22248
12/95 18252 21758 13888 26403
12/96 21181 22548 14348 29234
</TABLE>
- --------------------------------------------------------------------------------
Past performance is not predictive of future performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Average annual total returns are historical in nature and measure net investment
income and capital gain or loss from portfolio investments assuming reinvestment
of dividends. The returns do not reflect expenses associated with the subaccount
such as administrative fees, account charges and surrender charges which, if
reflected, would reduce the performance shown.
6
<PAGE> 42
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON -- CAPITAL APPRECIATION FUND AS OF 12/31/96 (UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------------------------
<S> <C>
Year Ended 12/31/96 28.21%
Five Years Ended 12/31/96 16.18%
Ten Years Ended 12/31/96 11.44%
</TABLE>
This chart assumes an initial investment of $10,000 made on
December 31, 1986 assuming reinvestment of dividends through
December 31, 1996. The Standard & Poor's 500 Index is an unmanaged
index composed of 500 widely held common stocks listed on the New
York Stock Exchange, American Stock Exchange and over-the-counter
market. The Russell 2000 Index is a capitalization weighted total
return index which is comprised of 2,000 of the smallest capitaled
U.S. domiciled companies with less than average growth orientation
whose common stock is traded in the United States of the New York
Stock Exchange, American Stock Exchange and NASDAQ. The Consumer
Price Index is a measure of the average change in prices over time
in a fixed market basket of goods and services.
<TABLE>
<CAPTION>
Measurement
Period Capital Standard Russell Consumer
(Fiscal Year Apprecia- & Poor's 2000 Price
Covered) tion Fund 500 Index Index Index
<S> <C> <C> <C> <C>
12/86 10000 10000 10000 10000
12/87 11005 10525 9120 10441
12/88 10111 12269 11402 10903
12/89 11129 16150 13256 11410
12/90 12877 15648 10674 12106
12/91 12073 20406 15589 12476
12/92 16318 21960 18458 12838
12/93 19190 24167 21943 13191
12/94 22086 24485 9105 13544
12/95 21035 29853 11696 13888
12/96 26976 36704 13626 14348
</TABLE>
- --------------------------------------------------------------------------------
Past performance is not predictive of future performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Average annual total returns are historical in nature and measure net investment
income and capital gains or losses from portfolio investments assuming
reinvestments of dividends. The returns do not reflect expenses associated with
the subaccount such as administrative fees, account charges and surrender
charges which, if reflected, would reduce the performance shown.
7
<PAGE> 43
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS DECEMBER 31, 1996
MANAGED ASSETS TRUST
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
COMMON STOCKS -- 54.7%
- ---------------------------------------------------------------------------------------------------------
CONSUMER CYCLICALS -- 7.6%
15,400 Accustaff Inc.+................................................................ $ 325,325
10,200 American Stores Co............................................................. 416,925
8,200 Borders Group, Inc.+........................................................... 294,175
10,400 Clear Channel Communications, Inc.+............................................ 375,700
2,700 Colgate-Palmolive Co........................................................... 249,075
10,000 Corrections Corp. of America+.................................................. 306,250
9,700 Dollar General................................................................. 310,400
5,200 Duracell International......................................................... 363,350
6,100 Eastman Kodak Co............................................................... 489,525
12,100 Federated Department Stores Inc.+.............................................. 412,913
6,500 Gannett Co..................................................................... 486,688
15,500 Gap Inc........................................................................ 466,938
12,700 Gillette Co.................................................................... 987,425
8,800 HFS Inc.+...................................................................... 525,800
13,800 Hilton Hotels Corp............................................................. 360,525
9,400 Home Depot Inc................................................................. 471,175
5,174 Kimberly-Clark Corp............................................................ 492,824
11,200 Lowes Co....................................................................... 397,600
11,600 McDonalds Corp................................................................. 524,900
10,100 New York Times Co., Class A Shares............................................. 383,800
10,700 Nike Inc., Class B Shares...................................................... 639,325
13,000 Procter & Gamble Co............................................................ 1,397,500
7,000 Sears Roebuck & Co............................................................. 322,875
1,250 TCI Satellite Entertainment Inc.+.............................................. 12,344
12,500 Tele-Communications Inc.+...................................................... 163,281
12,477 The Walt Disney Co............................................................. 868,711
8,700 Tiffany & Co................................................................... 318,638
10,000 Time Warner Inc................................................................ 375,000
2,600 Unilever N.V................................................................... 455,650
5,700 VF Corp........................................................................ 384,750
32,600 Wal-Mart Stores, Inc........................................................... 745,725
- ---------------------------------------------------------------------------------------------------------
14,325,112
- ---------------------------------------------------------------------------------------------------------
CONSUMER STAPLES -- 4.5%
3,100 American Brands Inc............................................................ 153,838
9,200 Anheuser-Busch Co.............................................................. 368,000
1,900 Campbell Soup Co............................................................... 152,475
44,800 Coca-Cola Co................................................................... 2,357,600
13,900 Conagra Inc.................................................................... 691,525
6,500 CPC International Inc.......................................................... 503,750
11,700 Dean Foods..................................................................... 377,325
2,900 General Mills Inc.............................................................. 183,788
29,000 PepsiCo Inc.................................................................... 851,875
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE> 44
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1996
MANAGED ASSETS TRUST
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
CONSUMER STAPLES -- 4.5% (CONTINUED)
18,100 Philip Morris Cos. ............................................................ $ 2,038,513
6,800 Pioneer Hi-Bred International.................................................. 476,000
9,000 Sara Lee Corp. ................................................................ 335,250
- ---------------------------------------------------------------------------------------------------------
8,489,939
- ---------------------------------------------------------------------------------------------------------
ENERGY -- 0.7%
5,700 Chesapeake Energy Corp.+....................................................... 317,091
6,800 Halliburton Co................................................................. 409,700
6,400 Louisiana Land & Exploration Co................................................ 343,200
2,800 Schlumberger Ltd. ............................................................. 279,650
- ---------------------------------------------------------------------------------------------------------
1,349,641
- ---------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 8.2%
8,265 Allstate Corp. ................................................................ 478,337
8,200 Ambac Inc...................................................................... 544,275
9,200 American Express Co. .......................................................... 519,800
8,850 American International Group Inc. ............................................. 958,012
7,289 Banc One Corp. ................................................................ 313,427
7,300 Bank of Boston Corp............................................................ 469,025
10,400 BankAmerica Corp. ............................................................. 1,037,400
3,600 Barnett Banks Inc. ............................................................ 148,050
12,736 Chase Manhattan Corp. ......................................................... 1,136,688
7,000 Chubb Corp..................................................................... 376,250
3,600 Cigna Corp..................................................................... 491,850
13,700 Citicorp....................................................................... 1,411,100
3,500 Federal Home Loan Mortgage Corp................................................ 385,437
20,600 Federal National Mortgage Association.......................................... 767,350
2,600 First Bank System Inc.......................................................... 177,450
6,000 First Chicago NBD Corp......................................................... 322,500
1,500 General Reinsurance Corp. ..................................................... 236,625
4,700 Golden West Financial Corp..................................................... 296,687
4,900 Household International Inc.................................................... 452,025
7,200 ITT Hartford Group, Inc........................................................ 486,000
8,300 Mellon Bank Corp............................................................... 589,300
3,100 Merrill Lynch & Co............................................................. 252,650
3,000 Morgan Stanley Group Inc. ..................................................... 171,375
6,000 NationsBank Corp............................................................... 586,500
8,400 Northern Trust Corp. .......................................................... 304,500
16,200 Norwest Corp................................................................... 704,700
3,500 Student Loan Marketing Association............................................. 325,938
6,900 SunAmerica Inc................................................................. 306,188
4,100 SunTrust Banks Inc............................................................. 201,925
5,400 Transatlantic Holdings Inc..................................................... 434,700
1,800 Wells Fargo & Co............................................................... 485,550
- ---------------------------------------------------------------------------------------------------------
15,371,614
- ---------------------------------------------------------------------------------------------------------
HEALTHCARE -- 6.0%
9,100 Abbott Laboratories............................................................ 461,825
7,000 American Home Products Corp.................................................... 410,375
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE> 45
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1996
MANAGED ASSETS TRUST
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
HEALTHCARE -- 6.0% (CONTINUED)
10,000 Amgen Inc.+.................................................................... $ 543,750
13,100 Bristol-Meyers Squibb Co....................................................... 1,424,625
12,300 Columbia/HCA Healthcare Corp................................................... 501,225
6,400 Eli Lilly & Co................................................................. 467,200
6,800 Guidant Corp................................................................... 387,600
7,900 HBO & Co....................................................................... 469,063
29,600 Johnson & Johnson.............................................................. 1,472,600
12,600 Medpartners, Inc.+............................................................. 264,600
4,500 Medtronic Inc.................................................................. 306,000
25,900 Merck & Co..................................................................... 2,052,575
11,700 Pfizer Inc. ................................................................... 969,637
11,400 Schering-Plough Corp........................................................... 738,150
9,600 Vencor Inc.+ .................................................................. 303,600
5,000 Warner-Lambert Co.............................................................. 375,000
- ---------------------------------------------------------------------------------------------------------
11,147,825
- ---------------------------------------------------------------------------------------------------------
MATERIALS & PROCESSING -- 3.1%
5,000 Aluminum Co. of America........................................................ 318,750
5,000 Armstrong World Industries Inc................................................. 347,500
13,100 Black & Decker Corp............................................................ 394,638
8,800 Cytec Industries Inc.+......................................................... 357,500
10,200 E.I. du Pont de Nemours & Co. ................................................. 962,625
13,900 Freeport-McMoRan Copper........................................................ 415,262
4,900 Georgia-Pacific Corp. ......................................................... 352,800
18,100 Homestake Mining Co............................................................ 257,925
18,000 Monsanto Co.................................................................... 699,750
9,700 Morton International Inc....................................................... 395,275
1,600 Nucor Corp..................................................................... 81,600
10,400 Union Carbide Corp............................................................. 425,100
5,100 USX-US Steel Group............................................................. 160,012
3,700 Weyerhauser Co................................................................. 175,287
5,900 Willamette Industries Inc. .................................................... 414,475
- ---------------------------------------------------------------------------------------------------------
5,758,499
- ---------------------------------------------------------------------------------------------------------
PRODUCER DURABLES -- 5.2%
5,200 Allied Signal Inc.............................................................. 348,400
9,900 Boeing Co. .................................................................... 1,053,113
3,700 Caterpillar Inc. .............................................................. 278,425
13,950 Crane Co....................................................................... 404,550
11,400 Deere & Co..................................................................... 463,125
4,100 Emerson Electric Co............................................................ 396,675
6,200 Fluor Corp..................................................................... 389,050
31,200 General Electric Co............................................................ 3,084,900
6,700 Honeywell Inc. ................................................................ 440,525
6,400 Illinois Tool Works............................................................ 511,200
3,680 Lockheed Martin Corp. ......................................................... 336,720
7,800 Minnesota Mining & Manufacturing Co. .......................................... 646,425
4,700 Raychem Corp................................................................... 376,587
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE> 46
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1996
MANAGED ASSETS TRUST
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
PRODUCER DURABLES -- 5.2% (CONTINUED)
10,800 United Technologies Corp....................................................... $ 712,800
5,000 W.W. Grainger Inc. ............................................................ 401,250
- ---------------------------------------------------------------------------------------------------------
9,843,745
- ---------------------------------------------------------------------------------------------------------
TECHNOLOGY -- 7.2%
6,150 Andrew Corp.+.................................................................. 326,334
11,100 Atmel Corp.+................................................................... 367,687
5,700 Automatic Data Processing Inc.................................................. 244,388
18,800 Cisco Systems Inc.+............................................................ 1,196,150
5,400 Compaq Computer Corp.+......................................................... 400,950
11,575 Computer Associates International Inc.......................................... 575,856
8,200 First Data Corp. .............................................................. 299,300
5,600 Gateway 2000 Inc.+............................................................. 299,950
18,600 Hewlett Packard Co............................................................. 934,650
17,400 Intel Corp..................................................................... 2,278,312
9,500 International Business Machines Corp........................................... 1,434,500
11,569 Lucent Technologies Inc........................................................ 534,974
22,200 Microsoft Corp.+............................................................... 1,834,275
10,600 Motorola Inc. ................................................................. 650,575
12,000 Oracle Corp.+.................................................................. 501,000
19,600 Sun Microsystems Inc.+......................................................... 503,475
3,200 Texas Instruments Inc.......................................................... 204,000
3,200 3Com Corp.+ ................................................................... 234,800
4,900 U.S. Robotics Corp.+........................................................... 352,800
6,000 Xerox Corp. ................................................................... 315,750
- ---------------------------------------------------------------------------------------------------------
13,489,726
- ---------------------------------------------------------------------------------------------------------
TRANSPORTATION -- 1.9%
6,300 Burlington Northern Sante Fe................................................... 544,163
17,600 Chrysler Corp.................................................................. 580,800
1,448 Conrail Inc.................................................................... 144,257
11,200 Continental Airlines, Inc., Class B Shares+.................................... 316,400
21,100 Ford Motor Co.................................................................. 672,562
12,900 General Motors Corp............................................................ 719,175
7,800 Lear Corp.+.................................................................... 266,175
4,000 Union Pacific Corp. ........................................................... 240,500
- ---------------------------------------------------------------------------------------------------------
3,484,032
- ---------------------------------------------------------------------------------------------------------
OIL -- 4.5%
7,100 Amerada Hess Corp.............................................................. 410,913
9,000 Amoco Corp..................................................................... 724,500
8,100 Ashland Inc. .................................................................. 355,388
2,100 Atlantic Richfield Co.......................................................... 278,250
12,000 Chevron Corp................................................................... 780,000
19,400 Exxon Corp. ................................................................... 1,901,200
9,800 Mobil Corp..................................................................... 1,198,050
7,900 Royal Dutch Petroleum Co....................................................... 1,348,925
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE> 47
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1996
MANAGED ASSETS TRUST
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
OIL -- 4.5% (CONTINUED)
10,200 Texaco Inc. ................................................................... $ 1,000,875
11,100 Unocal Corp.................................................................... 450,937
- ---------------------------------------------------------------------------------------------------------
8,449,038
- ---------------------------------------------------------------------------------------------------------
UTILITIES -- 5.8%
8,400 AES Corp.+..................................................................... 390,600
9,700 Allegheny Power System, Inc.................................................... 294,638
22,000 American Telephone & Telegraph Corp............................................ 957,000
10,500 Ameritech Corp................................................................. 636,562
9,900 Baltimore Gas & Electric Co.................................................... 264,825
8,200 Bell Atlantic Corp............................................................. 530,950
19,000 BellSouth Corp................................................................. 767,125
10,100 CalEnergy Inc.+................................................................ 337,088
6,500 CMS Energy Corp................................................................ 218,563
5,900 Columbia Gas System............................................................ 375,387
7,300 Consolidated Natural Gas....................................................... 403,325
3,800 Duke Power Co.................................................................. 175,750
4,700 Enron Corp..................................................................... 202,688
3,200 FPL Group Inc.................................................................. 147,200
15,600 GTE Corp. ..................................................................... 709,800
4,900 Houston Industries Inc......................................................... 110,862
22,700 MCI Communications Corp. ...................................................... 742,006
8,300 Nynex Corp. ................................................................... 399,438
4,100 Pacific Enterprises............................................................ 124,537
6,600 Pacific Telesis Group.......................................................... 242,550
15,400 SBC Communications Inc......................................................... 796,950
7,900 Sonat Inc. .................................................................... 406,850
20,300 Southern Co.................................................................... 459,287
6,300 Sprint Corp.................................................................... 251,213
11,400 Texas Utilities Co. ........................................................... 464,550
3,400 U.S. West Communications Group................................................. 109,650
15,100 Worldcom Inc.+................................................................. 393,542
- ---------------------------------------------------------------------------------------------------------
10,912,936
- ---------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS (Cost -- $78,744,955)...................................... 102,622,107
- ---------------------------------------------------------------------------------------------------------
PREFERRED STOCKS -- 2.1%
- ---------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 0.5%
2,000 FINOVA Group, Convertible 5.500%............................................... 105,000
4 Fuji Finance, Convertible 0.250%............................................... 105,140
8,000 Merry Land & Investment, Inc., Convertible 2.150%.............................. 211,000
4,000 St. Paul Capital, Convertible 6.000%........................................... 221,500
5,000 Tosco Financial Trust, Convertible 5.750%...................................... 258,750
- ---------------------------------------------------------------------------------------------------------
901,390
- ---------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE> 48
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1996
MANAGED ASSETS TRUST
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
INDUSTRIAL -- 1.6%
4,000 Amcor Ltd., Convertible 7.250%................................................. $ 204,000
10,000 Corning Delaware L.P........................................................... 636,250
12,000 International Paper............................................................ 552,000
10,990 News Corp Ltd., Convertible 5.000%............................................. 1,050,919
9,000 Occidental Petroleum Corp...................................................... 510,750
- ---------------------------------------------------------------------------------------------------------
2,953,919
- ---------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCKS (Cost -- $3,510,971).................................... 3,855,309
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
CORPORATE BONDS -- 22.9%
- ---------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 4.5%
$ 2,500,000 American Express Co., zero coupon due 12/12/00............................. 1,971,875
500,000 Great Western Financial Corp., Notes, 6.375% due 7/1/00.................... 497,500
5,000,000 New Plan Reality, 5.950% due 11/2/26....................................... 4,993,750
1,000,000 Signet Credit Card, Master Trust 1993-4B, 5.800% due 3/15/98............... 991,620
- ---------------------------------------------------------------------------------------------------------
8,454,745
- ---------------------------------------------------------------------------------------------------------
GOVERNMENT, NATIONAL -- 2.1%
2,000,000 Canada - Global Bond, 6.750% due 8/28/06................................... 2,010,000
2,000,000 Poland, 6.438% due 10/27/24................................................ 1,945,000
- ---------------------------------------------------------------------------------------------------------
3,955,000
- ---------------------------------------------------------------------------------------------------------
INDUSTRIAL -- 3.4%
2,000,000 Becton Dickinson & Co., 8.800% due 3/1/01.................................. 2,160,000
2,000,000 Cox Communications Inc., 6.875% due 6/15/05................................ 1,982,500
2,020,000 Tele-Communications Inc. 9.650% due 10/1/03................................ 2,191,700
- ---------------------------------------------------------------------------------------------------------
6,334,200
- ---------------------------------------------------------------------------------------------------------
MATERIALS & PROCESSING -- 5.7%
9,000,000 Weyerhauser Mortgage Co., 8.500% due 1/15/25............................... 10,794,330
- ---------------------------------------------------------------------------------------------------------
OIL -- 1.9%
500,000 Apache Corp., 6.000% due 1/15/02........................................... 640,000
3,000,000 Texaco Capital Inc., 7.750% due 2/15/33.................................... 3,052,500
- ---------------------------------------------------------------------------------------------------------
3,692,500
- ---------------------------------------------------------------------------------------------------------
TRANSPORTATION -- 0.5%
929,255 Delta Airlines, Inc., 9.250% due 1/2/07.................................... 960,376
- ---------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE> 49
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1996
MANAGED ASSETS TRUST
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
UTILITY - ELECTRIC -- 0.6%
$ 1,100,000 Niagara Mohawk Power Corp., 8.000% due 6/1/04.............................. $ 1,050,500
- ---------------------------------------------------------------------------------------------------------
UTILITY - TELEPHONE -- 4.2%
5,000,000 BellSouth Cap Funding, 6.040% due 11/15/26................................. 4,956,250
3,000,000 BellSouth Telecommunications, 7.000% due 12/1/2095......................... 2,887,500
- ---------------------------------------------------------------------------------------------------------
7,843,750
- ---------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS (Cost -- $41,691,641)................................ 43,085,401
- ---------------------------------------------------------------------------------------------------------
CONVERTIBLE CORPORATE BONDS -- 5.1%
- ---------------------------------------------------------------------------------------------------------
CONSUMER CYCLICALS -- 0.6%
580,000 Hilton Hotels Corp., 5.000% due 5/15/06.................................... 608,275
500,000 Home Depot Inc., 3.250% due 10/1/01........................................ 492,500
- ---------------------------------------------------------------------------------------------------------
1,100,775
- ---------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 0.7%
500,000 Equitable Cos., 6.125% due 12/15/24........................................ 580,625
500,000 Sappi BVI Finance Ltd., 7.500% due 8/1/02.................................. 460,000
500,000 USF&G Corp., zero coupon due 3/3/09........................................ 316,250
- ---------------------------------------------------------------------------------------------------------
1,356,875
- ---------------------------------------------------------------------------------------------------------
GOVERNMENT - NATIONAL -- 0.3%
500,000 Republic of Italy, 5.000% due 6/28/01...................................... 492,500
- ---------------------------------------------------------------------------------------------------------
INDUSTRIAL -- 3.2%
1,400,000 Alza Corp., zero coupon due 7/14/14........................................ 588,000
300,000 Berkshire Hathaway Inc., 1.000% due 12/3/01................................ 280,125
1,000,000 Comcast Corp., 1.125% due 4/15/07.......................................... 512,500
877,000 Cooper Industries Inc., 7.050% due 1/1/15.................................. 940,582
300,000 Inco Ltd., 7.750% due 3/15/16.............................................. 317,250
1,000,000 Marriott International Inc., zero coupon due 3/25/11....................... 561,250
500,000 McKesson Corp., 4.500% due 3/1/04.......................................... 443,125
100,000 Omnicom Group, Inc., zero coupon due 1/3/07................................ 100,000
500,000 Pennzoil Co., 4.750% due 10/1/03........................................... 571,250
400,000 Rouse Co., 5.750% due 7/23/02.............................................. 438,000
300,000 RPM Inc., zero coupon due 9/30/12.......................................... 134,625
200,000 Scholastic Corp., 5.000% due 8/15/05....................................... 208,750
200,000 Tenet Healthcare Corp., 6.000% due 12/1/05................................. 212,250
200,000 The Sports Authority Inc., 5.250% due 9/15/01.............................. 187,750
500,000 Trinova Corp., 6.000% due 10/15/02......................................... 496,875
- ---------------------------------------------------------------------------------------------------------
5,992,332
- ---------------------------------------------------------------------------------------------------------
UTILITY - ELECTRIC -- 0.3%
600,000 Potomac Electric Power Co., 5.000% due 9/1/02.............................. 558,000
- ---------------------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE CORPORATE BONDS (Cost -- $9,194,761)..................... 9,500,482
- ---------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE> 50
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1996
MANAGED ASSETS TRUST
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
U.S. GOVERNMENT SECTOR -- 7.9%
- ---------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCIES & OBLIGATIONS -- 7.9%
$ 75,000 U.S. Treasury Notes, 6.900% due 8/21/97*................................... $ 72,519
3,000,000 U.S. Treasury Strip, zero coupon due 5/15/07............................... 1,530,000
11,000,000 U.S. Treasury Strip, zero coupon due 5/15/09............................... 4,868,160
493,534 FHLMC, 8.500% due 9/1/02................................................... 508,958
2,000,000 FNMA Principal Strips, 7.890% due 3/9/97................................... 1,976,420
184,841 FNMA, 8.500% due 3/1/05.................................................... 192,408
3,333,217 FNMA, 7.500% due 10/1/25................................................... 3,333,217
318,618 GNMA, 7.500% due 3/15/07................................................... 318,914
60,555 GNMA, 7.500% due 6/15/07................................................... 60,612
209,632 GNMA, 9.000% due 12/15/16.................................................. 220,900
255,165 GNMA, 9.000% due 11/15/19.................................................. 268,881
379,737 GNMA, 9.500% due 1/15/20................................................... 410,473
209,395 GNMA, 9.500% due 3/15/20................................................... 226,342
194,535 GNMA, 7.500% due 5/15/23................................................... 194,717
745,284 GNMA, 7.500% due 12/15/25.................................................. 745,976
- ---------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECTOR (Cost -- $15,170,051)......................... 14,928,497
- ---------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER -- 1.6%
3,000,000 GE Capital Corp, 5.532% due 2/20/97 (Cost -- $2,977,583)................... 2,975,160
- ---------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 5.7%
10,715,000 Citibank, 6.900% due 1/2/97; Proceeds at maturity -- $10,719,107;
(Fully collateralized by U.S. Treasury Notes, 5.750% due 12/31/98;
Market value -- $10,936,313) (Cost -- $10,715,000)......................... 10,715,000
- ---------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $162,004,962**)......................... $187,681,956
- ---------------------------------------------------------------------------------------------------------
</TABLE>
+ Non-income producing security.
* Segregated security for futures contracts commitments.
** Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE> 51
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1996
HIGH YIELD BOND TRUST
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C>
CORPORATE BONDS AND NOTES -- 77.0%
- ----------------------------------------------------------------------------------------------------------
AMUSEMENTS -- 5.9%
$500,000 NR Live Entertainment Inc., Sr. Sub. Notes, 12.000% due 3/23/99........... $ 485,000
500,000 B- Plitt Theaters Inc., Sr. Sub. Notes, 10.875% due 6/15/04............... 510,000
- ----------------------------------------------------------------------------------------------------------
995,000
- ----------------------------------------------------------------------------------------------------------
CHEMICALS, PHARMACEUTICALS AND ALLIED PRODUCTS -- 3.5%
500,000 NR Renaissance Cosmetics Inc., Sr. Notes, Series B, 13.750% due 8/15/01... 585,000
- ----------------------------------------------------------------------------------------------------------
COMMUNICATIONS -- 10.2%
500,000 B3* Commodore Media Inc., Sr. Sub. Notes, 7.500% due 5/1/03................ 526,250
400,000 B- Paxson Communications Corp., Sr. Sub. Notes, 11.625% due 10/1/02+...... 417,000
400,000 B- Pegasus Media Communications Inc., Notes 12.500% due 7/1/05+........... 433,000
500,000 BB Telewest Communications PLC, Sr. Discount Debentures,
step bond to yield 10.751% due 10/1/07................................. 348,750
- ----------------------------------------------------------------------------------------------------------
1,725,000
- ----------------------------------------------------------------------------------------------------------
CONSTRUCTION -- 3.7%
250,000 B Greystone Homes Inc., Sr. Notes, 10.750% due 3/1/04.................... 250,313
400,000 B Johnston America Industries, Inc., Sr. Sub. Notes, 11.750% due 383,000
8/15/05................................................................
- ----------------------------------------------------------------------------------------------------------
633,313
- ----------------------------------------------------------------------------------------------------------
ELECTRICAL -- 3.0%
500,000 NR Emcor Group Inc., Notes, 11.000% due 12/15/01.......................... 504,375
- ----------------------------------------------------------------------------------------------------------
FINANCE -- 5.4%
400,000 B- B.F. Saul Real Estate Investment Trust, Sr. Secured Notes, 11.625% due 431,000
4/1/02+................................................................
36,896 B3* FRD Acquisition Co., Sr. Notes, Series B, 12.500% due 7/15/04.......... 37,634
500,000 Caa* Trump Castle Funding, 1st Mortgage, 11.750% due 11/15/03............... 442,500
- ----------------------------------------------------------------------------------------------------------
911,134
- ----------------------------------------------------------------------------------------------------------
INSURANCE -- 2.9%
500,000 NR I.C.H. Corp., Sr. Sub. Notes, 11.250% due 12/1/03++.................... 490,000
- ----------------------------------------------------------------------------------------------------------
MANUFACTURING -- 2.9%
500,000 NR Great Dane Holdings, Inc., Sr. Sub. Notes, 12.750% due 8/1/01.......... 503,750
- ----------------------------------------------------------------------------------------------------------
METAL PRODUCTS/MINING -- 8.7%
500,000 B Gulf States Steel Alabama Inc., 1st Mortgage,
13.500% due 4/15/03++.................................................. 473,750
500,000 NR Parker Drilling Co., Guaranteed Notes, 9.750% due 11/15/06+............ 527,500
500,000 B- Sheffield Steel Corp., 1st Mortgage Notes, 12.000% due 11/1/01......... 475,000
- ----------------------------------------------------------------------------------------------------------
1,476,250
- ----------------------------------------------------------------------------------------------------------
PAPER AND ALLIED PRODUCTS -- 2.4%
400,000 B Mail-Well Corp., Sr. Sub. Notes, 10.500% due 2/15/04+.................. 398,500
- ----------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE> 52
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1996
HIGH YIELD BOND TRUST
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C>
PETROLEUM REFINING AND RELATED INDUSTRIES -- 3.0%
$500,000 CCC+ Transamerican Refining Corp., Guaranteed 1st Mortgage Notes,
16.500% due 2/15/02................................................... $ 505,000
- ----------------------------------------------------------------------------------------------------------
PRINTING, PUBLISHING AND ALLIED INDUSTRIES -- 5.8%
500,000 Caa* Sullivan Graphics Inc., Sr. Sub. Notes, 12.750% due 8/1/05+........... 490,000
500,000 B- U.S. Banknote Corp., Sr. Notes, 11.625% due 8/1/02+................... 482,500
- ----------------------------------------------------------------------------------------------------------
972,500
- ----------------------------------------------------------------------------------------------------------
RETAIL -- 4.2%
250,000 B Flagstar Corp., Sr. Notes, 10.750% due 9/15/01........................ 230,000
500,000 B+ K mart Corp., Notes, 7.900% due 12/14/00.............................. 481,250
- ----------------------------------------------------------------------------------------------------------
711,250
- ----------------------------------------------------------------------------------------------------------
SERVICES -- 8.5%
500,000 B+ Americold Corp., 1st Mortgage Series B, 11.500% due 3/1/05............ 524,375
500,000 B- Florists Transworld Delivery Inc., Sr. Sub. Notes,
Series B, 14.000% due 12/15/01........................................ 506,250
400,000 B- Regency Health Services Inc., Sr. Sub. Notes, 9.875% due 10/15/02..... 406,000
- ----------------------------------------------------------------------------------------------------------
1,436,625
- ----------------------------------------------------------------------------------------------------------
TEXTILE MILL PRODUCTS -- 2.8%
500,000 B CMI Industries Inc., Sr. Sub. Notes, 9.500% due 10/1/03............... 466,250
- ----------------------------------------------------------------------------------------------------------
TRANSPORTATION -- 2.6%
400,000 B- Terex Corp., Sr. Secured Notes, 13.250% due 5/15/02+++................ 432,000
- ----------------------------------------------------------------------------------------------------------
WHOLESALE TRADE -- 1.5%
250,000 B+ Fleming Co. Inc., Sr. Notes, 10.625% due 12/15/01..................... 254,375
- ----------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(Cost -- $12,350,130)................................................. 13,000,322
- ----------------------------------------------------------------------------------------------------------
SHARES SECURITY VALUE
- ----------------------------------------------------------------------------------------------------------
COMMON STOCKS -- 0.0%
- ----------------------------------------------------------------------------------------------------------
UTILITIES -- 0.0%
264 Great Bay Power Co.+ (Cost -- $0)..................................... 2,210
- ----------------------------------------------------------------------------------------------------------
WARRANTS -- 0.0%
- ----------------------------------------------------------------------------------------------------------
METAL PRODUCTS/MINING -- 0.0%
500 Gulf State Steel Alabama Inc., Expire 4/15/03+........................ 2,500
- ----------------------------------------------------------------------------------------------------------
TRANSPORTATION -- 0.0%
1,600 Terex Corp., Expire 5/15/02++......................................... 3,200
- ----------------------------------------------------------------------------------------------------------
TOTAL WARRANTS
(Cost -- $0).......................................................... 5,700
- ----------------------------------------------------------------------------------------------------------
SUB-TOTAL INVESTMENTS
(Cost -- $12,350,130)................................................. 13,008,232
- ----------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE> 53
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1996
HIGH YIELD BOND TRUST
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
SHORT-TERM INVESTMENTS -- 23.0%
- ---------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER -- 3.5%
$ 600,000 Bankers Trust N.Y. Corp., 5.400% due 2/19/97............................ $ 595,590
- ---------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 19.5%
3,298,000 Chase Manhattan Bank, 6.550% due 1/2/97; Proceeds at
maturity -- $3,299,200; (Fully collateralized by U.S. Treasury Bill due
10/31/98; Market value -- $3,363,993)................................... 3,298,000
- ---------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS
(Cost -- $3,893,590).................................................... 3,893,590
- ---------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100%
(Cost -- $16,243,720**)................................................. $16,901,822
- ---------------------------------------------------------------------------------------------------------
</TABLE>
+ Security is exempt from registration under Rule 144A of the Securities Act of
1933. This security may be resold in transactions exempt that are from
registration, normally to qualified institutional buyers.
++ Non-income producing security.
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 19 for definition of bond ratings.
SUMMARY OF BONDS BY COMBINED RATINGS
<TABLE>
<CAPTION>
% OF TOTAL CORPORATE
STANDARD & POOR'S BONDS & NOTES
- ------------------------------------------
<S> <C>
BB 2.7%
B 58.8
CCC 7.8
NR 30.7
- ------------------------------------------
100.0%
- ------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE> 54
- --------------------------------------------------------------------------------
BOND RATINGS
All ratings are by Standard & Poor's Ratings Service ("Standard & Poor's"),
except that those identified by an asterisk (*) are rated by Moody's Investors
Service, Inc. ("Moodys"). The definitions of the applicable rating symbols are
set forth below:
Standard & Poor's -- Rating from "AA" to "C" may be modified by the addition of
a plus (+) or a minus (-) sign to show relative standings within the major
rating categories.
<TABLE>
<S> <C> <C>
AAA -- Debt rated "AAA" has the highest rating assigned by Standard & Poor's. Capacity to
pay interest and repay principal is extremely strong.
AA -- Debt rated "AA" has a very strong capacity to pay interest and repay principal and
differs from the highest rated issue only in a small degree.
A -- Debt rated "A" has a strong capacity to pay interest and repay principal although
it is somewhat more susceptible to the adverse effects of changes in circumstances
and economic conditions than debt in higher rated categories.
BBB -- Debt rated "BBB" are regarded as having an adequate capacity to pay interest and
repay principal. Whereas they normally exhibit adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for bonds in this category
than for bonds in higher rated categories.
BB, B and CCC -- Debt rated "BB" and "B" are regarded, on balance, as predominantly speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation. "BB" represents a lower degree of speculation than "B",
and "CCC" the highest degree of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed by large uncertainties
or major risk exposures to adverse conditions.
C -- The rating "C" is reserved for income bonds on which no interest is being paid.
D -- Debt rated "D" are in default, and payment of interest and/or repayment of
principal is in arrears.
</TABLE>
Moody's -- Numerical modifiers 1, 2, and 3 may be applied to each generic rating
from "Aa" to "C", where 1 is the highest and 3 the lowest rating within its
generic category.
<TABLE>
<S> <C> <C>
Aaa -- Bonds that are rated "Aaa" are judged to be of the best quality. They carry the
smallest degree of investment fisk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are likely to change,
such changes as can be visualized are most unlikely to impair the fundamentally
strong position of such issues.
Aa -- Bonds that are rated "Aa" are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection may
not be as large as in "Aaa" securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in "Aaa" securities.
A -- Bonds that are rated "A" possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment some time in the future.
Baa -- Bonds that are rated "Baa" are considered to be medium grade obligations; that is,
they are neither highly protected nor poorly secured. Interest payment and
principal security appear adequate for the present but certain protective elements
may be lacking or may be characteristically unreliable over any great length of
time. These bonds lack outstanding investment characteristics and may have
speculative characteristics as well.
Ba -- Bonds that are rated "Ba" are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B -- Bonds that are rated "B" generally lack characteristics of desirable investments.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa -- Bonds that are rated "Caa" are of poor standing. These issues may be in default, or
present elements of danger may exist with respect to principal or interest.
Ca -- Bonds that are rated "Ca" represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C -- Bonds that are rated "C" are the lowest rated class of bonds, and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
NR -- Indicates that the bond is not rated by Standard & Poor's or Moody's.
</TABLE>
19
<PAGE> 55
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1996
CAPITAL APPRECIATION FUND
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C>
COMMON STOCKS -- 89.5%
- ----------------------------------------------------------------------------------------------------------
AIRCRAFT & AEROSPACE -- 4.8%
68,375 Boeing Co................................................................ $ 7,273,391
13,875 Gulfstream Aerospace Corp.+.............................................. 336,469
33,025 Textron Inc.............................................................. 3,112,606
- ----------------------------------------------------------------------------------------------------------
10,722,466
- ----------------------------------------------------------------------------------------------------------
AIRLINES -- 3.9%
138,650 UAL Corp.+............................................................... 8,665,625
- ----------------------------------------------------------------------------------------------------------
AUTO RELATED -- 0.1%
7,925 Cross-Continent Auto Retailers+.......................................... 165,434
- ----------------------------------------------------------------------------------------------------------
BANKING -- 11.7%
10,000 Catskill Financial Corp.+................................................ 140,000
90,475 Chase Manhattan Corp. ................................................... 8,074,894
63,190 Citicorp................................................................. 6,508,570
10,000 Community Federal Bancorp................................................ 170,000
10,000 First Bergen Bancorp..................................................... 115,000
10,000 GA Financial Inc......................................................... 151,250
28,550 Mercantile Bancorp Inc................................................... 1,466,756
10,000 PFF Bancorp Inc.+........................................................ 148,750
47,000 R & G Financial Corp..................................................... 1,116,250
30,666 Wells Fargo & Co......................................................... 8,272,154
- ----------------------------------------------------------------------------------------------------------
26,163,624
- ----------------------------------------------------------------------------------------------------------
BEVERAGES -- 5.9%
93,250 Coca-Cola Co............................................................. 4,907,281
15,650 Coca-Cola Enterprises.................................................... 759,025
257,750 PepsiCo, Inc. ........................................................... 7,571,406
- ----------------------------------------------------------------------------------------------------------
13,237,712
- ----------------------------------------------------------------------------------------------------------
BUSINESS SERVICES -- 4.5%
7,800 Alco Standard Corp....................................................... 402,675
75,675 Danka Business Systems PLC ADR........................................... 2,677,003
20,725 Diebold Inc.............................................................. 1,303,084
117,100 First Data Corp. ........................................................ 4,274,150
40,850 First USA Paymentech Inc.+............................................... 1,383,794
- ----------------------------------------------------------------------------------------------------------
10,040,706
- ----------------------------------------------------------------------------------------------------------
CAPITAL GOODS -- 0.1%
3,175 Raychem Corp............................................................. 254,397
- ----------------------------------------------------------------------------------------------------------
CHEMICAL -- 6.3%
175,575 Cytec Industries Inc.+................................................... 7,132,734
177,775 Monsanto Co.............................................................. 6,911,003
- ----------------------------------------------------------------------------------------------------------
14,043,737
- ----------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE> 56
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1996
CAPITAL APPRECIATION FUND
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C>
COMMUNICATIONS -- 0.8%
29,200 Ascend Communications, Inc.+............................................. $ 1,814,050
- ----------------------------------------------------------------------------------------------------------
COMPUTERS -- 10.9%
92,875 Clarify Inc.+............................................................ 4,458,000
67,375 Dell Computer Corp.+..................................................... 3,579,297
40,625 Electronics For Imaging+................................................. 3,341,406
15,200 HBO & Co................................................................. 902,500
13,850 Intel Corp............................................................... 1,813,484
60,325 International Business Machines Corp..................................... 9,109,075
21,525 Oracle Systems Corp.+.................................................... 898,669
5,750 Parametric Technology+................................................... 295,406
3,075 Transaction Systems Architects -- Class A Shares+........................ 102,244
- ----------------------------------------------------------------------------------------------------------
24,500,081
- ----------------------------------------------------------------------------------------------------------
DIVERSIFIED OPERATIONS -- 1.8%
41,750 General Electric Co...................................................... 4,128,031
- ----------------------------------------------------------------------------------------------------------
DRUGS AND HEALTHCARE -- 8.6%
15,000 American Home Products Corp. ............................................ 879,375
1,650 Bristol-Myers Squibb Co. ................................................ 179,438
78,825 Eli Lilly & Co........................................................... 5,754,225
39,550 Merck & Co., Inc. ....................................................... 3,134,338
63,475 Pfizer, Inc.............................................................. 5,260,491
52,225 Warner-Lambert Co........................................................ 3,916,875
- ----------------------------------------------------------------------------------------------------------
19,124,742
- ----------------------------------------------------------------------------------------------------------
ENERGY -- 0.4%
36,100 Peco Energy Co........................................................... 911,525
- ----------------------------------------------------------------------------------------------------------
ENTERTAINMENT AND LEISURE TIME -- 4.1%
98,100 G-TECH Holdings Corp.+................................................... 3,139,200
113,075 Hilton Hotels Corp....................................................... 2,954,084
146,250 Mirage Resorts Inc.+..................................................... 3,162,656
- ----------------------------------------------------------------------------------------------------------
9,255,940
- ----------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 5.0%
8,825 Chester Bancorp Inc. .................................................... 115,828
4,375 Federal Home Loan Mortgage Corp. ........................................ 481,797
101,630 Federal National Mortgage Association.................................... 3,823,829
10,000 First Defiance Financial Corp............................................ 123,750
80,465 Merrill Lynch & Co., Inc. ............................................... 6,557,898
10,000 South Street Financial Co.+.............................................. 140,000
- ----------------------------------------------------------------------------------------------------------
11,243,102
- ----------------------------------------------------------------------------------------------------------
HOSPITAL RELATED -- 0.5%
43,275 Fresenius Medical Care ADR+.............................................. 1,217,109
- ----------------------------------------------------------------------------------------------------------
INSURANCE -- 0.4%
26,600 CMAC Investment Corp. ................................................... 977,550
- ----------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE> 57
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1996
CAPITAL APPRECIATION FUND
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C>
NATURAL GAS -- 1.6%
75,500 Praxair Inc.............................................................. $ 3,482,438
- ----------------------------------------------------------------------------------------------------------
NETWORKING -- 3.4%
119,375 Cisco Systems Inc.+...................................................... 7,595,234
- ----------------------------------------------------------------------------------------------------------
PRINTING & PUBLISHING -- 2.3%
133,350 Gartner Group+........................................................... 5,192,316
- ----------------------------------------------------------------------------------------------------------
RETAIL -- 5.2%
50,400 Gucci Group N.V.......................................................... 3,219,300
115,975 Nike Inc., Class B Shares................................................ 6,929,506
18,600 The Finish Line, Class A Shares+......................................... 392,925
17,800 Vons Companies Inc.+..................................................... 1,065,775
- ----------------------------------------------------------------------------------------------------------
11,607,506
- ----------------------------------------------------------------------------------------------------------
SOFTWARE -- 2.9%
77,975 Microsoft Corp.+......................................................... 6,442,684
- ----------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 4.3%
14,225 Cincinnati Bell, Inc..................................................... 876,616
186,900 Lucent Technologies Inc.................................................. 8,644,125
- ----------------------------------------------------------------------------------------------------------
9,520,741
- ----------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS (Cost -- $154,608,059)............................... 200,306,750
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<C> <S> <C>
REPURCHASE AGREEMENT -- 10.5%
$23,489,000 Citibank, 6.898% due 1/2/97; Proceeds at maturity -- $23,579,002; (Fully
collateralized by U.S. Treasury Notes, 5.750% due 12/13/98; Market
value -- $23,970,000) (Cost -- $23,489,000).............................. 23,489,000
- ----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $178,097,059*)........................ $223,795,750
- ----------------------------------------------------------------------------------------------------------
</TABLE>
+ Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE> 58
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1996
CASH INCOME TRUST
<TABLE>
<CAPTION>
FACE ANNUALIZED
AMOUNT SECURITY YIELD VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT AGENCIES AND OBLIGATIONS -- 19.6%
$ 275,000 Federal Home Loan Mortgage Corp. matures 2/18/97............... 5.28% to 5.41% $ 273,068
425,000 Federal National Mortgage Association mature 1/3/97 to 5.28 to 5.31
3/3/97....................................................... 422,648
- ------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCIES AND OBLIGATIONS
(Cost -- $695,716)............................................. 695,716
- ------------------------------------------------------------------------------------------------------------
U.S. TREASURY BILLS -- 38.7%
1,385,000 U.S. Treasury Bills mature 1/9/97 to 4/17/97 5.07 to 5.11
(Cost -- $1,374,750)......................................... 1,374,750
- ------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER -- 41.7%
150,000 Associates Corp. of North America matures 2/4/97............... 5.36 149,251
150,000 Chevron Oil Finance matures 2/4/97............................. 5.34 149,253
150,000 CIT Group Holdings, Inc. matures 1/16/97....................... 5.37 149,668
150,000 Ford Motor Credit Corp. matures 1/16/97........................ 5.36 149,669
150,000 General Electric Capital Corp. matures 1/9/97.................. 5.48 149,820
150,000 H.J. Heinz Co. matures 1/23/97................................. 5.45 149,507
150,000 Household Finance Corp. matures 2/13/97........................ 5.48 149,032
135,000 Potomac Electric Power Co. matures 1/15/97..................... 5.83 134,698
150,000 Prudential Funding Co. matures 1/16/97......................... 5.34 149,671
150,000 Xerox Corp. matures 1/16/97.................................... 5.45 149,664
- ------------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER (Cost -- $1,480,233).................... 1,480,233
- ------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $3,550,699*)................ $3,550,699
- ------------------------------------------------------------------------------------------------------------
</TABLE>
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE> 59
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 1996
<TABLE>
<CAPTION>
MANAGED HIGH YIELD CAPITAL CASH
ASSETS BOND APPRECIATION INCOME
TRUST TRUST FUND TRUST
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS:
Investments -- Cost............................... $162,004,962 $12,350,130 $154,608,059 $3,550,699
Short-term investments -- Cost.................... -- 3,893,590 23,489,000 --
- ------------------------------------------------------------------------------------------------------------
Investments, at value............................. $187,681,956 $13,008,232 $200,306,750 $3,550,699
Short-term investments, at value.................. -- 3,893,590 23,489,000 --
Cash.............................................. 518 -- 855 4,509
Receivable for securities sold.................... 409,824 -- -- --
Dividends and interest receivable................. 1,128,214 360,137 147,193 --
Receivable for Fund shares sold................... -- 52,645 454,681 --
Receivable from affiliate......................... -- -- -- 15,843
- ------------------------------------------------------------------------------------------------------------
TOTAL ASSETS...................................... 189,220,512 17,314,604 224,398,479 3,571,051
- ------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased.................. 519,223 -- 109,975 --
Investment advisory fees payable.................. 77,599 7,420 141,259 1,147
Payable for Fund shares purchased................. 3,504 -- -- --
Dividends payable................................. -- -- -- 5,696
Accrued expenses.................................. 9,705 16,141 15,494 21,553
- ------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES................................. 610,031 23,561 266,728 28,396
- ------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS.................................... $188,610,481 $17,291,043 $224,131,751 $3,542,655
- ------------------------------------------------------------------------------------------------------------
NET ASSETS:
Paid-in capital................................... $158,673,246 $21,746,024 $179,434,374 $3,542,655
Undistributed (overdistributed) net investment
income......................................... 689,249 (172,955) 219,605 --
Accumulated net realized gain (loss) from security
transactions and futures contracts............. 3,570,992 (4,940,128) (1,220,919) --
Net unrealized appreciation of investments........ 25,676,994 658,102 45,698,691 --
- ------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS.................................... $188,610,481 $17,291,043 $224,131,751 $3,542,655
- ------------------------------------------------------------------------------------------------------------
SHARES OUTSTANDING.................................. 12,594,215 2,036,482 6,103,983 3,542,673
- ------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, PER SHARE.......................... $14.98 $8.49 $36.72 $1.00
- ------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PAGE> 60
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
MANAGED HIGH YIELD CAPITAL CASH
ASSETS BOND APPRECIATION INCOME
TRUST TRUST FUND TRUST
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest............................................... $ 5,087,435 $1,774,958 $ 853,439 $114,317
Dividends.............................................. 2,160,122 -- 1,687,610 --
- -------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME................................ 7,247,557 1,774,958 2,541,049 114,317
- -------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 3)...................... 891,042 72,800 1,261,284 19,000
Custody................................................ 49,323 12,866 65,089 --
Administration fees (Note 3)........................... 48,885 24,332 25,243 6,622
Shareholder communications............................. 22,028 16,446 17,563 16,446
Trustees' fees......................................... 6,544 6,544 6,544 6,544
Audit and legal........................................ 5,918 6,440 9,521 13,330
Registration fees...................................... 1,267 1,267 1,267 1,267
Shareholder and system servicing fees.................. 1,000 1,000 2,000 --
Other.................................................. 104 1,569 3,083 --
- -------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES......................................... 1,026,111 143,264 1,391,594 63,209
Less: Expense reimbursement (Note 3)................... -- -- -- (43,376)
- -------------------------------------------------------------------------------------------------------------
NET EXPENSES........................................... 1,026,111 143,264 1,391,594 19,833
- -------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME.................................... 6,221,446 1,631,694 1,149,455 94,484
- -------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FUTURES CONTRACTS (NOTES 4 & 6):
Realized Gain (Loss) From:
Security transactions (excluding short-term
securities)....................................... 14,175,095 (304,388) 13,938,060 --
Futures contracts................................... (744,302) -- -- --
- -------------------------------------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS)............................... 13,430,793 (304,388) 13,938,060 --
- -------------------------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation (Depreciation)
of Investments:
Beginning of year................................... 22,303,922 (199,726) 21,220,176 --
End of year......................................... 25,676,994 658,102 45,698,691 --
- -------------------------------------------------------------------------------------------------------------
INCREASE IN NET UNREALIZED APPRECIATION................ 3,373,072 857,828 24,478,515 --
- -------------------------------------------------------------------------------------------------------------
NET GAIN ON INVESTMENTS AND FUTURES CONTRACTS............ 16,803,865 553,440 38,416,575 --
- -------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS................... $23,025,311 $2,185,134 $ 39,566,030 $ 94,484
- -------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
25
<PAGE> 61
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
MANAGED HIGH YIELD CAPITAL CASH
ASSETS BOND APPRECIATION INCOME
TRUST TRUST FUND TRUST
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income............................. $ 6,221,446 $ 1,631,694 $ 1,149,455 $ 94,484
Net realized gain (loss).......................... 13,430,793 (304,388) 13,938,060 --
Increase in net unrealized appreciation........... 3,373,072 857,828 24,478,515 --
- ------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS............ 23,025,311 2,185,134 39,566,030 94,484
- ------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
FROM (NOTE 2):
Net investment income............................. (10,914,123) (2,978,125) (1,741,271) (94,502)
Net realized gains................................ (17,258,729) -- (23,015,510) --
- ------------------------------------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM
DISTRIBUTIONS TO SHAREHOLDERS.................. (28,172,852) (2,978,125) (24,756,781) (94,502)
- ------------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 9):
Net proceeds from sale of shares.................. 7,067,309 5,233,862 72,301,317 9,941,686
Net asset value of shares issued for
reinvestment of dividends...................... 28,172,852 2,978,125 24,756,781 94,502
Cost of shares reacquired......................... (12,757,653) (3,030,251) (9,891,028) (7,910,199)
- ------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM FUND SHARE
TRANSACTIONS................................... 22,482,508 5,181,736 87,167,070 2,125,989
- ------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS.............................. 17,334,967 4,388,745 101,976,319 2,125,971
NET ASSETS:
Beginning of year................................. 171,275,514 12,902,298 122,155,432 1,416,684
- ------------------------------------------------------------------------------------------------------------
END OF YEAR*...................................... $188,610,481 $17,291,043 $224,131,751 $3,542,655
- ------------------------------------------------------------------------------------------------------------
* Includes undistributed (overdistributed) net
investment income of: ............................ $689,249 $(172,955) $219,605 --
- ------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
26
<PAGE> 62
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
MANAGED HIGH YIELD CAPITAL CASH
ASSETS BOND APPRECIATION INCOME
TRUST TRUST FUND TRUST
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income............................. $ 5,381,926 $ 1,173,476 $ 811,421 $ 51,414
Net realized gain................................. 7,915,343 395,891 12,852,764 --
Increase in net unrealized appreciation........... 23,599,777 221,759 16,423,842 --
- -------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS............ 36,897,046 1,791,126 30,088,027 51,414
- -------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
FROM (NOTE 2):
Net investment income............................. (5,441,569) (960,192) (540,784) (51,414)
Net realized gains................................ (1,783,880) -- -- --
- -------------------------------------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM
DISTRIBUTIONS TO SHAREHOLDERS.................. (7,225,449) (960,192) (540,784) (51,414)
- -------------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 9):
Net proceeds from sale of shares.................. 5,376,731 1,749,523 26,600,150 3,284,741
Net asset value of shares issued for
reinvestment of dividends...................... 7,225,449 960,192 540,784 52,033
Cost of shares reacquired......................... (11,885,171) (2,354,757) (13,026,347) (3,122,783)
- -------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM FUND SHARE
TRANSACTIONS................................... 717,009 354,958 14,114,587 213,991
- -------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS.............................. 30,388,606 1,185,892 43,661,830 213,991
NET ASSETS:
Beginning of year................................. 140,886,908 11,716,406 78,493,602 1,202,693
- -------------------------------------------------------------------------------------------------------------
END OF YEAR*...................................... $171,275,514 $12,902,298 $122,155,432 $ 1,416,684
- -------------------------------------------------------------------------------------------------------------
* Includes undistributed net investment income
of:............................................... $5,381,926 $1,173,476 $811,421 --
- -------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
27
<PAGE> 63
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Managed Assets Trust, High Yield Bond Trust, Capital Appreciation Fund
and Cash Income Trust (collectively, "Fund(s)") are each a Massachusetts
business trust registered under the Investment Company Act of 1940, as amended,
as diversified, open-end management investment companies. Shares of the Funds
are offered only to insurance company separate accounts that fund certain
variable annuity and variable life insurance contracts.
The significant accounting policies consistently followed by the Funds are:
(a) security transactions are accounted for on trade date; (b) securities traded
on national securities markets are valued at the closing prices on such markets;
securities for which no sales price were reported and U.S. Government and Agency
obligations are valued at the mean between the last reported bid and ask prices
or on the basis of quotations received from reputable brokers or other
recognized sources; (c) securities maturing within 60 days are valued at cost
plus accreted discount and, or minus amortized premium, which approximates
market value; (d) securities that have a maturity of 60 days or more are valued
at prices based on market quotations for securities of similar type, yield and
maturity; (e) interest income, adjusted for amortization of premium and
accretion of discount, is recorded on the accrual basis and dividend income is
recorded on the ex-dividend date; (f) gains or losses on the sale of securities
are calculated by using the specific identification method; (g) dividends and
distributions to shareholders are recorded on the ex-dividend date; (h) the
character of income and gains to be distributed are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. At December 31, 1996, reclassifications were made to the capital
accounts of the High Yield Bond Trust, Capital Appreciation Fund and Cash Income
Trust to reflect permanent book/tax differences and income and gains available
for distributions under income tax regulations. Accordingly, for the High Yield
Bond Trust a portion of accumulated net realized loss amounting to $1,893,310
was reclassified to paid-in capital. Net investment income, net realized gains
and net assets were not affected by this change; (i) the Funds intend to comply
with the requirements of the Internal Revenue Code of 1986, as amended,
pertaining to regulated investment companies and to make distributions of
taxable income sufficient to relieve it from substantially all Federal income
and excise taxes; and (j) estimates and assumptions are required to be made
regarding assets, liabilities and changes in net assets resulting from
operations when financial statements are prepared. Changes in the economic
environment, financial markets and any other parameters used in determining
these estimates could cause actual results to differ.
In addition, for the year ended December 31, 1996, distributions from
realized gains include both net realized short-term and long-term capital gains.
Previous to 1996 net realized short-term capital gains were included in
distributions from net investment income.
2. DIVIDENDS
Cash Income Trust declares and records a dividend of substantially all of
its net investment income on each business day. Such dividends are paid or
reinvested on the payable date.
3. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS
Travelers Asset Management International Corporation ("TAMIC"), an indirect
wholly owned subsidiary of Travelers Group Inc., acts as investment manager and
advisor to the Managed Assets Trust ("MAT"), High Yield Bond Trust ("HYBT") and
Cash Income Trust ("CIT"). MAT and CIT pay TAMIC an investment management and
advisory fee calculated at the annual rate of 0.50% and 0.3233%, respectively of
its average daily net assets. HYBT pays TAMIC an investment management and
advisory fee calculated at an annual rate of: 0.50% on the first $50,000,000,
0.40% on the next $100,000,000, 0.30% on the next $100,000,000 and 0.25% on the
amount over $250,000,000 of its average daily net assets. This fee is calculated
daily and paid monthly.
TAMIC has a sub-advisory agreement with The Travelers Investment Management
Company, Inc. ("TIMCO"), an indirect wholly owned subsidiary of Travelers Group
Inc. Pursuant to the sub-advisory agreement, TIMCO is responsible for the
day-to-day portfolio operations and investment decisions for MAT. As a result,
TAMIC pays TIMCO, as sub-advisor, 0.25% of the average daily net assets of MAT.
In addition, TIMCO acts as investment manager and advisor to the Capital
Appreciation Fund ("CAF"). CAF pays TIMCO an investment management and advisory
fee calculated at an annual rate of 0.75% of the average daily net assets. This
fee is calculated daily and paid monthly.
28
<PAGE> 64
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
TIMCO also has a sub-advisory agreement with Janus Capital Corporation
("Janus"). Pursuant to the sub-advisory agreement, Janus is responsible for the
day-to-day portfolio operations and investment decisions for CAF. As a result,
TIMCO pays Janus, as sub-advisor, 0.55% of the average daily net assets of CAF.
Travelers Insurance Company ("Travelers Insurance") acts as administrator
to the Funds. The Funds pay Travelers Insurance an administration fee calculated
at an annual rate of 0.06% of its average daily net assets. Travelers Insurance
has entered into a sub-administrative services agreement with Smith Barney
Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith Barney Holdings
Inc. ("SBH"). Travelers Insurance pays SBMFM, as sub-administrator, a fee
calculated at an annual rate of 0.06% for the average daily net assets of each
Fund. This fee is calculated daily and paid monthly.
MAT received brokerage commissions of $1,380 from affiliated brokers.
One Trustee and all officers of the Funds are employees of Travelers Group
Inc., or its subsidiaries.
4. INVESTMENTS
During the year ended December 31, 1996, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
<TABLE>
<CAPTION>
MANAGED HIGH CAPITAL
ASSETS YIELD BOND APPRECIATION
TRUST TRUST FUND
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Purchases.................................................... $177,030,601 $10,021,937 $180,570,344
- -----------------------------------------------------------------------------------------------------------
Sales........................................................ 189,051,386 9,367,054 126,712,795
- -----------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1996, the aggregate gross unrealized appreciation and
depreciation of investments were as follows:
<TABLE>
<CAPTION>
MANAGED HIGH CAPITAL
ASSETS YIELD BOND APPRECIATION
TRUST TRUST FUND
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross unrealized appreciation*............................... $26,911,202 $779,745 $47,569,236
Gross unrealized depreciation*............................... (1,234,208) (121,643) (1,870,545)
- -----------------------------------------------------------------------------------------------------------
Net unrealized appreciation*................................. $25,676,994 $658,102 $45,698,691
- -----------------------------------------------------------------------------------------------------------
</TABLE>
* Substantially the same for Federal income tax purposes.
5. REPURCHASE AGREEMENTS
The Funds purchase (and its custodian takes possession of) U.S. Government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day) at
an agreed-upon higher repurchase price. The Funds require continual maintenance
of the market value of the collateral in amounts at least equal to 102% of the
repurchase price.
6. FUTURES CONTRACTS
Initial margin deposits made upon entering into futures contracts are
recognized as assets. The initial margin is segregated by the custodian and is
noted in the schedule of investments. During the period the futures contract is
open, changes in the value of the contract are recognized as unrealized gains or
losses by "marking-to-market" on a daily basis to reflect the market value of
the contract at the end of each day's trading. Variation margin payments are
made or received and recognized as assets due from or liabilities due to broker,
depending upon whether unrealized gains or losses are incurred. When the
contract is closed, the Funds record a realized gain or loss equal to the
difference between the proceeds from (or cost of) the closing transactions and
the Funds' basis in the contract. The Funds bear the market risk that arises
from changes in the value of the financial instruments and securities indices
(futures contracts) and the credit risk should a counterparty fail to perform
under such contracts.
At December 31, 1996, the Funds had no open futures contracts.
29
<PAGE> 65
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. OPTIONS CONTRACTS
Premiums paid when put or call options are purchased by the Funds,
represent investments, which are "marked-to-market" daily. When a purchased
option expires, the Funds realize a loss in the amount of the premium paid. When
the Funds enter into closing sales transactions, the Funds realize a gain or
loss depending on whether the proceeds from the closing sales transaction are
greater or less than the premium paid for the option. When the Funds exercise a
put option, it will realize a gain or loss from the sale of the underlying
security and the proceeds from such sale will be decreased by the premium
originally paid. When the Funds exercise a call option, the cost of the security
which the Funds purchase upon exercise will be increased by the premium
originally paid.
As of December 31, 1996, the Funds had no open purchased call or put
options contracts.
8. CAPITAL LOSS CARRYFORWARD
At December 31, 1996, HYBT had, for Federal income tax purposes,
approximately $4,751,000 of capital loss carryforwards available to offset
future capital gains. To the extent that these carryforward losses can be used
to offset realized capital gains, it is probable that such gains will not be
distributed. The amount and expiration of the carryforwards are indicated below.
Expiration occurs on December 31 of the year indicated:
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000 2001 2002 2004
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Carryforward
Amounts............ $530,000 $1,094,000 $1,970,000 $748,000 $48,000 $135,000 $38,000 $188,000
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
9. SHARES OF BENEFICIAL INTEREST
The Declaration of Trust authorizes the issuance of an unlimited number of
shares of beneficial interest without par value. Transactions in shares of each
Fund were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
MANAGED ASSETS TRUST
Shares sold.................................................... 469,580 375,304
Shares issued on reinvestment.................................. 1,926,518 581,291
Shares redeemed................................................ (847,611) (871,567)
- --------------------------------------------------------------------------------------------------------
Net Increase................................................... 1,548,487 85,028
- --------------------------------------------------------------------------------------------------------
HIGH YIELD BOND TRUST
Shares sold.................................................... 591,013 206,291
Shares issued on reinvestment.................................. 356,007 122,473
Shares redeemed................................................ (343,196) (276,334)
- --------------------------------------------------------------------------------------------------------
Net Increase................................................... 603,824 52,430
- --------------------------------------------------------------------------------------------------------
CAPITAL APPRECIATION FUND
Shares sold.................................................... 1,994,300 900,317
Shares issued on reinvestment.................................. 716,103 22,109
Shares redeemed................................................ (287,644) (445,510)
- --------------------------------------------------------------------------------------------------------
Net Increase................................................... 2,422,759 476,916
- --------------------------------------------------------------------------------------------------------
CASH INCOME TRUST
Shares sold.................................................... 9,941,686 3,284,741
Shares issued on reinvestment.................................. 94,502 52,033
Shares redeemed................................................ (7,910,199) (3,122,783)
- --------------------------------------------------------------------------------------------------------
Net Increase................................................... 2,125,989 213,991
- --------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE> 66
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
For a share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
MANAGED ASSETS TRUST 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR................. $15.50 $12.85 $14.21 $14.02 $14.78
- --------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income............................ 0.46 0.49 0.46 0.51 0.64
Net realized and unrealized gain (loss).......... 1.50 2.83 (0.73) 0.72 0.01
- --------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations................ 1.96 3.32 (0.27) 1.23 0.65
- --------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM (1):
Net investment income............................ (0.89) (0.50) (0.67) (0.85) (1.04)
Net realized gains............................... (1.59) (0.17) (0.42) (0.19) (0.37)
- --------------------------------------------------------------------------------------------------------------
Total Distributions................................ (2.48) (0.67) (1.09) (1.04) (1.41)
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR....................... $14.98 $15.50 $12.85 $14.21 $14.02
- --------------------------------------------------------------------------------------------------------------
TOTAL RETURN....................................... 13.78% 27.12% (2.24)% 9.33% 5.14%
- --------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S).................... $188,610 $171,276 $140,887 $156,767 $148,971
- --------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses (2)..................................... 0.58% 0.58% 0.61% 0.56% 0.56%
Net investment income............................ 3.51 3.49 3.59 3.65 4.97
- --------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE............................ 108% 110% 97% 86% 112%
- --------------------------------------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARES PAID ON EQUITY
TRANSACTIONS (3)................................. $0.06 -- -- -- --
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
HIGH YIELD BOND TRUST 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR................. $9.00 $8.49 $9.25 $8.91 $8.75
- --------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income............................ 0.91 0.80 0.66 0.68 0.88
Net realized and unrealized gain (loss).......... 0.41 0.41 (0.76) 0.47 0.18
- --------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations................ 1.32 1.21 (0.10) 1.15 1.06
- --------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTION FROM (1):
Net investment income............................ (1.83) (0.70) (0.66) (0.81) (0.90)
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR....................... $8.49 $9.00 $8.49 $9.25 $8.91
- --------------------------------------------------------------------------------------------------------------
TOTAL RETURN....................................... 16.05% 15.47% (1.26)% 14.01% 13.16%
- --------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S).................... $17,291 $12,902 $11,716 $12,765 $10,289
- --------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses (4)..................................... 0.97% 1.25% 1.25% 0.99% 0.56%
Net investment income............................ 11.01 9.37 7.71 7.69 10.24
- --------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE............................ 84% 222% 146.% 19% 52%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the year ended December 31, 1996, distributions from realized gains
include both net realized short-term and long-term capital gains. Previous
to 1996 net realized short-term capital gains were included in distributions
from net investment income.
(2) The ratios of expenses to average net assets for the years 1993 and 1992
reflects an expense reimbursement by The Travelers in connection with
voluntary expense limitations. Without the expense reimbursement, the ratios
of expenses to average net assets would have been 0.60% and 0.63%, for the
years ended December 31, 1993 and 1992, respectively.
(3) For the fiscal years beginning after 1995, the SEC instituted new guidelines
requiring the disclosure of average commissions per share on Funds which
held more than 10% of their assets in commissionable equity securities.
(4) The ratio of expenses to average net assets reflects an expense
reimbursement by The Travelers in connection with voluntary expense
limitations. Without the expense reimbursement, the ratios of expenses to
average net assets would have been 1.28%, 1.33%, 1.31% and 1.28%, for the
years ended December 31, 1995, 1994, 1993 and 1992, respectively.
31
<PAGE> 67
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
CAPITAL APPRECIATION FUND 1996 1995 1994 1993(1) 1992
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR............ $33.18 $24.50 $25.87 $22.72 $19.63
- -------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income....................... 0.23 0.24 0.19 0.19 0.28
Net realized and unrealized gain (loss)..... 8.49 8.61 (1.41) 3.21 3.13
- -------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations........... 8.72 8.85 (1.22) 3.40 3.41
- -------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTION FROM (2):
Net investment income....................... (0.41) (0.17) (0.15) (0.25) (0.32)
Net realized gains.......................... (4.77) -- -- -- --
- -------------------------------------------------------------------------------------------------------------
Total Distributions........................... (5.18) (0.17) (0.15) (0.25) (0.32)
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR.................. $36.72 $33.18 $24.50 $25.87 $22.72
- -------------------------------------------------------------------------------------------------------------
TOTAL RETURN.................................. 28.21% 36.37% (4.76)% 15.09% 17.60%
- -------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S)............... $224,132 $122,155 $78,494 $62,414 $29,506
- -------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses (3)................................ 0.83% 0.85% 0.89% 0.87% 0.56%
Net investment income....................... 0.69 0.84 0.79 0.81 1.39
- -------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE....................... 84% 124% 106% 155% 126%
- -------------------------------------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE PAID
ON EQUITY TRANSACTIONS (4).................. $0.06 -- -- -- --
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CASH INCOME TRUST 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR............ $1.00 $1.00 $1.00 $1.00 $1.00
- -------------------------------------------------------------------------------------------------------------
Net investment income (5)................... 0.0412 0.0417 0.0278 0.0214 0.0322
Distributions from net investment income.... (0.0412) (0.0417) (0.0278) (0.0214) (0.0322)
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR.................. $1.00 $1.00 $1.00 $1.00 $1.00
- -------------------------------------------------------------------------------------------------------------
TOTAL RETURN.................................. 4.20% 4.17% 2.78% 2.14% 3.22%
- -------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S)............... $3,543 $1,417 $1,203 $647 $697
- -------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses (5)(6)............................. 0.78% 1.25% 1.25% 0.94% 0.38%
Net investment income....................... 3.72 -- -- -- --
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Effective May 1, 1993, Janus Capital Corporation became sub-adviser for
Capital Appreciation Fund.
(2) For the year ended December 31, 1996, distributions from realized gains
include both net realized short-term and long-term capital gains. Previous
to 1996 net realized short-term capital gains were included in distributions
from net investment income.
(3) The ratio of expenses to average net assets for 1993 and 1992 reflects an
expense reimbursement by The Travelers in connection with voluntary expense
limitations. Without the expense reimbursement, the ratios of expenses to
average net assets would have been 0.96% and 0.91%, for the years ended
December 31, 1993 and 1992, respectively.
(4) For the fiscal years beginning after 1995, the SEC instituted new guidelines
requiring the disclosure of average commissions per share on Funds which
held more than 10% of their assets in commissionable equity securities.
(5) For the year ended December 31, 1996, The Travelers reimbursed CIT for
$43,376 in expenses. If such fees were not waived and expenses not
reimbursed, the per share decrease of net investment income would have been
$0.002 and the expense ratio would have been 1.71%.
(6) The ratio of expenses to average net assets for 1995-1992 reflects an
expense reimbursement by The Travelers in connection with voluntary expense
limitations. Without the expense reimbursement, the ratios of expenses to
average net assets would have been 7.37%, 6.40%, 8.47% and 7.70% for the
years ended December 31, 1995, 1994, 1993 and 1992, respectively.
- --------------------------------------------------------------------------------
TAX INFORMATION (UNAUDITED)
The amount of long-term capital gains paid for the fiscal year ended
December 31, 1996, are $13,912,800 for the Managed Assets Trust and $19,412,512
for the Capital Appreciation Portfolio.
32
<PAGE> 68
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of
Managed Assets Trust:
We have audited the accompanying statement of assets and liabilities of Managed
Assets Trust including the schedule of investments as of December 31, 1996, and
the related statement of operations for the year then ended, the statement of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the five years in the period then ended.
These financial statements and financial highlights are the responsibility of
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Managed Assets Trust as of December 31, 1996, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended, and the financial highlights for each of the five years
in the period then ended, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Hartford, Connecticut
February 24, 1997
33
<PAGE> 69
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of
High Yield Bond Trust:
We have audited the accompanying statement of assets and liabilities of High
Yield Bond Trust including the schedule of investments as of December 31, 1996,
and the related statement of operations for the year then ended, the statement
of changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the five years in the period then ended.
These financial statements and financial highlights are the responsibility of
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of High
Yield Bond Trust as of December 31, 1996, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Hartford, Connecticut
February 24, 1997
34
<PAGE> 70
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of
Capital Appreciation Fund:
We have audited the accompanying statement of assets and liabilities of Capital
Appreciation Fund including the schedule of investments as of December 31, 1996,
and the related statement of operations for the year then ended, the statement
of changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the five years in the period then ended.
These financial statements and financial highlights are the responsibility of
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Capital Appreciation Fund as of December 31, 1996, the results of its operations
for the year then ended, the changes in its net assets for each of the two years
in the period then ended, and the financial highlights for each of the five
years in the period then ended, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Hartford, Connecticut
February 24, 1997
35
<PAGE> 71
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of
Cash Income Trust:
We have audited the accompanying statement of assets and liabilities of Cash
Income Trust including the schedule of investments as of December 31, 1996, and
the related statement of operations for the year then ended, the statement of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the five years in the period then ended.
These financial statements and financial highlights are the responsibility of
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Cash
Income Trust as of December 31, 1996, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Hartford, Connecticut
February 24, 1997
36
<PAGE> 72
ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES PORTFOLIO
For the year ended December 31, 1996, the U.S. Government Securities Portfolio
generated a total return of 1.46%. As of December 31, 1996 the composition of
assets contained in the Portfolio was 47% in mortgage-backed securities, 31% in
U.S. Treasuries, 12% in U.S. agency securities and 10% in cash.
Prospects for bond investors appeared promising as the year began. In
Washington, D.C., there were talks of federal deficit reduction through a
balanced budget amendment while the outlook for inflation was tame. Long-term
U.S. Treasuries were yielding less than 6% and the expectation of a Federal
Reserve easing of monetary policy drove down yields on 2 year U.S. Treasuries to
under 5%. However, as the year progressed, bullish sentiments were shattered as
balanced budget talks stalled, energy prices began to rise and U.S. economic
growth resumed. Heightened investor concerns over rising inflation drove up the
yield on long-term U.S. Treasuries to over 7%. Toward the end of the year, these
inflation fears proved to be unfounded and the long-term U.S. Treasury dropped
to a range of around 6.6%.
Against this backdrop of volatile interest rates, the Portfolio lagged behind
the Lehman Government Bond Index for the first three quarters of the year. By
shortening the maturity and through careful selection of securities, we were
able to recoup lost ground to finish the year in line with the Portfolio's
benchmark. Specifically, we added securities from Financing Corporation ("FICO")
and Tennessee Valley Authority ("TVA"). In our view, FICO securities were very
attractively priced due to concerns about the solvency of the Savings
Association Insurance Fund, the agency responsible for making interest payments
on the FICO securities. The U.S. Congress subsequently passed a bill that would
shore up funds required to ensure payment of interest which resulted in the FICO
bond's rise in price. In the case of TVA bonds, we utilized a hedging strategy
to boost the yield as well as to provide investors with an additional cushion
against interest rate volatility.
Looking ahead to 1997, we expect a continuation of higher interest rate
volatility. Therefore, we have reduced the Portfolio's weighting in
mortgage-backed securities while increasing the exposure to other U.S. agency
bonds. In addition, we believe the recently introduced inflation-indexed
securities by the U.S. Treasury may represent a good investment opportunity for
the Portfolio.
SOCIAL AWARENESS STOCK PORTFOLIO
Social Awareness Stock Portfolio finished 1996 with a competitive total return
of 19.98%. Our exposure to the financial and technology sectors were major
contributors to the Portfolio's positive results. As of December 31, 1996, the
Portfolio consisted of about 15% cash reserves and 71 stock holdings, with some
75% of those considered to be "core" investments. The weighted market
capitalization of the stocks owned by the Portfolio averages about $24.5
billion, approximating a 50/50 mix of large and mid-capitalization companies. As
the year ended, the Portfolio was overweighted in the consumer cyclical,
financial, and technology industries while underweighted in capital goods,
communications services, energy, and utilities industries. This composition
proved to be an advantage for the Portfolio during the period. While the
Portfolio's beta ( the comparative movement of a security's price relative to
the overall market) was approximately 10% more than the rest of the stock
market, the slightly increased risk taken was generally well rewarded. The
stocks in the Portfolio generated more earnings and more growth potential
compared to their cost than that offered by the overall market.
Our investment strategy for 1997 continues to focus on owning quality companies.
The overall Portfolio's quality remains strong with a Standard & Poor's average
rating of A minus (a ranking of common stocks from A+ through C on the basis of
growth and stability). We remain cautiously optimistic about the stock market's
1997 potential, but hold some cash reserves to take advantage of buying
opportunities from normal market volatility following two years of very strong
performance.
UTILITIES PORTFOLIO
Utilities Portfolio seeks to provide current income and as a secondary goal,
capital appreciation, by investing at least 25% of its assets in the utilities
industry. For the year ended December 31, 1996, the Utilities Portfolio had a
total return of 7.47%.
The past year was frustrating for electric utility investors. As a group,
utilities underperformed the broad based equity market. A strong stock market
combined with a relatively weak bond market caused attention to move away from
defensive sectors such as utilities. Nevertheless, we believe the electric
utility sector should continue to benefit from industry restructuring and the
rapid pace of mergers and acquisitions. For example, several state restructuring
proposals have focused on the need to
37
<PAGE> 73
ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
lower customer rates and creating opportunities for electric utilities to
recover their capital investments. In our opinion, these proposals should create
a more positive environment for investors by removing some of the uncertainty
that has plagued utilities over the past few years. The consolidation of
electric utility and natural gas companies dominated merger activity during 1996
as management teams attempted to enlarge their customer base and become full
service energy providers in a more competitive industry. Furthermore, several
electric utility companies continue to diversify by aggressively expanding into
foreign markets.
We remain positive for electric utilities in 1997 based on continued
clarification of the impact of deregulation and competition in the industry and
its favorable defensive characteristics. In addition, we expect more individual
state initiatives regarding electric utility industry restructuring.
Consolidation should continue involving electric sector and electric companies
with natural gas companies. In this dynamic and rapidly changing environment,
individual stock selection will continue to be extremely important in achieving
competitive total returns. We expect performance among individual companies to
vary significantly. In our view, special situation companies, with above average
dividend growth, favorable regulatory rulings or positive deregulatory proposals
are exciting new investment opportunities. We continue to focus on higher
quality companies with strong earnings and dividend growth, superior management
teams and favorable environments. Moreover, we favor lower-cost companies in
this more competitive environment. We believe investors should view utility
investing from a total return perspective and not simply evaluate the sector's
current yield.
The economic outlook for 1997 calls for a continuance of slow to moderate U.S.
economic growth without renewed inflation and the long-term U.S. Treasury bond
is expected to trade in a range of 6.25% to 7%. These conditions should be
generally favorable for fixed-income markets and interest rate-sensitive sectors
such as electric utilities. However, higher overall market volatility may
increase if there is a surprise regarding the economy or corporate earnings.
Our portfolio strategy continues to focus on income and long-term growth. We
have increased our natural gas holdings and gradually reduced telecommunications
holdings awaiting a clearer competitive picture or more favorable valuations in
that industry. After two years of above historical returns, an increase in stock
market volatility could enhance the appeal of electric utilities as a stable
long-term investment vehicle.
In closing, we thank you for your investment in The Travelers Series Trust
Portfolios. We look forward to continuing to help you achieve your financial
goals.
Sincerely,
/s/ HEATH B. MCLENDON
Heath B. McLendon
Chairman
January 15, 1997
38
<PAGE> 74
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON -- U.S. GOVERNMENT SECURITIES PORTFOLIO AS OF 12/31/96
(UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------------------------
<S> <C>
Year Ended 12/31/96 1.46%
1/24/92* through 12/31/96 5.84%
<CAPTION>
CUMULATIVE TOTAL RETURN
---------------------------------------------
<S> <C>
1/24/92* through 12/31/96 32.33%
* Commencement of operations
</TABLE>
This chart assumes an initial investment of $10,000 made on January
24, 1992 and assuming reinvestment of dividends through December
31, 1996. The Lehman Government Bond Index is a broad-based Index
of all public debt obligations of the U.S. Government and its
agencies and has an average maturity of nine years. The Consumer
Price Index is a measure of the average change in prices over time
in a fixed market basket of goods and services.
<TABLE>
<CAPTION>
U.S. Gov-
ernment Lehman
Measurement Period Securities Government Consumer
(Fiscal Year Covered) Portfolio Bond Index Price Index
<S> <C> <C> <C>
1/24/92 10000 10000 10000
12/92 10290 10920 10275
12/93 11813 12125 10557
12/94 11147 11699 10840
12/95 13869 13950 11115
12/31/96 14077 14354 11484
</TABLE>
- --------------------------------------------------------------------------------
Past performance is not predictive of future performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Average annual total returns are historical in nature and measure net investment
income and capital gain or loss from portfolio investments assuming
reinvestments of dividends. The returns do not reflect expenses associated with
the subaccount such as administrative fees, account charges and surrender
charges which, if reflected, would reduce the performance shown.
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON -- SOCIAL AWARENESS STOCK PORTFOLIO AS OF 12/31/96
(UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------------------------
<S> <C>
Year Ended 12/31/96 19.98%
5/1/92* through 12/31/96 12.62%
<CAPTION>
CUMULATIVE TOTAL RETURN
---------------------------------------------
<S> <C>
5/1/92* through 12/31/96 73.33%
* Commencement of operations
</TABLE>
This chart assumes an initial investment of $10,000 made on May 1,
1992 assuming reinvestment of dividends through December 31, 1996.
The Standard & Poor's 500 Index is an unmanaged index composed of
500 widely held common stocks listed on the New York Stock
Exchange, American Stock Exchange and the over-the-counter market.
The Consumer Price Index is a measure of the average change in
prices over time in a fixed market basket of goods and services.
<TABLE>
<CAPTION>
Social
Awareness Standard &
Measurement Period Stock Poor's 500 Consumer
(Fiscal Year Covered) Portfolio Index Price Index
<S> <C> <C> <C>
5/1/92 10000 10000 10000
12/92 10850 10673 10157
12/93 11777 11745 10436
12/94 11461 11900 10716
12/95 16285 14509 10988
12/31/96 18340 17838 11353
</TABLE>
- --------------------------------------------------------------------------------
Past performance is not predictive of future performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Average annual total returns are historical in nature and measure net investment
income and capital gain or loss from portfolio investments assuming
reinvestments of dividends. The returns do not reflect expenses associated with
the subaccount such as administrative fees, account charges and surrender
charges which, if reflected, would reduce the performance shown.
39
<PAGE> 75
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON -- UTILITIES PORTFOLIO AS OF 12/31/96 (UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------------------------
<S> <C>
Year Ended 12/31/96 7.47%
2/4/94* through 12/31/96 11.24%
<CAPTION>
CUMULATIVE TOTAL RETURN
---------------------------------------------
<S> <C>
2/4/94* through 12/31/96 36.26%
* Commencement of operations
</TABLE>
This chart assumes an initial investment of $10,000 made on
February 4, 1994 assuming reinvestment of dividends through
December 31, 1996. Standard & Poor's 500 Index is an unmanaged
index composed of 500 widely held common stocks listed on the New
York Stock Exchange, American Stock Exchange and over-the-counter
market. The Consumer Price Index is a measure of the average change
in prices over time in a fixed market basket of goods and services.
<TABLE>
<CAPTION>
Standard &
Measurement Period Utilities Poor's 500 Consumer
(Fiscal Year Covered) Portfolio Index Price Index
<S> <C> <C> <C>
2/4/94 10000 10000 10000
12/94 10170 10072 10205
12/95 13149 13852 10464
12/31/96 14139 17031 10811
</TABLE>
- --------------------------------------------------------------------------------
Past performance is not predictive of future performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Average annual total returns are historical in nature and measure net investment
income and capital gain or loss from portfolio investments assuming
reinvestments of dividends. The returns do not reflect expenses associated with
the subaccount such as administrative fees, account charges and surrender
charges which, if reflected, would reduce the performance shown.
40
<PAGE> 76
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS DECEMBER 31, 1996
U.S. GOVERNMENT SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS -- 89.8%
$ 1,000,000 U.S. Treasury Bond, 9.250% due 2/15/16...................................... $ 1,269,950
700,000 U.S. Treasury Bond, 8.125% due 5/15/21...................................... 813,281
3,000,000 U.S. Treasury Bond, 6.875% due 8/15/25...................................... 3,058,440
10,000,000 U.S. Treasury Strip, zero coupon due 2/15/15................................ 2,940,700
2,955,466 FHLMC, 6.000% due 3/1/26.................................................... 2,749,500
988,365 FHLMC, 8.000% due 5/1/26.................................................... 1,008,131
2,019,999 FNMA, 7.000% due 6/1/24..................................................... 1,977,075
2,964,852 FNMA, 7.500% due 11/1/26@................................................... 2,964,850
392,192 GNMA, 8.500% due 3/15/18.................................................... 406,530
595,113 GNMA, 8.500% due 5/15/18.................................................... 616,871
251,104 GNMA, 8.500% due 6/15/18.................................................... 260,285
177,531 GNMA, 8.500% due 7/15/18.................................................... 184,022
1,974,160 GNMA, 7.000% due 6/15/24.................................................... 1,931,578
3,000,000 Tennessee Valley Authority Debenture, 5.980% due 4/1/36..................... 3,041,250
- ---------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS (Cost -- $23,037,806).......... 23,222,463
- ---------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 10.2%
2,626,000 Citibank, 6.900% due 1/2/97; Proceeds at maturity -- $2,627,007;
(Fully collateralized by U.S. Treasury Notes, 5.750% due 12/31/98;
Market value -- $2,686,638) (Cost -- $2,626,000)............................ 2,626,000
- ---------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $25,663,806*)............................ $25,848,463
- ---------------------------------------------------------------------------------------------------------
</TABLE>
@ Date shown represents the last in range of maturity dates of mortgage
certificates owned.
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
41
<PAGE> 77
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1996
SOCIAL AWARENESS STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
COMMON STOCKS -- 83.7%
- ---------------------------------------------------------------------------------------------------------
BASIC MATERIALS -- 3.8%
2,000 Air Products & Chemicals, Inc..................................................... $ 138,250
5,000 Engelhard Corp.................................................................... 95,625
4,000 Praxair, Inc...................................................................... 184,500
- ---------------------------------------------------------------------------------------------------------
418,375
- ---------------------------------------------------------------------------------------------------------
CAPITAL GOODS -- 2.9%
1,500 AMP, Inc.......................................................................... 57,562
2,000 Pitney Bowes, Inc................................................................. 109,000
2,800 York International, Inc........................................................... 156,450
- ---------------------------------------------------------------------------------------------------------
323,012
- ---------------------------------------------------------------------------------------------------------
COMMUNICATION -- 1.1%
800 Bell Atlantic Corp................................................................ 51,800
2,300 MCI Communications Corp........................................................... 75,181
- ---------------------------------------------------------------------------------------------------------
126,981
- ---------------------------------------------------------------------------------------------------------
CONSUMER CYCLICALS -- 11.6%
2,900 Fleetwood Enterprises, Inc........................................................ 79,750
2,900 Home Depot, Inc................................................................... 145,363
3,500 Kaufman & Broad Home Corp......................................................... 45,063
1,864 Lucas Variety PLC+................................................................ 70,832
3,000 May Department Stores............................................................. 140,250
2,000 Nine West Group, Inc.+............................................................ 92,750
6,000 Olsten Corp....................................................................... 90,750
4,000 Pep Boys -- Manny, Moe & Jack..................................................... 123,000
4,000 Toys "R" Us, Inc.+................................................................ 120,000
1,900 Tribune Co........................................................................ 149,862
3,500 Wal-Mart Stores, Inc.............................................................. 80,062
3,000 Xerox Corp........................................................................ 157,875
- ---------------------------------------------------------------------------------------------------------
1,295,557
- ---------------------------------------------------------------------------------------------------------
CONSUMER STAPLES -- 10.5%
2,000 Coca-Cola Co...................................................................... 105,250
2,000 Gillette Co....................................................................... 155,500
3,000 Kroger Co.+....................................................................... 139,500
2,000 McDonald's Corp................................................................... 90,500
5,000 Newell Co......................................................................... 157,500
4,800 PepsiCo, Inc...................................................................... 141,000
2,800 Sysco Corp........................................................................ 91,350
1,000 Unilever N.V...................................................................... 175,250
1,600 Walt Disney Co.................................................................... 111,400
- ---------------------------------------------------------------------------------------------------------
1,167,250
- ---------------------------------------------------------------------------------------------------------
ENERGY -- 1.6%
2,800 Anadarko Petroleum Corp........................................................... 181,300
- ---------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
42
<PAGE> 78
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1996
SOCIAL AWARENESS STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
FINANCE -- 17.8%
1,600 Aetna Inc......................................................................... $ 128,000
3,500 American Express Co............................................................... 197,750
1,250 American International Group Inc.................................................. 135,313
3,000 Associates 1st Capital Corp....................................................... 132,375
2,700 Bank of Boston Corp............................................................... 173,475
3,000 Barnett Banks, Inc................................................................ 123,375
1,800 Citicorp.......................................................................... 185,400
1,200 Federal Home Loan Mortgage Corp................................................... 132,150
3,000 H. F. Ahmanson & Co............................................................... 97,500
2,500 Lincoln National Corp............................................................. 131,250
2,200 NationsBank Corp.................................................................. 215,050
3,400 State Street Boston Corp.......................................................... 219,300
1,500 Transamerica Corp................................................................. 118,500
- ---------------------------------------------------------------------------------------------------------
1,989,438
- ---------------------------------------------------------------------------------------------------------
HEALTH CARE -- 10.3%
2,200 Amgen Inc.+....................................................................... 119,625
3,750 Columbia/HCA Healthcare Corp...................................................... 152,813
3,300 DENTSPLY International, Inc....................................................... 156,750
3,600 Johnson & Johnson................................................................. 179,100
2,300 Merck & Co., Inc.................................................................. 182,275
1,200 Pfizer, Inc....................................................................... 99,450
1,200 Schering-Plough Corp.............................................................. 77,700
6,200 Stryker Corp...................................................................... 185,225
- ---------------------------------------------------------------------------------------------------------
1,152,938
- ---------------------------------------------------------------------------------------------------------
TECHNOLOGY -- 20.5%
4,500 Belden, Inc....................................................................... 166,500
4,400 Cabletron Systems, Inc.+.......................................................... 146,300
2,000 Compaq Computer Corp.+............................................................ 148,500
3,000 Computer Associates International................................................. 149,250
3,000 DSC Communications, Inc.+......................................................... 53,625
2,500 Electronic Data Systems Corp...................................................... 108,125
7,000 EMC Corp.+........................................................................ 231,875
2,000 Intel Corp........................................................................ 261,875
700 International Business Machines Corp.............................................. 105,700
3,600 Lucent Technologies Corp.......................................................... 166,500
2,000 Madge Networks N.V.+.............................................................. 19,750
3,300 Marshall Industries+.............................................................. 101,062
2,800 Microsoft Corp.+.................................................................. 231,350
3,500 Oracle Corp.+..................................................................... 146,125
2,500 Perkin-Elmer Corp................................................................. 147,187
4,000 Sun Microsystems Inc.+............................................................ 102,750
- ---------------------------------------------------------------------------------------------------------
2,286,474
- ---------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
43
<PAGE> 79
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1996
SOCIAL AWARENESS STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
TRANSPORTATION -- 2.0%
4,500 Mesaba Holdings, Inc.+............................................................ $ 66,938
1,400 Norfolk Southern Corp. ........................................................... 122,500
1,300 Southwest Airlines................................................................ 28,763
- ---------------------------------------------------------------------------------------------------------
218,201
- ---------------------------------------------------------------------------------------------------------
UTILITIES -- 1.6%
4,000 Enron Corp........................................................................ 172,500
- ---------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS (Cost -- $6,883,357).......................................... 9,332,026
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
REPURCHASE AGREEMENT -- 16.3%
$1,822,000 CS First Boston, 6.48% due 1/2/97; Proceeds at maturity -- $1,822,658; $ 1,822,000
(Fully collateralized by U.S. Treasury Notes, 7.25% due 2/15/98;
Market value -- $1,861,755) (Cost -- $1,822,000)............................
- ---------------------------------------------------------------------------------------------------------
$11,154,026
TOTAL INVESTMENTS -- 100% (Cost -- $8,705,357*).............................
- ---------------------------------------------------------------------------------------------------------
</TABLE>
+ Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
44
<PAGE> 80
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1996
UTILITIES PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
COMMON STOCKS -- 82.9%
- ---------------------------------------------------------------------------------------------------------
ELECTRIC - UTILITY -- 65.5%
15,000 Allegheny Power System, Inc.................................................... $ 455,625
11,000 American Electric Power Co..................................................... 452,375
7,500 Baltimore Gas & Electric Co.................................................... 200,625
15,000 Carolina Power & Light......................................................... 547,500
9,000 Central & Southwest Corp. ..................................................... 230,625
15,000 CINergy Corp................................................................... 500,625
5,000 CIPSCO, Inc. .................................................................. 180,625
15,000 CMS Energy Corp................................................................ 504,375
10,000 Dominion Resources, Inc. ...................................................... 385,000
10,000 DPL Inc........................................................................ 245,000
12,750 DQE Inc........................................................................ 369,750
20,000 Edison International........................................................... 397,500
15,000 Entergy Corp. ................................................................. 416,250
10,000 Florida Progress Corp.......................................................... 322,500
12,000 FPL Group Inc.................................................................. 552,000
12,000 GPU Inc........................................................................ 403,500
11,000 Houston Industries............................................................. 248,875
12,000 Illinova Corp. ................................................................ 330,000
15,000 Long Island Lighting........................................................... 331,875
10,000 NIPSCO Industries, Inc......................................................... 396,250
18,000 PacifiCorp. ................................................................... 369,000
15,000 Pinnacle West Capital.......................................................... 476,250
7,500 Public Service Co. of Colorado................................................. 291,563
15,000 Public Service Co. of New Mexico............................................... 294,375
15,000 SCANA Corp..................................................................... 401,250
15,000 Sierra Pacific Resources....................................................... 431,250
12,500 Southern Co.................................................................... 282,813
15,000 Texas Utilities Co. ........................................................... 611,250
10,000 Unicom Corp.................................................................... 271,250
12,000 UtiliCorp. United, Inc......................................................... 324,000
13,000 Wisconsin Energy Corp.......................................................... 349,375
- ---------------------------------------------------------------------------------------------------------
11,573,251
- ---------------------------------------------------------------------------------------------------------
NATURAL GAS -- 11.0%
10,000 Coastal Corp. ................................................................. 488,750
10,000 Enron Corp. ................................................................... 431,250
5,000 Equitable Resources Inc. ...................................................... 148,750
10,000 Pacific Enterprises............................................................ 303,750
15,000 Southwest Gas Corp. ........................................................... 288,750
7,500 Williams Cos................................................................... 281,250
- ---------------------------------------------------------------------------------------------------------
1,942,500
- ---------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
45
<PAGE> 81
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1996
UTILITIES PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
TELEPHONE -- 6.4%
15,000 Frontier Corp.................................................................. $ 339,375
7,500 GTE Corp....................................................................... 341,250
2,000 MCI Communications............................................................. 65,375
10,000 Teleport Communications+....................................................... 305,000
5,000 US West Media Group+........................................................... 92,500
- ---------------------------------------------------------------------------------------------------------
1,143,500
- ---------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS (Cost -- $12,839,147)...................................... 14,659,251
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
CORPORATE BONDS -- 3.6%
- ---------------------------------------------------------------------------------------------------------
TELEPHONE -- 1.3%
$ 230,000 MCI Communication Corp., 7.75% due 3/23/25................................... 232,875
- ---------------------------------------------------------------------------------------------------------
UTILITY - ELECTRIC -- 2.3%
200,000 Arizona Public Service Co., 7.25% due 8/1/23................................. 188,750
200,000 Philadelphia Electric, 8.75% due 4/1/22...................................... 212,250
- ---------------------------------------------------------------------------------------------------------
401,000
- ---------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS (Cost -- $605,853)..................................... 633,875
- ---------------------------------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS -- 3.0%
500,000 U.S. Treasury Notes, 7.75% due 11/30/99 (Cost -- $499,802)................... 522,605
- ---------------------------------------------------------------------------------------------------------
SUB-TOTAL INVESTMENTS (Cost -- $13,944,802).................................. 15,815,731
- ---------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 10.5%
1,859,000 CS First Boston Corp., 6.50% due 1/2/97; Proceeds at maturity -- $1,859,671;
(Fully collateralized by U.S. Treasury Note, 7.25% due 2/15/98; Market
value -- $1,898,260) (Cost -- $1,859,000).................................... 1,859,000
- ---------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $15,803,802*)............................. $17,674,731
- ---------------------------------------------------------------------------------------------------------
</TABLE>
+ Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
46
<PAGE> 82
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 1996
<TABLE>
<CAPTION>
U.S. SOCIAL
GOVERNMENT AWARENESS
SECURITIES STOCK UTILITIES
PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Investments -- Cost.................................... $23,037,806 $ 6,883,357 $13,944,802
Repurchase agreements -- Cost.......................... 2,626,000 1,822,000 1,859,000
- ------------------------------------------------------------------------------------------------------------
Investments, at value.................................. $23,222,463 $ 9,332,026 $15,815,731
Repurchase agreements, at value........................ 2,626,000 1,822,000 1,859,000
Cash................................................... 268 697 519,418
Receivable from affiliate.............................. -- 25,093 --
Dividends and interest receivable...................... 239,298 8,769 60,046
- ------------------------------------------------------------------------------------------------------------
TOTAL ASSETS........................................... 26,088,029 11,188,585 18,254,195
- ------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for Fund shares purchased...................... 35,299 30,508 13,724
Investment advisory fees payable....................... 9,932 -- 9,697
Payable for securities purchased....................... -- 77,340 --
Accrued expenses....................................... 34,264 40,742 16,548
- ------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES...................................... 79,495 148,590 39,969
- ------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS......................................... $26,008,534 $11,039,995 $18,214,226
- ------------------------------------------------------------------------------------------------------------
NET ASSETS:
Paid-in capital........................................ $26,527,392 $ 8,594,239 $16,338,333
Undistributed (overdistributed) net investment
income.............................................. (2,726) -- 4,964
Accumulated net realized loss on security
transactions........................................ (700,789) (2,913) --
Net unrealized appreciation of investments............. 184,657 2,448,669 1,870,929
- ------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS......................................... $26,008,534 $11,039,995 $18,214,226
- ------------------------------------------------------------------------------------------------------------
SHARES OUTSTANDING....................................... 2,393,878 700,357 1,490,143
- ------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, PER SHARE............................... $10.86 $15.76 $12.22
- ------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
47
<PAGE> 83
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
U.S. SOCIAL
GOVERNMENT AWARENESS
SECURITIES STOCK UTILITIES
PORTFOLIO PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest................................................... $ 1,705,367 $ 42,150 $ 209,151
Dividends.................................................. -- 107,312 647,584
- -----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME.................................... 1,705,367 149,462 856,735
- -----------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2).......................... 86,625 58,250 113,601
Administration fees (Note 2)............................... 24,429 23,155 23,970
Audit and legal............................................ 24,309 24,075 18,415
Shareholder communications................................. 11,714 15,063 11,714
Custody.................................................... 8,711 18,907 7,335
Trustees' fees............................................. 6,544 6,544 6,544
Shareholder and system servicing fees...................... 1,000 1,000 1,000
Registration fees.......................................... 212 212 212
Other...................................................... 1,436 1,500 2,998
- -----------------------------------------------------------------------------------------------------------
TOTAL EXPENSES............................................. 164,980 148,706 185,789
Less: Expense reimbursement (Note 2)....................... -- (36,367) --
- -----------------------------------------------------------------------------------------------------------
NET EXPENSES............................................... 164,980 112,339 185,789
- -----------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME........................................ 1,540,387 37,123 670,946
- -----------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 3):
Realized Gain (Loss) From Security Transactions (excluding
short-term securities):
Proceeds from sales..................................... 125,294,879 2,106,414 6,065,073
Cost of securities sold................................. 125,999,485 1,705,595 5,235,457
- -----------------------------------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS)................................... (704,606) 400,819 829,616
- -----------------------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year....................................... 797,061 1,289,613 2,093,137
End of year............................................. 184,657 2,448,669 1,870,929
- -----------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET UNREALIZED APPRECIATION......... (612,404) 1,159,056 (222,208)
- -----------------------------------------------------------------------------------------------------------
NET GAIN (LOSS) ON INVESTMENTS............................... (1,317,010) 1,559,875 607,408
- -----------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS....................... $ 223,377 $1,596,998 $1,278,354
- -----------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
48
<PAGE> 84
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
U.S. SOCIAL
GOVERNMENT AWARENESS
SECURITIES STOCK UTILITIES
PORTFOLIO PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATIONS:
Net investment income...................................... $ 1,540,387 $ 37,123 $ 670,946
Net realized gain (loss)................................... (704,606) 400,819 829,616
Increase (decrease) in net unrealized appreciation......... (612,404) 1,159,056 (222,208)
- -----------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS..................... 223,377 1,596,998 1,278,354
- -----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income...................................... (3,539,054) (233,199) (1,107,181)
Net realized gains......................................... (423,418) (525,148) (974,527)
- -----------------------------------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM DISTRIBUTIONS TO
SHAREHOLDERS............................................ (3,962,472) (758,347) (2,081,708)
- -----------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 8):
Net proceeds from sale of shares........................... 6,750,676 4,848,116 7,458,285
Net asset value of shares issued for reinvestment of
dividends............................................... 3,962,472 758,347 2,081,708
Cost of shares reacquired.................................. (9,157,807) (2,459,930) (5,862,088)
- -----------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS........ 1,555,341 3,146,533 3,677,905
- -----------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS............................ (2,183,754) 3,985,184 2,874,551
NET ASSETS:
Beginning of year.......................................... 28,192,288 7,054,811 15,339,675
- -----------------------------------------------------------------------------------------------------------
END OF YEAR*............................................... $26,008,534 $11,039,995 $18,214,226
- -----------------------------------------------------------------------------------------------------------
* Includes undistributed (overdistributed) net investment
income of:................................................. $(2,726) -- $4,964
- -----------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
49
<PAGE> 85
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
U.S. SOCIAL
GOVERNMENT AWARENESS
SECURITIES STOCK UTILITIES
PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATIONS:
Net investment income....................................... $ 1,520,848 $ 55,079 $ 441,157
Net realized gain........................................... 1,110,792 265,239 144,953
Increase in net unrealized appreciation..................... 3,171,708 1,316,045 2,170,686
- ------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS...................... 5,803,348 1,636,363 2,756,796
- ------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income....................................... (1,404,917) (51,494) (150,491)
Net realized gains.......................................... -- (68,327) --
- ------------------------------------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM DISTRIBUTIONS TO SHAREHOLDERS... (1,404,917) (119,821) (150,491)
- ------------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 8):
Net proceeds from sale of shares............................ 5,439,282 2,552,645 9,178,587
Net asset value of shares issued for reinvestment of
dividends................................................ 1,404,917 119,821 150,491
Cost of shares reacquired................................... (7,572,507) (1,013,468) (2,352,367)
- ------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM FUND SHARE
TRANSACTIONS............................................. (728,308) 1,658,998 6,976,711
- ------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS........................................ 3,670,123 3,175,540 9,583,016
NET ASSETS:
Beginning of year........................................... 24,522,165 3,879,271 5,756,659
- ------------------------------------------------------------------------------------------------------------
END OF YEAR*................................................ $28,192,288 $7,054,811 $15,339,675
- ------------------------------------------------------------------------------------------------------------
* Includes undistributed net investment income of:............ $1,520,848 $55,079 $441,157
- ------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
50
<PAGE> 86
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The U.S. Government Securities, Social Awareness Stock and Utilities
Portfolios (collectively, "Portfolio(s)") are separate investment portfolios of
The Travelers Series Trust ("Trust"). The Trust is a Massachusetts business
trust registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company and consists of these
portfolios and ten other separate investment portfolios: Travelers Quality Bond,
Lazard International Stock, MFS Emerging Growth, Federated High Yield, Federated
Stock, Large Cap, Equity Income, Zero Coupon Bond Fund Portfolio Series 1998,
Zero Coupon Bond Fund Portfolio Series 2000 and Zero Coupon Bond Fund Portfolio
Series 2005 Portfolios. Shares of the Trust are offered only to insurance
company separate accounts that fund certain variable annuity and variable life
insurance contracts. The financial statements and financial highlights for the
other portfolios are presented in separate annual reports.
The significant accounting policies consistently followed by the Portfolios
are: (a) security transactions are accounted for on trade date; (b) securities
traded on national securities markets are valued at the closing prices on such
markets; securities for which no sales prices were reported and U.S. Government
and Agency obligations are valued at the mean between the last reported bid and
ask prices or on the basis of quotations received from reputable brokers or
other recognized sources; (c) securities maturing within 60 days are valued at
cost plus accreted discount and, or minus amortized premium, which approximates
market value; (d) securities that have a maturity of 60 days or more are valued
at prices based on market quotations for securities of similar type, yield and
maturity; (e) interest income, adjusted for amortization of premium and
accretion of discount, is recorded on the accrual basis and dividend income is
recorded on the ex-dividend date; (f) gains or losses on the sale of securities
are calculated by using the specific identification method; (g) dividends and
distributions to shareholders are recorded on the ex-dividend date; (h) the
Portfolios intend to comply with the requirements of the Internal Revenue Code
of 1986, as amended, pertaining to regulated investment companies and to make
distributions of taxable income sufficient to relieve it from substantially all
Federal income and excise taxes; (i) the character of income and gains to be
distributed are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles. At December 31, 1996,
reclassifications were made to the Portfolio capital accounts to reflect
permanent book/tax differences and income and gains available for distribution
under income tax regulations. Accordingly, a portion of overdistributed net
investment income and accumulated net realized loss amounting to $6,915 and
$9,045, respectively, were reclassified to paid-in capital for Social Awareness
Stock Portfolio. Net investment income, net realized gains and net assets for
each Portfolio were not affected by these changes; and (j) estimates and
assumptions are required to be made regarding assets, liabilities and changes in
net assets resulting from operations when financial statements are prepared.
Changes in the economic environment, financial markets and any other parameters
used in determining these estimates could cause actual results to differ.
In addition, for the year ended December 31, 1996, distributions from
realized gains include both net realized short-term and long-term capital gains.
Previous to 1996 net realized short-term capital gains were included in
distributions from net investment income.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS
Travelers Asset Management International Corporation ("TAMIC"), an indirect
wholly owned subsidiary of Travelers Group Inc., acts as investment manager and
advisor to the U.S. Government Securities Portfolio ("USGS"). USGS pays TAMIC an
investment management and advisory fee calculated at the annual rate of 0.3233%
of its average daily net assets. This fee is calculated daily and paid monthly.
Greenwich Street Advisors ("GSA"), a division of Smith Barney Mutual Funds
Management Inc. ("SBMFM") which is a subsidiary of Smith Barney Holdings Inc.
("SBH") and an indirect wholly owned subsidiary of Travelers Group Inc., acts as
investment manager and advisor to the Social Awareness Stock ("SAS") and
Utilities ("Utilities") Portfolios. SAS pays GSA an investment management and
advisory fee calculated at an annual rate of : 0.65% on the first $50 million,
0.55% on the next $50 million, 0.45% on the next $100 million and 0.40% on
amounts over $200 million of the average daily net assets. Utilities pays GSA an
investment management and advisory fees calculated at an annual rate of 0.65% of
the average daily net assets. These fees are calculated daily and paid monthly.
For the year ended December 31, 1996, GSA waived $11,274 of investment advisory
fee and has agreed to reimburse expenses in the amount of $25,093 for SAS.
51
<PAGE> 87
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Travelers Insurance Company ("Travelers Insurance") acts as administrator
to the Portfolios. The Portfolios pay Travelers Insurance an administration fee
calculated at an annual rate of 0.06% of the average daily net assets. Travelers
Insurance has entered into a sub-administrative services agreement with SBMFM.
Travelers Insurance pays SBMFM, as sub-administrator, a fee calculated at an
annual rate of 0.06% of the average daily net assets of each Portfolio. This fee
is calculated daily and paid monthly.
One Trustee and all officers of the Trust are employees of Travelers Group
Inc., or its subsidiaries.
3. INVESTMENTS
During the year ended December 31, 1996, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
<TABLE>
<CAPTION>
USGS SAS UTILITIES
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Purchases....................................................... $123,349,711 $3,047,308 $8,414,809
- -----------------------------------------------------------------------------------------------------------
Sales........................................................... 125,294,879 2,106,414 6,065,073
- -----------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1996, aggregate gross unrealized appreciation and
depreciation of investments were as follows:
<TABLE>
<CAPTION>
USGS SAS UTILITIES
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross unrealized appreciation*...................................... $239,436 $2,624,768 $2,025,482
Gross unrealized depreciation*...................................... (54,779) (176,099) (154,553)
- -----------------------------------------------------------------------------------------------------------
Net unrealized appreciation*........................................ $184,657 $2,448,669 $1,870,929
- -----------------------------------------------------------------------------------------------------------
</TABLE>
* Substantially the same for Federal income tax purposes.
4. REPURCHASE AGREEMENTS
The Portfolios purchase (and their custodian takes possession of) U.S.
Government securities from banks and securities dealers subject to agreements to
resell the securities to the sellers at a future date (generally, the next
business day) at an agreed-upon higher repurchase price. The Portfolios require
continual maintenance of the market value of the collateral in amounts at least
equal to 102% of the repurchase price.
5. FUTURES CONTRACTS
Initial margin deposits made upon entering into futures contracts are
recognized as assets. The initial margin is segregated by the custodian and is
noted in the schedule of investments. During the period the futures contract is
open, changes in the value of the contract are recognized as unrealized gains or
losses by "marking-to-market" on a daily basis to reflect the market value of
the contract at the end of each day's trading. Variation margin payments are
made or received and recognized as assets due from or liabilities due to broker,
depending upon whether unrealized gains or losses are incurred. When the
contract is closed, the Portfolios record a realized gain or loss equal to the
difference between the proceeds from (or cost of) the closing transactions and
the Portfolio's basis in the contract. The Portfolios bear the market risk that
arises from changes in the value of the financial instruments and securities
indices (futures contracts) and the credit risk should a counterparty fail to
perform under such contracts.
At December 31, 1996, the Portfolios had no open futures contracts.
52
<PAGE> 88
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. OPTIONS CONTRACTS
Premiums paid when put or call options are purchased by the Portfolios,
represent investments, which are "marked-to-market" daily. When a purchased
option expires, the Portfolios will realize a loss in the amount of the premium
paid. When the Portfolios enter into closing sales transactions, the Portfolios
will realize a gain or loss depending on whether the proceeds from the closing
sales transactions are greater or less than the premium paid for the option.
When the Portfolios exercise a put option, they will realize a gain or loss from
the sale of the underlying security and the proceeds from such sale will be
decreased by the premium originally paid. When the Portfolios exercise a call
option, the cost of the security which the Portfolios purchase upon exercise
will be increased by the premium originally paid.
As of December 31, 1996, the Portfolios had no open purchased call or put
options contracts.
7. CAPITAL LOSS CARRYFORWARD
At December 31, 1996, U.S. Government Securities Portfolio had, for Federal
income tax purposes, approximately $715,000 of capital loss carryforwards
available to offset future capital gains through 2004. To the extent that these
carryforward losses are used to offset capital gains, it is probable that the
gains so offset will not be distributed.
8. SHARES OF BENEFICIAL INTEREST
The Declaration of Trust authorizes the issuance of an unlimited number of
shares of beneficial interest without par value. Transactions in shares of each
Portfolio were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT SECURITIES PORTFOLIO
Shares sold.................................................... 606,114 484,178
Shares issued on reinvestment.................................. 355,511 138,279
Shares redeemed................................................ (834,803) (672,686)
- --------------------------------------------------------------------------------------------------------
Net Increase (Decrease)........................................ 126,822 (50,229)
- --------------------------------------------------------------------------------------------------------
SOCIAL AWARENESS STOCK PORTFOLIO
Shares sold.................................................... 323,694 205,312
Shares issued on reinvestment.................................. 51,251 10,913
Shares redeemed................................................ (167,210) (74,604)
- --------------------------------------------------------------------------------------------------------
Net Increase................................................... 207,735 141,621
- --------------------------------------------------------------------------------------------------------
UTILITIES PORTFOLIO
Shares sold.................................................... 590,496 822,640
Shares issued on reinvestment.................................. 169,391 14,594
Shares redeemed................................................ (463,451) (209,288)
- --------------------------------------------------------------------------------------------------------
Net Increase................................................... 296,436 627,946
- --------------------------------------------------------------------------------------------------------
</TABLE>
53
<PAGE> 89
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
For a share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
U.S. GOVERNMENT SECURITIES PORTFOLIO 1996 1995 1994 1993 1992(1)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR..................... $12.43 $10.58 $11.63 $10.79 $10.00
- ------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income................................ 0.68 0.65 0.60 0.57 0.53
Net realized and unrealized gain (loss).............. (0.52) 1.80 (1.23) 0.44 0.26
- ------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations.................... 0.16 2.45 (0.63) 1.01 0.79
- ------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM (2):
Net investment income................................ (1.55) (0.60) (0.39) (0.17) --
Net realized gains................................... (0.18) -- (0.03) -- --
- ------------------------------------------------------------------------------------------------------------
Total Distributions.................................... (1.73) (0.60) (0.42) (0.17) --
- ------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR........................... $10.86 $12.43 $10.58 $11.63 $10.79
- ------------------------------------------------------------------------------------------------------------
TOTAL RETURN........................................... 1.46% 24.42% (5.64)% 9.48% 7.90%++
- ------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S)........................ $26,009 $28,192 $24,522 $25,520 $9,017
- ------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses (3)......................................... 0.62% 0.56% 0.71% 0.58% 0.38%+
Net investment income................................ 5.68 5.80 5.56 5.04 4.72+
- ------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE................................ 501% 214% 16% 51% 25%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SOCIAL AWARENESS STOCK PORTFOLIO 1996 1995 1994 1993 1992(4)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR..................... $14.32 $11.05 $11.64 $10.95 $10.00
- ------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income (5)............................ 0.31 0.12 0.16 0.17 0.16
Net realized and unrealized gain (loss).............. 2.42 3.47 (0.45) 0.65 0.79
- ------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations.................... 2.73 3.59 (0.29) 0.82 0.95
- ------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM (2):
Net investment income................................ (0.43) (0.14) (0.24) (0.13) --
Net realized gains................................... (0.86) (0.18) (0.06) -- --
- ------------------------------------------------------------------------------------------------------------
Total Distributions.................................... (1.29) (0.32) (0.30) (0.13) --
- ------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR........................... $15.76 $14.32 $11.05 $11.64 $10.95
- ------------------------------------------------------------------------------------------------------------
TOTAL RETURN........................................... 19.98% 33.37% (2.69)% 7.55% 9.50%++
- ------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S)........................ $11,040 $7,055 $3,879 $3,361 $1,394
- ------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses (5)(6)...................................... 1.25% 1.25% 1.25% 1.05% 0.71%+
Net investment income................................ 0.43 0.99 1.43 1.50 2.22+
- ------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE................................ 26% 73% 137% 60% 56%
- ------------------------------------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE PAID
ON EQUITY TRANSACTIONS(7)............................ $0.06 -- -- -- --
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the period from January 24, 1992 (commencement of operations) to
December 31, 1992.
(2) For the year ended December 31, 1996, distributions from realized gains
include both net realized short-term and long-term capital gains. Previous
to 1996 net realized short-term capital gains were included in distributions
from net investment income.
(3) The expense ratios for the year ended December 31, 1993 and the period ended
December 31, 1992 reflect expense reimbursement by The Travelers in
connection with voluntary expense limitations. Without the expense
reimbursement, the expense ratios would have been 0.77% and 0.72%
(annualized), respectively.
(4) For the period from May 1, 1992 (inception date) to December 31, 1992.
(5) For the year ended December 31, 1996, The Travelers reimbursed the Portfolio
for $25,093 in expenses. If such fees were not waived and expenses not
reimbursed, the per share decrease of net investment income would have been
$0.06 and the expense ratio would have been 1.69%.
(6) The expense ratios for the years ended December 31, 1995, 1994, 1993 and the
period ended December 31, 1992 reflect expense reimbursement by The
Travelers in connection with voluntary expense limitations. Without the
expense reimbursement, the expense ratios would have been 1.75%, 3.34%,
3.73% and 2.19% (annualized), respectively.
(7) For the fiscal years beginning after 1995, the SEC instituted new guidelines
requiring the disclosure of average commissions per share on Funds which
held more than 10% of their assets in commissionable equity securities.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
54
<PAGE> 90
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
UTILITIES PORTFOLIO 1996 1995 1994(1)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR....................................... $12.85 $10.17 $10.00
- --------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income.................................................. 0.47 0.48 0.35
Net realized and unrealized gain (loss)................................ 0.47 2.44 (0.18)
- --------------------------------------------------------------------------------------------------------
Total Income From Operations............................................. 0.94 2.92 0.17
- --------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM (2):
Net investment income.................................................. (0.84) (0.24) --
Net realized gains..................................................... (0.73) -- --
- --------------------------------------------------------------------------------------------------------
Total Distributions...................................................... (1.57) (0.24) --
- --------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR............................................. $12.22 $12.85 $10.17
- --------------------------------------------------------------------------------------------------------
TOTAL RETURN............................................................. 7.47% 29.29% 1.70%++
- --------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S).......................................... $18,214 $15,340 $5,757
- --------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses (3)........................................................... 1.07% 1.25% 1.25%+
Net investment income.................................................. 3.88 4.29 3.86+
- --------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE.................................................. 39% 25% 32%
- --------------------------------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE PAID ON EQUITY TRANSACTIONS (4)............ $0.06 -- --
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the period from February 4, 1994 (commencement of operations) to
December 31, 1994.
(2) For the year ended December 31, 1996, distributions from realized gains
include both net realized short-term and long-term capital gains. Previous
to 1996 net realized short-term capital gains were included in distributions
from net investment income.
(3) The ratios of expenses to average net assets for the year ended December 31,
1995 and the period ended December 31, 1994 reflect expense reimbursements
by The Travelers in connection with voluntary expense limitations. Without
the expense reimbursements, the ratios of expenses to average net assets
would have been 1.27% and 3.49% (annualized), respectively.
(4) For the fiscal years beginning after 1995, the SEC instituted new guidelines
requiring the disclosure of average commissions per share on Funds which
held more than 10% of their assets in commissionable equity securities.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized
- --------------------------------------------------------------------------------
TAX INFORMATION (UNAUDITED)
The amount of long-term capital gains paid for the fiscal year ended
December 31, 1996, are $479,773 for the Social Awareness Stock Portfolio and
$638,099 for Utilities Portfolio.
55
<PAGE> 91
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of
The Travelers Series Trust:
We have audited the accompanying statements of assets and liabilities of the
U.S. Government Securities Portfolio, Social Awareness Stock Portfolio and the
Utilities Portfolio of The Travelers Series Trust, including the schedules of
investments as of December 31, 1996, and the related statements of operations
for the year then ended, the statements of changes in net assets for the periods
ended December 31, 1996 and 1995, and the financial highlights for each of the
applicable periods ended December 31, 1996, 1995, 1994, 1993 and 1992. These
financial statements and financial highlights are the responsibility of
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996, by correspondence with the custodian and also with brokers
for the Social Awareness Stock Portfolio. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
U.S. Government Securities Portfolio, Social Awareness Stock Portfolio, and
Utilities Portfolio of The Travelers Series Trust as of December 31, 1996, the
results of their operations for the year then ended, the changes in their net
assets for the periods ended December 31, 1996 and 1995, and the financial
highlights for each of the applicable periods ended December 31, 1996, 1995,
1994, 1993 and 1992, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Hartford, Connecticut
February 24, 1997
56
<PAGE> 92
Investment Advisers
--------------------
CAPITAL APPRECIATION FUND
THE TRAVELERS INVESTMENT MANAGEMENT COMPANY
Hartford, Connecticut
MANAGED ASSETS TRUST, HIGH YIELD BOND TRUST, CASH INCOME TRUST AND
THE TRAVELERS SERIES TRUST: U.S. GOVERNMENT SECURITIES PORTFOLIO
TRAVELERS ASSET MANAGEMENT INTERNATIONAL CORPORATION
Hartford, Connecticut
THE TRAVELERS SERIES TRUST: SOCIAL AWARENESS STOCK PORTFOLIO AND UTILITIES
PORTFOLIO
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
New York, New York
Independent Accountants
-------------------------
COOPERS & LYBRAND L.L.P.
Hartford, Connecticut
Custodian
----------
PNC BANK, N.A.
This report is prepared for the general information of contract owners and is
not an offer of shares of Managed Assets Trust, High Yield Bond Trust, Capital
Appreciation Fund, Cash Income Trust, The Travelers Series Trust: U.S.
Government Securities Portfolio, Social Awareness Stock Portfolio or Utilities
Portfolio. It should not be used in connection with any offer except in
conjunction with the Prospectuses for the Variable Annuity and Variable
Universal Life Insurance products offered by The Travelers Insurance Company and
the Prospectuses for the underlying funds, which collectively contain all
pertinent information, including the applicable sales commissions.
VG-181 (Annual)(12-96) Printed in U.S.A.
<PAGE> 93
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) The financial statements of the Registrant and the Report of Independent
Accountants are contained in the Fund's Annual Report which is
incorporated in the Statement of Additional Information by reference.
The Registrant's financial statements include:
Statement of Assets and Liabilities as of December 31, 1996
Statement of Operations for the year ended December 31, 1996
Statement of Changes in Net Assets for the years ended December
31, 1996 and 1995
Statement of Investments as of December 31, 1996
Notes to Financial Statements
(b) Exhibits
1. Declaration of Trust. (Incorporated herein by reference to
Exhibit 1 to Post-Effective Amendment No. 21 to the Registration
Statement on Form N-1A filed on April 11, 1996.)
2. By-Laws of High Yield Bond Trust. (Incorporated herein by
reference to Exhibit 2 to Post-Effective Amendment No. 21 to the
Registration Statement on Form N-1A filed on April 11, 1996.)
5. Investment Advisory Agreement between the Registrant and
Travelers Asset Management International Corporation.
(Incorporated herein by reference to Exhibit 5 to Post-Effective
Amendment No. 21 to the Registration Statement on Form N-1A filed
on April 11, 1996.)
8(a). Custody Agreement between the Registrant and PNC Bank, N.A., of
Lester, PA. To be filed by amendment
8(b). Custody Agreement between the Registrant and Barclay's Bank of
New York. To be filed by amendment
9. Administrative Services Agreement between the Registrant and The
Travelers Insurance Company. (Incorporated herein by reference to
Exhibit 9 to Post-Effective Amendment No. 22 to the Registration
Statement on Form N-1A filed February 20, 1997.
10. An opinion and consent of counsel as to the legality of the
securities registered by the Registrant. (Incorporated herein by
reference to the Registrant's most recent Rule 24f-2 Notice
filing on February 28, 1997.)
11(A). Consent of Coopers & Lybrand L.L.P., Independent
Accountants.
11(B). Powers of Attorney authorizing Ernest J. Wright or Kathleen A.
McGah as signatories for Heath B. McLendon, Knight Edwards,
Robert E. McGill III, Lewis Mandell, Frances M. Hawk and Ian R.
Stuart. (Incorporated herein by reference to Exhibit
<PAGE> 94
11(B) to Post-Effective Amendment No. 21 to the Registration
Statement on Form N-1A filed on April 11, 1996.)
Power of Attorney authorizing Ernest J. Wright or Kathleen A.
McGah as signatory for Lewis E. Daidone. (Incorporated herein by
reference to Exhibit 11(B) to Post-Effective Amendment No. 22 to
the Registration Statement on Form N-1A filed February 20, 1997.
27. Financial Data Schedule.
Item 25. Persons Controlled By or Under Common Control With the Registrant
Not Applicable.
Item 26. Number of Holders of Securities
<TABLE>
<CAPTION>
Number of Record Holders
Title of Class as of February 20, 1997
-------------- -------------------------------------
<S> <C>
Shares of beneficial interest, Three (3)
without par value
</TABLE>
Item 27. Indemnification
Provisions for the indemnification of the Fund's Trustees and officers are
contained in the Fund's Declaration of Trust which was filed with
Post-Effective Amendment No. 21 to this Registration Statement as Exhibit 1 on
April 11, 1996.
Rule 484 Undertaking
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
<PAGE> 95
Item 28. Business and Other Connections of Investment Adviser
Officers and Directors of Travelers Asset Management International Corporation
(TAMIC), the Fund's Investment Adviser, are set forth in the following table:
<TABLE>
<CAPTION>
Name Position with TAMIC Other Business
- ---- ------------------- --------------
<S> <C> <C>
Marc P. Weill Director and Chairman Senior Vice President **
David A. Tyson Director, President and Senior Vice President *
Chief Investment Officer
F. Denney Voss Director and Senior Senior Vice President*
Vice President
Joseph E. Rueli, Jr. Director, Vice President Vice President*
and Chief Financial Officer
John R. Britt Director and Secretary Assistant Secretary *
Joseph M. Mullally Senior Vice President Vice President*
David Amaral Vice President Assistant Director*
John R. Calcagni Vice President Second Vice President*
Gene Collins Vice President Vice President*
Kathyrn D. Karlic Vice President Vice President*
David R. Miller Vice President Vice President*
Emil J. Molinaro Vice President Vice President*
Jordan M. Stitzer Vice President Vice President
William H. White Treasurer Vice President and Treasurer *
Charles B. Chamberlain Assistant Treasurer Assistant Treasurer *
George C. Quaggin, Jr. Assistant Treasurer Assistant Treasurer *
Marla A. Berman Assistant Secretary Assistant Secretary**
Patricia A. Uzzel Compliance Officer Assistant Director*
Frank J. Fazzina Controller Director *
</TABLE>
* Positions are held with The Travelers Insurance Group Inc., One Tower
Square, Hartford, Connecticut 06183.
** Positions are held with Travelers Group Inc., 388 Greenwich Street, New
York, N.Y. 10013.
<PAGE> 96
Item 29. Principal Underwriter
Not Applicable.
Item 30. Location of Accounts and Records
(1) Smith Barney Mutual Funds Management Inc.
388 Greenwich Street
New York, NY 10013
(2) PNC Bank, N. A.
200 Stevens Drive
Lester, PA 19113
(3) Barclay's Bank, PLC
75 Wall Street
New York, NY 10265
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
The undersigned Registrant hereby undertakes to provide to each person to whom
a prospectus is delivered a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
<PAGE> 97
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant, High Yield Bond Trust, certifies that it
meets all of the requirements for effectiveness of this post-effective
amendment to this Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933 and has duly caused this amendment to this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Hartford, State of Connecticut, on April 17, 1997.
HIGH YIELD BOND TRUST
---------------------
(Registrant)
By: *HEATH B. McLENDON
---------------------------------
Heath B. McLendon
Chairman, Board of Trustees
Pursuant to the requirements of the Securities Act of 1933, this post-effective
amendment to this Registration Statement has been signed below by the following
persons in the capacities indicated on April 17, 1997.
*HEATH B. McLENDON Chairman of the Board
- ---------------------------------------
(Heath B. McLendon)
*KNIGHT EDWARDS Trustee
- ---------------------------------------
(Knight Edwards)
*ROBERT E. McGILL III Trustee
- ---------------------------------------
(Robert E. McGill III)
*LEWIS MANDELL Trustee
- ---------------------------------------
(Lewis Mandell)
*FRANCES M. HAWK Trustee
- ---------------------------------------
(Frances M. Hawk)
*LEWIS E. DAIDONE Treasurer
- ---------------------------------------
(Lewis E. Daidone)
*By: Ernest J. Wright, Attorney-in-Fact
Secretary, Board of Trustees
<PAGE> 98
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
1. Declaration of Trust. (Incorporated herein by
reference to Exhibit 1 to Post-Effective Amendment
No. 21 to the Registration Statement on Form N-1A
filed on April 11, 1996.)
2. By-Laws of High Yield Bond Trust. (Incorporated herein
by reference to Exhibit 1 to Post-Effective Amendment
No. 21 to the Registration Statement on Form N-1A filed
on April 11, 1996.)
5. Investment Advisory Agreement between the Registrant
and Travelers Asset Management International Corporation.
(Incorporated herein by reference to Exhibit 1 to Post-
Effective Amendment No. 21 to the Registration Statement
on Form N-1A filed on April 11, 1996.)
8. Custody Agreements between the Registrant and To be filed by
PNC Bank, N.A., of Lester, PA amendment
8. Custody Agreements between the Registrant and To be filed by
Barclay's Bank, PLC of New York, NY. amendment
9. Administrative Services Agreement between the
Registrant and The Travelers Insurance Company.
(Incorporated herein by reference to Exhibit 9 to Post-
Effective Amendment No. 22 to the Registration Statement
on Form N-1A filed on February 20, 1997.)
10. An opinion and consent of counsel as to the legality of
the securities registered by the Registrant. (Incorporated
herein by reference to the Registrant's most recent
Rule 24f-2 Notice filing on February 28, 1997.)
11(A). Consent of Coopers & Lybrand L.L.P., Independent Electronically
Accountants.
11(B). Powers of Attorney authorizing Ernest J. Wright or
Kathleen A. McGah as signatory for Heath B.
McLendon, Knight Edwards, Robert E. McGill III,
Lewis Mandell, Frances M. Hawk and Ian R. Stuart.
(Incorporated herein by reference to Exhibit 11(B)
to Post-Effective Amendment No. 21 to the Registration
Statement on Form N-1A filed on April 11, 1996.)
</TABLE>
<PAGE> 99
<TABLE>
<S> <C> <C>
Power of Attorney authorizing Ernest J. Wright or
Kathleen A. McGah as signatory for Lewis E. Daidone.
(Incorporated herein by reference to Exhibit 11(B) to
Post-Effective Amendment No. 22 to the Registration
Statement on Form N-1A filed on February 20, 1997.)
27. Financial Data Schedule Electronically
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000701387
<NAME> HIGH YIELD BOND TRUST
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 16,243,720
<INVESTMENTS-AT-VALUE> 16,901,822
<RECEIVABLES> 412,782
<ASSETS-OTHER> 16,901,822
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 17,314,604
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 23,561
<TOTAL-LIABILITIES> 23,561
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 21,746,024
<SHARES-COMMON-STOCK> 2,036
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 1,631,694
<OVERDISTRIBUTION-NII> (304,388)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 857,828
<NET-ASSETS> 17,291,043
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,774,958
<OTHER-INCOME> 0
<EXPENSES-NET> 143,264
<NET-INVESTMENT-INCOME> 1,631,694
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 857,828
<NET-CHANGE-FROM-OPS> 2,185,134
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,978,125
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 591,013
<NUMBER-OF-SHARES-REDEEMED> 343,196
<SHARES-REINVESTED> 356,007
<NET-CHANGE-IN-ASSETS> 2,185,134
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 72,800
<INTEREST-EXPENSE> 70,464
<GROSS-EXPENSE> 143,264
<AVERAGE-NET-ASSETS> 14,779,565
<PER-SHARE-NAV-BEGIN> 9.00
<PER-SHARE-NII> 0.91
<PER-SHARE-GAIN-APPREC> 0.41
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 1.83
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.49
<EXPENSE-RATIO> 0.97
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE> 1
EXHIBIT 11(A)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Post-Effective Amendment
No. 23 to the Registration Statement of High Yield Bond Trust (the "Fund") on
Form N-1A (File Nos. 2-76639; 811-3428) of our report dated February 24, 1997,
on our audits of the financial statements and financial highlights of the Fund,
which report is included in the Fund's Annual Report for the year ended December
31, 1996 which is incorporated by reference in this Post-Effective Amendment to
the Registration Statement. We also consent to the reference to our Firm as
experts in accounting and auditing under the caption "Additional Information" in
the Statement of Additional Information.
COOPERS & LYBRAND L.L.P.
Hartford, Connecticut
April 17, 1997
