THE TRAVELERS VARIABLE
PRODUCTS FUNDS
ANNUAL REPORTS
December 31, 1997
THE TRAVELERS SERIES TRUST:
ZERO COUPON BOND FUND PORTFOLIO SERIES 1998
ZERO COUPON BOND FUND PORTFOLIO SERIES 2000
ZERO COUPON BOND FUND PORTFOLIO SERIES 2005
[TRAVELERSLIFE LOGO]
The Travelers Insurance Company
The Travelers Life and Annuity Company
One Tower Square
Hartford, CT 06183
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TRAVELERS SERIES TRUST: ZERO COUPON BOND FUND PORTFOLIOS: SERIES 1998, 2000,
2005
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DEAR SHAREHOLDER:
We are pleased to provide the annual report for The Travelers Series Trust: Zero
Coupon Bond Fund Portfolios: Series 1998, 2000 and 2005 ("Portfolio(s)") for the
year ended December 31, 1997. In this letter, we briefly discuss general
economic and market conditions. In addition, more detailed comparisons showing
the growth of a hypothetical $10,000 investment in each Portfolio since
inception date can also be found in this report. A more detailed summary of
performance and current holdings for each Portfolio can be found in the
appropriate sections that follow.
ECONOMIC REVIEW AND OUTLOOK
The big story in the second half of 1997 was the Asian economic and financial
crisis. What started out as a localized disturbance in Thailand in July 1997
soon spread to other countries in Southeast Asia and wreaked havoc on their
currency and capital markets. The events in Asia raise the specter of a global
economic slowdown and prospects of global deflation.
We begin with a discussion of the outlook for inflation and the potential for
deflation with a focus on the U.S. economy. The remarkable string of good news
on the inflation front in the U.S. continued in the fourth quarter of 1997. The
Producer Price Index fell slightly in the fourth quarter and declined by 1.2%
for 1997. Producer prices declined in 9 out of 12 months in 1997 while the
Consumer Price Index rose by a mere 1.7% in 1997, the smallest rise since 1986.
Inflation has rarely or ever been so low at such a late stage in the economic
cycle.
Technology-driven productivity gains have contributed to the recent
disinflationary trend, and the significant devaluation of several Asian
currencies, should result in lower import prices and help domestic inflation
decline further.
With worldwide overproduction, the cost of items such as cars and electronic
goods is actually showing near-zero growth. Prices of some of the most important
industrial commodities, including oil and copper, have tumbled in recent months
and the price of gold, a traditional hedge against inflation, was at an 18-year
low in December 1997, well below $300 per ounce. Despite a tight labor market in
the U.S., wage inflation has not surged. Global deflationary pressures should
offset wage inflation in 1998. (Deflation is a decline in the prices of goods
and services or when there are major imbalances, too much supply and little or
no demand. Disinflation is a slowing down in the rate of price increases which
means you don't have pricing power today, but there aren't any major imbalances
or dislocations to the economy.) While we acknowledge the arguments in favor of
global deflation, we have not seen enough evidence to foresee zero or negative
inflation in 1998 and believe we will continue to experience a period of overall
price stability.
The crisis in Southeast Asia also raises the possibility of a global economic
slowdown. The U.S. economy derives almost 15% of its total output from exports.
Approximately 10% of these exports are made to Southeast Asia. While it is
difficult to predict the eventual impact on U.S. exports, most reasonable
estimates of growth shortfalls suggest that the impact on U.S. Gross Domestic
Product ("GDP") growth will be no more than -0.5%. Economic growth forecasts for
1998 have been revised down recently and the consensus GDP growth estimate for
1998 is now about 2.5%.
The continued good news on the inflation front sent U.S. interest rates lower
during the fourth quarter. Long-term rates fell from 6.4% to 5.9% as investors
began to discount a deflationary outlook and became comfortable with a stable
monetary environment.
Short-term interest rates have held steady even as inflation and long-term rates
have fallen. Even though the Federal Reserve Board ("Fed") has not raised short
rates for several months now, monetary policy has effectively become tighter as
the real federal-funds rate has risen to 3.3%. (The federal-funds rate is the
interest rate banks charge each other for overnight loans and a closely watched
indicator of the direction of interest rates.) With Asian currencies in turmoil,
we believe that the Fed is likely to stay put and the odds of another Fed hike
are remote.
FIXED INCOME MARKET COMMENTARY
For the first time in seven quarters, bonds outperformed stocks as the Asian
crisis that began in Thailand in July 1997 spread throughout Asia and other
emerging markets. The crisis impacted all global markets in late October when
Hong Kong dollar came under pressure. The Standard & Poor's 500 Index went down
roughly 10% in October and that led to a sharp rally in the U.S. bond market.
Declining bond yields and bargain hunting by some investors helped stabilize
financial markets as the reporting period drew to a close. The U.S. stock market
and emerging debt markets posted positive returns in November and December as
both of these markets did not offset the amount lost in October. As of this
writing, Asia's problems continue to challenge many investment professionals.
We believe that many investors have underestimated the damage caused by the
crisis in Asia. Imports from countries with devalued currencies will keep
downward pressure on the inflation rate in the U.S., taking that issue off the
radar screen for
1
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many investors. The reduction in corporate revenues will impact some combination
of profits and employment. To the extent that corporations reduce their labor
forces to preserve profits, pressure will be taken off U.S. labor markets and
the Fed will be given a compelling reason to cut rates. Moreover, many of the
problems in Asia are the result of building too much capacity in industries such
as automobiles, chemicals and semiconductors. This overcapacity, which has been
exacerbated by the decline of demand in Asia, should slow down U.S. capital
spending growth, which has been in the recent past the fastest-growing component
of GDP.
Looking ahead for the remainder of 1998, we expect that the difference between
short-term and long-term interest rates will probably widen. In our opinion, one
of two scenarios could develop that could cause this change in the relationship
between interest rates. We believe the most likely scenario is that ongoing
financial turmoil in Asian could hamper U.S. economic growth and lead the Fed to
compensate by lowering short-term interest rates. The other possibility is the
U.S. economy continues to grow robustly, heightening investor concerns of
greater inflationary pressures. In this case, investors would shift their
attention to the tight U.S. labor market, reflecting their inflationary concerns
in the form of higher long-term interest rates. This latter scenario could
happen if Asian economies recover quickly or if interest-rate sensitive
industries of the U.S. economy pick up sufficiently to offset any adverse
affects that the Asian crisis might have on domestic economic growth.
ZERO COUPON BOND FUND PORTFOLIO PERFORMANCE
The three Portfolios commenced operations on October 11, 1995. These Portfolios
were set up as an option for the Travelers Single Premium Variable Universal
Life Product offered by The Travelers Insurance Company and the Travelers Life
and Annuity Company. The three Portfolios have target maturity dates of December
1998, December 2000 and December 2005, respectively. The Portfolios invest
primarily in U.S. Treasury securities that have "locked-in" rate of return. Zero
coupons, sometimes referred to as "strips," are long-term U.S. Treasury
securities that have been "stripped" of their interest coupons. Instead of
regular interest payments, these securities offer returns based on the
difference between the purchase price and the value at maturity, or par value.
The yield for a zero coupon is the difference in price over the time until the
bond matures.
Each Portfolio is managed (immunized) to have a duration equal to a zero coupon
bond due on its maturity date. To boost its yield potential, we have added zero
coupon corporate bonds. Because these are hard to find, we buy a range of
maturities and use U.S. Treasury strips to bring total duration in line. U.S.
Treasury strip positions are used to adjust each Portfolio's durations.
ZERO COUPON BOND FUND PORTFOLIO SERIES 1998
The Portfolio had a total return of 6.13% for the year ended December 31, 1997
versus the Merrill Lynch Zero Coupon -- 2 year return of 5.70% for the same
period.
ZERO COUPON BOND FUND PORTFOLIO SERIES 2000
The Portfolio had a total return of 7.20% for the year ended December 31, 1997
versus the Merrill Lynch Zero Coupon -- 5 year total return of 5.42% for the
same period.
ZERO COUPON BOND FUND PORTFOLIO SERIES 2005
The Portfolio had a total return of 11.63% for the year ended December 31, 1997
versus the Merrill Lynch Zero Coupon -- 10 year total return of 4.88% for the
same period.
In closing, thank you for investing in The Travelers Series Trust: Zero Coupon
Bond Fund Portfolios. We look forward to serving your investment needs.
Sincerely,
/S/ HEATH B. MCLENDON
Heath B. McLendon
Chairman
February 3, 1998
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PERFORMANCE COMPARISON -- ZERO COUPON BOND FUND PORTFOLIO SERIES 1998
(UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------------------------
<S> <C>
Year Ended 12/31/97 6.13%
10/11/95* through 12/31/97 5.69%
CUMULATIVE TOTAL RETURN
---------------------------------------------
10/11/95* through 12/31/97 13.09%
*Commencement of operations
</TABLE>
This chart assumes an initial investment of $10,000 made on October
11, 1995, assuming reinvestment of dividends, through December 31,
1997. The Merrill Lynch Zero Coupon - 2 year is comprised of U.S.
government stripped securities which have a maturity not greater
than two years.
<TABLE>
<CAPTION>
Zero Coupon
Bond Fund Merrill Lynch
Measurement Period Portfolio Zero Coupon -
(Fiscal Year Covered) Series 1998 2 year
<S> <C> <C>
10/11/95 10000 10000
12/31/95 10211 10299
12/31/96 10655 10738
12/31/97 11309 11350
</TABLE>
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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
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.
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PERFORMANCE COMPARISON -- ZERO COUPON BOND FUND PORTFOLIO SERIES 2000
(UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------------------------
<S> <C>
Year Ended 12/31/97 7.20%
10/11/95* through 12/31/97 5.89%
CUMULATIVE TOTAL RETURN
---------------------------------------------
10/11/95* through 12/31/97 13.59%
*Commencement of operations
</TABLE>
This chart assumes an initial investment of $10,000 made on October
11, 1995, assuming reinvestment of dividends, through December 31,
1997. The Merrill Lynch Zero Coupon - 5 year is comprised of U.S.
government stripped securities which have a maturity not greater
than five years.
<TABLE>
<CAPTION>
Zero Coupon
Bond Fund Merrill Lynch
Measurement Period Portfolio Zero Coupon -
(Fiscal Year Covered) Series 2000 5 year
<S> <C> <C>
10/11/95 10000 10000
12/31/95 10252 10405
12/31/96 10596 10648
12/31/97 11359 11226
</TABLE>
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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
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.
3
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PERFORMANCE COMPARISON -- ZERO COUPON BOND FUND PORTFOLIO SERIES 2005
(UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------------------------
<S> <C>
Year Ended 12/31/97 11.63%
10/11/95* through 12/31/97 7.76%
CUMULATIVE TOTAL RETURN
---------------------------------------------
10/11/95* through 12/31/97 18.10%
*Commencement of operations
</TABLE>
This chart assumes an initial investment of $10,000 made on October
11, 1995, assuming reinvestment of dividends, through December 31,
1997. The Merrill Lynch Zero Coupon - 10 year is comprised of U.S.
government stripped securities which have a maturity not greater
than ten years.
<TABLE>
<CAPTION>
Zero Coupon
Bond Fund Merrill Lynch
Measurement Period Portfolio Zero Coupon -
(Fiscal Year Covered) Series 2005 10 year
<S> <C> <C>
10/11/95 10000 10000
12/31/95 10480 10687
12/31/96 10580 10584
12/31/97 11810 11101
</TABLE>
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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
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.
4
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SCHEDULES OF INVESTMENTS DECEMBER 31, 1997
ZERO COUPON BOND FUND PORTFOLIO SERIES 1998
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C>
U.S. TREASURY OBLIGATION -- 56.5%
$810,000 AAA U.S. Treasury Note, Stripped Principal Payment Only due 11/15/98
(Cost -- $770,582)..................................................... $ 771,753
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COLLATERALIZED MORTGAGE OBLIGATION -- 3.1%
45,137 AAA Federal Home Loan Mortgage Corp., zero coupon bond to yield 6.687% due
12/15/99 (Cost -- $42,565)........................................... 42,358
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CORPORATE BONDS AND NOTES -- 15.2%
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AUTOMOBILE -- 3.6%
48,000 A- General Motors Acceptance Corp., Note, 7.500% due 5/26/00.............. 49,500
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BANKING -- 3.9%
60,000 AAA Deutsche Bank, zero coupon medium term note to yield 6.652% due
2/1/00............................................................... 53,100
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FINANCE -- 7.7%
60,000 A* Avco Financial Services, Inc., zero coupon structure note to yield
6.814% due 12/16/98.................................................. 56,719
50,000 A- Sears Overseas Financial NV, zero coupon bond to yield 6.015% due
7/12/98.............................................................. 48,463
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105,182
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TOTAL CORPORATE BONDS AND NOTES (Cost -- $207,365) 207,782
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FOREIGN BONDS AND NOTES -- 16.4%
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BANKING -- 8.1%
60,000 A- Chemical New York NV Corp., zero coupon bond to yield 7.316% due
2/16/99.............................................................. 56,320
60,000 NR International Bank of Reconstruction & Development, zero coupon bond to
yield 7.316% due 4/16/99............................................. 54,663
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110,983
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FOOD -- 4.2%
62,000 A1* PepsiCo, Inc., zero coupon note to yield 6.932% due 5/25/99............ 57,040
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INSURANCE -- 4.1%
60,000 AA New England Life, zero coupon bond to yield 7.228% due 2/1/99.......... 56,138
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TOTAL FOREIGN BONDS AND NOTES (Cost -- $223,924) 224,161
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REPURCHASE AGREEMENT -- 8.8%
121,000 Citibank, 6.016% due 1/2/98; Proceeds at maturity -- $121,040;
(Fully collateralized by U.S. Treasury Note, 6.625% due 4/30/02;
Market value -- $125,100) (Cost -- $121,000)........................... 121,000
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TOTAL INVESTMENTS -- 100% (Cost -- $1,365,436**) $1,367,054
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</TABLE>
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 8 for definition of ratings.
SEE NOTES TO FINANCIAL STATEMENTS.
5
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SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
ZERO COUPON BOND FUND PORTFOLIO SERIES 2000
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C>
U.S. TREASURY OBLIGATIONS -- 57.4%
$593,000 AAA U.S. Treasury Note, Stripped Principal Payment Only due 11/15/00....... $ 504,673
167,000 AAA U.S. Treasury Note, Stripped Principal Payment Only due 5/15/01........ 138,141
300,000 AAA U.S. Treasury Note, Stripped Principal Payment Only due 8/15/01........ 244,692
74,000 AAA U.S. Treasury Note, Stripped Principal Payment Only due 11/15/02....... 56,255
47,000 AAA U.S. Treasury Note, Stripped Principal Payment Only due 2/15/03........ 35,212
- ----------------------------------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS (Cost -- $965,203) 978,973
- ----------------------------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATION -- 3.1%
62,000 AAA Federal Home Loan Mortgage Corp., zero coupon bond to yield 7.452% due
9/15/18 (Cost -- $53,688)............................................ 53,591
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CORPORATE BONDS AND NOTES -- 17.0%
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BANKING -- 3.1%
60,000 AAA Deutsche Bank Financial, zero coupon medium term note to yield 6.652%
due 2/1/00........................................................... 53,100
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FINANCIAL SERVICES -- 3.2%
65,000 AAA Exxon Capital Ventures, Inc., zero coupon guaranteed note to yield
6.713% due 2/15/01................................................... 54,113
- ----------------------------------------------------------------------------------------------------------
FOODS -- 3.1%
70,000 AA- Archer-Daniels Midland Co., zero coupon debenture
to yield 6.830% due 5/1/02........................................... 53,725
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HOSPITAL SUPPLIES & SERVICES -- 3.1%
65,000 A- Hospital Corp. of America, zero coupon bond to yield 7.311% due
6/1/00............................................................... 52,244
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TELECOMMUNICATIONS -- 4.5%
70,000 BBB- Tele-Communications Inc., amortizing note, 9.650% due 10/1/03.......... 77,437
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TOTAL CORPORATE BONDS AND NOTES (Cost -- $289,988) 290,619
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FOREIGN BONDS AND NOTES -- 22.5%
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BANKING -- 6.5%
60,000 A- Chemical New York NV, zero coupon bond to yield 7.316% due 2/16/99..... 56,320
60,000 NR International Bank of Reconstruction & Development, zero coupon bond to
yield 7.316% due 4/16/99............................................. 54,663
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110,983
- ----------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 6.1%
65,000 A+ American Express Co., zero coupon bond to yield 6.945% due 12/12/00.... 54,438
50,000 A1* IBM International Finance NV, 6.250% due 10/10/00...................... 50,142
- ----------------------------------------------------------------------------------------------------------
104,580
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FOODS -- 3.4%
62,000 A1* PepsiCo, Inc., zero coupon note to yield 6.932% due 5/25/99............ 57,040
- ----------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT -- 3.2%
64,000 AA+ Kingdom of Sweden, zero coupon note to yield 6.395% due 7/31/00........ 55,080
- ----------------------------------------------------------------------------------------------------------
INSURANCE -- 3.3%
60,000 AA New England Life, zero coupon bond to yield 7.228% due 2/1/99.......... 56,138
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TOTAL FOREIGN BONDS AND NOTES (Cost -- $383,394) 383,821
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TOTAL INVESTMENTS -- 100% (Cost -- $1,692,273**) $1,707,004
- ----------------------------------------------------------------------------------------------------------
</TABLE>
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 8 for definition of ratings.
SEE NOTES TO FINANCIAL STATEMENTS.
6
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SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
ZERO COUPON BOND FUND PORTFOLIO SERIES 2005
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C>
U.S. TREASURY OBLIGATIONS -- 80.9%
$1,090,000 AAA U.S. Treasury Note, Stripped Principal Payment Only due 11/15/05...... $ 695,038
1,600,000 AAA U.S. Treasury Note, Stripped Principal Payment Only due 2/15/06....... 1,004,176
500,000 AAA U.S. Treasury Note, Stripped Principal Payment Only due 2/15/09....... 261,075
- -----------------------------------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS (Cost -- $1,837,946) 1,960,289
- -----------------------------------------------------------------------------------------------------------
CORPORATE BONDS AND NOTES -- 4.5%
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FINANCE -- 2.3%
80,000 A+ Grand Metro Investment, zero coupon note to yield 7.137% due 1/6/04... 55,000
- -----------------------------------------------------------------------------------------------------------
FOODS -- 2.2%
70,000 AA- Archer-Daniels Midland Co., zero coupon bond to yield 6.830% due
5/1/02................................................................ 53,725
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TOTAL CORPORATE BONDS AND NOTES (Cost -- $106,894) 108,725
- -----------------------------------------------------------------------------------------------------------
FOREIGN BONDS AND NOTES -- 9.0%
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BANKING -- 2.4%
75,000 A- Chemical New York NV, zero coupon bond to yield 7.646% due 2/16/02.... 57,844
- -----------------------------------------------------------------------------------------------------------
FINANCE -- 2.2%
80,000 AAA Exxon Capital Corp., zero coupon note to yield 7.287% due 11/15/04.... 53,850
- -----------------------------------------------------------------------------------------------------------
FOODS -- 2.2%
80,000 A+ General Mills Inc., zero coupon bond to yield 7.576% due 8/15/04...... 53,200
- -----------------------------------------------------------------------------------------------------------
INSURANCE -- 2.2%
80,000 AAA American International Group, zero coupon bond to yield 7.330% due
8/15/04............................................................... 53,600
- -----------------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS AND NOTES (Cost -- $213,026) 218,494
- -----------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 5.6%
137,000 Citibank, 6.054% due 1/2/98; Proceeds at maturity -- $137,046;
(Fully collateralized by U.S. Treasury Note; 6.625% due 4/30/02;
Market value -- $145,950) (Cost -- $137,000).......................... 137,000
- -----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $2,294,866**) $2,424,508
- -----------------------------------------------------------------------------------------------------------
</TABLE>
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 8 for definition of ratings.
SEE NOTES TO FINANCIAL STATEMENTS.
7
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BOND RATINGS
All ratings are by Standard & Poor's Ratings Service ("Standard & Poor's),
except those identified by an asterisk (*) are rated by Moody's Investors
Service, Inc. ("Moody's"). The definitions of the applicable rating symbols are
set forth below:
Standard & Poor's -- Ratings from "AA" to "BBB" may be modified by the addition
of a plus (+) or minus (-) sign to show relative standings within the major
rating categories.
<TABLE>
<S> <C> <C>
AAA -- Bonds rated "AAA" have the highest rating assigned by Standard & Poor's. Capacity to pay
interest and repay principal are extremely strong.
AA -- Bonds rated "AA" have a very strong capacity to pay interest and repay principal and differ
from the highest rated issue only in a small degree.
A -- Bonds rated "A" have a strong capacity to pay interest and repay principal although they are
somewhat more susceptible to the adverse effects of changes in circumstances and economic
conditions than bonds in higher rated categories.
BBB -- Bonds 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 in higher rated categories.
</TABLE>
Moody's -- Numerical modifiers 1, 2, and 3 may be applied to each generic
rating from "Aa" to "Baa", 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 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 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 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.
NR -- Indicates that the bond is not rated by Standard & Poor's or Moody's.
</TABLE>
8
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- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 1997
<TABLE>
<CAPTION>
ZERO COUPON ZERO COUPON ZERO COUPON
BOND FUND BOND FUND BOND FUND
PORTFOLIO PORTFOLIO PORTFOLIO
SERIES 1998 SERIES 2000 SERIES 2005
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Investments, at value (Cost -- $1,365,436, $1,692,273 and
$2,294,866, respectively).................................... $1,367,054 $1,707,004 $2,424,508
Cash............................................................ 945 43,349 984
Interest receivable............................................. 930 2,416 23
Receivable from affiliate....................................... 58,716 57,809 58,572
- -------------------------------------------------------------------------------------------------------------
TOTAL ASSETS.................................................... 1,427,645 1,810,578 2,484,087
- -------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased................................ -- 29,807 103,232
Accrued expenses................................................ 24,510 24,183 23,485
- -------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES............................................... 24,510 53,990 126,717
- -------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS.................................................. $1,403,135 $1,756,588 $2,357,370
- -------------------------------------------------------------------------------------------------------------
NET ASSETS:
Paid-in capital................................................. $1,402,689 $1,746,612 $2,236,116
Undistributed net investment income............................. 449 955 2,119
Accumulated net realized loss on security transactions.......... (1,621) (5,710) (10,507)
Net unrealized appreciation of investments...................... 1,618 14,731 129,642
- -------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS.................................................. $1,403,135 $1,756,588 $2,357,370
- -------------------------------------------------------------------------------------------------------------
SHARES OUTSTANDING................................................ 139,900 174,138 223,826
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, PER SHARE........................................ $10.03 $10.09 $10.53
- -------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
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- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
ZERO COUPON ZERO COUPON ZERO COUPON
BOND FUND BOND FUND BOND FUND
PORTFOLIO PORTFOLIO PORTFOLIO
SERIES 1998 SERIES 2000 SERIES 2005
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest...................................................... $ 77,238 $ 99,451 $ 129,709
- -------------------------------------------------------------------------------------------------------------
EXPENSES:
Audit and legal............................................... 13,500 13,500 13,500
Shareholder and system servicing fees......................... 7,300 7,200 7,200
Shareholder communications.................................... 3,500 3,900 4,900
Custody....................................................... 1,500 600 350
Investment advisory fees (Note 2)............................. 1,354 1,645 2,066
Administration fees (Note 2).................................. 813 999 1,243
Other......................................................... 2,000 1,800 2,200
- -------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES................................................ 29,967 29,644 31,459
Less: Expense Reimbursement (Note 2).......................... (27,937) (27,177) (28,361)
- -------------------------------------------------------------------------------------------------------------
NET EXPENSES.................................................. 2,030 2,467 3,098
- -------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME........................................... 75,208 96,984 126,611
- -------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE 3):
Net Realized Loss From Security Transactions (excluding
short-term securities):
Proceeds from sales...................................... 305,684 463,791 178,552
Cost of securities sold.................................. 306,630 466,463 181,585
- -------------------------------------------------------------------------------------------------------------
NET REALIZED LOSS............................................. (946) (2,672) (3,033)
- -------------------------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation (Depreciation) of Investments:
Beginning of year........................................ (4,686) (6,197) 19,427
End of year.............................................. 1,618 14,731 129,642
- -------------------------------------------------------------------------------------------------------------
INCREASE IN NET UNREALIZED APPRECIATION....................... 6,304 20,928 110,215
- -------------------------------------------------------------------------------------------------------------
NET GAIN ON INVESTMENTS......................................... 5,358 18,256 107,182
- -------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS.......................... $ 80,566 $ 115,240 $ 233,793
- -------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PG$PCN>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
ZERO ZERO ZERO
COUPON COUPON COUPON
BOND FUND BOND FUND BOND FUND
PORTFOLIO PORTFOLIO PORTFOLIO
SERIES SERIES SERIES
1998 2000 2005
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATIONS:
Net investment income............................................ $ 75,208 $ 96,984 $ 126,611
Net realized loss................................................ (946) (2,672) (3,033)
Increase in net unrealized appreciation.......................... 6,304 20,928 110,215
- ------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS........................... 80,566 115,240 233,793
- ------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................................ (75,077) (96,426) (125,818)
Net realized gain................................................ (675) -- --
- ------------------------------------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM DISTRIBUTIONS TO SHAREHOLDERS (75,752) (96,426) (125,818)
- ------------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 8):
Net proceeds from sales of shares................................ 52,016 108,077 308,853
Net asset value of shares issued for reinvestment of dividends... 75,752 96,426 125,818
Cost of shares reacquired........................................ (32,017) (31,473) (239,518)
- ------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS.............. 95,751 173,030 195,153
- ------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS............................................. 100,565 191,844 303,128
NET ASSETS:
Beginning of year................................................ 1,302,570 1,564,744 2,054,242
- ------------------------------------------------------------------------------------------------------------
END OF YEAR*..................................................... $1,403,135 $1,756,588 $2,357,370
- ------------------------------------------------------------------------------------------------------------
* Includes undistributed net investment income of:................. $449 $955 $2,119
- ------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PG$PCN>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) FOR THE YEAR ENDED DECEMBER
31, 1996
<TABLE>
<CAPTION>
ZERO ZERO ZERO
COUPON COUPON COUPON
BOND FUND BOND FUND BOND FUND
PORTFOLIO PORTFOLIO PORTFOLIO
SERIES SERIES SERIES
1998 2000 2005
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATIONS:
Net investment income............................................ $ 65,673 $ 76,115 $ 94,226
Net realized gain (loss)......................................... 1,301 (1,828) (5,606)
Increase in net unrealized depreciation.......................... (17,675) (25,539) (17,386)
- ------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS........................... 49,299 48,748 71,234
- ------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................................ (78,270) (88,804) (106,679)
Net realized gain................................................ (943) -- --
- ------------------------------------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM DISTRIBUTIONS TO SHAREHOLDERS........ (79,213) (88,804) (106,679)
- ------------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 8):
Net proceeds from sales of shares................................ 239,165 504,039 1,100,998
Net asset value of shares issued for reinvestment of dividends... 79,213 88,804 106,679
Cost of shares reacquired........................................ (9,692) (17,510) (167,911)
- ------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS.............. 308,686 575,333 1,039,766
- ------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS............................................. 278,772 535,277 1,004,321
NET ASSETS:
Beginning of year................................................ 1,023,798 1,029,467 1,049,921
- ------------------------------------------------------------------------------------------------------------
END OF YEAR*..................................................... $1,302,570 $1,564,744 $2,054,242
- ------------------------------------------------------------------------------------------------------------
* Includes undistributed net investment income of:................. -- -- $1,326
- ------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PG$PCN>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Zero Coupon Bond Fund Portfolio Series 1998 ("Series 1998"), Zero
Coupon Bond Fund Portfolio Series 2000 ("Series 2000") and Zero Coupon Bond Fund
Portfolio Series 2005 ("Series 2005"), (collectively, "Portfolios"), 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 eleven other separate investment
portfolios: U.S. Government Securities, Social Awareness Stock, Utilities,
Travelers Quality Bond, Lazard International Stock, MFS Emerging Growth,
Federated High Yield, Federated Stock, Large Cap, Equity Income Portfolios and
Mid Cap Disciplined Equity Fund. 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
agencies and 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, or minus amortized premium, which approximates
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 an accrual basis; (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, 1997, reclassifications were made to the Portfolios'
capital accounts to reflect permanent book/tax differences and income and gains
available for distributions under income tax regulations. Accordingly, a portion
of overdistributed net investment income amounting to $318 and $397, were
reclassified to paid-in capital for Series 1998 and Series 2000, respectively.
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.
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
adviser to the Portfolios. The Portfolios pay TAMIC an investment management and
advisory fee calculated at an annual rate of 0.10% of the average daily net
assets. This fee is calculated daily and paid monthly.
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 service agreement with Mutual
Management Corp. ("MMC"), formerly known as Smith Barney Mutual Funds
Management, Inc. Travelers Insurance pays MMC, 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.
For the year ended December 31, 1997, Travelers Insurance has agreed to
reimburse Series 1998, Series 2000, and Series 2005 for expenses in the amount
of $27,937, $27,177, and $28,361, respectively.
13
<PG$PCN>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS
During the year ended December 31, 1997, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
<TABLE>
<CAPTION>
SERIES SERIES SERIES
1998 2000 2005
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Purchases............................................................ $208,035 $507,467 $188,234
Sales................................................................ 305,684 463,791 178,552
- ----------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1997, the aggregate unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
<TABLE>
<CAPTION>
SERIES SERIES SERIES
1998 2000 2005
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross unrealized appreciation........................................... $2,417 $19,525 $129,642
Gross unrealized depreciation........................................... (799) (4,794) --
- ---------------------------------------------------------------------------------------------------------
Net unrealized appreciation............................................. $1,618 $14,731 $129,642
- ---------------------------------------------------------------------------------------------------------
</TABLE>
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. Securities equal to the initial margin amount are
segregated by the custodian in the name of the broker. Additional securities are
also segregated up to the current market value of the futures contracts. 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 received or made 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 Portfolio records 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 enter into such contracts to hedge a portion of their
portfolios. The Portfolios bear the market risk that arises from changes in the
value of the financial instruments and securities indices (futures contracts).
At December 31, 1997, the Portfolios had no open futures contracts.
6. STRIPPED SECURITIES
Each Portfolio will invest primarily in "Stripped Securities," a term used
collectively for Stripped Treasury Securities, Stripped Government Securities,
Stripped Corporate Securities, and Stripped Eurodollar Obligations; as well as
other stripped securities. Stripped securities can be securities consisting of
debt obligations that have been stripped of unmatured interest coupons,
securities consisting of unmatured interest coupons that have been stripped from
debt obligations, or debt obligations that are issued without interest coupons
and are sold at substantial discounts from their face amounts.
Stripped securities do not make periodic payments of interest prior to
maturity. The market value of stripped securities will fluctuate in response to
changes in economic conditions, interest rates and the market's perception of
the securities. Fluctuations in response to interest rates may be greater than
those for debt obligations of comparable maturities that pay interest currently.
The amount of fluctuation increases with a longer period of maturity.
14
<PG$PCN>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. CAPITAL LOSS CARRYFORWARD
At December 31, 1997, Series 2000 and Series 2005 had, for Federal income
tax purposes, approximately $5,200 and $8,500, respectively, of capital loss
carryforwards available to offset future capital gains. 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. The amount and expiration of the
carryforwards are indicated below. Expiration occurs on December 31 of the year
indicated:
<TABLE>
<CAPTION>
2003 2004 2005
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Series 2000................................................................ $ 700 -- $4,500
Series 2005................................................................ 1,800 $1,700 5,000
- ---------------------------------------------------------------------------------------------------------
</TABLE>
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, 1997 DECEMBER 31, 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
SERIES 1998
Shares sold................................................... 5,116 23,525
Shares issued on reinvestment................................. 7,560 7,906
Shares redeemed............................................... (3,138) (944)
- -------------------------------------------------------------------------------------------------------
Net Increase.................................................. 9,538 30,487
- -------------------------------------------------------------------------------------------------------
SERIES 2000
Shares sold................................................... 10,557 50,040
Shares issued on reinvestment................................. 9,576 8,881
Shares redeemed............................................... (3,082) (1,710)
- -------------------------------------------------------------------------------------------------------
Net Increase.................................................. 17,051 57,211
- -------------------------------------------------------------------------------------------------------
SERIES 2005
Shares sold................................................... 29,538 111,855
Shares issued on reinvestment................................. 11,994 10,654
Shares redeemed............................................... (23,752) (16,627)
- -------------------------------------------------------------------------------------------------------
Net Increase.................................................. 17,780 105,882
- -------------------------------------------------------------------------------------------------------
</TABLE>
15
<PG$PCN>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
For a share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
ZERO COUPON BOND FUND PORTFOLIO SERIES 1998 1997 1996 1995(a)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR................................... $9.99 $10.25 $10.00
- ---------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income (b).......................................... 0.57 0.53 0.12
Net realized and unrealized gain (loss)............................ 0.04 (0.13) 0.13
- ---------------------------------------------------------------------------------------------------------
Total Income From Operations......................................... 0.61 0.40 0.25
- ---------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income.............................................. (0.56) (0.65) --
Net realized gains................................................. (0.01) (0.01) --
- ---------------------------------------------------------------------------------------------------------
Total Distributions.................................................. (0.57) (0.66) --
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR......................................... $10.03 $9.99 $10.25
- ---------------------------------------------------------------------------------------------------------
TOTAL RETURN......................................................... 6.13% 3.94% 2.50%++
- ---------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S)...................................... $1,403 $1,303 $1,024
- ---------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses (b)(c).................................................... 0.15% 0.15% 0.15%+
Net investment income.............................................. 5.55 5.64 5.55+
- ---------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE.............................................. 17% 19% 20%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(a) For the period from October 11, 1995 (commencement of operations) to
December 31, 1995.
(b) For the years ended December 31, 1997 and 1996 and the period ended December
31, 1995, Travelers Insurance reimbursed the Portfolio for $27,937, $31,112
and $14,257 in expenses, respectively. If expenses were not reimbursed, the
per share decrease of net investment income and actual expense ratios would
have been as follows:
<TABLE>
<CAPTION>
PER SHARE DECREASES EXPENSE RATIOS
TO NET INVESTMENT INCOME WITHOUT REIMBURSEMENT
------------------------ ---------------------
<S> <C> <C>
1997 $ 0.20 2.21%
1996 0.24 2.82
1995 0.14 6.51+
</TABLE>
(c) The expense ratios for the years ended December 31, 1997 and 1996 and the
period ended December 31, 1995 reflect expense reimbursement by Travelers
Insurance in connection with voluntary expense limitations.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
16
<PG$PCN>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
ZERO COUPON BOND FUND PORTFOLIO SERIES 2000 1997 1996 1995(a)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR................................... $9.96 $10.31 $10.00
- ---------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income (b).......................................... 0.59 0.50 0.13
Net realized and unrealized gain (loss)............................ 0.13 (0.22) 0.18
- ---------------------------------------------------------------------------------------------------------
Total Income From Operations......................................... 0.72 0.28 0.31
- ---------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income.............................................. (0.59) (0.63) --
- ---------------------------------------------------------------------------------------------------------
Total Distributions.................................................. (0.59) (0.63) --
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR......................................... $10.09 $9.96 $10.31
- ---------------------------------------------------------------------------------------------------------
TOTAL RETURN......................................................... 7.20% 2.76% 3.10%++
- ---------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S)...................................... $1,757 $1,565 $1,029
- ---------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses (b)(c).................................................... 0.15% 0.15% 0.15%+
Net investment income.............................................. 5.88 5.74 5.61+
- ---------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE.............................................. 29% 33% 34%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(a) For the period from October 11, 1995 (commencement of operations) to
December 31, 1995.
(b) For the years ended December 31, 1997 and 1996 and the period ended December
31, 1995, Travelers Insurance reimbursed the Portfolio for $27,177, $31,032
and $14,257 in expenses, respectively. If expenses were not reimbursed, the
per share decrease of net investment income and actual expense ratios would
have been as follows:
<TABLE>
<CAPTION>
PER SHARE DECREASES EXPENSE RATIOS
TO NET INVESTMENT INCOME WITHOUT REIMBURSEMENT
------------------------ ---------------------
<S> <C> <C>
1997 $ 0.16 1.80%
1996 0.20 2.49
1995 0.14 6.51+
</TABLE>
(c) The expense ratios for the years ended December 31, 1997 and 1996 and the
period ended December 31, 1995 reflect expense reimbursement by Travelers
Insurance in connection with voluntary expense limitations.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
17
<PG$PCN>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
ZERO COUPON BOND FUND PORTFOLIO SERIES 2005 1997 1996 1995(a)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR................................ $9.97 $10.48 $10.00
- ---------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income (b)....................................... 0.60 0.48 0.13
Net realized and unrealized gain (loss)......................... 0.56 (0.38) 0.35
- ---------------------------------------------------------------------------------------------------------
Total Income From Operations...................................... 1.16 0.10 0.48
- ---------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income........................................... (0.60) (0.61) --
- ---------------------------------------------------------------------------------------------------------
Total Distributions............................................... (0.60) (0.61) --
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR...................................... $10.53 $9.97 $10.48
- ---------------------------------------------------------------------------------------------------------
TOTAL RETURN...................................................... 11.63% 0.90% 4.80%++
- ---------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S)................................... $2,357 $2,054 $1,050
- ---------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses (b)(c)................................................. 0.15% 0.15% 0.15%+
Net investment income........................................... 6.11 6.14 5.89+
- ---------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE........................................... 9% 17% 23%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(a) For the period from October 11, 1995 (commencement of operations) to
December 31, 1995.
(b) For the years ended December 31, 1997 and 1996 and the period ended December
31, 1995, Travelers Insurance reimbursed the Portfolio for $28,361, $30,922
and $14,256 in expenses, respectively. If expenses were not reimbursed, the
per share decrease of net investment income and actual expense ratios would
have been as follows:
<TABLE>
<CAPTION>
PER SHARE DECREASES EXPENSE RATIOS
TO NET INVESTMENT INCOME WITHOUT REIMBURSEMENT
------------------------ ---------------------
<S> <C> <C>
1997 $ 0.13 1.52%
1996 0.15 2.17
1995 0.14 6.48+
</TABLE>
(c) The expense ratios for the years ended December 31, 1997 and 1996 and the
period ended December 31, 1995 reflect expense reimbursement by Travelers
Insurance in connection with voluntary expense limitations.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
18
<PG$PCN>
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees of
The Travelers Series Trust:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of the Zero Coupon Bond Fund Portfolio Series
1998, Zero Coupon Bond Fund Portfolio Series 2000 and the Zero Coupon Bond Fund
Portfolio Series 2005 as of December 31, 1997, the related statements of
operations, the statements of changes in net assets and financial highlights for
the year then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The statements of changes in net assets for the year ended December 31,
1996 and the financial highlights for the year ended December 31, 1996 and the
period from October 11, 1995 (commencement of operations) to December 31, 1995
were audited by other auditors whose report thereon, dated February 24, 1997,
expressed an unqualified opinion on those financial statements and those
financial highlights.
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, 1997, by correspondence with the custodian. As to securities
purchased but not yet received, we performed other appropriate auditing
procedures. 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
Zero Coupon Bond Fund Portfolio Series 1998, Zero Coupon Bond Fund Portfolio
Series 2000 and Zero Coupon Bond Fund Portfolio Series 2005 of the Travelers
Series Trust as of December 31, 1997, the results of their operations, the
changes in their net assets and financial highlights for the year then ended, in
conformity with generally accepted accounting principles.
/s/KPMG PEAT MARWICK LLP
New York, New York
February 10, 1998
19
<PG$PCN>
- --------------------------------------------------------------------------------
TAX INFORMATION (UNAUDITED)
The following percentages of ordinary income dividends paid by the Trust
are derived from Federal obligations and may be exempt from taxation at the
state level.
<TABLE>
<S> <C>
Zero Coupon Bond Fund Portfolio Series 1998.................................. 56.32%
Zero Coupon Bond Fund Portfolio Series 2000.................................. 54.79%
Zero Coupon Bond Fund Portfolio Series 2005.................................. 84.63%
</TABLE>
20
<PG$PCN>
Investment Adviser
TRAVELERS ASSET MANAGEMENT INTERNATIONAL CORPORATION
Hartford, Connecticut
Independent Auditors
KPMG PEAT MARWICK LLP
New York, New York
Custodian
PNC BANK, N.A.
This report is prepared for the general information of contract owners and is
not an offer of shares of Zero Coupon Bond Fund Portfolio Series 1998, Zero
Coupon Bond Fund Portfolio Series 2000 and Zero Coupon Bond Fund Portfolio
Series 2005. It should not be used in connection with any offer except in
conjunction with the Prospectuses for the Variable Universal Life Insurance
products offered by The Travelers Insurance Company and The Travelers Life and
Annuity Company and the Prospectuses for the underlying funds, which
collectively contain all pertinent information, including the applicable sales
commissions.
VG-ZERO (Annual) (12-97) Printed in U.S.A.
<PG$PCN>
THE TRAVELERS VARIABLE
PRODUCTS FUNDS
ANNUAL REPORTS
December 31, 1997
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
<PG$PCN>
ANNUAL REPORT FOR THE TRAVELERS VARIABLE PRODUCTS FUNDS
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
We are pleased to provide the annual report for Managed Assets Trust, High Yield
Bond Trust, Capital Appreciation Fund, Cash Income Trust ("Trust" or "Fund") and
the Travelers Series Trust (U.S. Government Securities, Social Awareness Stock
and Utilities Portfolios; "Portfolios") for the year ended December 31, 1997.
In this letter, we briefly discuss general economic and market conditions. In
addition, more detailed comparisons showing the growth of a hypothetical $10,000
investment in each Trust or Portfolio since its inception can be found in this
report. A detailed summary of performance and current holdings for each Trust or
Portfolio can be found in the pages listed below.
<TABLE>
<CAPTION>
MARKET SCHEDULE OF
COMMENTARY INVESTMENTS
---------- -----------
<S> <C> <C>
Managed Assets Trust.................................. 3 9
High Yield Bond Trust................................. 4 17
Capital Appreciation Fund............................. 5 23
Cash Income Trust..................................... 6 26
U.S. Government Securities Portfolio.................. 39 44
Social Awareness Stock Portfolio...................... 39 45
Utilities Portfolio................................... 40 48
</TABLE>
ECONOMIC REVIEW AND OUTLOOK
The big story in the second half of 1997 was the Asian economic and financial
crisis. What started out as a localized disturbance in Thailand in July 1997
soon spread to other countries in Southeast Asia and wreaked havoc on their
currency and capital markets. The events in Asia raise the specter of a global
economic slowdown and prospects of global deflation.
We begin with a discussion of the outlook for inflation and the potential for
deflation with a focus on the U.S. economy. The remarkable string of good news
on the inflation front in the U.S. continued in the fourth quarter of 1997. The
Producer Price Index ("PPI") fell slightly in the fourth quarter and declined by
- -1.2% for 1997. Producer prices fell in 9 out of 12 months in 1997 while the
Consumer Price Index rose by a mere 1.7% in 1997, the smallest rise since 1986.
Inflation has rarely or ever been so low at such a late stage in the economic
cycle.
Technology-driven productivity gains have contributed to the recent
disinflationary trend and the significant devaluation of several Asian
currencies should result in lower import prices and help domestic inflation to
decline further.
With worldwide overproduction, the cost of items such as cars and electronic
goods is actually showing near-zero growth. Prices of some of the most important
industrial commodities, including oil and copper, have tumbled in recent months
and the price of gold, a traditional hedge against inflation, was at an 18-year
low in December 1997, well below $300 per ounce.
Despite a tight labor market in the U.S., wage inflation has not surged. Global
deflationary pressures should offset wage inflation in 1998. (Deflation is a
decline in the prices of goods and services or when there are major imbalances,
too much supply and little or no demand. Disinflation is a slowing down in the
rate of price increases and means you do not have pricing power today, but there
are not any major imbalances or dislocations to the economy) While we
acknowledge the arguments in favor of global deflation, we have not seen enough
evidence to foresee zero or negative inflation in 1998 and believe we will
continue to experience a period of overall price stability.
The crisis in Southeast Asia also raises the possibility of a global economic
slowdown. The U.S. economy derives almost 15% of its total output from exports.
Approximately 10% of these exports are made to Southeast Asia. While it is
difficult to predict the eventual impact on U.S. exports, most reasonable
estimates of growth shortfalls suggest that the impact on U.S. Gross Domestic
Product ("GDP") growth will be no more that -0.5%. Economic growth forecasts for
1998 have been revised down recently and the consensus GDP growth estimate for
1998 is now about 2.5%.
The continued good news on the inflation front sent U.S. interest rates lower
during the fourth quarter. Long-term rates fell from 6.4% to 5.9% as investors
began to discount a deflationary outlook and became comfortable with a stable
monetary policy environment.
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Short-term interest rates have held steady even as inflation and long-term rates
have fallen. Even though the Federal Reserve Board ("Fed") has not raised short
rates for several months now, monetary policy has effectively become tighter as
the real federal funds rate, (actual rate less inflation), has risen to 3.3%.
(The federal-funds rate is the interest rate banks charge each other for
overnight loans and a closely watched indicator of the direction of interest
rates.) With Asian currencies in turmoil, we believe that the Fed is likely to
stay put here and that the odds of another Fed hike are remote.
EQUITY MARKET COMMENTARY
The year 1997 turned out to be another spectacular one for the U.S. stock
market. For the first time ever, the U.S. stock market posted three consecutive
years of gains in excess of 20%. The current bull market continues to be driven
by stable economic growth, robust earnings growth and a continuation of low
inflation.
Stock market volatility also increased in 1997 when the Dow Jones Industrial
Average ("DJIA") (DJIA is a price-weighted average of 30 actively traded blue
chip stocks, primarily industrials.) moved up or down by more than 1% every
third trading day on average. The uncertainty on the earnings front as a result
of the Asian financial and currency crisis should sustain a high level of
volatility and complicate the market outlook for 1998.
After a strong showing in the first half of 1997, the U.S. stock market posted
solid gains in the third quarter. The S&P 500 Index ("S&P 500"), gained 7.5% in
the third quarter of 1997, the Russell 2000 Index ("Russell 2000"), rose sharply
by 14.9% and the NASDAQ Index performed even better with a spectacular rise of
16.9%. The U.S. stock market posted a mixed performance in the fourth quarter.
The S&P 500 gained 2.9% in the fourth quarter, while the Russell 2000 fell by
- -3.4% and the NASDAQ Index declined by -6.8%. For the calendar year 1997, the
S&P 500 rose by 33.4%, the Russell 2000 advanced by 22.4% and the NASDAQ Index
gained 21.6%. (The S&P 500 is a capitalization-weighted measure of 500 widely
held common stocks. The Russell 2000 is made up of 2,000 smaller-capitalized
U.S.-based companies whose common stocks trade on either the New York, American
or NASDAQ stock exchanges.)
Stock market volatility increased in the third quarter with the DJIA registering
its second-largest point decline and its single-largest daily gain within a
three-week period in the middle of the third quarter. Most stock market indexes
fell about 3% on August 15, 1997, on a groundswell of earnings concerns after a
few, large cap consumer companies warned about earnings disappointments for the
third quarter. Investor sentiment reversed on September 2, 1997 when a weaker
economic report from the National Association of Purchasing Managers ("NAPM")
dispelled fears of further Fed tightening. The stock market reversed course with
an equally spectacular 3% gain as bond prices rose sharply also.
The events in Southeast Asia came into sharp focus for U.S. investors when a
sell-off in Hong Kong, a beacon of stability in the region, dropped the DJIA by
554 points on Monday, October 27, 1997, and was a major factor of the largest
point loss in history. After a wild swing in trading the following day, stock
prices began to stabilize. Despite more bad news in terms of large-scale
bankruptcies in South Korea and Japan in the ensuing weeks, U.S. investors
assessed a relatively modest impact on the domestic economy and the stock market
was able to recover its losses from Gray Monday and even nudge higher by
year-end in select sectors.
Second quarter earnings showed the same pattern of good news from earlier
quarters which investors have now almost come to expect as a routine outcome.
Positive surprises again far outnumbered disappointing earnings reports. Over
61% of all companies reported earnings above consensus while only 26% failed to
deliver on earnings expectations.
Third quarter earnings were also ahead of expectations. The final tally on the
earnings scorecard showed that 55% of all companies reported positive earnings
surprises while 28% turned in earnings disappointments. We observe yet again
that the current string of good earnings reports has now reached 19 consecutive
quarters and is unprecedented in terms of both magnitude and duration.
The consensus forecast for 1998 corporate earnings growth is now 7.2%. The key
to stock market performance in 1998 will be the extent to which corporate
profits remain immune to the problems in Asia. The obvious contributors to
likely shortfalls in earnings will be currency translation losses and lower
export revenues stemming from lower demand in Asia. With current valuations at
fairly high levels, the stock market should be intolerant of any earnings
disappointments.
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We suspect that the global stock markets are currently more vulnerable to the
woes of a weak economy than the risk of higher interest rates stimulated by
economic strength. It is difficult to gauge the precise impact of the Asian
crisis on corporate earnings and as a result, 1998 promises to be a year of
great uncertainty.
FIXED INCOME MARKET COMMENTARY
For the first time in seven quarters, bonds outperformed stocks as the Asian
crisis that began in Thailand in July 1997 spread throughout Asia and other
emerging markets. The crisis impacted all global markets in late October when
the Hong Kong dollar came under pressure. The S&P 500 went down roughly 10% in
October leading to a sharp rally in the U.S. bond market, while declining bond
yields and bargain hunting by some investors helped stabilize financial markets
as the reporting period drew to a close. The U.S. stock market and emerging debt
markets posted positive returns in November and December as both of these
markets did not offset the amount lost in October. As of this writing, Asia's
problems continue to challenge many investment professionals.
We believe that many investors have underestimated the damage caused by the
crisis in Asia. Imports from countries with devalued currencies will keep
downward pressure on the inflation rate in the U.S., taking that issue off the
radar screen for many investors. The reduction in corporate revenues will impact
some combination of profits and employment. To the extent that corporations
reduce their labor forces to preserve profits, pressure will be taken off U.S.
labor markets and the Fed will be given a compelling reason to cut rates.
Moreover, many of the problems in Asia are the result of building too much
capacity in industries such as automobiles, chemicals and semiconductors. This
overcapacity, which has been exacerbated by the decline of demand in Asia,
should slow down U.S. capital spending growth, which has been in the recent past
the fastest-growing component of GDP.
Looking ahead to 1998, we expect that the difference between short-term and
long-term interest rates will probably widen. In our opinion, one of two
scenarios could develop that could cause this change in the relationship between
interest rates. We believe the most likely scenario is that ongoing financial
turmoil in Asian could hamper U.S. economic growth and lead the Fed to
compensate by lowering short-term interest rates. The other possibility is that
U.S. economy continues to grow robustly, heightening investor concerns of
greater inflationary pressures. In this case, investors would shift their
attention to the tight U.S. labor market, reflecting their inflationary concerns
in the form of higher long-term interest rates. This latter scenario could
happen if Asian economies recover quickly or if interest-rate sensitive
industries of the U.S. economy pick up sufficiently to offset any adverse
affects that the Asian crisis might have on domestic economic growth.
MANAGED ASSETS TRUST
Managed Assets Trust ("Trust") returned 2.40% for the fourth quarter of 1997
versus 3.14% for the 60% S&P 500, 40% Lehman Government/Corporate Index
benchmark. Returns were hurt by being slightly overweighted in stocks and a
small exposure to emerging market debt. For the year ended December 31, 1997,
the Trust returned 21.31% versus 23.92% for the 60/40 benchmark primarily hurt
by its underweighting in stocks in the second quarter of 1997.
For the first time in seven quarters, bonds outperformed stocks as the Asian
crisis that started in Thailand in July spread throughout Asia and other
emerging markets. The crisis hit all global markets in late October when the
Hong Kong dollar was under pressure. The S&P 500 dropped 10% in October leading
to a sharp rally in the U.S. bond market. Emerging market debt declined even
more than stocks, with the J.P. Morgan EMBI Index declining 14% from peak to
trough. The decline in bond yields and bargain hunting by investors stabilized
markets so that U.S. stocks and emerging market debt posted positive returns in
November and December, although not offsetting the amount they lost in October.
However, Asian problems continued to occur and kept the markets on guard. For
the quarter, the S&P 500 was up roughly 2.86%, bringing its return to 33.35% for
the year. The Lehman Government/Corporate Bond Index was up 3.25% for the
quarter bringing its return to 9.76% for the year.
Looking ahead for the remainder of 1998, we expect that the difference between
short-term and long-term interest rates will probably widen. In our opinion, one
of two scenarios could develop that could cause this change in the relationship
between interest rates. We believe the most likely scenario is that ongoing
financial turmoil in Asian could hamper U.S. economic growth and lead the Fed to
compensate by lowering short-term interest rates. The other possibility is that
the U.S. economy
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continues to grow robustly, heightening investor concerns of greater
inflationary pressures. In this case, investors would shift their attention to
the tight U.S. labor market, reflecting their inflationary concerns in the form
of higher long-term interest rates. This latter scenario could happen if Asian
economies recover quickly or if interest-rate sensitive industries of the U.S.
economy pick up sufficiently to offset any adverse affects that the Asian crisis
might have on domestic economic growth.
We think corporate earnings will continue to be higher than expectations as
corporations adjust their labor needs more quickly than expected for any revenue
changes caused by the Asian slowdown. Therefore, stocks should be able to
provide a 10% -- 15% return in a slower economic environment. Yet stocks may
face more risk from a stronger-than-expected economy that takes liquidity from
the financial markets. The Trust has an emphasis on stocks, while its bond
portfolio's duration is longer than its target because of our bullishness on
bonds.
HIGH YIELD BOND TRUST
For the year ended December 31, 1997, the High Yield Bond Trust ("Trust") had a
total return of 16.56%. In comparison, the Lehman Aggregate Bond Index posted a
total return of 9.65% for the same period. The high yield bond market generated
relatively strong performance throughout 1997 with total returns in excess of
about 13% compared to 6% to 11% returns for intermediate (i.e., less than 10
years) U.S. Treasurys and investment grade corporate bonds and roughly 12% to
14% for long-term (i.e., ten or more years) U.S. Treasurys and investment grade
corporate bonds.
The Fund generated competitive total returns within that range for 1997. Within
the high yield bond market, the lower-quality issues generated the strongest
total returns in 1997 (i.e., a roughly 16% range). This was not surprising given
the strong performance of the domestic stock market. The lower-quality segment
of the high yield bond market tends to be more closely correlated to the
domestic stock market than the higher-quality segments of the high yield bond
market.
The high yield bond market began to underperform U.S. Treasurys in the fourth
quarter of 1997 as fears of an economic slowdown and lower corporate profits
caused high yield bond premiums to increase versus the U.S. Treasury market. The
greatest underperformance in the fourth quarter of 1997 was among the
lower-quality issues. In periods of increasing economic uncertainty, the
lower-quality segments of the high yield bond market generally underperform
because of their greater vulnerability to weaker economic conditions. The more
interest-rate sensitive higher quality issues generated the strongest total
returns as general interest rates declined.
By the start of the fourth quarter, the crisis in Asia had taken center stage
with severe currency and financial market declines in a number of Asian
countries potentially threatening economic stability not only in the Far Eastern
region, but throughout the world. Asia represents more than 25% of world
economic output and is a significant producer and consumer of a large number of
products and services. Consequently, there was a dramatic increase in market
volatility in the fourth quarter, especially in the world's stock markets. Many
investors began to invest more aggressively in U.S. Treasurys that are viewed as
the ultimate safe haven during periods of economic uncertainty. Despite this
increasing uncertainty over economic growth and corporate profitability, the
domestic stock market had another strong year, with total returns in the 25% to
33% range.
In 1997, the domestic high yield bond market responded favorably to the strength
in the domestic stock and U.S. Treasury markets. During the year, a total of $19
billion of new money flowed into open-end high yield bond funds. In addition,
there was higher demand for high-yield bonds from insurance companies and
pension funds. The overall demand was significant enough to absorb a record
total of more than $120 billion of new high yield issues. Given this record new
issuance, the high yield bond market now totals more than $450 billion in size,
representing a meaningful 25% of the entire domestic corporate bond market.
We continue to believe that U.S. economic growth remains mixed and that many
consumer-sensitive sectors will continue to experience fierce price competition.
In addition, the significant problems in Asia could also put severe pressure on
commodity goods prices as troubled Asian companies attempt to increase their
exports to the rest of the world to make up for the expected economic declines
in their own region. We also believe that a slowdown in overall world economic
growth is inevitable as the severe economic decline in Asia sharply reduces
demand for U.S. and European products. Consequently, the first half of 1998
could see an increase in many default rates among certain high yield bonds,
especially the weaker more vulnerable companies that are having difficulty
competing.
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We believe the financial markets will remain choppy as investors continue to
sort out the potential negative impact on world economic growth from the large
declines in both the currencies and financial assets of the emerging markets in
Asia and Latin America.
CAPITAL APPRECIATION FUND
For the year ended December 31, 1997, the Capital Appreciation Fund posted a
total return of 26.14%. In comparison, the Russell 2000 returned 22.36% for the
same period. As the year ended, Southeast Asia became the focal point of
international markets, injecting volatility into equities worldwide. Despite
substantial and at times unsettling fluctuations, the S&P 500 gained 33.35% for
the year ended December 31, 1997.
Asia's expanding financial crisis engulfed new victims, and South Korea, the
world's eleventh largest economy, became the latest to be infected with the
"Asian contagion." At home, the growing Asian downturn raised new concerns about
corporate earnings, and selling became pronounced. As a result, the DJIA
experienced its worst single day point decline, dropping more than 550 points on
October 27, 1997. Markets around the world moved lower, and most established
markets actually experienced a true correction.
However, U.S. stocks proved resilient, and many investors once again treated the
decline as a buying opportunity. Specifically, a global flight toward quality
benefited the U.S. Treasury market, where long-term yields fell from 6.40% to
5.92% -- a substantial decline. Although stocks drew strength from falling
interest rates, the rebound was limited in scope. The large multinationals drove
the S&P 500's returns towards year end, and as a result, most other areas
underperformed the Index.
During the period, we remained focused on a wide variety of companies including
technology, telecommunications, pharmaceuticals, health care, financial services
and select retailers. Ultimately, we look for companies that are benefiting from
broader demographic trends both here and abroad. With Asia's escalating crisis,
the follow-through effects will most likely become more intense in coming
months, so we've focused on well-established companies with dominant business
franchises.
In the technology area, we zeroed in on blue-chip companies with predictable
earnings streams that should not be impacted by Asia's turmoil. Microsoft Corp.
has been a long time favorite of ours, and remains a core position in the Fund.
The company dominates the software industry and is now making headway into
networking with the proliferation of its WindowsNT product. We also held Dell
Computers & Co. which, despite reporting record earnings, finished the reporting
period lower on concerns over the Far East. We still believe that Dell's
long-term earnings potential is intact because revenues from the Far East
account for only a fraction of Dell's sales. More recently, we were able to use
the technology sector's weakness to add or increase several positions, including
America Online, Inc. and Cisco Systems, Inc.
We also held several high-quality pharmaceutical manufacturers, including
Warner-Lambert Co., Eli Lilly Corp. and Pfizer, Inc. These companies have either
launched or are rolling out several exciting new products with exceptional sales
potential. Combine this with an aging population that will increasingly draw on
pharmaceutical products to treat ailments, and this creates tremendous long-term
earnings for select drug manufacturers. Although Warner-Lambert enjoyed an
incredible run in 1997, the stock price suffered a temporary setback recently.
One of its two new blockbuster drugs (Rezulin) received negative press regarding
side-effects that affect a very small portion of the drug's users. However, due
to Rezulin's quality of life improvements for diabetics, we still believe that
the drug could eventually generate over $1 billion dollars in sales per year.
While we had many strong performers, we did have some disappointments, with
Oxford Health being the most significant. Two weeks prior to the company's
earnings announcement, we met with Denver-based senior management and did a
thorough review of the company. We sold our position at a loss after that
meeting.
As we enter 1998, liquidity flows into stocks remain strong, fueled in part by
lower interest rates. Looking at the economy, the hit to GDP from Asia's
downturn should act as a brake, reigning in any inflationary pressures, which is
good news for stocks. The current danger is that a slowdown in the global
economy will inevitably work its way back to some U.S. companies. Pricing power
remains weak for most of Corporate America, and rising labor wages continue to
pressure margins at many companies. But in a less robust environment, we believe
that superior companies with exceptional earnings
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ANNUAL REPORT FOR THE TRAVELERS VARIABLE PRODUCTS FUNDS
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will be rewarded. We've therefore focused our assets in a variety of
high-quality companies where we are very confident about their future earnings.
A result, we are positive about the Fund's prospects in 1998.
CASH INCOME TRUST
Cash Income Trust ("Fund") seeks to provides shareholders with high current
income from short-term money market instruments while emphasizing preservation
of capital and maintaining a high degree of liquidity. The Fund pursues this
objective by investing in securities maturing in one year or less.
For the year ended December 31, 1997, the Fund generated an effective yield of
5.03% and as of December 31, 1997 had an average maturity of 31 days. The Fund
continues to invest primarily in U.S. Treasurys and government agency
securities. This investment strategy has provided the Fund with safety,
liquidity and stability.
You should be aware that your investment in the Fund is neither insured nor
guaranteed by the U.S. Government. Moreover, no assurance can be given that the
Fund will be able to maintain a stable net asset value of $1.00 per share.
In closing, we would like to thank you for your investment in Managed Assets
Trust, High Yield Bond Trust, Capital Appreciation Fund and Cash Income Trust.
We look forward to continuing to help you pursue your financial goals.
Sincerely,
/s/ HEATH B. MCLENDON
Heath B. McLendon
Chairman
January 26, 1998
6
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PERFORMANCE COMPARISON -- MANAGED ASSETS TRUST AS OF 12/31/97 (UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
------------------------------------
<S> <C>
Year Ended 12/31/97 21.31%
Five Years Ended 12/31/97 13.40%
Ten Years Ended 12/31/97 13.06%
</TABLE>
This chart assumes an initial investment of $10,000 made on
December 31, 1987, assuming reinvestment of dividends, through
December 31, 1997. 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 Standard Managed Government/ Consumer
Period & Poor's Assets Corporate Price
(Fiscal Year 500 Index Trust Bond Index Index
Covered)
<S> <C> <C> <C> <C>
Dec-87 10000 10000 10000 10000
Dec-88 11657 10919 10758 10442
Dec-89 15344 13880 12289 10927
Dec-90 14867 14223 13308 11594
Dec-91 19388 17310 15454 11949
Dec-92 20864 18199 16626 12295
Dec-93 22961 19897 18460 12633
Dec-94 23263 19497 17811 12971
Dec-95 28363 24726 21239 13301
Dec-96 34872 28133 21854 13742
Dec-97 46506 34128 23987 13975
</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 12/31/97 (UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------------------------
<S> <C>
Year Ended 12/31/97 16.56%
Five Years Ended 12/31/97 11.95%
Ten Years Ended 12/31/97 10.23%
</TABLE>
This chart assumes an initial investment of $10,000 made on
December 31, 1987, assuming reinvestment of dividends, through
December 31, 1997. 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 issues, 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
High Yield Consumer
Measurement Period Index Top High Yield Lehman Aggregate Price
(Fiscal Year Covered) Tier Bond Trust Bond Index Index
<S> <C> <C> <C> <C>
Dec-87 10000 10000 10000 10000
Dec-88 11223 11457 10789 10442
Dec-89 12703 11618 12357 10927
Dec-90 12821 10558 13465 11594
Dec-91 15775 13315 15619 11949
Dec-92 17130 15066 16774 12295
Dec-93 19806 17177 18410 12633
Dec-94 19769 16960 17873 12971
Dec-95 23461 19584 21175 13301
Dec-96 25976 22727 21943 13742
Dec-97 29257 26491 24060 13975
</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.
7
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PERFORMANCE COMPARISON -- CAPITAL APPRECIATION FUND AS OF 12/31/97 (UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------------------------
<S> <C>
Year Ended 12/31/97 26.14%
Five Years Ended 12/31/97 19.31%
Ten Years Ended 12/31/97 16.46%
</TABLE>
This chart assumes an initial investment of $10,000 made on
December 31, 1987, assuming reinvestment of dividends, through
December 31, 1997. 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 Appreciation & Poor's 2000 Price
Covered) Fund 500 Index Index Index
<S> <C> <C> <C> <C>
Dec-87 10000 10000 10000 10000
Dec-88 11657 11006 12501 10442
Dec-89 15344 12735 14535 10927
Dec-90 14867 11940 11703 11594
Dec-91 19388 16139 17093 11949
Dec-92 20864 18980 20239 12295
Dec-93 22961 21844 24060 12633
Dec-94 23263 20803 9983 12971
Dec-95 28363 28369 12825 13301
Dec-96 34872 36370 14940 13742
Dec-97 46537 45879 18282 13975
</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.
8
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- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS DECEMBER 31, 1997
MANAGED ASSETS TRUST
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
COMMON STOCK -- 63.6%
- ---------------------------------------------------------------------------------------------------------
CONSUMER CYCLICALS -- 8.5%
13,600 Accustaff Inc.++............................................................ $ 312,800
17,500 Albertsons, Inc. ........................................................... 829,063
9,800 Borders Group Inc.++ ....................................................... 306,863
24,271 Cendant Corp. .............................................................. 834,326
9,700 Colgate-Palmolive Co. ...................................................... 712,950
14,200 Costco Cos., Inc. .......................................................... 633,231
10,400 CVS Corp. .................................................................. 666,250
13,000 Family Dollar Stores Inc. .................................................. 381,063
10,500 Federated Dept. Stores Inc.++............................................... 452,156
10,500 Gannett Co. ................................................................ 649,031
7,800 Gap Inc. ................................................................... 276,413
7,100 Gillette Co. ............................................................... 713,106
14,100 Home Depot Inc. ............................................................ 830,138
5,200 Jones Apparel Group, Inc. .................................................. 223,600
10,248 Kimberly-Clark Corp. ....................................................... 505,355
4,700 Lowes Cos., Inc. ........................................................... 498,788
5,400 McDonalds Corp. ............................................................ 257,850
4,000 MGM Grand, Inc. ............................................................ 144,250
9,900 Mirage Resorts, Inc. ....................................................... 225,225
10,400 New York Times Co., Class A shares.......................................... 687,700
25,600 Procter & Gamble Co. ....................................................... 2,043,200
4,400 Rohm & Haas Co. ............................................................ 421,300
8,200 Ross Stores, Inc. .......................................................... 298,788
300 Stride Rite Corp. .......................................................... 3,600
5,800 Thomas & Betts Corp. ....................................................... 274,050
15,900 Time Warner Inc. ........................................................... 985,800
12,100 TJX Cos., Inc. ............................................................. 415,938
13,000 Torchmark Corp. ............................................................ 546,813
10,400 Unilever NV................................................................. 649,350
10,400 Walgreen Co. ............................................................... 326,300
43,000 Wal-Mart Stores, Inc. ...................................................... 1,695,813
12,477 Walt Disney Co. ............................................................ 1,236,003
- ---------------------------------------------------------------------------------------------------------
19,037,113
- ---------------------------------------------------------------------------------------------------------
CONSUMER STAPLES -- 4.9%
9,200 Anheuser-Busch Cos., Inc. .................................................. 404,800
10,875 Archer-Daniels-Midland Co. ................................................. 235,852
10,400 Brunswick Corp. ............................................................ 315,250
3,700 Campbell Soup Co. .......................................................... 215,063
44,300 Coca-Cola Co. .............................................................. 2,951,488
21,800 Conagra Inc. ............................................................... 715,313
7,510 Dean Foods Co. ............................................................. 446,845
8,700 Interstate Bakeries Corp. .................................................. 325,163
7,800 Kellogg Co. ................................................................ 387,075
7,300 Liz Claiborne, Inc. ........................................................ 305,231
29,000 PepsiCo, Inc. .............................................................. 1,056,688
45,800 Philip Morris Cos., Inc. ................................................... 2,075,313
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
MANAGED ASSETS TRUST
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
CONSUMER STAPLES -- 4.9% (CONTINUED)
14,400 Sara Lee Corp. ............................................................. $ 810,900
5,300 Thiokol Corp. .............................................................. 430,625
6,400 Whirlpool Corp. ............................................................ 352,000
- ---------------------------------------------------------------------------------------------------------
11,027,606
- ---------------------------------------------------------------------------------------------------------
ENERGY -- 0.4%
8,500 MidAmerican Energy Holdings Co. ............................................ 187,000
9,000 Schlumberger Ltd. .......................................................... 724,500
- ---------------------------------------------------------------------------------------------------------
911,500
- ---------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 9.7%
8,265 Allstate Corp. ............................................................. 751,082
6,700 Ambac Financial Group, Inc. ................................................ 308,200
9,200 American Express Co. ....................................................... 821,100
16,125 American International Group Inc. .......................................... 1,753,594
5,389 Banc One Corp. ............................................................. 292,690
7,100 Bank of New York Co., Inc. ................................................. 410,469
17,300 BankAmerica Corp. .......................................................... 1,262,900
4,300 Bankers Trust New York Corp. ............................................... 483,481
3,600 Barnett Banks Inc. ......................................................... 258,750
5,400 Baxter International Inc. .................................................. 272,363
8,136 Chase Manhattan Corp. ...................................................... 890,892
8,400 Citicorp.................................................................... 1,062,075
5,700 Comerica, Inc. ............................................................. 514,425
14,000 Federal Home Loan Mortgage Co. ............................................. 587,125
13,800 Federal National Mortgage Association....................................... 787,463
3,000 First Chicago NBD Corp. .................................................... 250,500
661 First Empire State Corp. ................................................... 307,365
11,300 First Union Corp. (N.C.).................................................... 579,125
4,700 Fleet Financial Group, Inc. ................................................ 352,206
5,700 Golden West Financial Corp. ................................................ 557,531
5,500 Hartford Financial Services Group Inc. ..................................... 514,594
3,400 J.P Morgan & Co. ........................................................... 383,775
4,000 KeyCorp New................................................................. 283,250
5,000 Mellon Bank Corp. .......................................................... 303,125
12,000 Merrill Lynch & Co., Inc. .................................................. 875,250
9,900 MGIC Investment Corp. ...................................................... 658,350
18,450 Morgan Stanley, Dean Witter, Discover and Co. .............................. 1,090,856
4,100 National City Corp. ........................................................ 269,575
14,000 NationsBank Corp. .......................................................... 851,375
4,600 Northern Trust Corp. ....................................................... 321,713
14,200 Norwest Corp. .............................................................. 548,475
5,900 PNC Bank Corp. ............................................................. 336,669
8,500 State Street Corp. ......................................................... 494,594
7,000 SunAmerica, Inc. ........................................................... 299,250
4,100 SunTrust Banks, Inc. ....................................................... 292,638
4,900 UnionBanCal Corp. .......................................................... 526,750
2,600 U.S. Bancorp................................................................ 291,038
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
MANAGED ASSETS TRUST
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
FINANCIAL SERVICES -- 9.7% (CONTINUED)
4,500 Washington Mutual Inc. ..................................................... $ 287,016
1,800 Wells Fargo & Co. .......................................................... 610,988
- ---------------------------------------------------------------------------------------------------------
21,742,617
- ---------------------------------------------------------------------------------------------------------
HEALTHCARE -- 7.6%
9,100 Abbott Laboratories......................................................... 596,619
16,400 American Home Products Corp. ............................................... 1,254,600
18,800 Beverly Enterprises, Inc. .................................................. 244,400
21,900 Bristol-Myers Squibb Co. ................................................... 2,072,288
491 Crescendo Pharmaceuticals Corp. ............................................ 5,677
16,800 Eli Lilly & Co. ............................................................ 1,169,700
11,100 Guidant Corp. .............................................................. 690,975
12,400 HBO & Co. .................................................................. 595,200
13,650 Health Management Associates Inc., Class A shares .......................... 344,663
7,300 Health Care and Retirement Corp. ........................................... 293,825
2,700 HealthCare COMPARE Corp. ................................................... 138,713
29,600 Johnson & Johnson........................................................... 1,949,900
5,800 Lincare Holdings, Inc. ..................................................... 330,600
23,100 Merck & Co. ................................................................ 2,454,375
9,500 Omnicare, Inc. ............................................................. 294,500
20,850 Pfizer Inc. ................................................................ 1,554,628
8,555 PharMerica, Inc. ........................................................... 89,560
11,319 Quorum Health Group, Inc. .................................................. 297,124
19,200 Schering-Plough Corp. ...................................................... 1,192,800
6,000 Shared Medical Systems Corp. ............................................... 396,000
7,300 Warner-Lambert Co. ......................................................... 905,200
3,200 Wellpoint Heath Networks Inc. .............................................. 135,200
- ---------------------------------------------------------------------------------------------------------
17,006,547
- ---------------------------------------------------------------------------------------------------------
INSURANCE -- 1.0%
9,600 Conseco Inc. ............................................................... 436,200
9,400 Equitable Cos., Inc. ....................................................... 467,650
10,600 Everest Reinsurance Holdings, Inc. ......................................... 437,250
6,800 Marsh & McLennan Cos., Inc.................................................. 507,025
3,950 Transatlantic Holdings, Inc. ............................................... 282,425
- ---------------------------------------------------------------------------------------------------------
2,130,550
- ---------------------------------------------------------------------------------------------------------
MATERIALS & PROCESSING -- 3.7%
6,143 Aeroquip-Vickers Inc. ...................................................... 301,391
7,600 Alumax Inc. ................................................................ 258,400
5,000 Aluminum Co. of America..................................................... 351,875
30,400 Bethlehem Steel Corp. ...................................................... 262,200
10,900 Crompton & Knowles Corp. ................................................... 288,850
8,600 Dayton Hudson Corp. ........................................................ 580,500
4,400 Eaton Corp. ................................................................ 392,700
20,200 E.I. Du Pont de Nemours & Co. .............................................. 1,213,263
4,900 Georgia-Pacific Corp. ...................................................... 297,675
4,900 Georgia-Pacific (Timber Group).............................................. 111,169
11,800 Lyondell Petrochemical Co. ................................................. 312,700
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
MANAGED ASSETS TRUST
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
MATERIALS & PROCESSING -- 3.7% (CONTINUED)
12,100 Masco Corp. ................................................................ $ 615,588
6,000 Mercury General Corp. ...................................................... 331,500
10,700 Monsanto Co. ............................................................... 449,400
7,400 National Services Industries, Inc. ......................................... 366,763
918 Raytheon Co., Class A shares................................................ 45,283
7,600 Raytheon Co., Class B shares................................................ 383,800
10,500 United Technologies Corp. .................................................. 764,531
10,800 U.S. Industries, Inc. ...................................................... 325,350
11,700 USX-US Steel Group Inc. .................................................... 365,625
3,700 Weyerhauser Co. ............................................................ 181,531
- ---------------------------------------------------------------------------------------------------------
8,200,094
- ---------------------------------------------------------------------------------------------------------
OIL -- 4.7%
9,000 Amoco Corp. ................................................................ 766,125
6,200 Atlantic Richfield Co. ..................................................... 496,775
3,496 BJ Services Co. ............................................................ 251,494
10,600 Burlington Resources Inc. .................................................. 475,013
12,000 Chevron Corp. .............................................................. 924,000
5,900 Enron Corp. ................................................................ 245,219
7,100 Ensco International Inc. ................................................... 237,850
42,700 Exxon Corp. ................................................................ 2,612,706
14,300 Mobil Corp. ................................................................ 1,032,281
5,000 Phillips Petroleum Co. ..................................................... 243,125
31,600 Royal Dutch Petroleum Co. ADR............................................... 1,712,325
16,800 Texaco Inc. ................................................................ 913,500
14,200 Unocal Corp. ............................................................... 551,138
- ---------------------------------------------------------------------------------------------------------
10,461,551
- ---------------------------------------------------------------------------------------------------------
PRODUCER DURABLES -- 5.6%
10,400 Allied Signal Inc. ......................................................... 404,950
9,200 AVX Corp. .................................................................. 169,625
18,270 Boeing Co. ................................................................. 894,088
7,400 Caterpillar Inc. ........................................................... 359,363
11,900 CBS Corp. .................................................................. 350,306
11,400 Deere & Co. ................................................................ 664,763
4,500 Dow Chemical Co. ........................................................... 456,750
8,200 Emerson Electric Co. ....................................................... 462,788
15,200 Entergy Corp. .............................................................. 455,050
58,400 General Electric Co. ....................................................... 4,285,100
6,700 Honeywell Inc. ............................................................. 458,950
9,900 Illinois Tool Works, Inc. .................................................. 595,238
5,500 International Paper Co. .................................................... 237,188
3,900 King World Productions, Inc. ............................................... 225,225
7,200 Knight-Ridder, Inc. ........................................................ 374,400
3,680 Lockheed Martin Corp. ...................................................... 362,480
12,700 LTV Corp. .................................................................. 123,825
5,000 Minnesota Mining & Manufacturing Co. ....................................... 410,313
6,200 Pitney Bowes Inc. .......................................................... 557,613
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
MANAGED ASSETS TRUST
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
PRODUCER DURABLES -- 5.6% (CONTINUED)
9,400 Raychem Corp. .............................................................. $ 404,788
11,500 20th Century Industries..................................................... 299,000
- ---------------------------------------------------------------------------------------------------------
12,551,803
- ---------------------------------------------------------------------------------------------------------
TECHNOLOGY -- 8.8%
16,300 Applied Materials, Inc. .................................................... 490,528
17,850 Cisco Systems, Inc. ........................................................ 996,253
23,550 Compaq Computer Corp. ...................................................... 1,329,103
6,462 Computer Associates International, Inc. .................................... 341,678
6,600 Dell Computer Corp. ........................................................ 554,606
23,000 Edison International........................................................ 625,313
7,400 Fluor Corp. ................................................................ 276,575
14,800 Hewlett-Packard Co. ........................................................ 925,000
27,800 Intel Corp. ................................................................ 1,952,081
19,000 International Business Machines Corp. ...................................... 1,986,688
11,569 Lucent Technologies Inc. ................................................... 924,074
9,700 Meredith Corp. ............................................................. 346,169
25,100 Microsoft Corp. ............................................................ 3,243,391
11,000 Motorola Inc. .............................................................. 627,688
18,000 Oracle Corp. ............................................................... 401,063
5,200 PacifiCorp.................................................................. 142,025
8,600 Parker-Hannifin Corp. ...................................................... 394,525
6,500 SCI Systems, Inc. .......................................................... 283,156
6,500 Sun Microsystems Inc. ...................................................... 259,594
10,700 Sysco Corp. ................................................................ 487,519
8,600 Tellabs, Inc. .............................................................. 453,919
7,400 Texas Instruments Inc. ..................................................... 333,000
9,200 Textron, Inc. .............................................................. 575,000
10,300 Tyco International Ltd. .................................................... 464,144
13,600 USX Marathon Group.......................................................... 459,000
16,800 VLSI Technology, Inc. ...................................................... 396,900
6,200 Xerox Corp. ................................................................ 457,638
- ---------------------------------------------------------------------------------------------------------
19,726,630
- ---------------------------------------------------------------------------------------------------------
TRANSPORTATION -- 2.2%
2,900 Burlington Northern Railroad Co. ........................................... 269,519
12,800 Chrysler Corp. ............................................................. 450,400
11,200 Continental Airlines, Inc., Class B shares.................................. 539,000
32,500 Ford Motor Co. ............................................................. 1,582,344
14,400 General Motors Corp. ....................................................... 873,000
13,300 Navistar International Corp. ............................................... 330,006
7,200 Norfolk Southern Corp. ..................................................... 221,850
4,800 Phelps Dodge Corp. ......................................................... 298,800
4,000 Union Pacific Corp. ........................................................ 249,750
- ---------------------------------------------------------------------------------------------------------
4,814,669
- ---------------------------------------------------------------------------------------------------------
UTILITIES -- 6.5%
9,700 Airtouch Communications Inc. ............................................... 403,156
10,500 Ameritech Corp. ............................................................ 845,250
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
MANAGED ASSETS TRUST
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
UTILITIES -- 6.5% (CONTINUED)
31,000 American Telephone & Telegraph Corp. ....................................... $ 1,898,750
9,900 Baltimore Gas & Electric Co. ............................................... 337,219
14,574 Bell Atlantic Corp. ........................................................ 1,326,234
19,000 Bellsouth Corp. ............................................................ 1,069,938
4,800 Chancellor Media Corp. ..................................................... 358,350
6,600 Clear Channel Communications Inc. .......................................... 524,288
4,700 Columbia Gas Systems........................................................ 369,244
3,800 Duke Energy Corp. .......................................................... 210,425
9,800 FPL Group Inc. ............................................................. 580,038
18,300 GTE Corp. .................................................................. 956,175
4,900 Houston Industries, Inc. ................................................... 130,769
12,700 MCI Communications Corp. ................................................... 544,116
4,700 Northern Telecom Ltd. ...................................................... 418,300
22,827 SBC Communications, Inc. ................................................... 1,672,078
8,700 Sonat Inc. ................................................................. 398,025
12,700 Southern Co. ............................................................... 328,613
8,200 Sprint Corp. ............................................................... 480,725
10,000 Texas Utilities Co. ........................................................ 415,625
8,700 US West Communications Group................................................ 392,562
31,300 WorldCom Inc. .............................................................. 946,825
- ---------------------------------------------------------------------------------------------------------
14,606,705
- ---------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK (Cost -- $98,700,190).................................... 142,217,385
- ---------------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK -- 2.3%
- ---------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 0.9%
2,000 Finova Finance, 5.500%...................................................... 140,000
4 Fuji Finance Bermuda Trust-Sponsored ADR, 0.250%............................ 35,495
14,564 Equity Residential Properties, 7.250%....................................... 360,459
4,000 Excel Reality Trust Inc., 2.125%............................................ 121,375
8,000 Merry Land & Investment, Series C, $2.150................................... 223,500
8,000 National Australia Bank, 7.875%............................................. 227,500
6,000 Newell Financial Trust, 5.250%.............................................. 310,500
4,000 St. Paul Capital, 6.000%.................................................... 288,000
5,000 Tosco Financial Trust, 5.750%............................................... 321,875
- ---------------------------------------------------------------------------------------------------------
2,028,704
- ---------------------------------------------------------------------------------------------------------
INDUSTRIAL -- 1.4%
4,000 Amcor Ltd., 7.250%.......................................................... 190,000
10,000 Calenergy Capital II, 6.250%+............................................... 525,000
12,000 International Paper, 5.250%................................................. 586,500
10,990 News Corp. Ltd., 5.000%..................................................... 978,110
9,000 Occidental Petroleum Corp., $3.025+......................................... 590,625
4,000 Rouse Co., Series B, $3.000................................................. 202,000
- ---------------------------------------------------------------------------------------------------------
3,072,235
- ---------------------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCK (Cost -- $4,730,477)...................... 5,100,939
- ---------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
MANAGED ASSETS TRUST
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
BONDS -- 18.0%
- ---------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 2.5%
$ 500,000 Great Western Financial, 6.375% due 7/1/00.................................. $ 501,875
5,000,000 Nationwide Health, 6.900% due 10/1/37....................................... 5,143,750
- ---------------------------------------------------------------------------------------------------------
5,645,625
- ---------------------------------------------------------------------------------------------------------
GOVERNMENT - NATIONAL -- 0.9%
2,000,000 Canada - Global Bond, 6.375% due 7/21/05.................................... 2,040,000
- ---------------------------------------------------------------------------------------------------------
INDUSTRIAL -- 9.0%
2,000,000 Becton Dickinson, 8.800% due 3/1/01......................................... 2,147,500
2,000,000 Cox Communications Inc., 6.875% due 6/15/05................................. 2,045,000
3,000,000 IBM International, 6.250% due 10/10/2000.................................... 3,012,222
200,000 Omnicom Inc., 2.250% due 1/6/13............................................. 210,750
4,000,000 Philip Morris Co., Inc., 7.750% due 1/15/27................................. 4,335,000
1,000,000 Signet Master Trust, 1993-4b, 5.800% due 3/15/99............................ 997,830
2,020,000 Tele-Comm Inc., 9.650% due 10/1/03.......................................... 2,234,625
5,000,000 Xerox Corp., 6.250% due 11/15/26++.......................................... 5,081,250
- ---------------------------------------------------------------------------------------------------------
20,064,177
- ---------------------------------------------------------------------------------------------------------
MISCELLANEOUS -- 1.3%
3,000,000 TRW Inc., 6.250% due 1/5/98................................................. 2,997,917
- ---------------------------------------------------------------------------------------------------------
OIL -- 0.2%
500,000 Apache Corp, 6.000% due 1/15/02............................................. 571,250
- ---------------------------------------------------------------------------------------------------------
TELEPHONE -- 2.3%
5,000,000 Bellsouth Cap Funding, 6.040% due 11/15/26.................................. 5,056,250
- ---------------------------------------------------------------------------------------------------------
TRANSPORTATION -- 1.8%
3,000,000 CSX, 6.950% due 5/1/27+..................................................... 3,078,750
880,199 Wilmington Trust, 9.250% due 1/2/07+........................................ 903,366
- ---------------------------------------------------------------------------------------------------------
3,982,116
- ---------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS (Cost -- $38,805,078)................................. 40,357,335
- ---------------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS -- 3.2%
- ---------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 0.2%
500,000 USF&G Corp., zero coupon due 3/3/09......................................... 345,000
- ---------------------------------------------------------------------------------------------------------
GOVERNMENT - NATIONAL -- 0.3%
500,000 Republic of Italy, 5.000% due 6/28/01....................................... 615,000
- ---------------------------------------------------------------------------------------------------------
INDUSTRIAL -- 2.4%
1,108,000 Alza Corp., zero coupon due 7/14/14......................................... 509,680
500,000 Athena Neurosciences Inc., 4.750% due 11/15/04+............................. 511,875
300,000 Berkshire Hathaway, 1.000% due 12/2/01...................................... 479,625
500,000 CUC International Inc., 3.000% due 2/15/02+................................. 630,000
300,000 GVC Corp. Ltd., zero coupon due 5/21/02+.................................... 315,000
500,000 Home Depot Inc., 3.250% due 10/1/01......................................... 680,000
300,000 Inco Ltd., 7.750% due 3/15/16............................................... 300,750
300,000 Indian Petrochemicals, 2.500% due 3/11/02+ ++............................... 288,000
1,000,000 Marriott International, zero coupon due 3/25/11............................. 647,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
MANAGED ASSETS TRUST
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
INDUSTRIAL -- 2.4% (CONTINUED)
$ 100,000 Omnicom, 4.250% due 1/3/07.................................................. $ 139,875
500,000 Scholastic Corp., 5.000% due 8/15/05........................................ 443,125
200,000 Taiwan Semiconductor, zero coupon due 7/3/02+............................... 214,000
200,000 Telefonica Europa, 2.000% due 7/15/02....................................... 216,500
- ---------------------------------------------------------------------------------------------------------
5,375,930
- ---------------------------------------------------------------------------------------------------------
UTILITY - ELECTRIC -- 0.3%
600,000 Potomac Electric Power Co., 5.000% due 9/1/02............................... 582,750
- ---------------------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE CORPORATE BONDS (Cost -- $6,037,041)...................... 6,918,680
- ---------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECTOR -- 11.8%
375,000 U.S. Treasury Bill, 5.010% due 3/12/98++.................................... 371,350
3,000,000 U.S. Treasury Note, 5.875% due 9/30/02...................................... 3,017,520
3,000,000 U.S. Treasury Note, 7.875% due 11/15/04..................................... 3,355,470
2,000,000 U.S. Treasury Note, 6.500% due 8/15/05...................................... 2,087,540
3,000,000 U.S. Treasury Note, 6.125% due 8/15/07++.................................... 3,084,180
5,000,000 U.S. Treasury Strips, zero coupon due 2/15/04............................... 3,536,400
4,950,003 FHLMC, 8.00% due 9/1/04..................................................... 5,115,482
299,635 FHLMC, 8.500% due 9/1/02.................................................... 308,435
3,500,000 FNMA Dwarf, 6.00% due 5/15/12#.............................................. 3,439,835
155,906 FNMA, 8.500% due 3/1/05..................................................... 161,997
892,165 GNMA, 7.500% due 12/15/25 @................................................. 914,742
323,403 GNMA, 9.000% due 12/15/16 @................................................. 346,043
499,110 GNMA, 9.500% due 3/15/20 @.................................................. 540,288
- ---------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECTOR (Cost -- $25,974,482).......................... 26,279,282
- ---------------------------------------------------------------------------------------------------------
SUB-TOTAL INVESTMENTS (Cost -- $174,247,268)................................ 220,873,621
- ---------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 1.1%
2,527,000 Citibank, 6.35% due 1/2/98; Proceeds at maturity -- $2,527,889; (Fully
collateralized by U.S. Treasury Notes, 6.625% due 4/30/02; Market
value -- $2,580,189) (Cost -- $2,527,000)................................... 2,527,000
- ---------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $176,774,268*)........................... $223,400,621
- ---------------------------------------------------------------------------------------------------------
</TABLE>
++ Non-income producing security.
+ Security is exempt from registration under rule 144A of the Securities Act of
1933. This security may be sold in transactions that are exempt from
registration, normally to qualified institutional buyers.
++ Security is segregated by the Custodian for futures contract commitments
and/or for securities traded on a "to-be-announced" basis.
# Security is traded on a "to-be-announced" basis (See Note 8).
@ Date shown represents the last in range of maturity dates of mortgage
certificates owned.
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
HIGH YIELD BOND TRUST
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C>
CORPORATE BONDS AND NOTES -- 91.4%
- ----------------------------------------------------------------------------------------------------------
AUTOMOTIVE -- 1.0%
$250,000 B Stanadyne Automotive Corp., Sr. Sub. Notes, 10.250% due 12/15/07+...... $ 250,000
- ----------------------------------------------------------------------------------------------------------
CHEMICALS -- 2.3%
100,000 B+ Huntsman Corp., Sr. Sub. Notes, 9.500% due 7/1/07+..................... 105,000
150,000 B- Koppers Industry Inc., Sr. Sub. Notes, 9.875% due 12/1/07+............. 154,500
300,000 B Polymer Group Inc., Sr. Sub. Notes, Series B, 9.000% due 7/1/07........ 300,000
- ----------------------------------------------------------------------------------------------------------
559,500
- ----------------------------------------------------------------------------------------------------------
CONSUMER NON-DURABLES -- 2.3%
200,000 B- Amscan Holdings, Sr. Sub. Notes, 9.875% due 12/15/07+.................. 204,500
340,000 NR French Fragrances Inc., Sr. Notes, Series B, 10.375% due 5/15/07+...... 358,700
- ----------------------------------------------------------------------------------------------------------
563,200
- ----------------------------------------------------------------------------------------------------------
ENERGY -- 5.8%
125,000 B Anker Coal Group Inc., Sr. Notes, 9.750% due 10/1/07+.................. 125,000
74,000 B- Belden Blake Corp., Sr. Sub. Notes, Series B, 9.875% due 6/15/07+...... 75,017
230,000 B Energy Corp. of America, Sr. Sub. Notes, Series A, 9.500% due
5/15/07.............................................................. 230,575
200,000 B- Panaco Inc., Sr. Notes, 10.625% due 10/1/04+........................... 201,500
400,000 B+ Parker Drilling Corp., Sr. Notes, Series B, 9.750% due 11/15/06+....... 432,000
200,000 B Southwest Royalties Inc., Sr. Notes, 10.500% due 10/15/04+............. 198,000
65,000 B+ Transamerican Energy Corp., Sr. Secured Notes, 11.500% due 6/15/02+.... 63,863
100,000 BB Triton Energy Ltd., Sr. Notes, 8.750% due 4/15/02...................... 102,500
- ----------------------------------------------------------------------------------------------------------
1,428,455
- ----------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 5.1%
100,000 B- American Banknote, Sr. Sub. Notes, 11.250% due 12/1/07+(a)............. 100,375
400,000 B- B. F. Saul Real Estate Investment Trust, Sr. Secured Notes, Series B,
11.625% due 4/1/02+.................................................. 428,000
250,000 B- ITT Publimedia, Sr. Sub. Notes, 9.375% due 9/15/07..................... 263,750
464,000 B- Unicco Service Finance, Sr. Sub. Notes, 9.875% due 10/15/07+........... 465,740
- ----------------------------------------------------------------------------------------------------------
1,257,865
- ----------------------------------------------------------------------------------------------------------
FOOD AND DRUG -- 15.2%
350,000 B AFC Enterprises Inc., Sr. Sub. Notes, 10.250% due 5/15/07+............. 370,125
500,000 B+ Americold Corp., 1st Mortgage, Series B, 11.500% due 3/1/05............ 535,625
150,000 NR Archibald Candy Corp., Sr. Secured Notes, 10.250% due 7/1/04+.......... 157,125
500,000 B- Duane Reade Corp., Sr. Notes, Series B, 12.000% due 9/15/02............ 525,000
285,225 NR Food 4 Less Holdings Inc., Sr. Sub. Debentures, Payment-in-kind,
13.625% due 6/15/07.................................................. 347,974
236,896 NR FRD Acquisition Co., Sr. Notes, Series B, 12.500% due 7/15/04.......... 257,032
290,000 BB- Fresh Del Monte Produce N.V., Sr. Notes, 10.000% due 5/1/03............ 303,412
180,000 B Friendly Ice Cream Corp., Sr. Notes, 10.500% due 12/1/07............... 181,350
150,000 B+ Mrs. Fields Original Cookies Inc., Sr. Notes, 10.125% due 12/1/01+..... 151,125
80,000 B Penn Traffic Co., Sr. Notes, 8.625% due 12/15/03....................... 68,500
90,000 B- Pueblo Xtra International Inc., Sr. Notes, 9.500% due 8/1/03........... 85,500
300,000 B Ralph's Supermarket Inc., Sr. Sub. Notes, 10.450% due 6/15/04.......... 338,250
140,000 B+ Shoppers Food Warehouse Corp., Sr. Notes, 9.750% due 6/15/04+.......... 143,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
HIGH YIELD BOND TRUST
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C>
FOOD AND DRUG -- 15.2% (CONTINUED)
$100,000 B Toms Foods Inc., Sr. Notes, 10.500% due 11/1/04+....................... $ 100,000
210,000 NR Windy Hill Pet Food Inc., Sr. Sub. Notes, 9.750% due 5/15/07+.......... 218,925
- ----------------------------------------------------------------------------------------------------------
3,783,443
- ----------------------------------------------------------------------------------------------------------
FOREST PRODUCTS -- 1.2%
300,000 B Silgan Holdings Inc., Sr. Sub. Debentures, 9.000% due 6/1/09+.......... 308,625
- ----------------------------------------------------------------------------------------------------------
GAMING/LEISURE -- 5.8%
50,000 B Alliance Gaming Corp., Sr. Sub Notes, 10.000% due 8/1/07+.............. 50,375
200,000 B+ Autotote Corp., Sr. Notes, 10.875% due 8/1/04.......................... 209,000
407,000 B- Bally's Total Fitness Holdings Corp., Sr. Sub. Notes, 9.875% due
10/15/07+............................................................ 411,070
100,000 NR Colorado Gaming Entertainment Co., Sr. Secured Notes, Payment-in-kind,
12.000% due 6/1/03................................................... 108,000
100,000 B- Fitzgerald Gaming Corp., Sr. Secd. Notes, 12.25% due 12/15/04+......... 101,000
180,000 BB Grand Casinos Inc., 1st Mortgage Notes, 10.125% due 12/1/03............ 194,400
350,000 B+ Hollywood Casino Corp., Guaranteed Sr. Secured Notes, 12.750% due
11/1/03.............................................................. 374,500
- ----------------------------------------------------------------------------------------------------------
1,448,345
- ----------------------------------------------------------------------------------------------------------
HEALTHCARE -- 0.7%
160,000 B Physician Sales and Services Inc., Sr. Sub Notes, 8.500% due
10/1/07+............................................................. 164,800
- ----------------------------------------------------------------------------------------------------------
HOUSING -- 7.3%
421,300 NR Encor Group Inc., Sub. Notes, Series C, 11.000% due 12/15/01........... 442,365
350,000 BB+ Greystone Homes Inc., Sr. Notes, 10.750% due 3/1/04.................... 382,812
100,000 BB- Johns Manville International Group Inc., Sr. Notes, 10.875% due
12/15/04............................................................. 111,000
200,000 BB Kaufman Broad Home Corp., Sr. Notes, 7.750% due 10/15/04............... 198,000
150,000 B- Kevco Inc., Sr. Sub. Notes, 10.375% due 12/1/07+....................... 153,375
250,000 B+ NVR Inc., Sr. Notes, 11.000% due 4/15/03............................... 270,625
255,000 B- Reliant Building Products Inc., Sr. Sub. Notes, Series B, 10.875% due
5/1/04+.............................................................. 266,156
- ----------------------------------------------------------------------------------------------------------
1,824,333
- ----------------------------------------------------------------------------------------------------------
INFORMATION/TECHNOLOGY -- 0.7%
160,000 B+ Unisys Corp., Sr. Notes, Series B, 12.000% due 4/15/03................. 181,200
- ----------------------------------------------------------------------------------------------------------
MANUFACTURING -- 6.2%
250,000 B+ Burke Industries Inc., Sr. Notes, 10.00% due 8/15/07+.................. 260,000
250,000 B+ Pillowtex Corp., Sr. Sub. Notes, 9.000% due 12/15/07+.................. 255,938
250,000 B- Roller Bearing Co., Guaranteed Sr. Sub. Notes, 9.625% due 6/15/07+..... 251,875
50,000 B Selmer Co., Inc., Sr. Sub. Notes, 11.000% due 5/15/00.................. 55,187
100,000 B- Sullivan Graphics Inc., Sr. Sub. Notes, 12.750% due 8/1/05+............ 102,000
267,000 B- Terex Corp., Sr. Secured Notes, 13.250% due 5/15/02+................... 305,047
140,000 B- Viasystems Inc., Sr. Sub. Notes, 9.750% due 6/1/07+.................... 144,725
150,000 B- Werner Holdings Co., Inc., Sr. Sub. Notes, 10.000% due 11/15/07+....... 154,125
- ----------------------------------------------------------------------------------------------------------
1,528,897
- ----------------------------------------------------------------------------------------------------------
MEDIA/ENTERTAINMENT -- 15.5%
300,000 B Affinity Group Inc., Sr. Sub. Notes, 11.500% due 10/15/03.............. 320,625
American Communications Services:
95,000 NR Sr. Disc. Notes, step bond to yield 12.656% due 11/1/05.............. 76,475
100,000 NR Sr. Notes, 13.750% due 7/15/07+...................................... 118,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
HIGH YIELD BOND TRUST
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C>
MEDIA/ENTERTAINMENT -- 15.5% (CONTINUED)
$200,000 BB+ Cablevision Systems Corp., Sr. Notes, 7.875% due 12/15/07.............. $ 204,750
500,000 NR Commodore Media Inc., Sr. Sub. Notes, 7.500% due 5/1/03................ 557,500
350,000 B- Diamond Cable Communication PLC., Sr. Discount Notes, step bond to
yield 10.750% due 2/15/07+........................................... 239,750
200,000 B+ James Cable Partners LP Fin Corp., Sr. Notes, Series B, 10.750% due
8/15/04.............................................................. 211,500
250,000 B- Kabelmedia Holdings GMBH, Sr. Discount Notes, step bond to yield
12.840% due 8/1/06................................................... 183,437
400,000 B- Paxson Communications Corp., Sr. Sub. Notes, 11.625% due 10/1/02+...... 429,000
200,000 B- Pegasus Communications Corp., Sr. Notes, 9.625% due 10/15/05+.......... 205,500
400,000 B- Pegasus Media Communications Inc., Notes, Series B, 12.500% due
7/1/05+.............................................................. 457,000
250,000 B- Plitt Theaters Inc., Sr. Sub. Notes, 10.875% due 6/15/04............... 269,375
100,000 B- Source Media Inc., Sr. Notes, 12.000% due 11/01/04+.................... 99,000
150,000 B+ Telewest Communications PLC, Sr. Discount Debentures, step bond to
yield 10.751% due 10/1/07............................................ 117,000
150,000 B- Transwestern Publishing Co., Sr. Sub. Notes, 9.625% due 11/15/07+...... 155,250
240,000 B- United International Holdings Inc. Ltd., Sr. Secured Discount Notes,
zero coupon to yield 12.160% due 11/15/99............................ 196,800
- ----------------------------------------------------------------------------------------------------------
3,841,462
- ----------------------------------------------------------------------------------------------------------
METALS/MINERALS -- 1.6%
300,000 B- ACME Metals Inc., Sr. Notes, 10.875% due 12/15/07+..................... 294,750
100,000 NR Continental Global Group Corp., Sr. Notes, 11.000% due 4/1/07.......... 107,000
- ----------------------------------------------------------------------------------------------------------
401,750
- ----------------------------------------------------------------------------------------------------------
PAPER -- 3.4%
400,000 B Mail-Well Corp., Sr. Sub. Notes, 10.500% due 2/15/04+.................. 430,000
270,000 BB- Paperboard Industries International Inc., Sr. Notes, 8.375% due
9/15/07+............................................................. 274,725
133,000 B- Riverwood International Corp., Sr. Notes, 10.625% due 8/1/07........... 134,995
- ----------------------------------------------------------------------------------------------------------
839,720
- ----------------------------------------------------------------------------------------------------------
RETAIL -- 3.2%
500,000 B+ KMart Corp., Medium Term Notes, 7.900% due 12/14/00.................... 500,625
300,000 BB- Specialty Retailers Inc., Sr. Notes, 8.500% due 7/15/05+............... 306,000
- ----------------------------------------------------------------------------------------------------------
806,625
- ----------------------------------------------------------------------------------------------------------
SERVICES -- 5.1%
100,000 B- Details Inc., Sr. Sub. Notes, 10.00% due 11/15/05+..................... 102,750
260,000 CCC+ Florists Transworld Delivery Inc., Sr. Sub. Notes, Series B, 14.000%
due 12/15/01......................................................... 291,200
150,000 B- ICF Kaiser International Inc., Sr. Sub. Notes, 13.00% due 12/31/03..... 157,500
250,000 B- Production Resource Group LLC, Sr. Sub. Notes, 11.500% due 1/15/08+.... 251,250
260,000 B- Richmont Marketing Specialists, Sr. Sub. Notes, 10.125% due
12/15/07+............................................................ 264,550
200,000 B- Williams Scotsman Inc., Sr. Notes, 9.875% due 6/1/07+.................. 207,000
- ----------------------------------------------------------------------------------------------------------
1,274,250
- ----------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 5.3%
400,000 B- Communications Instruments Inc., Sr. Sub. Notes, 10.000% due
9/15/04+............................................................. 408,000
400,000 NR Jordan Telecommunications Products, Sr. Discount Notes, Series B, step
bond to yield 10.629% due 08/1/07+................................... 322,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
HIGH YIELD BOND TRUST
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C>
TELECOMMUNICATIONS -- 5.3% (CONTINUED)
$150,000 NR Knology Holdings Inc., Sr. Discount Notes, step bond to yield 11.875%
due 10/15/07+(a)..................................................... $ 82,500
240,000 CCC Nextel Communications Inc., Sr. Discount Notes, step bond to yield
9.750% due 10/31/07+................................................. 146,400
200,000 B- TSF Communications Corp., Sr. Sub. Notes, 10.375% due 11/1/07+......... 199,500
200,000 B- USN Communications Inc., Sr. Notes, step bond to yield 14.618% due
8/15/04.............................................................. 153,500
- ----------------------------------------------------------------------------------------------------------
1,311,900
- ----------------------------------------------------------------------------------------------------------
TEXTILES -- 0.8%
200,000 B+ Delta Mills Inc., Sr. Notes, 9.625% due 9/1/07+........................ 204,000
- ----------------------------------------------------------------------------------------------------------
TRANSPORTATION -- 2.9%
260,000 B Atlantic Express Transportation Corp., Sr. Secured Notes, 10.750% due
2/1/04+.............................................................. 276,250
300,000 B- Atlas Air Inc., Sr. Notes, 10.750% due 8/1/05.......................... 317,250
130,000 B+ Kitty Hawk Inc., Sr. Secured Notes, 9.950% due 11/15/04+............... 132,925
- ----------------------------------------------------------------------------------------------------------
726,425
- ----------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES (Cost -- $21,621,626).................. 22,704,795
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C>
STOCK -- 2.0%
- ----------------------------------------------------------------------------------------------------------
ENERGY -- 0.3%
264 BayCorp Holdings Ltd. ............................................... 1,749
740 Paxson Communications Corp., Preferred, Payment-in-kind, Exchangeable
12.500%............................................................ 74,740
- ----------------------------------------------------------------------------------------------------------
76,489
- ----------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 0.8%
1,300 SFX Broadcasting Inc., Series E, Preferred, Payment-in-kind,
Exchangeable 12.625%............................................... 154,700
2,000 Source Media Inc., Preferred, Payment-in-kind, Exchangeable
13.500%............................................................ 50,500
- ----------------------------------------------------------------------------------------------------------
205,200
- ----------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 0.9%
2,000 American Communications Services Inc., Preferred, Payment-in-kind
Exchangeable 12.750%+.............................................. 209,000
- ----------------------------------------------------------------------------------------------------------
TOTAL STOCK (Cost -- $461,588)....................................... 490,689
- ----------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
HIGH YIELD BOND TRUST
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C>
WARRANTS -- 0.1%
- ----------------------------------------------------------------------------------------------------------
MANUFACTURING -- 0.1%
1,600 Terex Corp., Expire 5/15/02++........................................ $ 28,800
- ----------------------------------------------------------------------------------------------------------
METAL PRODUCTS -- 0.0%
500 Gulf State Steel Alabama Inc., Expire 4/15/03+++..................... 2,500
2,000 USN Communications Inc., Expire 8/15/04.............................. 20
- ----------------------------------------------------------------------------------------------------------
2,520
- ----------------------------------------------------------------------------------------------------------
TOTAL WARRANTS (Cost -- $17)......................................... 31,320
- ----------------------------------------------------------------------------------------------------------
SUB-TOTAL INVESTMENTS (Cost -- $22,083,231).......................... 23,226,804
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C>
REPURCHASE AGREEMENT -- 6.5%
$1,603,000 Citibank, 6.350% due 1/2/98, Proceeds at maturity -- $1,603,563
(Fully collaterized by U.S. Treasury Notes, 6.625% due 4/30/02;
Market value -- $1,671,128) (Cost -- $1,603,000)..................... 1,603,000
- ----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $23,686,231**).................... $24,829,804
- ----------------------------------------------------------------------------------------------------------
</TABLE>
+ Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
(a) Security issued with attached warrants.
++ Non-income producing security.
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 22 for definition of bond ratings.
SUMMARY OF BONDS BY COMBINED RATINGS
<TABLE>
<CAPTION>
STANDARD & % OF TOTAL CORPORATE
MOODY'S AND/OR POOR'S BONDS & NOTES
- ---------------------------------------------------------
<S> <C> <C> <C>
B B 76.0%
Ba BB 9.0
Caa CCC 1.0
NR NR 14.0
- ---------------------------------------------------------
100.0%
- ---------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PG$PCN>
- --------------------------------------------------------------------------------
BOND RATINGS
All ratings are by Standard & Poor's Rating Service ("Standard & Poor's"),
except that those identified by an asterisk (*) are rated by Moody's Investors
Service, Inc. ("Moody's"). The definitions of the applicable rating symbols are
set forth below:
Standard & Poor's -- Ratings 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>
22
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
CAPITAL APPRECIATION FUND
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
COMMON STOCK -- 85.0%
- ---------------------------------------------------------------------------------------------------------
AIRCRAFT & AEROSPACE -- 1.5%
99,700 Textron Inc. .............................................................. $ 6,231,250
- ---------------------------------------------------------------------------------------------------------
AIRLINES -- 3.1%
15,850 Alaska Air Group, Inc. .................................................... 614,188
135,225 UAL Corp.++................................................................ 12,508,312
- ---------------------------------------------------------------------------------------------------------
13,122,500
- ---------------------------------------------------------------------------------------------------------
BANKING -- 5.4%
57,800 Bank of New York........................................................... 3,341,563
103,190 Citicorp................................................................... 13,047,086
42,825 Mercantile Bancorp, Inc.................................................... 2,633,738
11,016 Wells Fargo & Co. ......................................................... 3,739,244
- ---------------------------------------------------------------------------------------------------------
22,761,631
- ---------------------------------------------------------------------------------------------------------
BEVERAGE -- 6.0%
93,250 Coca-Cola Co............................................................... 6,212,781
526,100 Coca-Cola Enterprises...................................................... 18,709,431
- ---------------------------------------------------------------------------------------------------------
24,922,212
- ---------------------------------------------------------------------------------------------------------
CHEMICAL -- 6.2%
175,575 Cytec Industries Inc.++.................................................... 8,241,052
375,350 Monsanto Co. .............................................................. 15,764,700
75,070 Solutia Inc. .............................................................. 2,003,431
- ---------------------------------------------------------------------------------------------------------
26,009,183
- ---------------------------------------------------------------------------------------------------------
COMMUNICATIONS -- 0.9%
65,000 Qwest Communications International, Inc.++................................. 3,867,500
- ---------------------------------------------------------------------------------------------------------
COMPUTERS -- 6.7%
200,750 Compaq Computer Corp. ..................................................... 11,329,828
196,150 Dell Computer Corp.++...................................................... 16,476,600
- ---------------------------------------------------------------------------------------------------------
27,806,428
- ---------------------------------------------------------------------------------------------------------
CONSUMER STAPLES -- 1.8%
375,000 US Office Products Co...................................................... 7,359,375
- ---------------------------------------------------------------------------------------------------------
DIVERSIFIED OPERATIONS -- 4.0%
227,450 General Electric Co. ...................................................... 16,689,144
- ---------------------------------------------------------------------------------------------------------
DRUGS AND HEALTHCARE -- 13.7%
296,950 Eli Lilly & Co. ........................................................... 20,675,144
253,225 Pfizer, Inc. .............................................................. 18,881,089
143,375 Warner-Lambert Co. ........................................................ 17,778,500
- ---------------------------------------------------------------------------------------------------------
57,334,733
- ---------------------------------------------------------------------------------------------------------
ELECTRONICS -- 1.4%
126,950 Texas Instruments Inc. .................................................... 5,712,750
- ---------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
CAPITAL APPRECIATION FUND
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
FINANCIAL SERVICES -- 12.3%
226,425 Charles Schwab Corp........................................................ $ 9,495,698
179,325 Federal Home Loan Mortgage Corp............................................ 7,520,442
196,655 Federal National Mortage Association....................................... 11,221,626
120,905 Merrill Lynch & Co., Inc................................................... 8,818,508
63,300 SLM Holding Corp. ......................................................... 8,806,613
98,075 State Street Boston Corp. ................................................. 5,706,739
- ---------------------------------------------------------------------------------------------------------
51,569,626
- ---------------------------------------------------------------------------------------------------------
MATERIALS & PROCESSING -- 2.0%
277,400 Delta & Pine Land Co....................................................... 8,460,700
- ---------------------------------------------------------------------------------------------------------
OIL & GAS -- 6.8%
169,500 Diamond Offshore Drilling, Inc............................................. 8,157,188
204,375 Schlumberger Ltd........................................................... 16,452,187
83,250 Transocean Offshore Inc. .................................................. 4,011,609
- ---------------------------------------------------------------------------------------------------------
28,620,984
- ---------------------------------------------------------------------------------------------------------
RETAIL -- 0.6%
69,750 Fred Meyer, Inc.++......................................................... 2,537,156
- ---------------------------------------------------------------------------------------------------------
SOFTWARE -- 9.4%
85,900 America Online, Inc. ...................................................... 7,661,206
150,500 Cisco Systems, Inc.++...................................................... 8,390,375
158,650 J.D. Edwards & Co. ........................................................ 4,680,175
142,350 Microsoft Corp.++.......................................................... 18,398,738
- ---------------------------------------------------------------------------------------------------------
39,130,494
- ---------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 3.2%
167,325 Lucent Technologies Inc. .................................................. 13,365,084
- ---------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK (Cost -- $258,949,318).................................. 355,500,750
- ---------------------------------------------------------------------------------------------------------
FOREIGN STOCK -- 2.1%
2,183 Philips Electronics........................................................ 130,939
96,000 Sony Corp. ................................................................ 8,564,506
- ---------------------------------------------------------------------------------------------------------
TOTAL FOREIGN STOCK (Cost -- $8,786,658)................................... 8,695,445
- ---------------------------------------------------------------------------------------------------------
SUB-TOTAL INVESTMENTS (Cost -- $267,735,976)............................... 364,196,195
- ---------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
CAPITAL APPRECIATION FUND
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
REPURCHASE AGREEMENT -- 12.9%
$54,062,000 Citibank, 6.350% due 1/2/98; Proceeds at maturity -- $54,081,068 (Fully
collateralized by U.S. Treasury Notes, 6.125% due 12/31/01; Market
value -- $50,562,500; and U.S. Treasury Notes, 6.625% due 4/30/02; Market
value -- $4,581,788) (Cost -- $54,062,000)................................. $ 54,062,000
- ---------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $321,797,976*).......................... $418,258,195
- ---------------------------------------------------------------------------------------------------------
</TABLE>
++ Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
25
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
CASH INCOME TRUST
<TABLE>
<CAPTION>
FACE ANNUALIZED
AMOUNT SECURITY YIELD VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMERCIAL PAPER -- 97.8%
$ 400,000 Asset Securitization Corp. matures 1/26/98........................ 5.97% $ 398,364
400,000 Bell Atlantic Financial matures 1/6/98............................ 5.76 399,684
400,000 BHP Finance (USA) Inc. matures 1/26/98............................ 5.76 398,359
500,000 Campbell Soup Co. matures 1/22/98................................. 5.78 498,338
500,000 Ciesco L.P. matures 1/22/98....................................... 5.83 498,323
400,000 Corporate Asset Funding matures 1/8/98............................ 5.70 399,563
450,000 Daimler-Benz North America matures 1/20/98........................ 5.77 448,649
500,000 Dillard Investment Co., Inc., matures 1/13/98..................... 6.03 499,008
300,000 Export Development Corp. matures 1/26/98.......................... 5.63 298,844
400,000 Ford Motor Credit Corp. matures 1/8/98............................ 5.69 399,564
500,000 General Electric Capital Corp. matures 2/19/98.................... 5.83 496,087
400,000 General Mills Inc. matures 1/8/98................................. 5.73 399,561
500,000 Goldman, Sachs Group L.P. matures 1/29/98......................... 5.93 497,725
500,000 H.J. Heinz Co. matures 2/3/98..................................... 5.83 497,365
500,000 Household Finance Corp. mature 1/7/98............................. 5.64 to 5.90 499,530
400,000 IBM Credit Corp. matures 1/7/98................................... 5.73 399,623
500,000 Johnson Controls matures 1/20/98.................................. 5.96 498,448
400,000 J.P. Morgan matures 1/6/98........................................ 5.66 399,690
400,000 Manitoba Hydro Electric matures 2/19/98........................... 5.75 396,913
400,000 Morgan Stanley matures 1/22/98.................................... 5.78 398,670
500,000 Northern Indiana Public Service Corp. matures 1/21/98............. 5.93 498,375
500,000 Pearson, Inc. matures 1/12/98..................................... 5.93 499,107
500,000 Potomac Electric Power Co. matures 1/9/98......................... 6.18 499,322
500,000 PPG Industries matures 1/29/98.................................... 5.71 497,811
500,000 Progress Capital Holdings matures 1/5/98.......................... 5.83 499,680
500,000 Prudential Funding Co. mature 1/4/98 to 1/21/98................... 5.84 to 5.85 498,483
500,000 Southern New England Telecom matures 1/20/98...................... 5.90 498,464
500,000 Tampa Electric Co. matures 1/12/98................................ 5.93 499,106
500,000 Teco Finance Inc. matures 1/23/98................................. 5.79 498,255
- ------------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER (Cost -- $13,210,911)...................... 13,210,911
- ------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 2.2%
293,000 Citibank, 6.35% due 1/2/98; Proceeds at maturity -- $293,101;
(Fully collateralized by U.S. Treasury Notes, 6.625% due 4/30/02;
Market value -- $302,325) (Cost -- $293,000)...................... 293,000
- ------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $13,503,911*).................. $13,503,911
- ------------------------------------------------------------------------------------------------------------
</TABLE>
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
26
<PG$PCN>
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 1997
<TABLE>
<CAPTION>
MANAGED HIGH YIELD CAPITAL CASH
ASSETS BOND APPRECIATION INCOME
TRUST TRUST FUND TRUST
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS:
Investments -- Cost.............................. $174,247,268 $22,083,231 $267,735,976 $13,210,911
Repurchase agreements -- Cost.................... 2,527,000 1,603,000 54,062,000 293,000
- ------------------------------------------------------------------------------------------------------------
Investments, at value............................ $220,873,621 $23,226,804 $364,196,195 $13,210,911
Repurchase agreements, at value.................. 2,527,000 1,603,000 54,062,000 293,000
Cash............................................. 751 706 671 727
Receivable for securities sold................... 4,388,391 -- 1,145,361 --
Dividends and interest receivable................ 1,143,590 438,675 181,502 50
Receivable for Fund shares sold.................. 13,881 32,647 405,581 --
Receivable from affiliate........................ -- -- -- 23,348
- ------------------------------------------------------------------------------------------------------------
TOTAL ASSETS..................................... 228,947,234 25,301,832 419,991,310 13,528,036
- ------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased................. 4,907,054 -- 12,011,596 --
Investment advisory fees payable................. 93,346 10,583 252,953 --
Administration fees payable...................... 11,241 1,270 20,236 --
Dividends payable................................ -- -- -- 24,178
Accrued expenses................................. 65,313 17,801 5,308 10,057
- ------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES................................ 5,076,954 29,654 12,290,093 34,235
- ------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS................................... $223,870,280 $25,272,178 $407,701,217 $13,493,801
- ------------------------------------------------------------------------------------------------------------
NET ASSETS:
Paid-in capital.................................. $160,370,796 $25,718,998 $295,792,208 $13,493,801
Undistributed net investment income.............. 6,032,308 1,906,327 1,757,481 --
Accumulated net realized gain (loss) from
security transactions and futures contracts... 10,907,773 (3,496,720) 13,691,309 --
Net unrealized appreciation of investments and
futures contracts............................. 46,559,403 1,143,573 96,460,219 --
- ------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS................................... $223,870,280 $25,272,178 $407,701,217 $13,493,801
- ------------------------------------------------------------------------------------------------------------
SHARES OUTSTANDING................................. 12,682,454 2,554,899 8,801,078 13,493,801
- ------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, PER SHARE......................... $17.65 $9.89 $46.32 $1.00
- ------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
27
<PG$PCN>
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
MANAGED HIGH YIELD CAPITAL CASH
ASSETS BOND APPRECIATION INCOME
TRUST TRUST FUND TRUST
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest............................................... $ 5,078,799 $2,071,449 $ 1,882,080 $339,989
Dividends.............................................. 2,263,576 12,591 2,639,119 --
Less: Foreign withholding tax.......................... -- -- (45,564) --
- -------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME................................ 7,342,375 2,084,040 4,475,635 339,989
- -------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 3)...................... 1,035,501 105,287 2,436,487 19,634
Administration fees (Note 3)........................... 121,093 11,741 183,798 3,644
Shareholder communications............................. 63,998 6,000 42,800 800
Audit and legal........................................ 43,732 21,000 19,913 18,050
Custody................................................ 23,298 10,400 20,160 6,257
Shareholder and system servicing fees.................. 7,799 11,200 7,673 6,012
Trustees' fees......................................... 6,025 6,000 5,909 6,544
Registration fees...................................... -- -- -- 3,080
Other.................................................. 5,884 6,085 1,414 1,800
- -------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES......................................... 1,307,330 177,713 2,718,154 65,821
Less: Expense reimbursement (Note 3)................... -- -- -- (31,300)
- -------------------------------------------------------------------------------------------------------------
NET EXPENSES........................................... 1,307,330 177,713 2,718,154 34,521
- -------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME.................................... 6,035,045 1,906,327 1,757,481 305,468
- -------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FUTURES CONTRACTS (NOTES 4 AND 6):
Realized Gain (Loss) From:
Security transactions (excluding short-term
securities)....................................... 14,416,928 813,430 14,695,393 (72)*
Futures contracts................................... (1,488,265) -- -- --
- -------------------------------------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS)............................... 12,928,663 813,430 14,695,393 (72)
- -------------------------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments
and Futures Contracts:
Beginning of year................................... 25,676,994 658,102 45,698,691 --
End of year......................................... 46,559,403 1,143,573 96,460,219 --
- -------------------------------------------------------------------------------------------------------------
INCREASE IN NET UNREALIZED APPRECIATION................ 20,882,409 485,471 50,761,528 --
- -------------------------------------------------------------------------------------------------------------
NET GAIN (LOSS) ON INVESTMENTS AND FUTURES CONTRACTS..... 33,811,072 1,298,901 65,456,921 (72)
- -------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS................... $39,846,117 $3,205,228 $ 67,214,402 $305,396
- -------------------------------------------------------------------------------------------------------------
</TABLE>
* Represents net realized losses from the sale of short-term securities for Cash
Income Trust.
SEE NOTES TO FINANCIAL STATEMENTS.
28
<PG$PCN>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
MANAGED HIGH YIELD CAPITAL CASH
ASSETS BOND APPRECIATION INCOME
TRUST TRUST FUND TRUST
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income............................ $ 6,035,045 $ 1,906,327 $ 1,757,481 $ 305,468
Net realized gain (loss)......................... 12,928,663 813,430 14,695,393 (72)
Increase in net unrealized appreciation.......... 20,882,409 485,471 50,761,528 --
- ------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS........... 39,846,117 3,205,228 67,214,402 305,396
- ------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
FROM (NOTE 2):
Net investment income............................ (1,469,979) (15,738) -- (305,378)
Net realized gains............................... (4,813,889) -- (2,626) --
- ------------------------------------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM
DISTRIBUTIONS TO SHAREHOLDERS................. (6,283,868) (15,738) (2,626) (305,378)
- ------------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 11):
Net proceeds from sale of shares................. 7,217,202 7,500,172 143,131,359 28,240,251
Net asset value of shares issued for
reinvestment of dividends..................... 6,283,868 15,738 2,626 286,879
Cost of shares reacquired........................ (11,803,520) (2,724,265) (26,776,295) (18,576,002)
- ------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM FUND SHARE
TRANSACTIONS.................................. 1,697,550 4,791,645 116,357,690 9,951,128
- ------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS............................. 35,259,799 7,981,135 183,569,466 9,951,146
NET ASSETS:
Beginning of year................................ 188,610,481 17,291,043 224,131,751 3,542,655
- ------------------------------------------------------------------------------------------------------------
END OF YEAR*..................................... $223,870,280 $25,272,178 $407,701,217 $13,493,801
- ------------------------------------------------------------------------------------------------------------
* Includes undistributed net investment income
of: ............................................. $6,032,308 $1,906,327 $1,757,481 --
- ------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
29
<PG$PCN>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) 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 11):
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) $219,605 --
- -------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
30
<PG$PCN>
- --------------------------------------------------------------------------------
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 a 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 asked
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, or minus amortized premium, which approximates 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; foreign dividends are recorded on the ex-dividend date or
as soon as practical after the Fund determines the existence of a dividend
declaration after exercising reasonable due diligence; (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 accounting records of the Fund are maintained in U.S.
dollars. All assets and liabilities denominated in foreign currencies are
translated into U.S. dollars on the date of valuation. Purchases and sales of
securities and income and expenses are translated at the rate of exchange quoted
on the respective date that such transactions are recorded. Differences between
income and expense amounts recorded and collected or paid are adjusted when
reported by the custodian; (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, 1997,
reclassifications were made to the capital accounts of the Managed Assets Trust,
High Yield Bond Trust and Capital Appreciation Fund 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 $818,671 was reclassified to paid-in
capital. In addition, for the Capital Appreciation Fund, a portion of
accumulated net realized gain amounting to $144 was reclassified to paid-in
capital. Net investment income, net realized gains and net assets were not
affected by this change; (j) 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 (k)
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.
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"),
Capital Appreciation Fund ("CAF") and Cash Income Trust ("CIT"). MAT, CAF and
CIT pay TAMIC an investment management and advisory fee calculated at the annual
rate of 0.50%, 0.75% 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. The
Travelers reimbursed CIT for expenses of $31,300.
TAMIC has a sub-advisory agreement with The Travelers Investment Management
Company, Inc. ("TIMCO"), an indirect wholly owned subsidiary of Travelers Group
Inc. Pursuant to the sub-advisory agreement, TIMCO is responsible for the
day-to-day portfolio operations and investment decisions for MAT. As a result,
TAMIC pays TIMCO, as sub-advisor, 0.25% of the average daily net assets of MAT.
31
<PG$PCN>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
TAMIC 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,
TAMIC 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 Mutual Management
Corp. ("MMC"), formerly known as Smith Barney Mutual Funds Management, Inc., a
subsidiary of Salomon Smith Barney Holdings Inc. ("SSBH"). Travelers Insurance
pays MMC, 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.
Brokerage commissions of $15,010 were received 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, 1997, 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.................................................... $186,544,096 $35,518,049 $362,587,231
- -----------------------------------------------------------------------------------------------------------
Sales........................................................ 177,972,207 26,755,511 264,154,624
- -----------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1997, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
<TABLE>
<CAPTION>
MANAGED HIGH CAPITAL
ASSETS YIELD BOND APPRECIATION
TRUST TRUST FUND
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross unrealized appreciation................................ $47,904,567 $1,161,383 $102,374,047
Gross unrealized depreciation................................ (1,278,214) (17,810) (5,913,828)
- -----------------------------------------------------------------------------------------------------------
Net unrealized appreciation.................................. $46,626,353 $1,143,573 $96,460,219
- -----------------------------------------------------------------------------------------------------------
</TABLE>
5. REPURCHASE AGREEMENTS
The Funds purchase (and its custodian takes possession of) U.S. Government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day) at
an agreed-upon higher repurchase price. The Funds require continual maintenance
of the market value of the collateral in amounts at least equal to 102% of the
repurchase price.
6. FUTURES CONTRACTS
Initial margin deposits made upon entering into futures contracts are
recognized as assets. The initial margin is segregated by the custodian and is
noted in the schedule of investments. During the period the futures contract is
open, changes in the value of the contract are recognized as unrealized gains or
losses by "marking-to-market" on a daily basis to reflect the market value of
the contract at the end of each day's trading. Variation margin payments are
made or received and recognized as assets due from or liabilities due to broker,
depending upon whether unrealized gains or losses are incurred. When the
contract is closed, the Funds record a realized gain or loss equal to the
difference between the proceeds from (or cost of) the closing transactions and
the Funds' basis in the contract.
The Funds enter into such contracts to hedge portions of their respective
portfolios. The Funds bear the market risk that arises from changes in the value
of the financial instruments and securities indices (futures contracts).
32
<PG$PCN>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1997, MAT had sold 26 financial futures contracts on the
Standard & Poor's 500 Index expiring in March 1998. The basis value of such
contracts was $6,297,200. The market value of such contracts on December 31,
1997 was $6,364,150, thereby resulting in an unrealized loss of $66,950.
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.
At December 31, 1997, the Funds had no open purchased call or put options
contracts.
8. SECURITIES TRADED ON A TO-BE-ANNOUNCED BASIS
The Funds may trade securities on a "to-be-announced" ("TBA") basis. In a
TBA transaction, the Funds commit to purchasing or selling securities for which
specific information is not yet known at the time of the trade, particularly the
face amount and maturity date in GNMA/FNMA transactions. Securities purchased on
a TBA basis are not settled until they are delivered to the Funds, normally 15
to 45 days later. These transactions are subject to market fluctuations and
their current value is determined in the same manner as for other securities.
At December 31, 1997, MAT held one TBA security with a cost of $3,439,470.
9. CAPITAL LOSS CARRYFORWARD
At December 31, 1997, HYBT had, for Federal income tax purposes,
approximately $3,281,000 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>
1998 1999 2000 2001 2002 2004
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Carryforward Amounts............... $1,970,000 $748,000 $48,000 $134,000 $38,000 $343,000
- --------------------------------------------------------------------------------------------------------------
</TABLE>
10. FOREIGN SECURITIES
Investing in securities of foreign companies and foreign governments
involves special risks and considerations not typically associated with
investing in U.S. companies and the U.S. Government. These risks include
revaluation of currencies and future adverse political and economic
developments. Moreover, securities of many foreign companies and foreign
governments and their markets may be less liquid and their prices more volatile
than those of securities of comparable U.S. companies and the U.S. Government.
33
<PG$PCN>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. 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, 1997 DECEMBER 31, 1996
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------
MANAGED ASSETS TRUST
Shares sold.................................................... 430,658 469,580
Shares issued on reinvestment.................................. 364,705 1,926,518
Shares redeemed................................................ (707,124) (847,611)
- --------------------------------------------------------------------------------------------------------
Net Increase................................................... 88,239 1,548,487
- --------------------------------------------------------------------------------------------------------
HIGH YIELD BOND TRUST
Shares sold.................................................... 811,252 591,013
Shares issued on reinvestment.................................. 1,591 356,007
Shares redeemed................................................ (294,426) (343,196)
- --------------------------------------------------------------------------------------------------------
Net Increase................................................... 518,417 603,824
- --------------------------------------------------------------------------------------------------------
CAPITAL APPRECIATION FUND
Shares sold.................................................... 3,339,655 1,994,300
Shares issued on reinvestment.................................. 59 716,103
Shares redeemed................................................ (642,619) (287,644)
- --------------------------------------------------------------------------------------------------------
Net Increase................................................... 2,697,095 2,422,759
- --------------------------------------------------------------------------------------------------------
CASH INCOME TRUST
Shares sold.................................................... 28,240,251 9,941,686
Shares issued on reinvestment.................................. 286,879 94,502
Shares redeemed................................................ (18,576,002) (7,910,199)
- --------------------------------------------------------------------------------------------------------
Net Increase................................................... 9,951,128 2,125,989
- --------------------------------------------------------------------------------------------------------
</TABLE>
34
<PG$PCN>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
For a share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
MANAGED ASSETS TRUST 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR................ $14.98 $15.50 $12.85 $14.21 $14.02
- --------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income........................... 0.48 0.46 0.49 0.46 0.51
Net realized and unrealized gain (loss)......... 2.70 1.50 2.83 (0.73) 0.72
- --------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations............... 3.18 1.96 3.32 (0.27) 1.23
- --------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM (1):
Net investment income........................... (0.12) (0.89) (0.50) (0.67) (0.85)
Net realized gains.............................. (0.39) (1.59) (0.17) (0.42) (0.19)
- --------------------------------------------------------------------------------------------------------------
Total Distributions............................... (0.51) (2.48) (0.67) (1.09) (1.04)
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR...................... $17.65 $14.98 $15.50 $12.85 $14.21
- --------------------------------------------------------------------------------------------------------------
TOTAL RETURN...................................... 21.31% 13.78% 27.12% (2.24)% 9.33%
- --------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S)................... $223,870 $188,610 $171,276 $140,887 $156,767
- --------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses (2).................................... 0.63% 0.58% 0.58% 0.61% 0.56%
Net investment income........................... 2.91 3.51 3.49 3.59 3.65
- --------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE........................... 90% 108% 110% 97% 86%
- --------------------------------------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARES PAID ON EQUITY
TRANSACTIONS (3)................................ $0.05 $0.06 -- -- --
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
HIGH YIELD BOND TRUST 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR................ $8.49 $9.00 $8.49 $9.25 $8.91
- --------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income........................... 0.76 0.91 0.80 0.66 0.68
Net realized and unrealized gain (loss)......... 0.65 0.41 0.41 (0.76) 0.47
- --------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations............... 1.41 1.32 1.21 (0.10) 1.15
- --------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM (1):
Net investment income........................... (0.01) (1.83) (0.70) (0.66) (0.81)
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR...................... $9.89 $8.49 $9.00 $8.49 $9.25
- --------------------------------------------------------------------------------------------------------------
TOTAL RETURN...................................... 16.56% 16.05% 15.47% (1.26)% 14.01%
- --------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S)................... $25,272 $17,291 $12,902 $11,716 $12,765
- --------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses (4).................................... 0.84% 0.97% 1.25% 1.25% 0.99%
Net investment income........................... 9.04 11.01 9.37 7.71 7.69
- --------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE........................... 137% 84% 222% 146% 19%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Distributions from realized gains include both net realized short-term and
long-term capital gains. Prior to 1996 net realized short-term capital gains
were included in distributions from net investment income.
(2) The ratio of expenses to average net assets for 1993 reflects an expense
reimbursement by The Travelers in connection with voluntary expense
limitations. Without the expense reimbursement, the ratio of expenses to
average net assets would have been 0.60% for the year ended December 31,
1993.
(3) For the fiscal years beginning after 1995, the SEC instituted new guidelines
requiring the disclosure of average commissions per share on Funds which
held more than 10% of their assets in commissionable equity securities.
(4) The ratio of expenses to average net assets reflects an expense
reimbursement by The Travelers in connection with voluntary expense
limitations. Without the expense reimbursement, the ratios of expenses to
average net assets would have been 1.28%, 1.33% and 1.31%, for the years
ended December 31, 1995, 1994 and 1993, respectively.
35
<PG$PCN>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
CAPITAL APPRECIATION FUND 1997 1996 1995 1994 1993(1)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR............ $36.72 $33.18 $24.50 $25.87 $22.72
- -------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income....................... 0.19 0.23 0.24 0.19 0.19
Net realized and unrealized gain (loss)..... 9.41 8.49 8.61 (1.41) 3.21
- -------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations........... 9.60 8.72 8.85 (1.22) 3.40
- -------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM (2):
Net investment income....................... -- (0.41) (0.17) (0.15) (0.25)
Net realized gains.......................... (0.00)* (4.77) -- -- --
- -------------------------------------------------------------------------------------------------------------
Total Distributions........................... (0.00)* (5.18) (0.17) (0.15) (0.25)
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR.................. $46.32 $36.72 $33.18 $24.50 $25.87
- -------------------------------------------------------------------------------------------------------------
TOTAL RETURN.................................. 26.14% 28.21% 36.37% (4.76)% 15.09%
- -------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S)............... $407,701 $224,132 $122,155 $78,494 $62,414
- -------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses (3)................................ 0.84% 0.83% 0.85% 0.89% 0.87%
Net investment income....................... 0.54 0.69 0.84 0.79 0.81
- -------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE....................... 89% 84% 124% 106% 155%
- -------------------------------------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE PAID
ON EQUITY TRANSACTIONS (4).................. $0.07 $0.06 -- -- --
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CASH INCOME TRUST 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------
<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)................... 0.049 0.0412 0.0417 0.0278 0.0214
Distributions from net investment income.... (0.049) (0.0412) (0.0417) (0.0278) (0.0214)
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR.................. $1.00 $1.00 $1.00 $1.00 $1.00
- -------------------------------------------------------------------------------------------------------------
TOTAL RETURN.................................. 5.03% 4.20% 4.17% 2.78% 2.14%
- -------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S)............... $13,494 $3,543 $1,417 $1,203 $647
- -------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses (5)(6)............................. 0.57% 0.78% 1.25% 1.25% 0.94%
Net investment income....................... 5.03 3.72 -- -- --
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Effective May 1, 1993, Janus Capital Corporation became sub-adviser for
Capital Appreciation Fund.
(2) Distributions from realized gains include both net realized short-term and
long-term capital gains. Prior 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 reflects an expense
reimbursement by The Travelers in connection with voluntary expense
limitations. Without the expense reimbursement, the ratio of expenses to
average net assets would have been 0.96% for the year ended December 31,
1993.
(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) The Travelers reimbursed CIT for $31,300 and $43,376 in expenses for the
years ended December 31, 1997 and December 31, 1996, respectively. If
expenses were not reimbursed, the per share decreases of net investment
income would have been $0.002 and $0.02, respectively, and the actual
expense ratios would have been 1.39% and 1.71%, respectively.
(6) The ratio of expenses to average net assets for 1995-1993 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% and 8.47% for the years
ended December 31, 1995, 1994 and 1993, respectively.
* Amount represents less than $0.01 per share.
36
<PG$PCN>
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
The Shareholders and Boards of Trustees of
Managed Assets Trust, High Yield Bond Trust, Capital Appreciation Fund and Cash
Income Trust:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of Managed Assets Trust, High Yield Bond Trust,
Capital Appreciation Fund and Cash Income Trust as of December 31, 1997, and the
related statements of operations, statements of changes in net assets, and
financial highlights for the year then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The statements of changes in net
assets for the year ended December 31, 1996 and the financial highlights for
each of the years in the four-year period then ended were audited by other
auditors whose report thereon, dated February 24, 1997, expressed an unqualified
opinion on those financial statements and financial highlights.
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, 1997, by correspondence with the custodian. As to securities
purchased or sold but not yet received or delivered, we performed other
appropriate auditing procedures. 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, High Yield Bond Trust, Capital Appreciation Fund and Cash
Income Trust as of December 31, 1997, their results of their operations, changes
in their net assets and their financial highlights for the year then ended, in
conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
New York, New York
February 10, 1998
37
<PG$PCN>
- --------------------------------------------------------------------------------
TAX INFORMATION (UNAUDITED)
For Federal tax purposes the Trust hereby designates for the fiscal year ended
December 31, 1997:
- Percentage of the ordinary dividends paid as qualifying for the corporate
dividends received deduction:
<TABLE>
<S> <C>
Managed Assets Trust................................................. 30.45%
</TABLE>
- The Taxpayer Relief Act of 1997 enacted differing rates of tax on various
long-term capital gain transactions. As a result, the Managed Assets
Trust designates:
- Total long-term capital gain distributions paid of $1,457,043 are
considered "28 percent rate gains".
A total of 1.37% of the ordinary dividends paid by the Managed Assets Trust from
net investment income are derived from federal obligations and may be exempt
from taxation at the state level.
38
<PG$PCN>
ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES PORTFOLIO
For the year ended December 31, 1997, the U.S. Government Securities Portfolio
("Portfolio") had a total return of 12.62%, which was above its Lipper
Analytical Services, Inc. peer group total return average of 8.20%. (Lipper is
an independent fund-tracking organization.) As of December 31, 1997, the
composition of assets was roughly 50% in mortgage-backed securities, and
approximately 35% in U.S. Government securities.
In the first four months of the reporting period, we emphasized mortgage-backed
securities in the Portfolio. However, as the year unfolded, U.S. Treasuries
became our primary focus. In addition, in the last six weeks of the period under
review, approximately 60% of the Portfolio was invested in Treasurys and about
40% was in mortgage-backed securities.
In our view, one of the most important events for the market in 1997 was the
widely publicized currency and economic turmoil in Asia, specifically in Korea,
Japan and Indonesia. As these currencies were devalued, the U.S. dollar was
clearly a beneficiary. Other notable events during the reporting period include:
- As a result of the unexpected strength in the U.S. economy, the Federal
Reserve Board ("Fed") raised the federal-funds rate by 25 basis points,
or 0.25%, at its March 1997 meeting. (The federal-funds rate is the
interest rate banks charge each other for overnight loans and is a
closely watched indicator of the direction of interest rates.)
- The not-so-successful introduction of inflation-indexed bonds by the U.S.
Treasury.
- The drastic reduction in the U.S. budget deficit. According to the latest
report by the Congressional Budget Office, the deficit will go down to $5
billion in fiscal 1998 and may actually run annual surpluses in 2001 if
present policies continue.
- As a result of lower rates, mortgage refinancing has increased.
- The drive toward the European Monetary Union continues to be on target
for 1999.
Looking ahead to 1998, we anticipate the following events to have an impact on
the bond market:
- The turmoil in Asia may be worse than what is being reported. Therefore,
the troubles in Asia will depress U.S. economic activity even more than
current consensus expectations.
- The Fed will probably ease its monetary policy and lower rates. In fact,
several Fed Governors have recently shifted to a more "dovish" view
regarding interest rates.
- Interest rates will be lower and the yield on the 30-Year U.S. Treasury
bond should initially trend toward 5 1/2%.
Moderate economic growth, combined with historically low inflation and the
threat of financial and economic turmoil in Southeast Asia, should provide more
than enough ammunition for rates to go lower. While non-believers would suggest
rates are too low, there is no compelling evidence to warrant a reversal of the
present trend. High real rates, a lesser supply of U.S. Treasurys and a strong
dollar are just some of the reasons why we remain bullish on bonds.
SOCIAL AWARENESS STOCK PORTFOLIO
The Social Awareness Stock Portfolio ("Portfolio") seeks high total return by
investing in the stocks of issuers who demonstrate a positive awareness of their
impact on the society in which they operate. For the year ended December 31,
1997, the Portfolio returned 27.28%. In comparison, the S&P 500 posted a total
return of 33.35% for the same period.
The year 1997 ended on a solid note, with long-term bonds providing very good
investment returns for the last quarter (up approximately 6%), while the broad
stock market, although positive, generated only about one-half that return. (The
benchmark S&P 500, for instance, returned 33.35% in 1997.) Psychologically, the
year's closing was dominated by the financial crisis that plagued Asian
economies and even spread into some of the other third world nations.
Deflationary fears and a flight to quality were the major themes of this
regional debacle.
In a stock market already characterized by extreme volatility, the Asian crisis
has rattled investor complacency -- currency collapses, market slides, deflation
tides and financial bailouts. Prices declined because Pacific-rim troubles
"infected" the U.S. markets, then prices rose for domestic securities as
investors flocked to quality. And they surged ahead in the last week of the year
as it appeared that world banks would bail out Korea, the eleventh largest
economy in the world. The markets are keenly sensitive to external factors
because they are basically "fairly" valued based on current inflation, interest
rates and earnings conditions. Therefore, any event that flags a possible change
in those elements is almost immediately factored into the structure. We view the
overseas developments as basically a regional event and not destructive to the
U.S. economy.
39
<PG$PCN>
ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
However, events in Asia will likely slow growth next year. Unless our global
view changes, we remain positive on the U.S. stock market.
Within the U.S. stock market, company size made a very big difference in
performance results -- namely the larger, the better. Consumer focus buried
cyclical and high technology industries. Sectors such as utilities, health care
and financials did significantly better than others. And finally, on a stylistic
basis, growth company stocks did twice as well as those defined as value.
During the fourth quarter of 1997, we established seven new stock positions in
the Portfolio, adding to our 24 previously owned stocks. In addition, we reduced
two holdings and sold seven holdings. (Over 75% of our buying took place in the
second half of October, as the S&P 500 went down by more than 5%.) Retail,
health, infrastructure (energy, water and electric), as well as financial and
technology services were all well represented in the Portfolio. As a result of
these actions, the Portfolio's asset allocation to stocks was approximately 89%,
with about 11% held in cash reserve awaiting additional buying opportunities. At
the end of December, the Portfolio owned 78 individual names, and continued to
over emphasize consumer cyclical, financial, technology and transportation
stocks.
UTILITIES PORTFOLIO
For the one year ended December 31, 1997, the Utilities Portfolio ("Portfolio")
had a total return of 25.29%. By all measures, the year 1997 was a positive one
for the broader utility sector, with indices such as the Dow Jones Utility
Average and Philadelphia Exchange Index of Utilities reaching all-time highs. In
the second half of 1997, the Philadelphia Utility Index ("UTY") outperformed the
S&P 500 by 13.8% and was up 20.1% nominally. The relative move in the UTY's
ended almost four years of underperformance by the electric utility sector.
In our view, the utility industry's good relative performance was driven by
several factors including the attractive yield relative to either bonds or other
stocks, falling long-term interest rates, improved regulatory reforms and the
prospects for sustained earnings and dividend growth. In addition to these
factors, superior relative performance by the utilities in the second half of
1997 reflected a flight to quality as investors grew concerned about the market
as a whole. Investors were particularly concerned about those sectors sensitive
to economic activity that will slow as a result of turmoil in the Asian markets.
We see continued strength in the utility sectors in 1998, despite the magnitude
of the sectors' December rally. In fact, we see an opportunity in the first half
of 1998 to take advantage of the groups' vulnerability to a short-term pullback
in relative performance. We intend to use this opportunity to adjust the
Portfolio's allocations and to establish several new positions. In light of our
macro view that stock market valuations are full and long-term interest rates
will continue to go down, we anticipate that the higher-yielding utility sectors
will remain relatively attractive compared to other sectors of the markets. If
slower corporate earnings growth materializes, a stronger case will be made for
the utilities. Companies such as Edison International, Duke Energy Corp.,
Florida Power & Light, SBC Communications and WorldCom will lead the expansion
of the sector's multiples as each company establishes individual leadership in
its own markets.
Irrespective of the markets, we expect that the pace of new mergers and
acquisitions in 1998 will increase over 1997 levels. We also expect a
continuation of positive "incentive for performance-based rate" reforms that
have enabled companies to strategically cut costs, lower their capital spending
and invest in higher margin non-regulated businesses, thereby creating the value
that justifies expanded P/E multiples (a price/earnings ratio shows the
relationship between a stock's price and the company's earnings for the last
four quarters).
In 1998, as was the case in 1997, we continue to emphasize quality, targeting
companies with strong balance sheets and positive free cash flows. Our
investment strategy also favors companies with managements who have implemented
a strategic plan for completing in a changing marketplace.
40
<PG$PCN>
ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
We expect continued volatility in the utilities industries as the financial
markets differentiate between competitive and non-competitive companies. The
Portfolio will continue to diversify in both traditional low volatility utility
companies such as Florida Power and Light and Texas Utilities Co. as well as
companies with higher growth potential such as WorldCom, Inc. and Teleport
Communications Group, Inc.
In closing, we thank you for your investment in The Travelers Series Trust. We
look forward to continuing to help you pursue your financial goals.
Sincerely,
/s/ HEATH B. MCLENDON
Heath B. McLendon
Chairman
January 26, 1998
41
<PG$PCN>
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON -- U.S. GOVERNMENT SECURITIES PORTFOLIO AS OF 12/31/97
(UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------------------------
<S> <C>
Year Ended 12/31/97 12.62%
Five Years Ended 12/31/97 7.99%
1/24/92* through 12/31/97 8.06%
<CAPTION>
CUMULATIVE TOTAL RETURN
---------------------------------------------
<S> <C>
1/24/92* through 12/31/97 58.46%
* Commencement of operations
</TABLE>
This chart assumes an initial investment of $10,000 made on January
24, 1992, assuming reinvestment of dividends, through December 31,
1997. 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>
Lehman U.S. Government Consumer
Measurement Period Government Securities Price
(Fiscal Year Covered) Bond Index Portfolio Index
<S> <C> <C> <C>
1/24/92 10000 10000 10000
Dec-92 10723 10790 10275
Dec-93 11866 11813 10557
Dec-94 11464 11147 10840
Dec-95 13567 13869 11115
Dec-96 13943 14077 11484
Dec-97 15280 15094 11679
</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 12/31/97
(UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------------------------
<S> <C>
Year Ended 12/31/97 27.28%
Five Years Ended 12/31/97 16.35%
5/1/92* through 12/31/97 16.12%
<CAPTION>
CUMULATIVE TOTAL RETURN
---------------------------------------------
<S> <C>
5/1/92* through 12/31/97 133.43%
* Commencement of operations
</TABLE>
This chart assumes an initial investment of $10,000 made on May 1,
1992, assuming reinvestment of dividends, through December 31,
1997. The Standard & Poor's 500 Index is an unmanaged index
composed of 500 widely held common stocks listed on the New York
Stock Exchange, American Stock Exchange and the over-the-counter
market. The Consumer Price Index is a measure of the average change
in prices over time in a fixed market basket of goods and services.
<TABLE>
<CAPTION>
Social
Standard Awareness Consumer
Measurement Period & Poor's Stock Price
(Fiscal Year Covered) 500 Index Portfolio Index
<S> <C> <C> <C>
5/1/92 10000 10000 10000
Dec-92 10673 10950 10157
Dec-93 11745 11777 10436
Dec-94 11900 11461 10716
Dec-95 14509 15285 10988
Dec-96 17838 18340 11353
Dec-97 23789 23343 11545
</TABLE>
- --------------------------------------------------------------------------------
Past performance is not predictive of future performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Average annual total returns are historical in nature and measure net investment
income and capital gain or loss from portfolio investments assuming
reinvestments of dividends. The returns do not reflect expenses associated with
the subaccount such as administrative fees, account charges and surrender
charges which, if reflected, would reduce the performance shown.
42
<PG$PCN>
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON -- UTILITIES PORTFOLIO AS OF 12/31/97 (UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------------------------
<S> <C>
Year Ended 12/31/97 25.29%
2/4/94* through 12/31/97 16.79%
<CAPTION>
CUMULATIVE TOTAL RETURN
---------------------------------------------
<S> <C>
2/4/94* through 12/31/97 83.40%
* Commencement of operations
</TABLE>
This chart assumes an initial investment of $10,000 made on
February 4, 1994, assuming reinvestment of dividends, through
December 31, 1997. Standard & Poor's 500 Index is an unmanaged
index composed of 500 widely held common stocks listed on the New
York Stock Exchange, American Stock Exchange and over-the-counter
market. The Consumer Price Index is a measure of the average change
in prices over time in a fixed market basket of goods and services.
<TABLE>
<CAPTION>
Standard Consumer
Measurement Period & Poor's Utilities Price
(Fiscal Year Covered) 500 Index Portfolio Index
<S> <C> <C> <C>
2/4/94 10000 10000 10000
Dec-94 10072 10170 10205
Dec-95 13852 13149 10464
Dec-96 17031 14139 10811
Dec-97 22712 17705 10995
</TABLE>
- --------------------------------------------------------------------------------
Past performance is not predictive of future performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Average annual total returns are historical in nature and measure net investment
income and capital gain or loss from portfolio investments assuming
reinvestments of dividends. The returns do not reflect expenses associated with
the subaccount such as administrative fees, account charges and surrender
charges which, if reflected, would reduce the performance shown.
43
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS DECEMBER 31, 1997
U.S. GOVERNMENT SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS -- 89.3%
$ 3,000,000 U.S. Treasury Bond, 6.125% due 11/15/27...................................... $ 3,085,410
3,200,000 U.S. Treasury Bond, 8.000% due 11/15/21...................................... 3,991,840
2,500,000 U.S. Treasury Bond, 8.125% due 8/15/19....................................... 3,127,850
9,000,000 FICO Strip, zero coupon due 9/26/19++........................................ 2,322,900
1,594,372 FHLMC, 6.500% due 2/1/26..................................................... 1,580,916
114,481 FHLMC, 6.500% due 2/1/27..................................................... 113,337
66,403 FHLMC, 6.500% due 4/1/27..................................................... 65,740
164,390 FHLMC, 6.500% due 5/1/27..................................................... 162,747
1,010,000 FHLMC, 6.500% due 12/1/27.................................................... 998,951
1,862,129 FNMA, 7.000% due 5/1/24...................................................... 1,883,656
1,896,215 FNMA, 7.000% due 6/1/24...................................................... 1,918,135
1,485,000 FNMA, 7.000% due 12/1/27..................................................... 1,496,598
1,778,803 FNMA, 7.500% due 8/1/26...................................................... 1,822,153
945,100 FNMA, 7.500% due 11/1/26..................................................... 967,839
196,118 FNMA, 7.500% due 9/1/27...................................................... 200,777
2,000,000 GNMA ARM, 6.000% due 1/28/27#................................................ 2,013,760
366,301 GNMA, 8.500% due 3/15/18..................................................... 390,683
549,098 GNMA, 8.500% due 5/15/18..................................................... 585,647
167,918 GNMA, 8.500% due 6/15/18..................................................... 179,095
140,729 GNMA, 8.500% due 7/15/18..................................................... 150,097
171,402 GNMA, 9.000% due 8/15/08..................................................... 185,116
132,420 GNMA, 9.000% due 9/15/08..................................................... 143,015
870,405 GNMA, 9.000% due 10/15/08.................................................... 940,043
268,447 GNMA, 9.000% due 12/15/08.................................................... 289,924
234,335 GNMA, 9.000% due 1/15/09..................................................... 253,083
68,466 GNMA, 9.000% due 2/15/09..................................................... 73,943
195,345 GNMA, 9.000% due 3/15/09..................................................... 210,973
363,000 GNMA, 9.000% due 4/15/09..................................................... 392,042
405,766 GNMA, 9.000% due 5/15/09..................................................... 438,230
121,922 GNMA, 9.000% due 9/15/09..................................................... 131,676
3,000,000 Tennessee Valley Authority Debenture, 6.375% due 6/15/05..................... 3,067,500
- ---------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS (Cost -- $31,476,624)........... 33,183,676
- ---------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 10.7%
3,992,000 Citibank, 6.350% due 1/2/98; Proceeds at maturity -- $3,993,406; (Fully
collateralized by U.S. Treasury Notes, 6.625% due 4/30/02 Market
value -- $4,076,175) (Cost -- $3,992,000).................................... 3,992,000
- ---------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $35,468,624*)............................. $37,175,676
- ---------------------------------------------------------------------------------------------------------
</TABLE>
++ Security is segregated by the Custodian for open purchase commitments and/or
for securities traded on a "to-be-announced" basis.
# Security is traded on a "to-be-announced" basis (See Note 7).
* Aggregate cost for Federal income tax purpose is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
44
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
SOCIAL AWARENESS STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
COMMON STOCK -- 88.7%
- ---------------------------------------------------------------------------------------------------------
BASIC MATERIALS -- 4.8%
2,000 Air Products & Chemicals, Inc. .................................................. $ 164,500
3,100 Aluminum Co. of America.......................................................... 218,162
15,000 Engelhard Corp. ................................................................. 260,625
8,000 Praxair, Inc. ................................................................... 360,000
- ---------------------------------------------------------------------------------------------------------
1,003,287
- ---------------------------------------------------------------------------------------------------------
CAPITAL GOODS -- 2.2%
1,500 AMP, Inc. ....................................................................... 63,000
4,500 Belden, Inc. .................................................................... 158,625
2,000 Pitney Bowes, Inc. .............................................................. 179,875
2,000 US Filter Corp.++................................................................ 59,875
- ---------------------------------------------------------------------------------------------------------
461,375
- ---------------------------------------------------------------------------------------------------------
COMMUNICATIONS -- 1.8%
800 Bell Atlantic Corp. ............................................................. 72,800
2,300 MCI Communications Corp. ........................................................ 98,469
7,000 WorldCom, Inc.++................................................................. 211,750
- ---------------------------------------------------------------------------------------------------------
383,019
- ---------------------------------------------------------------------------------------------------------
CONSUMER CYCLICALS -- 13.6%
3,750 Dollar General Corp. ............................................................ 135,937
4,350 Home Depot, Inc. ................................................................ 256,106
11,000 Kaufman & Broad Home Corp. ...................................................... 246,813
11,000 Liz Claiborne, Inc. ............................................................. 459,938
7,500 Lowe's Cos., Inc. ............................................................... 357,656
7,100 May Department Stores............................................................ 374,081
4,000 Pep Boys -- Manny, Moe & Jack.................................................... 95,500
4,000 Staples, Inc.++.................................................................. 111,000
6,000 Sylvan Learning Systems, Inc.++.................................................. 234,000
4,000 Toys "R" Us, Inc.++.............................................................. 125,750
3,800 Tribune Co. ..................................................................... 236,550
5,800 Wal-Mart Stores, Inc. ........................................................... 228,738
- ---------------------------------------------------------------------------------------------------------
2,862,069
- ---------------------------------------------------------------------------------------------------------
CONSUMER STAPLES -- 11.4%
9,400 American Stores Co. ............................................................. 193,287
2,000 Gillette Co. .................................................................... 200,875
7,500 Kroger Co.++..................................................................... 277,031
5,000 Newell Co. ...................................................................... 212,500
4,800 PepsiCo, Inc. ................................................................... 174,900
3,000 Rite Aid Corp. .................................................................. 176,063
9,600 Sysco Corp. ..................................................................... 437,400
480 Tricon Global Restaurants, Inc.++................................................ 13,950
4,000 Unilever N. V. .................................................................. 249,750
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
45
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
SOCIAL AWARENESS STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
CONSUMER STAPLES -- 11.4% (CONTINUED)
1,600 Walt Disney Co. ................................................................. $ 158,500
12,000 Wendy's International, Inc. ..................................................... 288,750
- ---------------------------------------------------------------------------------------------------------
2,383,006
- ---------------------------------------------------------------------------------------------------------
ENERGY -- 1.0%
3,300 Anadarko Petroleum Corp. ........................................................ 200,269
- ---------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 20.4%
1,600 Aetna Inc. ...................................................................... 112,900
3,300 Allstate Corp. .................................................................. 299,888
3,500 Amercian Express Co. ............................................................ 312,375
1,875 American International Group Inc. ............................................... 203,906
4,000 Associates 1st Capital Corp. .................................................... 284,500
2,700 BankBoston Corp. ................................................................ 253,631
3,000 Barnett Banks, Inc. ............................................................. 215,625
3,500 Chase Manhattan Corp. ........................................................... 383,250
1,800 Citicorp ........................................................................ 227,587
6,800 Federal Home Loan Mortgage Corp. ................................................ 285,175
3,000 H. F. Ahmanson & Co. ............................................................ 200,813
2,500 Lincoln National Corp. .......................................................... 195,312
4,400 NationsBank Corp. ............................................................... 267,575
4,000 St. Paul Co., Inc. .............................................................. 328,250
6,800 State Street Corp. .............................................................. 395,675
3,000 Transamerica Corp. .............................................................. 319,500
- ---------------------------------------------------------------------------------------------------------
4,285,962
- ---------------------------------------------------------------------------------------------------------
HEALTHCARE -- 10.9%
4,200 Amgen Inc. ...................................................................... 227,325
2,000 Beckman Instruments, Inc. ....................................................... 80,000
8,600 DENTSPLY International, Inc. .................................................... 262,300
3,600 Johnson & Johnson ............................................................... 237,150
3,300 Merck & Co., Inc. ............................................................... 350,625
2,400 Pfizer, Inc. .................................................................... 178,950
6,400 Schering-Plough Corp. ........................................................... 397,600
6,200 Stryker Corp. ................................................................... 230,950
10,000 Tenet Healthcare Corp.++......................................................... 331,250
- ---------------------------------------------------------------------------------------------------------
2,296,150
- ---------------------------------------------------------------------------------------------------------
TECHNOLOGY -- 16.6%
7,300 Automatic Data Processing, Inc. ................................................. 448,038
6,900 Cisco Systems Inc.++ ............................................................ 384,675
6,250 Compaq Computer Corp. ........................................................... 352,734
7,500 Computer Associates International ............................................... 396,563
14,000 EMC Corp.++ ..................................................................... 384,125
4,000 International Business Machines Corp. ........................................... 418,250
4,600 Lucent Technologies Corp. ....................................................... 367,425
2,200 Motorola Inc. ................................................................... 125,538
5,250 Oracle Corp.++ .................................................................. 117,141
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
46
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
SOCIAL AWARENESS STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
TECHNOLOGY -- 16.6% (CONTINUED)
4,000 Sun Microsystems Inc.++ ......................................................... $ 159,500
4,400 Xerox Corp. ..................................................................... 324,775
- ---------------------------------------------------------------------------------------------------------
3,478,764
- ---------------------------------------------------------------------------------------------------------
TRANSPORTATION -- 2.1%
4,500 Mesaba Holdings, Inc.++ ......................................................... 117,000
4,200 Norfolk Southern Corp. .......................................................... 129,412
7,950 Southwest Airlines .............................................................. 195,769
- ---------------------------------------------------------------------------------------------------------
442,181
- ---------------------------------------------------------------------------------------------------------
UTILITIES -- 3.9%
8,000 Enron Corp. ..................................................................... 332,500
3,500 NIPSCO Industries, Inc. ......................................................... 173,031
11,000 Williams Cos., Inc. ............................................................. 312,125
- ---------------------------------------------------------------------------------------------------------
817,656
- ---------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK (Cost -- $13,287,998)......................................... 18,613,738
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
REPURCHASE AGREEMENT -- 11.3%
$2,373,000 Citibank, 6.35% due 1/2/98; Proceeds at maturity -- $2,373,837; (Fully
collaterized by U.S. Treasury Notes, 6.625% due 4/30/02; Market
value -- $2,423,813) (Cost -- $2,373,000)................................... 2,373,000
- ---------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $15,660,998*)............................ $20,986,738
- ---------------------------------------------------------------------------------------------------------
</TABLE>
++ Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
47
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
UTILITIES PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
COMMON STOCK -- 85.8%
- ---------------------------------------------------------------------------------------------------------
ELECTRIC - UTILITY -- 58.0%
11,000 American Electric Power Co., Inc. .............................................. $ 567,875
7,500 Baltimore Gas & Electric Co. ................................................... 255,469
15,000 Central & South West Corp. ..................................................... 405,938
15,000 CINergy Corp. .................................................................. 574,687
15,000 CMS Energy Corp. ............................................................... 660,937
10,000 Dominion Resources, Inc. ....................................................... 425,625
12,000 DPL Inc. ....................................................................... 345,000
15,000 Duke Energy Corp. .............................................................. 830,625
20,000 Edison International............................................................ 543,750
10,000 Endesa.......................................................................... 181,875
15,000 Florida Progress Corp. ......................................................... 588,750
10,000 FPL Group Inc. ................................................................. 591,875
10,000 GPU Inc. ....................................................................... 421,250
10,000 KN Energy Inc. ................................................................. 540,000
10,000 Long Island Lighting Co. ....................................................... 301,250
10,000 New Century Energies, Inc. ..................................................... 479,375
10,000 NIPSCO Industries, Inc. ........................................................ 494,375
10,000 Northern States Power Co. ...................................................... 582,500
10,000 PacifiCorp...................................................................... 273,125
5,000 Pinnacle West Capital Corp. .................................................... 211,875
8,000 Public Service Co. of New Mexico................................................ 189,500
15,000 SCANA Corp. .................................................................... 449,063
15,000 Sierra Pacific Resources........................................................ 562,500
15,000 Southern Co. ................................................................... 388,125
15,000 Texas Utilities Co. ............................................................ 623,437
15,000 Unicom Corp. ................................................................... 461,250
12,000 UtiliCorp United, Inc. ......................................................... 465,750
- ---------------------------------------------------------------------------------------------------------
12,415,781
- ---------------------------------------------------------------------------------------------------------
NATURAL GAS -- 16.0%
8,000 Coastal Corp. .................................................................. 495,500
5,000 Columbia Gas Systems, Inc. ..................................................... 392,812
8,000 Consolidated Natural Gas Co. ................................................... 484,000
7,000 Energen Corp. .................................................................. 278,250
3,000 Enron Corp. .................................................................... 124,688
5,000 Equitable Resources Inc. ....................................................... 176,875
10,000 MCN Corp. ...................................................................... 403,750
3,000 ONEOK, Inc. .................................................................... 121,125
10,000 Pacific Enterprises............................................................. 376,250
15,000 Southwest Gas Corp. ............................................................ 280,312
10,000 Williams Cos., Inc. ............................................................ 283,750
- ---------------------------------------------------------------------------------------------------------
3,417,312
- ---------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
48
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
UTILITIES PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
TELEPHONE -- 11.8%
10,000 France Telecom S.A.++........................................................... $ 360,000
10,000 GTE Corp. ...................................................................... 522,500
8,000 NEXTLINK Communications Inc.++.................................................. 170,500
3,000 Qwest Communications International Inc. ........................................ 178,500
3,000 SBC Communications Inc. ........................................................ 219,750
9,000 Teleport Communications Group, Inc.++........................................... 493,875
5,000 US West Media Group++........................................................... 144,375
15,000 WorldCom, Inc. ................................................................. 453,750
- ---------------------------------------------------------------------------------------------------------
2,543,250
- ---------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK (Cost -- $13,649,234)........................................ 18,376,343
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
<S> <C>
- ---------------------------------------------------------------------------------------------------------
CORPORATE BONDS -- 3.0%
- ---------------------------------------------------------------------------------------------------------
ELECTRIC - UTILITY -- 1.9%
$200,000 Arizona Public Service Co., 7.25% due 8/1/23................................. 200,680
200,000 Philadelphia Electric, 8.75% due 4/1/22...................................... 209,750
- ---------------------------------------------------------------------------------------------------------
410,430
- ---------------------------------------------------------------------------------------------------------
TELEPHONE -- 1.1%
230,000 MCI Communication Corp., 7.75% due 3/23/25................................... 238,338
- ---------------------------------------------------------------------------------------------------------
648,768
TOTAL CORPORATE BONDS (Cost -- $606,132).....................................
- ---------------------------------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS -- 2.4%
500,000 U.S. Treasury Notes, 7.75% due 11/30/99 (Cost -- $499,865)................... 518,725
- ---------------------------------------------------------------------------------------------------------
SUB-TOTAL INVESTMENTS (Cost -- $14,755,231).................................. 19,543,836
- ---------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 8.8%
1,875,000 Citibank, 6.35% due by 1/2/98; Proceeds at maturity -- $1,875,659; (Fully
collateralized by U.S. Treasury Note, 6.6250% due 4/30/02; Market
value -- $1,918,200) (Cost -- $1,875,000).................................... 1,875,000
- ---------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $16,630,231*)............................. $21,418,836
- ---------------------------------------------------------------------------------------------------------
</TABLE>
++ Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
49
<PG$PCN>
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 1997
<TABLE>
<CAPTION>
U.S. GOVERNMENT SOCIAL AWARENESS
SECURITIES STOCK UTILITIES
PORTFOLIO PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Investments -- Cost.................................. $31,476,624 $ 13,287,998 $14,755,231
Repurchase agreements -- Cost........................ 3,992,000 2,373,000 1,875,000
- ---------------------------------------------------------------------------------------------------------------
Investments, at value................................ $33,183,676 $ 18,613,738 $19,543,836
Repurchase agreements, at value...................... 3,992,000 2,373,000 1,875,000
Cash................................................. 525 923 978
Receivable for Fund shares sold...................... -- 35,970 --
Receivable from affiliate............................ -- 25,093 --
Dividends and interest receivable.................... 238,175 17,231 60,285
- ---------------------------------------------------------------------------------------------------------------
TOTAL ASSETS......................................... 37,414,376 21,065,955 21,480,099
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased..................... 2,010,313 -- --
Payable for Fund shares purchased.................... 88,743 -- 13,837
Investment advisory fees payable..................... 9,750 11,138 10,795
Administration fees payable.......................... 1,794 1,078 728
Accrued expenses..................................... 24,333 40,527 41,683
- ---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES.................................... 2,134,933 52,743 67,043
- ---------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS....................................... $35,279,443 $ 21,013,212 $21,413,056
- ---------------------------------------------------------------------------------------------------------------
NET ASSETS:
Paid-in capital...................................... $34,085,800 $ 15,006,691 $15,371,389
Undistributed net investment income.................. 23,858 156,049 643,930
Accumulated net realized gain (loss) from
security transactions and futures contracts....... (537,267) 524,732 609,132
Net unrealized appreciation of investments........... 1,707,052 5,325,740 4,788,605
- ---------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS....................................... $35,279,443 $ 21,013,212 $21,413,056
- ---------------------------------------------------------------------------------------------------------------
SHARES OUTSTANDING..................................... 3,027,108 1,047,410 1,400,349
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, PER SHARE............................. $11.65 $20.06 $15.29
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
50
<PG$PCN>
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
U.S. GOVERNMENT SOCIAL AWARENESS
SECURITIES STOCK UTILITIES
PORTFOLIO PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest................................................ $ 1,830,022 $ 170,723 $ 204,572
Dividends............................................... -- 142,104 629,621
- ---------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME................................. 1,830,022 312,827 834,193
- ---------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)....................... 86,779 104,002 116,989
Audit and legal......................................... 17,550 23,750 20,006
Administration fees (Note 2)............................ 17,467 9,600 9,580
Shareholder and system servicing fees................... 5,345 7,209 7,858
Custody................................................. 2,981 5,000 4,301
Shareholder communications.............................. 2,500 3,800 11,513
Pricing fees............................................ 2,084 -- --
Trustees' fees.......................................... 1,500 1,500 4,015
Other................................................... 412 1,917 16,001
- ---------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES.......................................... 136,618 156,778 190,263
- ---------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME..................................... 1,693,404 156,049 643,930
- ---------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FUTURES
CONTRACTS (NOTES 3 AND 5):
Realized Gain From:
Security transactions (excluding short-term
securities)........................................ 146,348 535,769 631,548
Futures contracts.................................... 48,895 -- --
- ---------------------------------------------------------------------------------------------------------------
NET REALIZED GAIN....................................... 195,243 535,769 631,548
- ---------------------------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year.................................... 184,657 2,448,669 1,870,929
End of year.......................................... 1,707,052 5,325,740 4,788,605
- ---------------------------------------------------------------------------------------------------------------
INCREASE IN NET UNREALIZED APPRECIATION................. 1,522,395 2,877,071 2,917,676
- ---------------------------------------------------------------------------------------------------------------
NET GAIN ON INVESTMENTS AND FUTURES CONTRACTS............. 1,717,638 3,412,840 3,549,224
- ---------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS.................... $ 3,411,042 $3,568,889 $4,193,154
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
51
<PG$PCN>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
U.S. GOVERNMENT SOCIAL AWARENESS
SECURITIES STOCK UTILITIES
PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATIONS:
Net investment income............................ $ 1,693,404 $ 156,049 $ 643,930
Net realized gain................................ 195,243 535,769 631,548
Increase in net unrealized appreciation.......... 1,522,395 2,877,071 2,917,676
- ----------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS........... 3,411,042 3,568,889 4,193,154
- ----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................ (1,694,724) -- (19,187)
Net realized gains............................... -- -- (8,193)
- ----------------------------------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM DISTRIBUTIONS TO
SHAREHOLDERS.................................. (1,694,724) -- (27,380)
- ----------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 9):
Net proceeds from sale of shares................. 11,415,299 8,734,543 4,576,098
Net asset value of shares issued for reinvestment
of dividends.................................. 1,694,724 -- 27,380
Cost of shares reacquired........................ (5,555,432) (2,330,215) (5,570,422)
- ----------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM FUND SHARE
TRANSACTIONS.................................. 7,554,591 6,404,328 (966,944)
- ----------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS............................. 9,270,909 9,973,217 3,198,830
NET ASSETS:
Beginning of year................................ 26,008,534 11,039,995 18,214,226
- ----------------------------------------------------------------------------------------------------------
END OF YEAR*..................................... $35,279,443 $ 21,013,212 $21,413,056
- ----------------------------------------------------------------------------------------------------------
* Includes undistributed net investment income
of:.............................................. $23,858 $156,049 $643,930
- ----------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
52
<PG$PCN>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) FOR THE YEAR ENDED DECEMBER 31,
1996
<TABLE>
<CAPTION>
U.S. GOVERNMENT SOCIAL 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 9):
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) -- $4,964
- ----------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
53
<PG$PCN>
- --------------------------------------------------------------------------------
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 eleven other separate investment portfolios: Travelers Quality
Bond, Lazard International Stock, MFS Emerging Growth, Federated High Yield,
Federated Stock, Large Cap, Equity Income, Mid-Cap Disciplined Equity Fund, 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
asked 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, or minus amortized premium, which approximates
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, 1997,
reclassifications were made to the capital accounts of the U.S. Government
Securities Portfolio, Social Awareness Stock Portfolio and Utilities Portfolio
to reflect permanent book/tax differences and income and gains available for
distribution under income tax regulations. Accordingly, for the U.S. Government
Securities Portfolio, a portion of accumulated net realized gains amounting to
$3,817 was reclassified to paid-in capital. In addition, for the Social
Awareness Stock Portfolio, a portion of accumulated net realized gains amounting
to 8,124 was reclassified to paid-in capital. 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.
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.
Mutual Management Corp. ("MMC"), formerly known as Smith Barney Mutual
Funds Management Inc., a subsidiary of Salomon Smith Barney Holdings Inc.
("SSBH") 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 MMC 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 $200 million of the average daily net assets. Utilities pays MMC
investment management and advisory fees calculated at an annual rate of 0.65% of
the average daily net assets. These fees are calculated daily and paid monthly.
54
<PG$PCN>
- --------------------------------------------------------------------------------
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 MMC.
Travelers Insurance pays MMC, 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, 1997, 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....................................................... $62,069,149 $8,362,808 $10,679,007
- -----------------------------------------------------------------------------------------------------------
Sales........................................................... 52,832,129 2,493,936 11,000,476
- -----------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1997, aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
<TABLE>
<CAPTION>
USGS SAS UTILITIES
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross unrealized appreciation..................................... $1,707,052 $5,539,306 $4,788,605
Gross unrealized depreciation..................................... -- (213,566) --
- -----------------------------------------------------------------------------------------------------------
Net unrealized appreciation....................................... $1,707,052 $5,325,740 $4,788,605
- -----------------------------------------------------------------------------------------------------------
</TABLE>
4. REPURCHASE AGREEMENTS
The Portfolios purchase (and their custodian takes possession of) U.S.
Government securities from banks and securities dealers subject to agreements to
resell the securities to the sellers at a future date (generally, the next
business day) at an agreed-upon higher repurchase price. The Portfolios require
continual maintenance of the market value of the collateral in amounts at least
equal to 102% of the repurchase price.
5. FUTURES CONTRACTS
Initial margin deposits made upon entering into futures contracts are
recognized as assets. The initial margin is segregated by the custodian and is
noted in the schedule of investments. During the period the futures contract is
open, changes in the value of the contract are recognized as unrealized gains or
losses by "marking-to-market" on a daily basis to reflect the market value of
the contract at the end of each day's trading. Variation margin payments are
made or received and recognized as assets due from or liabilities due to broker,
depending upon whether unrealized gains or losses are incurred. When the
contract is closed, the Portfolios record a realized gain or loss equal to the
difference between the proceeds from (or cost of) the closing transactions and
the Portfolio's basis in the contract.
The Portfolios enter into such contracts to hedge portions of their
respective portfolios. The Portfolios bear the market risk that arises from
changes in the value of the financial instruments and securities indices
(futures contracts).
At December 31, 1997, the Portfolios had no open futures contracts.
55
<PG$PCN>
- --------------------------------------------------------------------------------
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.
At December 31, 1997, the Portfolios had no open purchased call or put
options contracts.
7. SECURITIES TRADED ON A TO-BE-ANNOUNCED BASIS
The Portfolios may trade securities on a "to-be-announced" ("TBA") basis.
In a TBA transaction, the Portfolios commit to purchasing or selling securities
for which specific information is not yet known at the time of the trade,
particularly the face amount and maturity date in GNMA/FNMA transactions.
Securities purchased on a TBA basis are not settled until they are delivered to
the Portfolios, normally 15 to 45 days later. These transactions are subject to
market fluctuations and their current value is determined in the same manner as
for other securities.
At December 31, 1997, USGS held one TBA security with a cost of $2,010,313.
8. CAPITAL LOSS CARRYFORWARD
At December 31, 1997, U.S. Government Securities Portfolio had, for Federal
income tax purposes, approximately $513,000 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.
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
Portfolio were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT SECURITIES PORTFOLIO
Shares sold.................................................... 978,971 606,114
Shares issued on reinvestment.................................. 145,971 355,511
Shares redeemed................................................ (491,712) (834,803)
- --------------------------------------------------------------------------------------------------------
Net Increase................................................... 633,230 126,822
- --------------------------------------------------------------------------------------------------------
SOCIAL AWARENESS STOCK PORTFOLIO
Shares sold.................................................... 479,843 323,694
Shares issued on reinvestment.................................. -- 51,251
Shares redeemed................................................ (132,790) (167,210)
- --------------------------------------------------------------------------------------------------------
Net Increase................................................... 347,053 207,735
- --------------------------------------------------------------------------------------------------------
UTILITIES PORTFOLIO
Shares sold.................................................... 341,896 590,496
Shares issued on reinvestment.................................. 1,816 169,391
Shares redeemed................................................ (433,506) (463,451)
- --------------------------------------------------------------------------------------------------------
Net Increase (Decrease)........................................ (89,794) 296,436
- --------------------------------------------------------------------------------------------------------
</TABLE>
56
<PG$PCN>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
For a share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
U.S. GOVERNMENT SECURITIES PORTFOLIO 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR..................... $10.86 $12.43 $10.58 $11.63 $10.79
- ------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income................................ 0.58 0.68 0.65 0.60 0.57
Net realized and unrealized gain (loss).............. 0.79 (0.52) 1.80 (1.23) 0.44
- ------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations.................... 1.37 0.16 2.45 (0.63) 1.01
- ------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM (1):
Net investment income................................ (0.58) (1.55) (0.60) (0.39) (0.17)
Net realized gains................................... -- (0.18) -- (0.03) --
- ------------------------------------------------------------------------------------------------------------
Total Distributions.................................... (0.58) (1.73) (0.60) (0.42) (0.17)
- ------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR........................... $11.65 $10.86 $12.43 $10.58 $11.63
- ------------------------------------------------------------------------------------------------------------
TOTAL RETURN........................................... 12.62% 1.46% 24.42% (5.64)% 9.48%
- ------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S)........................ $35,279 $26,009 $28,192 $24,522 $25,520
- ------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses (2)......................................... 0.49% 0.62% 0.56% 0.71% 0.58%
Net investment income................................ 6.10 5.68 5.80 5.56 5.04
- ------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE................................ 208% 501% 214% 16% 51%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SOCIAL AWARENESS STOCK PORTFOLIO 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR..................... $15.76 $14.32 $11.05 $11.64 $10.95
- ------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income (3)............................ 0.15 0.31 0.12 0.16 0.17
Net realized and unrealized gain (loss).............. 4.15 2.42 3.47 (0.45) 0.65
- ------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations.................... 4.30 2.73 3.59 (0.29) 0.82
- ------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM (1):
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........................... $20.06 $15.76 $14.32 $11.05 $11.64
- ------------------------------------------------------------------------------------------------------------
TOTAL RETURN........................................... 27.28% 19.98% 33.37% (2.69)% 7.55%
- ------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S)........................ $21,013 $11,040 $7,055 $3,879 $3,361
- ------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses (3)(4)...................................... 0.98% 1.25% 1.25% 1.25% 1.05%
Net investment income................................ 0.97 0.43 0.99 1.43 1.50
- ------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE................................ 19% 26% 73% 137% 60%
- ------------------------------------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE PAID
ON EQUITY TRANSACTIONS (5)........................... $0.06 $0.06 -- -- --
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Distributions from realized gains include both net realized short-term and
long-term capital gains. Prior to 1996 net realized short-term capital gains
were included in distributions from net investment income.
(2) The ratio of expenses to average net assets for the year ended December 31,
1993 reflects an expense reimbursement by The Travelers in connection with
voluntary expense limitations. Without the expense reimbursement, the ratio
of expenses to average net assets would have been 0.77%.
(3) 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
$0.06 and the actual expense ratio would have been 1.69%.
(4) The ratios of expenses to average net assets for the years ended December
31, 1995, 1994 and 1993 reflect an expense reimbursement by The Travelers in
connection with voluntary expense limitations. Without the expense
reimbursements, the ratios of expenses to average net assets would have been
1.75%, 3.34% and 3.73%, respectively.
(5) For the fiscal years beginning after 1995, the SEC instituted new guidelines
requiring the disclosure of average commissions per share on Funds which
held more than 10% of their assets in commissionable equity securities.
57
<PG$PCN>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
UTILITIES PORTFOLIO 1997 1996 1995 1994(1)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR............................... $12.22 $12.85 $10.17 $10.00
- ----------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income.......................................... 0.46 0.47 0.48 0.35
Net realized and unrealized gain (loss)........................ 2.63 0.47 2.44 (0.18)
- ----------------------------------------------------------------------------------------------------------
Total Income From Operations..................................... 3.09 0.94 2.92 0.17
- ----------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM (2):
Net investment income.......................................... (0.01) (0.84) (0.24) --
Net realized gains............................................. (0.01) (0.73) -- --
- ----------------------------------------------------------------------------------------------------------
Total Distributions.............................................. (0.02) (1.57) (0.24) --
- ----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR..................................... $15.29 $12.22 $12.85 $10.17
- ----------------------------------------------------------------------------------------------------------
TOTAL RETURN..................................................... 25.29% 7.47% 29.29% 1.70%++
- ----------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S).................................. $21,413 $18,214 $15,340 $5,757
- ----------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses (3)................................................... 1.06% 1.07% 1.25% 1.25%+
Net investment income.......................................... 3.58 3.88 4.29 3.86+
- ----------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE.......................................... 68% 39% 25% 32%
- ----------------------------------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE PAID ON EQUITY TRANSACTIONS (4).... $0.06 $0.06 -- --
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the period from February 4, 1994 (commencement of operations) to
December 31, 1994.
(2) Distributions from realized gains include both net realized short-term and
long-term capital gains. Prior to 1996 net realized short-term capital gains
were included in distributions from net investment income.
(3) The ratios of expenses to average net assets for the year ended December 31,
1995 and the period ended December 31, 1994 reflect expense reimbursements
by The Travelers in connection with voluntary expense limitations. Without
the expense reimbursements, the ratios of expenses to average net assets
would have been 1.27% and 3.49% (annualized), respectively.
(4) For the fiscal years beginning after 1995, the SEC instituted new guidelines
requiring the disclosure of average commissions per share on Funds which
held more than 10% of their assets in commissionable equity securities.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized
58
<PG$PCN>
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees of
The Travelers Series Trust:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of the U.S. Government Securities Portfolio,
Social Awareness Stock Portfolio and Utilities Portfolio of The Travelers Series
Trust as of December 31, 1997, and the related statements of operations,
statements of changes in net assets, and financial highlights for the year then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The statements of changes in net assets for the year ended December 31,
1996 and the financial highlights for each of the years in the four-year period
then ended were audited by other auditors whose report thereon, dated February
24, 1997, expressed an unqualified opinion on those financial statements and
financial highlights.
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, 1997, by correspondence with the custodian. As to securities
purchased but not yet received, we performed other appropriate auditing
procedures. 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 positions of the
U.S. Government Securities Portfolio, Social Awareness Stock Portfolio and
Utilities Portfolio of The Travelers Series Trust as of December 31, 1997, the
results of their operations, changes in their net assets and their financial
highlights for the year then ended, in conformity with generally accepted
accounting principles.
/s/ KPMG PEAT MARWICK LLP
New York, New York
February 10, 1998
59
<PG$PCN>
- --------------------------------------------------------------------------------
TAX INFORMATION (UNAUDITED)
For Federal tax purposes the Trust hereby designates for the fiscal year
ended December 31, 1997:
- Percentage of the ordinary dividends paid as qualifying for the
corporate dividends received deduction:
<TABLE>
<S> <C>
Utilities Portfolio.................................................. 70.08%
</TABLE>
A total of 36.50% of the ordinary dividends paid by the U.S. Government
Securities Portfolio from net investment income are derived from federal
obligations and may be exempt from taxation at the state level.
60
<PG$PCN>
(This page intentionally left blank)
<PG$PCN>
Investment Advisers
--------------------
MANAGED ASSETS TRUST, HIGH YIELD BOND TRUST, CAPITAL APPRECIATION FUND, CASH
INCOME TRUST AND
THE TRAVELERS SERIES TRUST: U.S. GOVERNMENT SECURITIES PORTFOLIO
TRAVELERS ASSET MANAGEMENT INTERNATIONAL CORPORATION
Hartford, Connecticut
THE TRAVELERS SERIES TRUST: SOCIAL AWARENESS STOCK PORTFOLIO AND UTILITIES
PORTFOLIO
MUTUAL MANAGEMENT CORP.
New York, New York
Independent Auditors
---------------------
KPMG PEAT MARWICK LLP
New York, New York
Custodian
----------
PNC BANK, N.A.
This report is prepared for the general information of contract owners and is
not an offer of shares of Managed Assets Trust, High Yield Bond Trust, Capital
Appreciation Fund, Cash Income Trust, The Travelers Series Trust: U.S.
Government Securities Portfolio, Social Awareness Stock Portfolio or Utilities
Portfolio. It should not be used in connection with any offer except in
conjunction with the Prospectuses for the Variable Annuity and Variable
Universal Life Insurance products offered by The Travelers Insurance Company and
the Prospectuses for the underlying funds, which collectively contain all
pertinent information, including the applicable sales commissions.
Printed in U.S.A. VG-181 (Annual)(2-98)
<PG$PCN>
THE TRAVELERS VARIABLE
PRODUCTS FUNDS
ANNUAL REPORTS
DECEMBER 31, 1997
[PHOTO]
THE TRAVELERS SERIES TRUST:
TRAVELERS QUALITY BOND PORTFOLIO
LAZARD INTERNATIONAL STOCK PORTFOLIO
MFS EMERGING GROWTH PORTFOLIO
FEDERATED HIGH YIELD PORTFOLIO
FEDERATED STOCK PORTFOLIO
MID CAP DISCIPLINED EQUITY FUND
[TRAVELERS LIFE & ANNUITY LOGO]
The Travelers Insurance Company
The Travelers Life and Annuity Company
One Tower Square
Hartford, CT 06183
<PG$PCN>
THE TRAVELERS SERIES TRUST:
TRAVELERS QUALITY BOND PORTFOLIO
LAZARD INTERNATIONAL STOCK PORTFOLIO
MFS EMERGING GROWTH PORTFOLIO
FEDERATED HIGH YIELD PORTFOLIO
FEDERATED STOCK PORTFOLIO
MID CAP DISCIPLINED EQUITY FUND
<PG$PCN>
ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
We are pleased to provide the annual report for six of the fourteen portfolios
of The Travelers Series Trust -- Travelers Quality Bond Portfolio, Lazard
International Stock Portfolio, MFS Emerging Growth Portfolio, Federated High
Yield Portfolio, Federated Stock Portfolio and Mid-Cap Disciplined Equity Fund
for the year ended December 31, 1997. In this letter, we briefly discuss general
economic and market conditions and outline each Portfolio's investment strategy.
A market commentary and detailed summary of performance and current holdings for
each Portfolio can be found in the pages listed below.
<TABLE>
<CAPTION>
PORTFOLIO SCHEDULE OF
COMMENTARY INVESTMENTS
---------- -----------
<S> <C> <C>
Travelers Quality Bond Portfolio...................... 3 12
Lazard International Stock Portfolio.................. 3 14
MFS Emerging Growth Portfolio......................... 5 17
Federated High Yield Portfolio........................ 6 23
Federated Stock Portfolio............................. 6 30
Mid Cap Disciplined Equity Fund....................... 7 34
</TABLE>
ECONOMIC REVIEW AND OUTLOOK
The big story in the second half of 1997 was the Asian economic and financial
crisis. What started out as a localized disturbance in Thailand in July 1997
soon spread to other countries in Southeast Asia and wreaked havoc on their
currency and capital markets. The events in Asia raise the specter of a global
economic slowdown and prospects of global deflation.
We begin with a discussion of the outlook for inflation and the potential for
deflation with a focus on the U.S. economy. The remarkable string of good news
on the inflation front in the U.S. continued in the fourth quarter of 1997. The
Producer Price Index ("PPI") fell slightly in the fourth quarter and declined by
- -1.2% for 1997. Producer prices fell in 9 out of 12 months in 1997 while the
Consumer Price Index rose by a mere 1.7% in 1997, the smallest rise since 1986.
Inflation has rarely or ever been so low at such a late stage in the economic
cycle.
Technology-driven productivity gains have contributed to the recent
disinflationary trend, and the significant devaluation of several Asian
currencies should result in lower import prices and help push domestic inflation
even lower.
With worldwide overproduction, the cost of items such as cars and electronic
goods is actually showing near-zero growth. Prices of some of the most important
industrial commodities, including oil and copper, have tumbled in recent months
and the price of gold, a traditional hedge against inflation, was at an 18-year
low in December 1997, well below $300 per ounce.
Despite a tight labor market in the U.S., wage inflation has not surged. Global
deflationary pressures should offset wage inflation in 1998. (Deflation is a
decline in the prices of goods and services or when there are major imbalances,
too much supply and little or no demand. Disinflation is a slowing down in the
rate of price increases which means you do not have pricing power today, but
there are not any major imbalances or dislocations to the economy.) While we
acknowledge the arguments in favor of global deflation, we have not seen enough
evidence to foresee zero or negative inflation in 1998 and believe we will
continue to experience a period of overall price stability.
The crisis in Southeast Asia also raises the possibility of a global economic
slowdown. The U.S. economy derives almost 15% of its total output from exports.
Approximately 10% of these exports are made to Southeast Asia. While it is
difficult to predict the eventual impact on U.S. exports, most reasonable
estimates of growth shortfalls suggest that the impact on U.S. Gross Domestic
Product ("GDP") growth will be no more than -0.5%. Economic growth forecasts for
1998 have been revised down recently and the consensus GDP growth estimate for
1998 is now about 2.5%.
The continued good news on the inflation front sent U.S. interest rates lower
during the fourth quarter. Long-term rates fell from 6.4% to 5.9% as investors
began to discount a deflationary outlook and became comfortable with a stable
monetary policy environment.
Short-term interest rates have held steady even as inflation and long-term rates
have declined. Even though the Federal Reserve Board ("Fed") has not raised
short-term interest rates for several months now, monetary policy has
effectively
1
<PG$PCN>
ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
become tighter as the real federal-funds rate (actual rate less inflation) has
risen to 3.3%.(The federal-funds rate is the interest rate banks charge each
other for overnight loans and a closely watched indicator of the direction of
interest rates.) With Asian currencies in turmoil, we believe that the Fed is
likely to stay put and the odds of another Fed hike are remote.
EQUITY MARKET COMMENTARY
The year 1997 turned out to be another spectacular one for the U.S. stock
market. For the first time ever, the U.S. stock market posted three consecutive
years of gains in excess of 20%. The current bull market continues to be driven
by stable economic growth, robust earnings growth and a continuation of low
inflation.
Stock market volatility also increased in 1997 when the Dow Jones Industrial
Average ("DJIA") moved up or down by more than 1% every third trading day on
average. (DJIA is a price-weighted average of 30 actively traded blue chip
stocks, primarily industrial.) The uncertainty on the earnings front as a result
of the Asian financial and currency crisis should sustain a high level of
volatility and complicate the market outlook for 1998.
After a strong showing in the first half of 1997, the U.S. stock market posted
solid gains in the third quarter. The S&P 500 Index ("S&P 500"), gained 7.5% in
the third quarter of 1997, the Russell 2000 Index, rose sharply by 14.9% and the
Nasdaq Index performed even better with a spectacular rise of 16.9%. The U.S.
stock market posted a mixed performance in the fourth quarter. The S&P 500
gained 2.9% in the fourth quarter, while the Russell 2000 Index fell by 3.4% and
the Nasdaq Index declined by 6.8%. For the calendar year 1997, the S&P 500 rose
by 33.4%, the Russell 2000 Index advanced by 22.4% and the Nasdaq Index gained
21.6%. (The S&P 500 is a capitalization-weighted measure of 500 widely held
common stocks. The Russell 2000 Index is made up of 2,000 smaller-capitalized
U.S.-based companies whose common stocks trade on either the New York, American
or Nasdaq stock exchanges.)
Stock market volatility increased in the third quarter of 1997 with the DJIA
registering its second-largest point decline and its single-largest daily gain
within a three-week period in the middle of the third quarter. Most stock market
indexes fell about 3% on August 15, 1997, on a groundswell of earnings concerns
after a few large-capitalization consumer companies warned about earnings
disappointments for the third quarter. Investor sentiment reversed on September
2, 1997 when a weaker economic report from the National Association of
Purchasing Managers ("NAPM") dispelled fears of further Fed tightening. The
stock market reversed course with an equally spectacular 3% gain as bond prices
rose sharply also.
The events in Southeast Asia came into sharp focus for U.S. investors when a
sell-off in Hong Kong, a beacon of stability in the region, dropped the DJIA by
554 points on Monday, October 27, 1997, and was a major factor of the largest
point loss in history. After a wild swing in trading the following day, stock
prices began to stabilize. Despite more bad news in terms of large-scale
bankruptcies in South Korea and Japan in the ensuing weeks, U.S. investors
assessed a relatively modest impact on the domestic economy and the stock market
was able to recover its losses from Gray Monday and even nudge higher by
year-end in select sectors.
Second quarter earnings showed the same pattern of good news from earlier
quarters which investors have now almost come to expect as a routine outcome.
Positive surprises again far outnumbered disappointing earnings reports. Over
61% of all companies reported earnings above consensus while only 26% failed to
deliver on earnings expectations.
Third quarter earnings were also ahead of expectations. The final tally on the
earnings scorecard showed that 55% of all companies reported positive earnings
surprises while 28% turned in earnings disappointments. We observe yet again
that the current string of good earnings reports has now reached 19 consecutive
quarters and is unprecedented in terms of both magnitude and duration.
The consensus forecast for 1998 corporate earnings growth is now 7.2%. The key
to stock market performance in 1998 will be the extent to which corporate
profits remain immune to the problems in Asia. The obvious contributors to
likely shortfalls in earnings will be currency translation losses and lower
export revenues stemming from lower demand in Asia. With current valuations at
fairly high levels, the stock market should be intolerant of any earnings
disappointments.
We suspect that the global stock markets are currently more vulnerable to the
woes of a weak economy than the risk of higher interest rates stimulated by
economic strength. It is difficult to gauge the precise impact of the Asian
crisis on corporate earnings and as a result, 1998 promises to be a year of
great uncertainty.
2
<PG$PCN>
ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
FIXED INCOME MARKET COMMENTARY
For the first time in seven quarters, bonds outperformed stocks as the Asian
crisis that began in Thailand in July 1997 spread throughout Asia and other
emerging markets. The crisis impacted all global markets in late October when
the Hong Kong dollar came under pressure. The S&P 500 went down roughly 10% in
October leading to a sharp rally in the U.S. bond market, while declining bond
yields and bargain hunting by some investors helped stabilize financial markets
as the reporting period drew to a close. The U.S. stock market and emerging debt
markets posted positive returns in November and December as both of these
markets did not offset the amount lost in October. As of this writing, Asia's
problems continue to challenge many investment professionals.
We believe that many investors have underestimated the damage caused by the
crisis in Asia. Imports from countries with devalued currencies will keep
downward pressure on the inflation rate in the U.S., taking that issue off the
radar screen for many investors. The reduction in corporate revenues will impact
some combination of profits and employment. To the extent that corporations
reduce their labor forces to preserve profits, pressure will be taken off U.S.
labor markets and the Fed will be given a compelling reason to cut rates.
Moreover, many of the problems in Asia are the result of building too much
capacity in industries such as automobiles, chemicals and semiconductors. This
overcapacity, which has been exacerbated by the decline of demand in Asia,
should slow down U.S. capital spending growth, which has been in the recent past
the fastest-growing component of GDP.
Looking ahead to 1998, we expect that the difference between short-term and
long-term interest rates will probably widen. In our opinion, one of two
scenarios could develop that could cause this change in the relationship between
interest rates. We believe the most likely scenario is that ongoing financial
turmoil in Asia could hamper U.S. economic growth and lead the Fed to compensate
by lowering short-term interest rates. The other possibility is that U.S.
economy continues to grow robustly, heightening investor concerns of greater
inflationary pressures. In this case, investors would shift their attention to
the tight U.S. labor market, reflecting their inflationary concerns in the form
of higher long-term interest rates. This latter scenario could happen if Asian
economies recover quickly or if interest-rate sensitive industries of the U.S.
economy pick up sufficiently to offset any adverse affects that the Asian crisis
might have on domestic economic growth.
TRAVELERS QUALITY BOND PORTFOLIO
The fourth quarter of 1997 was disastrous in Asia. The problems that originated
in Thailand spread quickly to Malaysia, Indonesia and then Korea. Fortunately,
the Travelers Quality Bond Portfolio's ("Portfolio") exposure to Asian credits
was eliminated earlier in the year. Prices of certain Korean paper dropped as
much as 35% from their highs as questions arose about their ability to roll over
short-term debt.
Corporate bond spreads widened and U.S. Treasurys rallied sharply, with two-year
yields falling. The yield curve flattened dramatically in the last quarter of
1997. (The yield curve shows the difference between short- and long-term
yields.)
In the fourth quarter, securities selection and a slightly longer duration
helped the Portfolio's performance. (Duration is a measure of a fund's
volatility relative to a given change in interest rates.) For the year, the
Portfolio posted a 7.14% total return versus the Lehman Government/Corporate
Bond Index of 9.76%. (The Lehman Government/Corporate Bond Index is a
combination of publicly issued intermediate- and long-term U.S. government bonds
and corporate bonds.) The Portfolio was hurt by our bearishness in the second
quarter of 1997.
The Portfolio enters 1998 with a slightly longer duration than the benchmark
(3.5 years versus 3.3 years). We have increased our exposure to U.S. Treasurys
and are overweighted in corporate bonds focusing on shorter maturities to
capture additional yield potential.
LAZARD INTERNATIONAL STOCK PORTFOLIO
The Lazard International Stock Portfolio ("Portfolio") posted excellent
performance for 1997. The Portfolio had a total return of 8.50% for the year
ended December 31, 1997 which outperformed the 1.78% posted by the MSCI EAFE
Index. (The MSCI EAFE Index consists of the equity total returns for Europe,
Australia, New Zealand and the Far East.) We believe the Portfolio's outstanding
performance demonstrates the merits of maintaining a strict investment
discipline. After stocks
3
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ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
peaked in mid-July, Asian financial turmoil sparked a global stock market slide,
sending the MSCI EAFE down nearly 10% by year end. In contrast, the Portfolio
slipped just 3%, protecting its earlier gains. Strong outperformance and low
volatility during turbulent market conditions are hallmarks of Lazard's
bottom-up value discipline. (A "bottom-up" approach to investing focuses on the
potential outstanding performance of individual companies rather than
considering the impact of major economic trends.)
Asian market turmoil and its global repercussions shook the stock markets in the
second half of 1997. The widely held belief that emerging Asian economies could
grow 7%-10% in perpetuity without contraction led valuations. Due to these
excessive valuations, we were significantly underweighted in Asia, with less
than a roughly 4% exposure. Undisciplined capital spending, excessive property
values, imprudent lending and inappropriate policy responses ultimately led to
the currency devaluation and falling stock markets. The Thai baht was the first
to collapse while South Korea has been the latest victim. International Monetary
Fund ("IMF") bailouts replaced Fed Chairman Alan Greenspan's comments as the
most publicized financial news stories. We believe our limited exposure to Asia
(ex-Japan) during the reporting period added significant value relative to the
MSCI EAFE Index.
Prudent stock selection lies at the heart of our investment discipline. While
the European political climate shifted this year, with Labor and Socialist
victories in the UK and France as well as the impending European Monetary Union,
many European companies are addressing global competition head on and
recognizing shareholder value through decisive corporate action. During the
first quarter, Alcatel Alsthom's (A French telecommunications and energy systems
company) stock price soared over 60% as the company returned to profit
delivering on a restructuring plan outlined by its CEO Serge Tchuruk in late
1995. Alcatel then turned to focusing on its core business by taking control of
Thomson-CSF (defense electronics) and finally closed the year by announcing its
intention to spin off its GEC-Alsthom energy business.
During the second quarter, Philips Electronics' (Netherlands) restructuring
program implemented last year began to bear fruit in the form of its first
quarterly earnings upturn in over two years. We invested in companies that
strengthened their core businesses through mergers. In Germany, Thyssen and
Krupp Hoesch announced a merger that will give them needed critical mass and
help bolster their global steel capabilities. Meanwhile in the UK, Grand
Metropolitan and Guinness merged to form Diageo PLC, creating a powerful
combination of brands and distribution in the fragmented global spirits
industry. B.A.T. Industries PLC merged its insurance business with Zurich
Insurance (Switzerland) leaving B.A.T. a focused tobacco company and
strengthening Zurich's global financial presence. However, the single largest
contributor of outperformance for the Portfolio was Japanese stock selection.
Japan's stock market struggled throughout 1997. Regional turmoil compounded
domestic problems and a weak economic outlook continued to plague Japanese
companies. Over the last two years, the Japanese stock market has become
polarized as exporters forced to change to compete with global peers have
prospered, while domestic companies in regulated industries have languished. Our
focus on proactive business attractively priced relative to the sustainable
returns they generate led us to a high exposure in companies such as Sony, Honda
and Nintendo. These stocks, have in turn, strongly outperformed the Japanese
market as a whole. A weak yen has also helped, but certain companies have
benefited from restructuring and they have developed competitive advantages
globally in their respective industries.
Domestic Japanese companies that are taking action to remain competitive in
deregulating industries also boosted performance. Orix Corp. (leasing) has taken
a number of positive steps that has driven its stock to be the Portfolio's
strongest performer this year. After its bad debt provisions peaked, Orix took
over a bankrupt leasing company and announced a joint venture with Bank One to
strengthen its core business and position itself to take advantage of favorable
deregulation announced at the beginning of the year. Orix also recognized its
shareholders by announcing a share buy back and became one of the first Japanese
companies to align the interests of its management with those of shareholders
through a stock option incentive plan. Such domestic leaders have joined global
exporters to post strong absolute returns in a weak market. While Japan tumbled
about 24%, the Portfolio's Japanese stocks actually went down just 1%.
As we scour the world for investment opportunities, we usually employ a global
industry perspective rather than a country or regional focus. As companies
become more global, we think it's critical to understand the industry in which
they operate rather than the countries where they are based.
British Aerospace PLC (UK, defense) is a great example of our industry focus.
Understanding how the U.S. defense industry has consolidated helps us in
evaluating European defense companies as the industry evolves. British Aerospace
restructured
4
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ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
and became the most efficient European defense/aerospace company. In fact,
before British Aerospace announced it would make wingsets for Boeing's new 737,
we already determined that Boeing envied British Aerospace wingset engineering
and manufacturing capabilities. In Europe, we found more compelling valuations
and companies actively consolidating in the face of deregulation, whereas
Japanese banks, also facing deregulation have essentially implemented no change.
In turn, we were overweighted in European financials and did not own a single
Japanese bank.
No matter what 1998 has in store for financial markets, Lazard remains committed
to its disciplined, bottom-up value-driven investment approach. Obviously we do
not ignore macroeconomic and political events, but by concentrating on finding
companies selling at compelling valuations with catalysts to unlock value for
shareholders, the Portfolio should be positioned to perform well in rising
markets and hopefully outperform its competition in flat and falling markets.
MFS EMERGING GROWTH PORTFOLIO
For the year ended December 31, 1997, the MFS Emerging Growth Portfolio
("Portfolio") provided a total return of 21.15%. This compares to a 22.36%
return for the Russell 2000 Index and a 33.35% return for S&P 500 for the same
period.
Although the Portfolio's performance benefited from the stock price appreciation
of many of its holdings in the technology, leisure, and retail sectors, the
overall stock market in 1997 continued to be dominated by the larger
capitalization issues as represented by DJIA and S&P 500.
1997 was a paradoxical year for investors. On one hand, the economy was stronger
than expected, yet inflation remained extremely low. In fact, economic growth
was so strong early in the year that concerns about possible interest-rate
increases enhanced the appeal of larger capitalization stocks of the DJIA and
S&P 500 compared to emerging growth stocks, despite their superior earnings'
growth and attractive valuations. At mid year when it became apparent that
inflation was subdued, emerging growth stocks outperformed larger capitalization
stocks. However, in late 1997, with the concerns generated by the economic
problems in Asia, investors again sought the liquidity and perceived "safety" of
larger cap stocks.
The Portfolio benefited from the strong performance of its largest sector:
technology. Our holdings are primarily in software, where the Portfolio owns the
leading database, design automation, and mainframe software companies such as
Cadence Design System, Inc., BMC Software Inc., Compuware, SAP (A German ADR)
and Microsoft Corp. These corporations are helping workers worldwide to become
more productive.
Our holdings in leisure, primarily lodging and media, also helped the
Portfolio's performance. The stocks of radio and television broadcasting
companies such as Clear Channel Communications, Inc. and Cox Radio Inc. were
buoyed by positive advertising trends and continued consolidation within their
markets. Drug store and food retailers such as CVS Corp., Rite Aid Corp., and
Fred Meyer Inc. also contributed to the Portfolio's performance because of
strong underlying growth and cost cutting opportunities generated by mergers and
acquisitions. Investors finally recognized the many synergies of the Portfolio's
largest position, Cendant Corp., the new company formed by the merger of HFS and
CUC International, two leading consumer service companies. The Portfolio's
second-largest position, Tyco International Ltd. (a diversified company that
designs, manufactures and sells disposable medical supplies, electronic security
devices, electronic components and flow control products), contributed favorably
as well due to acquisitions and strong internal growth.
One area that did not perform as well as we expected was health care, in
particular the stocks of health maintenance organizations ("HMOs").
Higher-than-expected expenses more than offset price increases, creating
earnings disappointments. Now these companies have a more realistic view of the
cost of doing business and should price their products more realistically. We
think the earnings of HMOs should begin to meet investors' expectations going
forward.
Looking ahead, we are positive about the fundamental outlook for emerging growth
stocks. In 1998, we expect a slowing of economic growth and a continuation of
the benign interest rate environment that marked this past year. Emerging growth
stocks should generate stronger relative earnings growth than their
large-capitalization, multinational counterparts who are typically more exposed
to the turmoil in Asia. Robust earnings combined with attractive valuations
should help performance. Moreover, the recent capital gains tax cut should also
increase the investment appeal of emerging growth stocks. We believe our
investment strategy of searching out rapidly growing companies early in their
development and identifying growth stocks at reasonable prices should be
rewarding for investors in 1998.
5
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ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
FEDERATED HIGH YIELD PORTFOLIO
The high yield bond market generated excellent returns for the year ended
December 31, 1997. The Federated High Yield Portfolio ("Portfolio") posted a
total return of 15.45% for the year ended December 31, 1997. In comparison, the
Lehman Brothers High Yield Bond Index returned 12.76% for the year versus 9.65%
for the Lehman Aggregate Index, a measure of high quality bond performance. (The
Lehman Aggregate Bond Index is an unmanaged index composed of the Lehman
Intermediate Government/Corporate Bond Index and the Mortgage-Backed Securities
Index and includes U.S. treasury issues, agency issues, corporate bond issues
and mortgage-backed securities.)
The major factor for the superior relative performance of high yield bonds was
the almost ideal economic conditions that existed in 1997. Strong steady
economic growth, coupled with low inflation, resulted in good operating
performance for most high yield bond issuers. Declining interest rates and
strong stock markets provided an attractive environment for most high yield bond
issuers. Moreover, the high yield bond market has benefited from strong demand
as investors continued to be attracted to the historically strong total return
performance and attractive yields from high yield bonds in a declining rate
environment.
The Portfolio outperformed both its Lipper high current yield fund peer group
average and the Lehman Brothers High Yield Bond Index for the year ended
December 31, 1997. We believe several factors benefited the Portfolio versus the
benchmarks. The Portfolio's largest industry exposures have been (and continue
to be) telecommunications, cable and broadcasting. These three sectors generated
very strong performance versus the bond market this year. The Portfolio was
generally underweighted in basic industries such as steel, forest products and
commodity chemicals. These sectors underperformed, especially in the fourth
quarter of 1997 as concerns about lower economic growth in 1998 began to
increase. The Portfolio also had no exposure to emerging Asian markets that were
negatively impacted in the fourth quarter by economic and currency turmoil.
Several Portfolio holdings were involved in corporate finance activities such as
mergers, initial public offerings ("IPOs") and tenders. For example, Astor was
acquired by Allied Signal while Ralph's Grocery and Brooks Fiber have announced
plans to be acquired. AMF and International Home Foods did initial stock
offerings and Owens Illinois tendered for its outstanding debt. In addition, the
Portfolio benefited from strong individual security selection, avoiding major
deteriorating situations while holding numerous strong performers. Nextel,
Teleport, Cablevision Systems and GS Technologies were particularly strong
performers.
In 1998, we believe the main area of uncertainty is what impact Asia's problems
will have on U.S. economic growth, inflation and the stock markets. It would
appear that the problems in Asia will slow the U.S. economy and reduce inflation
much like a Fed monetary policy tightening. This could serve to head off
inflationary fears, reduce the likelihood of a future Fed tightening and give
support to the current economic expansion.
Strong economic growth would be a long-term positive for high yield bonds. Yet,
the main risk is that Asia's problems will have a greater impact on the U.S.
economy and push it into recession. Therefore, superior credit selection will be
essential in 1998 as the odds-on-bet is for slower economic activity that could
lead to negative credit surprises. We continue to favor companies that are
benefiting from strong growth such as telecommunications and companies in
consolidating businesses such as cable and broadcasting.
FEDERATED STOCK PORTFOLIO
The year ended December 31, 1997 was a strong year for the Federated Stock
Portfolio ("Portfolio"). The Portfolio had a total return of 33.41% versus the
24.84% and 33.35% total returns for the Lipper growth and income funds average
index and the S&P 500 Index, respectively.
Continued market strength led us to become more defensive as valuations become
excessive in some areas and speculation seemed more abundant. We are close to
seven years of an economic expansion, quite long by historical standards. The
current economic turmoil facing some of our foreign trading partners during the
reporting period also concerns us. The combination of these and other factors
has increased investor uncertainty. When uncertainty increases in financial
markets, the typical reaction of investors is a "flight to quality." Investors
usually begin taking profits in more speculative (and often smaller) companies
and invest in large, well run companies that have weathered difficult economic
and market periods. We think these trends bode well for the Portfolio.
6
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ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
The best-performing sectors during the period under review were finance,
technology and energy. We continue to be overweighted in energy due to its
defensive nature as well as attractive valuation. In finance, we remain slightly
underweighted as valuations are now in the upper end of their historic ranges.
The run up in technology has given us the opportunity to reduce our exposure, as
excessive valuation and slowing growth rates persist. We continue to increase
our exposure to utilities and retailing as both groups have been ignored by most
investors, valuations are attractive and fundamentals are improving. We continue
to seek undervalued quality companies and avoid good stories with high risk.
As part of our portfolio management process in determining the relative value of
various sectors, we also attempt to identify underlying investment themes. At
this time, the major themes in the Portfolio are:
- Beneficiaries of corporate restructuring such as Pharmacia & Upjohn Inc.,
Rubbermaid Inc., Unilever NV and Cigna Corp.
- Companies that generate significant excess cash flow such as Philip
Morris Co. and Dow Chemical Corp.
- Dominant companies with superior management such as PepsiCo Inc.,
Wal-Mart Corp. and Philip Morris Co.
While concerned by the market's strength over the past years, we believe good
long-term values can still be identified through our disciplined investment
process and careful fundamental research. While we believe 1998 will be more
challenging for investors, we will continue to help minimize risk through
diversification as well as pay close attention to the valuation levels of
individual stocks.
MID CAP DISCIPLINED EQUITY FUND
The Mid Cap Disciplined Equity Fund ("Fund") was launched on April 1, 1997. From
its inception to December 31, 1997, the Fund had a total return of 34.38%,
comparing favorably to the 34.25% total return of S&P 400 index ("S&P 400").
(The S&P 400 is a value-weighted index comprised of mid- and small-company
stocks.)
The Fund is managed by the Travelers Investment Management Co. ("TIMCO"). TIMCO
manages the Fund to provide diversified exposure to the mid- and
small-capitalization sectors of the U.S. stock market. Stock selection is based
on a disciplined quantitative screening process that favors companies that are
able to grow earnings above consensus expectations and offer in the opinion of
the manager attractive relative value. In order to achieve consistent relative
performance, we manage the portfolio to mirror the overall risk, sector
weightings and growth/value style characteristics of the S&P 400 index.
During the second half of 1997, stock selection in the consumer discretionary
and technology sectors made the strongest positive contribution to the Fund's
overall relative performance. In the consumer discretionary sector, our biggest
relative performance gains came from our overweighted positions in a number of
specialty retailers, including Family Dollar Stores Inc. and TJX Cos. Inc.,
companies that benefited from a strong domestic economy and healthy consumer
spending. The Fund was also helped by solid advertising trends and merger
activity in the newspaper and media industries. These factors helped boost the
stocks of New York Times Co. and Chancellor Media Corp., respectively.
In the technology sector where investors became increasingly concerned about the
negative impact of the Asian economic crisis on corporate earnings and economic
growth rates, our underweighted position in semiconductor and semiconductor
equipment stocks also helped the Fund's returns. Computer software holdings such
as Policy Management Services Corp. and BMC Software Inc. rose on strong
fundamentals, positive earnings surprises and attractive valuations.
Our disciplined approach to stock selection emphasizes stocks that exhibit
improving fundamentals as measured by changes in analysts' earnings estimates
and the trend of recent earnings surprises, and which also trade at a reasonable
price-to-earnings ratio relative to expected earnings growth rates. In the
technology sector, we are maintaining our emphasis in VLSI Technology Inc., a
leading designer and manufacturer of semiconductors used in wireless and digital
telecommunications applications.
We lost ground to the benchmark primarily in the transportation and basic
materials sectors. In the transportation sector, we were hurt by our position in
Kansas City Southern, a railroad and financial services company that benefited
first from the strong performance of its money management operations and from
the decision to separate into two entities. In basic materials, the Asian crisis
led to plummeting commodity prices and pressured stocks in the gold, copper,
aluminum, paper and steel industries, as investors began to discount weaker 1998
earnings. The Fund's holdings which suffered as a result of
7
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ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
Asia include Boise Cascade Corp., a paper and forest product manufacturer, and
USX-U.S. Steel Group Inc., the nation's largest steel manufacturer.
We expect that the uncertainty on the earnings front as a result of the Asian
crisis will sustain the high level of market volatility experienced in 1997, a
year that saw the DJIA to move up or down by more than 1% on average every third
trading day. We remain cautious about the stock market in the short run. Over
the long term, a friendly interest rate environment and reasonable earnings
strength preclude the prospect of a sustained bear market.
In our view, the key to stock market performance in 1998 will be the extent to
which corporate profits remain immune to Asia's problems. The obvious
contributors to likely shortfalls in earnings will be currency translation
losses and lower export revenues as a result of lower demand in Asia. With
current valuations at fairly high levels, the stock market should be intolerant
with respect to any earnings disappointments.
The early corporate earnings season appears to be on track with no major
disappointments. Bellwether technology stocks such as Intel and Motorola have
reported earnings that have come close to expectations. The market is likely to
take its lead from the technology sector that has been hardest hit by earnings
concerns relating to Asia. We are closely monitoring the earnings season to
diagnose early symptoms of the Asian flu. In this environment, we believe that
it is particularly important to identify companies with sustainable earnings
growth at attractive valuations across a wide variety of industries.
In the health care sector, we hold McKesson Corp., the nation's largest
wholesale drug distributor, which is growing rapidly through acquisitions and
market share gains. In the consumer sector, our focus remains on diversified
media companies like New York Times Co., as well as retailers that demonstrate
above-average sales and earnings momentum, including Costco Cos. Inc., TJX Cos.
Inc. and Borders Group Inc. In transportation, we emphasized Lear, a leading
supplier of automotive interior and seating systems to the auto industry, with
rising earnings and what we think are an attractive valuation.
In closing, thank you for your investment in The Travelers Series Trust. We look
forward to continuing to help you pursue your financial goals in the years to
come.
Sincerely,
/s/ HEATH B. MCLENDON
Heath B. McLendon
Chairman
January 26, 1998
8
<PG$PCN>
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON -- TRAVELERS QUALITY BOND PORTFOLIO AS OF 12/31/97
(UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------------------------
<S> <C>
Year Ended 12/31/97 7.14%
8/30/96* through 12/31/97 8.08%
<CAPTION>
CUMULATIVE TOTAL RETURN
---------------------------------------------
<S> <C>
8/30/96* through 12/31/97 10.95%
* Commencement of operations
</TABLE>
This chart assumes an initial investment of $10,000 made on August
30, 1996, assuming reinvestment of dividends, through December 31,
1997. 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.
<TABLE>
<CAPTION>
Travelers Lehman
Measurement Period Quality Bond Government/Corporate
(Fiscal Year Covered) Portfolio Bond Index
<S> <C> <C>
8/30/96 10000 10000
12/96 10356 10489
6/97 10602 10776
12/31/97 11095 11512
</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 -- LAZARD INTERNATIONAL STOCK PORTFOLIO AS OF 12/31/97
(UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------------------------
<S> <C>
Year Ended 12/31/97 8.50%
8/1/96* through 12/31/97 11.70%
<CAPTION>
CUMULATIVE TOTAL RETURN
---------------------------------------------
<S> <C>
8/1/96* through 12/31/97 16.96%
* Commencement of operations
</TABLE>
This chart assumes an initial investment of $10,000 made on August
1, 1996, assuming reinvestment of dividends, through December 31,
1997. The Morgan Stanley Capital International ("MSCI") EAFE-GDP
Weighted Index is a composite portfolio consisting of equity total
returns for the countries of Europe, Australia, New Zealand and the
Far East, weighted based on each country's gross domestic product.
<TABLE>
<CAPTION>
Lazard
International MSCI EAFE -
Measurement Period Stock GDP Weighted
(Fiscal Year Covered) Portfolio Index
<S> <C> <C>
8/1/96 10000 10000
12/96 10780 10533
6/97 11859 11815
12/31/97 11696 11180
</TABLE>
- --------------------------------------------------------------------------------
Past performance is not predictive of future performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Average annual total returns are historical in nature and measure net investment
income and capital gain or loss from portfolio investments assuming
reinvestments of dividends. The returns do not reflect expenses associated with
the subaccount such as administrative fees, account charges and surrender
charges which, if reflected, would reduce the performance shown.
9
<PG$PCN>
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON -- MFS EMERGING GROWTH PORTFOLIO AS OF 12/31/97
(UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
----------------------------------------------
<S> <C>
Year Ended 12/31/97 21.15%
8/30/96* through 12/31/97 20.63%
<CAPTION>
CUMULATIVE TOTAL RETURN
----------------------------------------------
<S> <C>
8/30/96* through 12/31/97 28.43%
* Commencement of operations
</TABLE>
This chart assumes an initial investment of $10,000 made on August
30, 1996, assuming reinvestment of dividends, through December 31,
1997. 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
capitalized 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.
<TABLE>
<CAPTION>
MFS
Emerging Standard &
Measurement Period Growth Poor's 500 Russell
(Fiscal Year Covered) Portfolio Index 2000 Index
<S> <C> <C> <C>
8/30/96 10000 10000 10000
12/96 10600 11441 10931
6/97 11726 13798 12046
12/31/97 12843 15258 13376
</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 -- FEDERATED HIGH YIELD PORTFOLIO AS OF 12/31/97
(UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
----------------------------------------------
<S> <C>
Year Ended 12/31/97 15.45%
8/30/96* through 12/31/97 17.50%
<CAPTION>
CUMULATIVE TOTAL RETURN
----------------------------------------------
<S> <C>
8/30/96* through 12/31/97 23.94%
* Commencement of operations
</TABLE>
This chart assumes an initial investment of $10,000 made on August
30, 1996, assuming reinvestment of dividends, through December 31,
1997. 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 issues, corporate bond issues and mortgage-backed
securities. The Lehman High Yield Bond Index is composed of fixed
rate noninvestment grade debt with at least one year remaining to
maturity that are dollar-denominated, nonconvertible and have an
outstanding par value of at least $100 million.
<TABLE>
<CAPTION>
Federated Lehman Lehman High
Measurement Period High Yield Aggregate Yield Bond
(Fiscal Year Covered) Portfolio Bond Index Index
<S> <C> <C> <C>
8/30/96 10000 10000 10000
12/96 10761 10480 10599
6/97 11484 10804 11216
12/31/97 12394 11491 11952
</TABLE>
- --------------------------------------------------------------------------------
Past performance is not predictive of future performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Average annual total returns are historical in nature and measure net investment
income and capital gain or loss from portfolio investments assuming
reinvestments of dividends. The returns do not reflect expenses associated with
the subaccount such as administrative fees, account charges and surrender
charges which, if reflected, would reduce the performance shown.
10
<PG$PCN>
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON -- FEDERATED STOCK PORTFOLIO AS OF 12/31/97 (UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
--------------------------------------------
<S> <C>
Year Ended 12/31/97 33.41%
8/30/96* through 12/31/97 35.88%
<CAPTION>
CUMULATIVE TOTAL RETURN
--------------------------------------------
<S> <C>
8/30/96* through 12/31/97 50.23%
* Commencement of operations
</TABLE>
This chart assumes an initial investment of $10,000 made on August 30, 1996,
assuming reinvestment of dividends, through December 31, 1997. 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>
Federated Standard &
Measurement Period Stock Poor's 500
(Fiscal Year Covered) Portfolio Index
<S> <C> <C>
8/30/96 10000 10000
12/96 11261 11441
6/97 13482 13798
12/31/97 15023 15258
</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 -- MID CAP DISCIPLINED EQUITY FUND AS OF 12/31/97
(UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
--------------------------------------------
<S> <C>
4/1/97* through 12/31/97 34.38%+
<CAPTION>
CUMULATIVE TOTAL RETURN
--------------------------------------------
<S> <C>
4/1/97* through 12/31/97 34.38%+
* Commencement of operations
+ Total return is not annualized, as it may
not be representative of the total return
for the year.
</TABLE>
This chart assumes an initial investment of $10,000 made on April
1, 1997, assuming reinvestment of dividends, through December 31,
1997. The Standard & Poor's 400 Index is an unmanaged index
composed of 400 widely held mid cap common stocks listed on the New
York Stock Exchange, American Stock Exchange and the over-
the-counter market.
<TABLE>
<CAPTION>
Mid Cap Standard &
Measurement Period Disciplined Poor's 400
(Fiscal Year Covered) Equity Fund Index
<S> <C> <C>
4/1/97 10000 10000
6/97 11360 11151
12/31/97 13438 13425
</TABLE>
- --------------------------------------------------------------------------------
Past performance is not predictive of future performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Average annual total returns are historical in nature and measure net investment
income and capital gain or loss from portfolio investments assuming
reinvestments of dividends. The returns do not reflect expenses associated with
the subaccount such as administrative fees, account charges and surrender
charges which, if reflected, would reduce the performance shown.
11
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS DECEMBER 31, 1997
TRAVELERS QUALITY BOND PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C>
U.S. TREASURY OBLIGATIONS -- 40.1%
$1,000,000 AAA U.S. Treasury Note, 5.625% due 11/30/99.............................. $ 999,310
400,000 AAA U.S. Treasury Note, 5.750% due 11/15/00.............................. 400,696
1,875,000 AAA U.S. Treasury Note, 5.750% due 10/31/02.............................. 1,877,175
500,000 AAA U.S. Treasury Note, 6.125% due 8/15/07............................... 514,030
- -----------------------------------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS (Cost -- $3,783,986) 3,791,211
- -----------------------------------------------------------------------------------------------------------
CORPORATE BONDS & NOTES -- 54.1%
- -----------------------------------------------------------------------------------------------------------
AMUSEMENT PARKS -- 2.1%
220,000 BBB- Six Flags Entertainment Corp., Sr. Note, zero coupon bond
to yield 12.504% due 12/15/99...................................... 195,250
- -----------------------------------------------------------------------------------------------------------
BANKS -- 2.7%
250,000 BBB+ Bancponce Financial Corp., Medium Term Note, 6.750% due 8/9/01....... 253,438
- -----------------------------------------------------------------------------------------------------------
BROADCASTING -- 2.4%
200,000 BBB Continental Cablevision, Inc., Sr. Sub. Debenture, 11.000% due
6/1/07............................................................. 223,000
- -----------------------------------------------------------------------------------------------------------
CABLE -- 7.7%
365,000 A- Cox Communications, Inc., Medium Term Note, 6.690% due 9/20/04....... 369,563
320,000 BBB- Tele-Comm, Inc., Debentures, 9.650% due 10/1/03...................... 354,000
- -----------------------------------------------------------------------------------------------------------
723,563
- -----------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 8.5%
250,000 A+ CIT Group Holdings, Inc., 6.200% due 10/20/01........................ 250,625
285,000 A+ U.S. West Capital Funding, Inc., Sr. Note, 6.950% due 1/15/37........ 293,906
250,000 A USL Capital Corp., Sr. Note, 8.125% due 2/15/00...................... 260,313
- -----------------------------------------------------------------------------------------------------------
804,844
- -----------------------------------------------------------------------------------------------------------
MEDICAL -- 3.1%
250,000 BBB Columbia HCA Healthcare, Inc., Medium Term Note, 8.700% due
2/10/10............................................................ 290,625
- -----------------------------------------------------------------------------------------------------------
OIL/PETROLEUM -- 2.9%
250,000 A+ Texaco Capital, Inc., Debenture, 8.500% due 2/15/03.................. 276,250
- -----------------------------------------------------------------------------------------------------------
REAL ESTATE - HEALTH CARE -- 2.7%
250,000 BBB Nationwide Health Properties, Inc., Medium Term Note, 6.900% due
10/1/37............................................................ 257,188
- -----------------------------------------------------------------------------------------------------------
TECHNOLOGICAL SERVICE -- 3.7%
350,000 BBB+ Comdisco, Inc., Sr. Note, 6.500% due 4/30/99......................... 352,188
- -----------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 3.6%
300,000 A GTE Corp., Debenture, 9.100% due 6/1/03.............................. 336,000
- -----------------------------------------------------------------------------------------------------------
TOBACCO -- 2.7%
250,000 A Philip Morris Cos., Inc., Sr. Note, 6.950% due 6/1/06................ 256,250
- -----------------------------------------------------------------------------------------------------------
UTILITIES - ELECTRIC -- 12.0%
400,000 A- Avon Energy Partners Holding Inc., 6.730% due 12/11/02............... 402,000
350,000 BB+ Cal Energy Co., Inc., 9.500% due 9/15/06............................. 381,500
350,000 BBB Illinois Power Co., 1st Mortgage Bond, 6.500% due 9/1/99 (a)......... 352,185
- -----------------------------------------------------------------------------------------------------------
1,135,685
- -----------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS & NOTES (Cost -- $5,048,676) 5,104,281
- -----------------------------------------------------------------------------------------------------------
SUB-TOTAL INVESTMENTS (Cost -- $8,832,662) 8,895,492
- -----------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
TRAVELERS QUALITY BOND PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C>
REPURCHASE AGREEMENT -- 5.8%
$551,000 Citibank, 6.350% due 1/2/98; Proceeds at maturity -- $551,194;
(Fully collateralized by U.S. Treasury Note, 6.625% due 4/30/02;
Market value -- $574,418) (Cost -- $551,000)....................... $ 551,000
- -----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $9,383,662**) $9,446,492
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(a) Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers.
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 41 for definition of ratings.
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
LAZARD INTERNATIONAL STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
STOCK -- 91.6%
- ---------------------------------------------------------------------------------------------------------
AUSTRALIA -- 1.0%
24,300 Westpac Banking Corp. Ltd..................................................... $ 155,426
- ---------------------------------------------------------------------------------------------------------
DENMARK -- 1.1%
2,250 Unidanmark A/S, Class A Shares................................................ 165,282
- ---------------------------------------------------------------------------------------------------------
FINLAND -- 0.9%
12,200 Merita Oy, Class A Shares..................................................... 66,761
3,400 UPM-Kymmene Corp. ............................................................ 68,054
- ---------------------------------------------------------------------------------------------------------
134,815
- ---------------------------------------------------------------------------------------------------------
FRANCE -- 12.5%
1,860 Alcatel Alsthom............................................................... 236,519
3,000 Axa UAP....................................................................... 232,231
4,100 Banque Nationale de Paris..................................................... 218,017
1,230 Compagnie de Saint Gobain..................................................... 174,809
2,080 Compagnie Generale des Eaux................................................... 290,426
3,000 Elf Aquitaine SA.............................................................. 349,069
900 Havas SA...................................................................... 64,777
6,400 Rhone-Poulenc, Class A Shares................................................. 286,809
- ---------------------------------------------------------------------------------------------------------
1,852,657
- ---------------------------------------------------------------------------------------------------------
GERMANY -- 11.1%
2,600 Daimler-Benz AG............................................................... 183,638
1,930 Deutsche Bank AG.............................................................. 135,028
3,600 Dresdner Bank AG.............................................................. 163,773
6,900 Hoeschst AG................................................................... 239,069
420 Mannesmann AG................................................................. 210,923
5,600 Metallgesellschaft AG (a)..................................................... 102,464
4,200 Metro AG (a).................................................................. 149,024
615 Thyssen AG.................................................................... 131,339
600 Viag AG....................................................................... 328,680
- ---------------------------------------------------------------------------------------------------------
1,643,938
- ---------------------------------------------------------------------------------------------------------
HONG KONG -- 2.6%
7,473 HSBC Holdings PLC............................................................. 184,209
19,500 Swire Pacific Ltd............................................................. 106,956
41,000 Wharf Holdings Ltd............................................................ 89,953
- ---------------------------------------------------------------------------------------------------------
381,118
- ---------------------------------------------------------------------------------------------------------
ITALY -- 5.1%
36,300 Credito Italiano S.p.A. ...................................................... 112,346
37,900 ENI S.p.A. (a)................................................................ 216,547
32,470 Fiat S.p.A. .................................................................. 94,230
31,900 Fiat S.p.A. Preferred......................................................... 48,715
63,100 Telecom Italia S.p.A. Risp NC (b)............................................. 277,411
- ---------------------------------------------------------------------------------------------------------
749,249
- ---------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
LAZARD INTERNATIONAL STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
JAPAN -- 19.4%
6,000 Honda Motor Co. Ltd........................................................... $ 221,034
1,000 Ito-Yokado Co. Ltd............................................................ 51,144
640 Ito-Yokado Co. Ltd. ADR....................................................... 130,280
25 Japan Tobacco Inc. ........................................................... 178,043
19,000 Matsushita Electric Industrial Co. Ltd........................................ 279,100
33,000 Mitsubishi Heavy Industries Ltd............................................... 138,066
10,000 Mitsui Marine and Fire Insurance Co. Ltd...................................... 51,221
2,100 Nintendo Co. Ltd. ............................................................ 206,729
28 Nippon Telegraph & Telephone.................................................. 241,184
6,000 Omron Corp. .................................................................. 94,136
3,500 Orix Corp. ................................................................... 244,953
2,600 Promise Co. Ltd............................................................... 144,772
21,000 Ricoh Co. Ltd................................................................. 261,642
26,000 Sekisui Chemical Co. Ltd. .................................................... 132,575
2,400 Sony Corp..................................................................... 214,113
700 Sony Corp. ADR................................................................ 63,525
42,000 Sumitomo Trust & Banking Corp................................................. 219,004
- ---------------------------------------------------------------------------------------------------------
2,871,521
- ---------------------------------------------------------------------------------------------------------
MALAYSIA -- 0.2%
9,000 Genting Berhad................................................................ 22,543
- ---------------------------------------------------------------------------------------------------------
NETHERLANDS -- 3.1%
730 Heineken NV................................................................... 127,110
3,300 Philips Electronics NV ....................................................... 197,938
2,500 Royal Dutch Petroleum Co., New York Registered Shares......................... 135,469
- ---------------------------------------------------------------------------------------------------------
460,517
- ---------------------------------------------------------------------------------------------------------
SPAIN -- 1.6%
8,300 Telefonica de Espana.......................................................... 236,878
- ---------------------------------------------------------------------------------------------------------
SWEDEN -- 3.5%
4,634 Astra AB, Class B Shares...................................................... 77,967
2,440 Electrolux AB, Class B Shares................................................. 169,440
12,500 Nordbanken Holding AB......................................................... 70,735
5,800 Svenska Handelsbanken, Class A Shares......................................... 200,653
- ---------------------------------------------------------------------------------------------------------
518,795
- ---------------------------------------------------------------------------------------------------------
SWITZERLAND -- 8.5%
1,350 Credit Suisse Group........................................................... 209,173
165 Holderbank Financiere Glarus AG, Class B Shares............................... 134,842
101 Nestle SA, Registered Shares.................................................. 151,576
145 Novartis AG, Registered Shares................................................ 236,686
90 SGS Societe Generale de Surveillance Holding SA, Class B Shares............... 172,768
121 Societe Suisse pour la Microelectronique et l'Horlogerie, Bearer Shares....... 66,863
30 Societe Suisse pour la Microelectronique et l'Horlogerie, Registered Shares... 4,052
580 Zurich Versicherungs-Gesellschaft, Registered Shares.......................... 276,759
- ---------------------------------------------------------------------------------------------------------
1,252,719
- ---------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
LAZARD INTERNATIONAL STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
UNITED KINGDOM -- 21.0%
25,200 B.A.T. Industries PLC......................................................... $ 229,920
14,200 British Aerospace PLC......................................................... 406,782
13,500 British Petroleum Co. PLC..................................................... 177,816
51,700 BTR PLC....................................................................... 158,652
23,098 Cadbury Schweppes PLC......................................................... 229,935
25,343 Diageo PLC.................................................................... 232,893
12,100 EMI Group PLC................................................................. 104,376
16,200 General Electric Co. PLC...................................................... 106,356
9,200 Granada Group PLC............................................................. 141,841
61,500 LucasVarity PLC............................................................... 218,071
21,800 Mirror Group PLC.............................................................. 70,485
26,000 National Power PLC............................................................ 257,754
15,000 National Westminster Bank PLC................................................. 249,157
11,000 Prudential Corp. PLC.......................................................... 127,872
22,300 Rank Group PLC................................................................ 127,965
30,200 Unilever PLC.................................................................. 259,140
- ---------------------------------------------------------------------------------------------------------
3,099,015
- ---------------------------------------------------------------------------------------------------------
TOTAL STOCK (Cost -- $12,931,694)............................................. 13,544,473
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
REPURCHASE AGREEMENT -- 8.4%
$1,238,000 Citibank, 6.350% due 1/2/98; Proceeds at maturity -- $1,238,437;
(Fully collateralized by U.S. Treasury Note, 6.625% due 4/30/02;
Market value -- $1,266,638) (Cost -- $1,238,000)........................... 1,238,000
- ---------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $14,169,694*)............................. $14,782,473
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(a) Non-income producing security.
(b) Risp NC -- Risparmio Non-Convertible (non-convertible saving shares).
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
MFS EMERGING GROWTH PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
COMMON STOCK -- 91.4%
- ---------------------------------------------------------------------------------------------------------
ADVERTISING -- 0.2%
800 Lamar Advertising Co. ....................................................... $ 31,800
3,000 Outdoor Systems, Inc. ....................................................... 115,125
- ---------------------------------------------------------------------------------------------------------
146,925
- ---------------------------------------------------------------------------------------------------------
AEROSPACE -- 0.1%
850 Thiokol Corp. ............................................................... 69,063
- ---------------------------------------------------------------------------------------------------------
APPAREL & TEXTILES -- 0.0%
200 Tefron Ltd. ................................................................. 4,600
- ---------------------------------------------------------------------------------------------------------
AUTOMOTIVE -- 0.1%
2,900 Avis Rent A Car, Inc. ....................................................... 92,619
- ---------------------------------------------------------------------------------------------------------
BANKS & CREDIT CO. -- 0.4%
1,800 Compass Bancshares Inc. ..................................................... 78,750
900 First Security Corp. ........................................................ 37,688
500 First Virginia Banks Inc. ................................................... 25,844
800 Firstar Corp. ............................................................... 33,950
300 Interra Financial Inc. ...................................................... 20,700
600 Provident Financial Group, Inc. ............................................. 29,100
700 Summit Bancorp............................................................... 37,275
700 U.S. Trust Corp. ............................................................ 43,838
- ---------------------------------------------------------------------------------------------------------
307,145
- ---------------------------------------------------------------------------------------------------------
BIOTECHNOLOGY -- 1.0%
11,200 Guidant Corp. ............................................................... 697,200
- ---------------------------------------------------------------------------------------------------------
BUSINESS MACHINES -- 0.8%
10,200 Affiliated Computer Services Inc. (a)........................................ 268,388
8,550 Sun Microsystems, Inc. (a)................................................... 340,931
- ---------------------------------------------------------------------------------------------------------
609,319
- ---------------------------------------------------------------------------------------------------------
BUSINESS SERVICES -- 12.1%
21,300 Accustaff Inc. (a)........................................................... 489,900
6,200 Bisys Group Inc. ............................................................ 206,150
172,234 Cendant Corp. ............................................................... 5,920,552
8,400 Corestaff Inc. (a)........................................................... 222,600
27,400 Danka Business Systems, Inc. ................................................ 436,701
1,800 DST Systems Inc. (a)......................................................... 76,838
1,000 Fine Host Corp. ............................................................. 1,000
800 Galileo International Inc. .................................................. 22,100
500 Ikon Office Solutions Inc. .................................................. 14,063
500 Ivex Packaging Corp. ........................................................ 12,000
21,850 Learning Tree International Inc. (a)......................................... 630,919
1,800 Mail-Well Inc. .............................................................. 72,900
18,650 Technology Solutions Co. (a)................................................. 491,894
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
MFS EMERGING GROWTH PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
BUSINESS SERVICES -- 12.1% (CONTINUED)
500 Transaction Systems Architects, Inc. (a)..................................... $ 19,000
500 United Rentals Inc. ......................................................... 9,656
- ---------------------------------------------------------------------------------------------------------
8,626,273
- ---------------------------------------------------------------------------------------------------------
COMPUTER SOFTWARE -- 21.8%
2,925 Autodesk Inc. ............................................................... 108,225
35,100 BMC Software Inc. (a)........................................................ 2,303,438
80,410 Cadence Design System, Inc. (a).............................................. 1,970,045
3,450 Compaq Computer Corp. ....................................................... 194,709
66,202 Computer Associates International, Inc. ..................................... 3,500,431
69,400 Compuware Corp. (a).......................................................... 2,220,800
600 Dassault Systemes SA ADR..................................................... 18,525
16,260 First Data Corp. ............................................................ 475,605
100 Infinity Financial Technology, Inc. (a)...................................... 2,094
16,100 Microsoft Corp. (a).......................................................... 2,080,925
109,000 Oracle Systems Corp. (a)..................................................... 2,432,063
300 SAP Aktiengesellschaft ADR................................................... 32,306
5,800 Scopus Technology Inc. ...................................................... 69,600
300 Security Dynamics Technology Inc. ........................................... 10,725
5,800 Synopsys Inc. (a)............................................................ 207,350
- ---------------------------------------------------------------------------------------------------------
15,626,841
- ---------------------------------------------------------------------------------------------------------
CONSUMER GOODS & SERVICES -- 5.8%
8,400 Carson Inc. (a).............................................................. 56,175
3,800 Dollar Thrifty Automotive Group, Inc. ....................................... 77,900
1,100 Pier 1 Imports Inc. ......................................................... 24,888
1,000 Service Corp. International.................................................. 36,938
87,536 Tyco International Ltd. ..................................................... 3,944,591
- ---------------------------------------------------------------------------------------------------------
4,140,492
- ---------------------------------------------------------------------------------------------------------
ELECTRONICS -- 0.9%
9,800 Altera Corp. (a)............................................................. 324,625
10,300 Loral Space & Communications Ltd. ........................................... 220,806
2,300 Xilinx Inc. (a).............................................................. 80,644
- ---------------------------------------------------------------------------------------------------------
626,075
- ---------------------------------------------------------------------------------------------------------
ENTERTAINMENT -- 8.3%
5,800 American Radio Systems Co. .................................................. 309,213
15,100 CBS Corp. ................................................................... 444,514
3,400 Chancellor Media Corp. ...................................................... 253,725
12,500 Clear Channel Communications, Inc. (a)....................................... 992,969
9,600 Cox Radio Inc. (a)........................................................... 386,400
3,500 Emmis Broadcasting Corp. (a)................................................. 159,688
2,000 Gemstar International Group Ltd. ............................................ 48,750
6,500 Harrah's Entertainment Inc. (a).............................................. 122,688
3,200 Hearst Argyle TV Inc. ....................................................... 95,200
4,500 ITT Corp. ................................................................... 397,800
12,400 Jacor Communications, Inc. (a)............................................... 658,750
12,250 Lin Television Corp. (a)..................................................... 667,625
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
MFS EMERGING GROWTH PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
ENTERTAINMENT -- 8.3% (CONTINUED)
4,900 SFX Broadcasting Inc. ....................................................... $ 393,225
3,000 Sinclair Broadcast Group Inc. ............................................... 139,875
5,500 Univision Communications Inc. (a)............................................ 383,969
12,400 Viacom Inc. ................................................................. 513,825
- ---------------------------------------------------------------------------------------------------------
5,968,216
- ---------------------------------------------------------------------------------------------------------
FINANCIAL INSTITUTIONS -- 3.6%
3,800 Associates First Capital Corp. .............................................. 270,275
3,915 Charter One Financial Inc. .................................................. 247,134
200 Conning Corp. ............................................................... 3,350
14,600 Consolidation Capital Co. ................................................... 296,563
1,700 Donaldson, Lufkin & Jenrette Securities Corp. ............................... 135,150
9,687 Franklin Resources Inc. ..................................................... 842,168
2,100 Lehman Brothers Holdings Inc. ............................................... 107,100
200 Linc Capital Inc. ........................................................... 3,925
4,300 Morgan Stanley, Dean Witter, Discover & Co. ................................. 254,238
1,400 People's Heritage Financial Group Inc. ...................................... 64,400
4,600 T. Rowe Price & Associates................................................... 289,225
500 Union Planters Corp. ........................................................ 33,969
- ---------------------------------------------------------------------------------------------------------
2,547,497
- ---------------------------------------------------------------------------------------------------------
FOOD & BEVERAGE -- 0.5%
600 Corn Products International Inc. ............................................ 17,888
2,300 McCormick & Co. Inc. ........................................................ 64,400
2,800 Suiza Foods Corp. ........................................................... 166,776
700 Tootsie Roll Industries Inc. ................................................ 43,750
900 Whole Foods Market Inc. ..................................................... 46,013
- ---------------------------------------------------------------------------------------------------------
338,827
- ---------------------------------------------------------------------------------------------------------
INSURANCE -- 0.3%
800 Ace Ltd. .................................................................... 77,200
3,200 Conseco Inc. ................................................................ 145,400
400 ESG RE Ltd. ................................................................. 9,400
400 Hartford Life Inc. .......................................................... 18,125
- ---------------------------------------------------------------------------------------------------------
250,125
- ---------------------------------------------------------------------------------------------------------
MACHINERY -- 0.1%
3,150 SI Handling Systems Inc. .................................................... 43,313
- ---------------------------------------------------------------------------------------------------------
MEDICAL & HEALTH SERVICES -- 7.5%
5,700 Arterial Vascular Engineering, Inc. ......................................... 370,500
4,700 Columbia HCA Healthcare Corp. ............................................... 139,238
14,200 Cyberonics Inc. ............................................................. 216,550
82 Foundation Health System Inc. (a)............................................ 1,835
1,050 Health Management Association, Inc. (a)...................................... 26,513
22,100 Healthsouth Corp. (a)........................................................ 613,275
7,600 Integrated Health Service, Inc. ............................................. 237,025
2,200 Mariner Health Group Inc. (a)................................................ 35,750
1,650 McKesson Corp. .............................................................. 178,510
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
MFS EMERGING GROWTH PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
MEDICAL & HEALTH SERVICES -- 7.5% (CONTINUED)
2,000 Medtronic Inc. .............................................................. $ 104,625
1,200 Mentor Corp. ................................................................ 43,800
13,300 Orthodontic Centers of America, Inc. ........................................ 221,113
5,800 Oxford Health Plans, Inc. ................................................... 90,263
6,600 Pacificare Health System Inc. ............................................... 345,675
1,900 Pathogenesis Corp. .......................................................... 70,538
6300 Renal Treatment Centers, Inc. ............................................... 227,588
900 Safeskin Corp. .............................................................. 51,075
500 St. Jude Medical Inc. ....................................................... 15,250
45,600 United Healthcare Co. ....................................................... 2,265,750
1,200 VMR Scientific Products...................................................... 33,900
2,500 Zonagen Inc. ................................................................ 45,469
- ---------------------------------------------------------------------------------------------------------
5,334,242
- ---------------------------------------------------------------------------------------------------------
MISCELLANEOUS -- 3.6%
1,100 Applied Graphics Technologies Inc. .......................................... 58,575
5,300 Century Telephone Enterprises, Inc. ......................................... 264,009
12,100 Kansas City Southern Industries, Inc. ....................................... 384,175
34,400 MCI Communications Corp. .................................................... 1,472,767
12,000 Newport News Shipbuilding Inc. .............................................. 305,250
1,500 Royal Caribbean Cruises Ltd. ................................................ 79,969
700 Starwood Lodging Trust....................................................... 40,513
- ---------------------------------------------------------------------------------------------------------
2,605,258
- ---------------------------------------------------------------------------------------------------------
OIL SERVICES -- 1.1%
3,000 Cooper Cameron Corp. ........................................................ 183,000
3,600 Diamond Offshore Drilling Inc. .............................................. 173,250
10,400 Glober Industries Ltd. ...................................................... 176,800
1,100 Input/Ouput Inc. ............................................................ 32,656
4,700 Noble Drilling Corp. ........................................................ 143,938
600 Veritas DGC Inc. ............................................................ 23,700
1,600 Weatherford Enterra, Inc. ................................................... 70,000
- ---------------------------------------------------------------------------------------------------------
803,344
- ---------------------------------------------------------------------------------------------------------
POLLUTION CONTROL -- 0.2%
5,700 Allied Waste Industries, Inc. ............................................... 132,882
- ---------------------------------------------------------------------------------------------------------
RESTAURANTS & LODGING -- 1.0%
7,800 Applebees International Inc. ................................................ 140,888
13,357 Promus Hotel Corp. (a)....................................................... 560,994
- ---------------------------------------------------------------------------------------------------------
701,882
- ---------------------------------------------------------------------------------------------------------
STORES -- 11.4%
9,750 Consolidated Stores Corp. (a)................................................ 428,391
26,400 Corporate Express Inc. (a)................................................... 339,900
12,800 CVS Corp. ................................................................... 820,000
1,000 Dollar General Corp. ........................................................ 36,250
10,600 General Nutrition Co. ....................................................... 360,400
11,250 Home Depot Inc. ............................................................. 662,344
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
MFS EMERGING GROWTH PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
STORES -- 11.4% (CONTINUED)
1,200 Linens 'N Things Inc. ....................................................... $ 52,350
700 Lowes Co. Inc. .............................................................. 33,381
16,800 Micro Warehouse Inc. (a)..................................................... 234,150
57,100 Office Depot Inc. (a)........................................................ 1,366,831
53,100 Republic Industries Inc. .................................................... 1,237,894
25,400 Rite Aid Corp. .............................................................. 1,490,663
11,100 Staples Inc. (a)............................................................. 308,025
37,400 US Office Products Co. ...................................................... 733,975
800 Viking Office Products Inc. ................................................. 17,450
- ---------------------------------------------------------------------------------------------------------
8,122,004
- ---------------------------------------------------------------------------------------------------------
SUPERMARKETS -- 2.0%
700 Albertsons Inc. ............................................................. 33,163
32,770 Fred Meyer Inc. ............................................................. 1,192,009
1,400 Kroger Co. .................................................................. 51,713
1,900 Safeway Inc. ................................................................ 120,175
- ---------------------------------------------------------------------------------------------------------
1,397,060
- ---------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 8.6%
2,700 American Communications...................................................... 34,594
1,500 Aspect Telecommunication Corp. (a)........................................... 31,313
1,300 Brooks Fiber Properties Inc. ................................................ 71,500
8,000 Cincinnati Bell Inc. ........................................................ 248,000
57,100 Cisco Systems Inc. (a)....................................................... 3,183,325
3,400 Inter-Tel Inc. .............................................................. 65,875
13,700 Intermedia Communications Inc. (a)........................................... 832,275
7,100 LCI International Inc. ...................................................... 218,325
1,775 Lucent Technologies Inc. .................................................... 141,778
3,200 NEXTLINK Communications Inc. ................................................ 68,200
900 TCA Cable TV, Inc. .......................................................... 41,400
3,000 Tel-Save Holdings Inc. (a)................................................... 59,625
1,200 Teleport Communications Group Inc. .......................................... 65,850
35,800 Worldcom Inc. (a)............................................................ 1,082,931
- ---------------------------------------------------------------------------------------------------------
6,144,991
- ---------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK (Cost -- $60,061,030)..................................... 65,336,193
- ---------------------------------------------------------------------------------------------------------
FOREIGN STOCK -- 2.2%
- ---------------------------------------------------------------------------------------------------------
GERMANY -- 2.1%
4,700 SAP AG, Preferred............................................................ 1,527,023
- ---------------------------------------------------------------------------------------------------------
NETHERLANDS -- 0.1%
900 Benckiser NV................................................................. 37,247
- ---------------------------------------------------------------------------------------------------------
TOTAL FOREIGN STOCK (Cost -- $1,054,562)..................................... 1,564,270
- ---------------------------------------------------------------------------------------------------------
SUB-TOTAL INVESTMENTS(Cost -- $61,115,592)................................... 66,900,463
- ---------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
MFS EMERGING GROWTH PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
SHORT-TERM INVESTMENT -- 6.4%
$4,600,000 Federal Home Loan Discount Note, 5.500% due 7/1/98
(Cost -- $4,599,393)......................................................... $ 4,599,393
- ---------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $65,714,985*)............................. $71,499,856
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(a) Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
FEDERATED HIGH YIELD PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C>
CORPORATE BONDS & NOTES -- 90.5%
- ----------------------------------------------------------------------------------------------------------
AUTOMOTIVE -- 2.0%
$150,000 B Collins & Aikman Products Co., Sr. Sub. Note, 11.500% due 4/15/06..... $169,875
100,000 NR Lear Corp. Sub. Note, 9.500% due 7/15/06.............................. 110,000
- ----------------------------------------------------------------------------------------------------------
279,875
- ----------------------------------------------------------------------------------------------------------
BANKS -- 0.8%
100,000 Ba3* First Nationwide Corp., Sr. Sub. Note, 10.625% due 10/1/03............ 112,000
- ----------------------------------------------------------------------------------------------------------
BROADCASTING - TV, CABLE & RADIO -- 6.1%
125,000 B- Acme Television, Sr. Discount Note, step bond to yield 11.006% due
9/30/04 (a)......................................................... 91,875
100,000 BB- Cablevision Systems Corp. Sr. Sub. Note, 9.250% due 11/1/05........... 106,500
250,000 B1* Fox/Liberty Networks, Sr. Discount Note, step bond to yield 9.674%
due 8/15/07 (a)..................................................... 160,625
50,000 BB+ Heritage Media, Sr. Sub. Note, 8.750% due 2/15/06..................... 53,625
50,000 B Katz Media Corp., Sr. Sub. Note, 10.500% due 1/15/07.................. 55,125
150,000 BB- Rogers Cablesystem, Sr. Note, 10.000% due 3/15/05..................... 166,125
100,000 B Sinclair Broadcast Group, Sr. Sub. Note, 10.000% due 9/30/05.......... 105,250
100,000 B+ Sullivan Broadcast Holdings, Inc., Sr. Sub. Note, 10.250% due
12/15/05............................................................ 106,875
- ----------------------------------------------------------------------------------------------------------
846,000
- ----------------------------------------------------------------------------------------------------------
BUILDING MATERIALS -- 0.3%
33,000 NR United Stationers, Sr. Sub. Note, 12.750% due 5/1/05 (a).............. 36,754
- ----------------------------------------------------------------------------------------------------------
BUILDING/CONSTRUCTION -- 1.5%
50,000 B American Architectural Products, Sr. Note, 11.750% due 12/1/07 (a).... 50,250
50,000 B3* American Builders & Contractors, Sr. Sub. Note, 10.625% due 5/15/07... 52,062
100,000 BB- Building Materials Corp., Sr. Note, 8.000% due 10/15/07 (a)........... 100,500
- ----------------------------------------------------------------------------------------------------------
202,812
- ----------------------------------------------------------------------------------------------------------
BUSINESS MACHINES -- 1.1%
75,000 B Dialog Corp., Sr. Sub. Note, 11.000% due 11/15/07 (a)................. 78,469
65,000 B+ Knoll Inc., Sr. Sub. Note, 10.875% due 3/15/06........................ 72,800
- ----------------------------------------------------------------------------------------------------------
151,269
- ----------------------------------------------------------------------------------------------------------
CABLE/CELLULAR -- 4.2%
100,000 BB+ Charter Communications Southeast LP, Sr. Note, 11.250% due 3/15/06.... 109,875
225,000 B- Diamond Cable Communications PLC, Sr. Discount Note, step bond to
yield 10.674% due 2/15/07........................................... 154,125
100,000 B3* Echostar Satellite, Sr. Discount Note, step bond to yield 13.017% due
3/15/04............................................................. 85,250
50,000 NR Frontiervision Holdings LP, Senior Discount Note, step bond to yield
11.632% due 9/15/07 (a)............................................. 36,875
250,000 B- International Cabletel Inc., Sr. Note, step bond to yield 10.991% due
2/1/06.............................................................. 194,375
- ----------------------------------------------------------------------------------------------------------
580,500
- ----------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
FEDERATED HIGH YIELD PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C>
CHEMICALS -- 4.2%
$100,000 BB- Buckeye Cellulose, Sr. Sub. Note, 9.250% due 9/15/08.................. $105,750
150,000 BB- ISP Holdings Inc., Sr. Note, 9.000% due 10/15/03...................... 156,000
125,000 BB- Polymer Group Inc., Sr. Sub. Note, 9.000% due 7/1/07.................. 125,000
50,000 BB2* Sterling Chemical Holdings, Sr. Discount Note, step bond to yield
12.485% due 8/15/08................................................. 33,938
150,000 B+ Westpoint Stevens, Inc., Sr. Sub. Note, 9.375% due 12/15/05........... 157,500
- ----------------------------------------------------------------------------------------------------------
578,188
- ----------------------------------------------------------------------------------------------------------
CONSUMER PRODUCTS -- 3.0%
50,000 B- Amscan Holdings Inc., Sr. Sub. Note, 9.875% due 12/15/07.............. 51,125
100,000 B+ NBTY Inc., Sr. Sub. Note, 8.625% due 9/15/07 (a)...................... 100,250
100,000 B+ Playtex Products Inc., Sr. Note, 8.875% due 7/15/04................... 101,750
50,000 B- Renaissance Cosmetics, Sr. Note, 11.750% due 2/15/04.................. 49,188
100,000 NR Simmons Co., Sr. Sub. Note, 10.750% due 4/15/06....................... 105,375
- ----------------------------------------------------------------------------------------------------------
407,688
- ----------------------------------------------------------------------------------------------------------
DIVERSIFIED -- 1.2%
50,000 B Climachem Inc., Sr. Note, 10.750% due 12/1/07 (a)..................... 50,312
100,000 B- Neenah Corp., Sr. Sub. Note, 11.125% due 5/1/07....................... 110,000
- ----------------------------------------------------------------------------------------------------------
160,312
- ----------------------------------------------------------------------------------------------------------
ELECTRIC UTILITIES -- 1.2%
50,000 BB+ California Energy, Discount Note, step bond to yield 9.369% due
1/15/04............................................................. 54,250
100,000 BB+ El Paso Electric Co., 1st Mortgage Note, 9.400% due 5/1/11............ 113,750
- ----------------------------------------------------------------------------------------------------------
168,000
- ----------------------------------------------------------------------------------------------------------
ELECTRONICS -- 0.4%
50,000 B Fairchild Semiconductor Inc., Sr. Sub. Note, 10.125% due 3/15/07...... 52,875
- ----------------------------------------------------------------------------------------------------------
ENTERTAINMENT -- 4.4%
100,000 BB- Premier Parks, Sub. Note, 9.750% due 1/15/07.......................... 106,500
150,000 B Six Flags Theme Parks, Sr. Discount Note, step bond to yield 11.012%
due 6/15/05......................................................... 156,750
100,000 BB- Livent Inc., Sr. Note, 9.375% due 10/15/04 (a)........................ 100,250
250,000 Aa3* Viacom International, Sub. Debenture, 8.000% due 7/7/06............... 251,250
- ----------------------------------------------------------------------------------------------------------
614,750
- ----------------------------------------------------------------------------------------------------------
FOOD PRODUCTS -- 4.1%
125,000 B- Ameriserve Food Distribution Inc., Sr. Sub. Note, 10.125% due
7/15/07............................................................. 131,250
100,000 B- Aurora Foods Inc., Sr. Sub. Note, 9.875% due 2/15/07.................. 105,500
100,000 B- Curtice-Burns Foods Inc., Sr. Sub. Note, 12.250% due 2/1/05........... 110,750
100,000 B2* International Home Foods, Sr. Sub. Note, 10.375% due 11/01/06......... 110,000
100,000 B2* Van de Kamp, Inc., Sr. Sub. Note, 12.000% due 9/15/05................. 111,000
- ----------------------------------------------------------------------------------------------------------
568,500
- ----------------------------------------------------------------------------------------------------------
FOREST PRODUCTS -- 0.8%
100,000 B Four M Corp., Sr. Note, 12.000% due 6/1/06............................ 106,750
- ----------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
FEDERATED HIGH YIELD PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C>
HEALTH CARE -- 3.3%
$ 50,000 B- Alliance Imaging, Sr. Sub. Note, 9.625% due 12/15/05.................. $ 50,875
100,000 B Dade International Inc., Sr. Sub. Note, 11.125% due 5/1/06............ 111,500
50,000 Aa3* Icon Fitness, step bond to yield 14.000% due 11/15/06................. 29,313
50,000 B2* MMI Products Inc., Sr. Sub. Note, 11.250% due 4/15/07................. 54,625
Tenet Healthcare Corp.:
100,000 Ba1* Sr. Note, 8.000% due 1/15/05........................................ 101,875
100,000 Ba3* Sr. Sub. Note, 10.125% due 3/1/05................................... 109,250
- ----------------------------------------------------------------------------------------------------------
457,438
- ----------------------------------------------------------------------------------------------------------
HOME FURNISHINGS -- 0.4%
50,000 B2* Werner Holdings Co. Inc., Sr. Sub. Note, 10.000% due 11/15/07 (a)..... 51,375
- ----------------------------------------------------------------------------------------------------------
HOTEL/GAMING -- 0.8%
100,000 B- Courtyard Marriott, Sr. Secured Note, 10.750% due 2/1/08.............. 110,000
- ----------------------------------------------------------------------------------------------------------
INDUSTRIALS -- 0.8%
50,000 B- International Knife & Saw Inc., Sr. Sub. Note, 11.375% due 11/15/06... 54,250
50,000 B Johnstown America Industries, Inc., Sr. Sub. Note, 11.750% due
8/15/05............................................................. 55,000
- ----------------------------------------------------------------------------------------------------------
109,250
- ----------------------------------------------------------------------------------------------------------
INVESTMENT TRUST -- 0.7%
100,000 B Elgin National, Sr. Note, 11.000% due 11/1/07 (a)..................... 103,750
- ----------------------------------------------------------------------------------------------------------
LEISURE -- 1.4%
108,000 B2* AMF Bowling Worldwide Inc., Sr. Sub. Note, step bond to yield
10.798% due 3/15/06................................................. 83,700
100,000 B Cobblestone Golf Group, Sr. Note, 11.500% due 6/1/03.................. 109,000
- ----------------------------------------------------------------------------------------------------------
192,700
- ----------------------------------------------------------------------------------------------------------
MACHINERY -- 1.5%
50,000 B- Alvey Systems Inc., Sr. Sub. Note, 11.375% due 1/31/03................ 52,250
50,000 B+ Clark Material Handling, Sr. Note, 10.750% due 11/15/06............... 53,250
100,000 B- National Equipment, Sr. Sub. Note, 10.000% due 11/30/04 (a)........... 99,250
- ----------------------------------------------------------------------------------------------------------
204,750
- ----------------------------------------------------------------------------------------------------------
MANUFACTURING -- 1.1%
50,000 NR Dyersburg Corp., Sr. Sub. Note, 9.750% due 9/1/07..................... 52,500
100,000 NR Roller Bearing Co. of America, Inc., Sr. Sub. Note, 9.625% due 6/15/07
(a)................................................................. 100,750
- ----------------------------------------------------------------------------------------------------------
153,250
- ----------------------------------------------------------------------------------------------------------
MEDIA/CABLE -- 6.8%
100,000 BB- Cablevision Systems Corp., Sr. Sub. Debenture, 9.875% due 2/15/13..... 110,750
100,000 B Chancellor Media Corp., Sr. Sub. Note, 9.375% due 10/1/04............. 104,250
100,000 B+ Garden State Newspaper Inc., Sr. Sub. Note, 8.750% due 10/1/09 (a).... 100,500
150,000 BB+ Lenfest Communications, Sr. Note, 8.375% due 11/1/05.................. 154,875
200,000 B1* Outdoor Systems Inc., Sr. Sub. Note, 8.875% due 6/15/07............... 209,500
250,000 B+ Telewest Communications, Sr. Discount Debenture, step bond to yield
11.041% due 10/1/07................................................. 195,000
100,000 B UIH Australia, Sr. Discount Note, step bond to yield 12.114% due
5/15/06............................................................. 68,500
- ----------------------------------------------------------------------------------------------------------
943,375
- ----------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
25
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
FEDERATED HIGH YIELD PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C>
METALS & MINING -- 1.1%
$100,000 B2* AEI Holdings Inc., Sr. Note, 10.000% due 11/15/07 (a)................. $102,750
50,000 NR Continental Global Group Inc., Sr. Note, 11.000% due 4/1/07........... 53,500
- ----------------------------------------------------------------------------------------------------------
156,250
- ----------------------------------------------------------------------------------------------------------
MISCELLANEOUS -- 2.3%
225,000 NR Allied Waste Industries, Sr. Discount Note, step bond to yield 10.251%
due 6/1/07 (a)...................................................... 158,906
100,000 B+ Coinmach Corp., Sr. Note, 11.750% due 11/15/05........................ 110,750
50,000 B- Dimon Inc., Sr. Note, 8.875% due 6/1/06............................... 54,062
- ----------------------------------------------------------------------------------------------------------
323,718
- ----------------------------------------------------------------------------------------------------------
OIL & GAS -- 4.4%
100,000 B Abraxas Petroleum Corp., Sr. Note, 11.500% due 11/1/04................ 109,000
100,000 B+ Dailey Petroleum, Sr. Note, 9.750% due 8/15/07 (a).................... 104,625
Forcenergy Inc., Sr. Sub. Note:
50,000 B 8.500% due 2/15/07.................................................. 50,625
50,000 B 9.500% due 11/1/06.................................................. 53,000
50,000 BB- Pride Petroleum Services Inc., Sr. Note, 9.375% due 5/1/07............ 53,875
100,000 B Tokheim Corp., Sr. Sub. Note, 11.500% due 8/1/06...................... 113,625
50,000 B United Meridian Corp., Sr. Sub. Note, 10.375% due 10/15/05............ 54,500
50,000 NR XCL Ltd., Unit, 13.500% due 5/1/04 (a)................................ 65,000
- ----------------------------------------------------------------------------------------------------------
604,250
- ----------------------------------------------------------------------------------------------------------
POLLUTION CONTROL -- 0.4%
50,000 B+ Allied Waste North America Inc., Sr. Sub. Note, 10.250% due 12/1/06... 54,750
- ----------------------------------------------------------------------------------------------------------
PUBLISHING & PRINTING -- 1.5%
Hollinger International, Sr. Sub. Note:
50,000 BB- 9.250% due 2/1/06................................................... 52,750
100,000 BB- 9.250% due 3/15/07.................................................. 105,500
38,000 B Petersen Publishing, Sr. Sub. Note, 11.125% due 11/15/06.............. 43,035
- ----------------------------------------------------------------------------------------------------------
201,285
- ----------------------------------------------------------------------------------------------------------
RETAIL -- 1.5%
100,000 NR American Safety Razor Co., Sr. Note, 9.875% due 8/1/05................ 106,875
100,000 B- Jitney Jungle Stores of America, Inc., Sr. Sub. Notes, 10.375% due
9/15/07............................................................. 103,750
- ----------------------------------------------------------------------------------------------------------
210,625
- ----------------------------------------------------------------------------------------------------------
STEEL -- 1.6%
100,000 B GS Technologies, Sr. Note, 12.250% due 10/1/05........................ 112,000
100,000 NR Ryerson Tull Inc., Note, 8.500% due 7/15/01........................... 103,625
- ----------------------------------------------------------------------------------------------------------
215,625
- ----------------------------------------------------------------------------------------------------------
SUPERMARKETS -- 1.6%
100,000 B1* Ralphs Grocery Co., Sr. Note, 10.450% due 6/15/04..................... 112,750
100,000 B- Stater Brothers Holdings, Sr. Sub. Note, 9.000% due 7/1/04............ 104,250
- ----------------------------------------------------------------------------------------------------------
217,000
- ----------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
26
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
FEDERATED HIGH YIELD PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C>
TECHNOLOGY -- 1.5%
$100,000 B2* Amphenol Corp., Sr. Sub. Note, 9.875% due 5/15/07..................... $ 106,500
100,000 B- Decisionone Corp., Sr. Sub. Note, 9.750% due 8/1/07................... 104,250
- ----------------------------------------------------------------------------------------------------------
210,750
- ----------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 15.6%
100,000 BB- American Communications Services, Sr. Discount Note, step bond to
yield 10.789% due 4/1/06............................................ 77,375
Brooks Fiber Properties, Sr. Discount Note:
50,000 NR Step bond to yield 9.689% due 11/1/06............................... 40,000
100,000 NR Step bond to yield 11.524% due 3/1/06............................... 83,250
200,000 BB- Call-Net Enterprises Inc., Sr. Discount Note, step bond to yield
8.974% due 8/15/07.................................................. 137,000
100,000 BB+ Comcast Cellular, Sr. Note, 9.500% due 5/1/07......................... 104,750
50,000 NR Esprit Telecom Group PLC, Sr. Note, 11.500% due 12/15/07.............. 51,500
100,000 B Hermes Europe Railtel BV, Sr. Note, 11.500% due 8/15/07 (a)........... 111,000
50,000 B Highwaymaster Communications Inc., 13.750% due 9/15/05 (a)............ 51,000
50,000 B- Intermedia Communications, Sr. Discount Note, step bond to yield
11.250% due 7/15/07................................................. 35,625
100,000 B Intermedia Communications of Florida, Sr. Discount Note, step bond to
yield 10.755% due 5/15/06........................................... 79,000
200,000 B McLeod Inc., step bond to yield 9.860% due 3/1/07..................... 145,500
50,000 NR Metronet Communications Corp., Sr. Note, 12.000% due 8/15/07 (a)...... 57,750
100,000 B- Millicom International Cellular, Sr. Discount Note, step bond to yield
11.897% due 6/1/06.................................................. 74,250
Nextel Communications:
100,000 B3* Step bond to yield 13.986% due 8/15/04.............................. 89,000
50,000 B3* Sr. Discount Note, step bond to yield 10.650% due 9/15/07 (a)....... 31,688
100,000 B Nextlink Communications, Sr. Note, 9.625% due 10/1/07................. 103,000
150,000 B Paging Network Inc., Sr. Sub. Note, 10.000% due 10/15/08.............. 156,000
50,000 B- Pegasus Communications Corp., Sr. Note, 9.625% due 10/15/05 (a)....... 51,375
175,000 B+ Qwest Communications International Inc., Sr. Discount Note, step bond
to yield 8.973% due 10/15/07 (a).................................... 119,000
50,000 B3* RCN Corp., Sr. Discount Note, step bond to yield 11.125% due 10/15/07
(a)................................................................. 31,500
100,000 B- Sygnet Wireless Inc, Sr. Note, 11.500% due 10/1/06.................... 107,375
250,000 B+ Teleport Communications, Sr. Discount Note, step bond to yield 9.712%
due 7/1/07.......................................................... 205,000
100,000 CCC Telesystems International Wireless, Sr. Discount Note, step bond to
yield 12.025% due 6/30/07 (a)....................................... 62,750
50,000 B- Teligent Inc., Sr. Note, 11.500% due 12/1/07.......................... 50,250
100,000 B+ Vanguard Cellular System, Debenture, 9.375% due 4/15/06............... 104,125
- ----------------------------------------------------------------------------------------------------------
2,159,063
- ----------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
27
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
FEDERATED HIGH YIELD PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C>
TEXTILES -- 3.1%
$150,000 B Collins & Aikman Group, Sr. Sub. Note, 10.000% due 1/15/07............ $ 156,000
50,000 B- Gear For Sports, Sr. Sub. Note, 9.625% due 3/1/07..................... 51,500
50,000 B- Glenoit Corp., Sr. Sub. Note, 11.000% due 4/15/07 (a)................. 53,875
150,000 B+ Pillowtex Corp., Sr. Sub. Note, 10.000% due 11/15/06.................. 160,500
- ----------------------------------------------------------------------------------------------------------
421,875
- ----------------------------------------------------------------------------------------------------------
TRANSPORTATION -- 3.8%
100,000 NR Allied Holdings, Sr. Note, 8.625% due 10/1/07......................... 102,750
100,000 BB Gearbulk Holding Ltd., Sr. Note, 11.250% due 12/1/04.................. 110,000
50,000 B1* Statia Terminals, 1st Mortgage Note, 11.750% due 11/15/03............. 52,938
Stena AB, Sr. Note:
100,000 Ba2* 10.500% due 12/15/05................................................ 109,500
50,000 Ba2* 8.750% due 6/15/07.................................................. 50,750
100,000 B- Trism Inc., Sr. Sub. Note, 10.750% due 12/15/00....................... 98,500
- ----------------------------------------------------------------------------------------------------------
524,438
- ----------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS & NOTES (Cost -- $12,025,955)................... 12,491,790
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C>
COMMON STOCK -- 0.0%
- ----------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 0.0%
154 Nextel Communications (Cost -- $2,485)................................ 3,604
- ----------------------------------------------------------------------------------------------------------
PREFERRED STOCK -- 5.0%
- ----------------------------------------------------------------------------------------------------------
COMMUNICATIONS -- 0.4%
500 Echostar Communications Corp., Payment-in-kind........................ 52,625
- ----------------------------------------------------------------------------------------------------------
BROADCASTING - TV, CABLE & RADIO -- 3.4%
1,052 American Radio Systems Corp., Payment-in-kind......................... 127,292
530 Capstar Broadcasting Partners Inc., Payment-in-kind................... 58,035
529 Chancellor Radio Broadcasting Co., Payment-in-kind.................... 63,347
53 Pegasus Communications, Payment-in-kind............................... 57,443
500 SFX Broadcasting, Inc., Payment-in-kind............................... 59,500
1,000 Sinclair Broadcast Group.............................................. 110,000
- ----------------------------------------------------------------------------------------------------------
475,617
- ----------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 0.4%
1,000 Crown American Realty Trust........................................... 52,250
- ----------------------------------------------------------------------------------------------------------
PUBLISHING & PRINTING -- 0.8%
1,100 Primedia Inc.......................................................... 110,275
- ----------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCK (Cost -- $639,010).............................. 690,767
- ----------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
28
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
FEDERATED HIGH YIELD PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C>
WARRANTS -- 0.0%
- ----------------------------------------------------------------------------------------------------------
CABLE TELEVISION - EQUIPMENT -- 0.0%
50 Pegasus Communications Corp., Expire 1/1/07 (b)....................... $ 1,625
100 UIH Australia, Expire 5/15/06 (b)..................................... 1,200
- ----------------------------------------------------------------------------------------------------------
2,825
- ----------------------------------------------------------------------------------------------------------
CHEMICALS -- 0.0%
100 Sterling Chemicals Holdings Inc., Expire 8/15/08 (b).................. 3,300
- ----------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 0.0%
50 Highway Master Communications, Expire 9/15/05 (b)..................... 62
- ----------------------------------------------------------------------------------------------------------
TOTAL WARRANTS (Cost -- $6,814)....................................... 6,187
- ----------------------------------------------------------------------------------------------------------
SUB-TOTAL INVESTMENTS (Cost -- $12,674,264)........................... 13,192,348
- ----------------------------------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
- ----------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 4.5%
$616,000 Citibank, 6.350% due 1/2/98; Proceeds at maturity -- $616,217;
(Fully collateralized by U.S. Treasury Note, 6.625% due 4/30/02;
Market value -- $630,713) (Cost -- $616,000).......................... 616,000
- ----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $13,290,264**)..................... $13,808,348
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(a) Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers.
(b) Non-income producing security.
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 41 for definition of ratings.
SEE NOTES TO FINANCIAL STATEMENTS.
29
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
FEDERATED STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- --------------------------------------------------------------------------------------------------------
<S> <C>
COMMON STOCK -- 94.2%
- --------------------------------------------------------------------------------------------------------
AIRLINES -- 1.0%
3,127 KLM Royal Dutch Airlines........................................................ $118,044
- --------------------------------------------------------------------------------------------------------
AUTOMOTIVE -- 1.4%
1,200 General Motors Corp. ........................................................... 72,750
2,000 PACCAR Inc. .................................................................... 105,000
- --------------------------------------------------------------------------------------------------------
177,750
- --------------------------------------------------------------------------------------------------------
BEVERAGES -- 1.9%
6,500 Pepsico Inc. ................................................................... 236,843
- --------------------------------------------------------------------------------------------------------
CABLE TELEVISION -- 1.6%
7,071 Tele-Communications Inc. (a).................................................... 197,550
- --------------------------------------------------------------------------------------------------------
CHEMICALS - DIVERSIFIED -- 1.1%
1,400 Dow Chemical Corp. ............................................................. 142,100
- --------------------------------------------------------------------------------------------------------
CONSUMER DURABLES -- 2.0%
2,200 Eastman Kodak Co. .............................................................. 133,788
4,300 Rubbermaid Inc. ................................................................ 107,500
- --------------------------------------------------------------------------------------------------------
241,288
- --------------------------------------------------------------------------------------------------------
CONSUMER NON-DURABLES -- 1.4%
2,200 RJR Nabisco Holdings Corp. ..................................................... 82,500
1,500 Sara Lee Corp. ................................................................. 84,468
- --------------------------------------------------------------------------------------------------------
166,968
- --------------------------------------------------------------------------------------------------------
DRUGS -- 3.1%
2,600 Bristol-Myers Squibb Co. ....................................................... 246,025
1,300 Merck & Co. Inc. ............................................................... 138,125
- --------------------------------------------------------------------------------------------------------
384,150
- --------------------------------------------------------------------------------------------------------
ENERGY -- 4.6%
1,300 Atlantic Richfield Co. ......................................................... 104,163
4,100 Occidental Petroleum Corp. ..................................................... 120,181
5,000 Sun Co. ........................................................................ 210,313
3,800 YPF Sociedad Anonima ADR........................................................ 129,913
- --------------------------------------------------------------------------------------------------------
564,570
- --------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 5.1%
2,900 Bear Stearns & Co., Inc. ....................................................... 137,750
3,200 Boston Properties Inc. ......................................................... 105,800
2,700 H & R Block Inc. ............................................................... 120,993
1,800 MBIA, Inc. ..................................................................... 120,263
2,400 Morgan Stanley, Dean Witter, Discover & Co. .................................... 141,900
- --------------------------------------------------------------------------------------------------------
626,706
- --------------------------------------------------------------------------------------------------------
FOOD PROCESSING -- 0.9%
1,000 CPC International Inc. (a)...................................................... 107,750
- --------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
30
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
FEDERATED STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- --------------------------------------------------------------------------------------------------------
<S> <C>
HEALTH CARE -- 1.3%
4,000 Perrigo Co. (a)................................................................. $ 53,500
2,000 Smithkline Beecham PLC.......................................................... 102,875
- --------------------------------------------------------------------------------------------------------
156,375
- --------------------------------------------------------------------------------------------------------
HOSPITAL SUPPLIES & SERVICES -- 3.6%
2,200 Abbott Laboratories............................................................. 144,238
6,800 U.S. Surgical Corp. ............................................................ 199,325
1,900 United Healthcare Corp. ........................................................ 94,407
- --------------------------------------------------------------------------------------------------------
437,970
- --------------------------------------------------------------------------------------------------------
HOTELS & MOTELS -- 1.8%
6,900 ITT Industries Inc. ............................................................ 216,488
- --------------------------------------------------------------------------------------------------------
INDUSTRIAL CONTROLS -- 1.9%
3,700 Unilever NV..................................................................... 231,019
- --------------------------------------------------------------------------------------------------------
INSURANCE -- 6.2%
2,300 Allmerica Financial Corp. ...................................................... 114,856
1,400 Allstate Corp. ................................................................. 127,225
1,300 Cigna Corp. .................................................................... 224,981
500 General Re Corp. ............................................................... 106,000
2,600 Marsh & McLennan Inc. .......................................................... 193,863
- --------------------------------------------------------------------------------------------------------
766,925
- --------------------------------------------------------------------------------------------------------
MEDICAL -- 2.6%
7,400 Beverly Enterprises Inc. (a).................................................... 96,200
6,100 Pharmacia & Upjohn, Inc. ....................................................... 223,413
- --------------------------------------------------------------------------------------------------------
319,613
- --------------------------------------------------------------------------------------------------------
MISCELLANEOUS -- 3.1%
9,200 Archer-Daniels-Midland Co....................................................... 199,525
2,500 Corn Products International, Inc. (a)........................................... 74,531
5,600 Louisiana-Pacific Corp. ........................................................ 106,400
- --------------------------------------------------------------------------------------------------------
380,456
- --------------------------------------------------------------------------------------------------------
OIL & GAS -- 6.0%
2,100 Chevron Corp. .................................................................. 161,700
2,600 Exxon Corp. .................................................................... 159,088
1,800 Royal Dutch Petroleum Co. ADR................................................... 97,538
2,800 Texaco Inc. .................................................................... 152,250
5,100 USX Marathon Group Inc. ........................................................ 172,125
- --------------------------------------------------------------------------------------------------------
742,701
- --------------------------------------------------------------------------------------------------------
PRODUCER & MANUFACTURER -- 4.0%
4,400 Ingersoll-Rand Co. ............................................................. 178,200
3,100 Johnson Controls Inc. .......................................................... 148,025
4,200 Lexmark Holding Inc., Class A Shares (a)........................................ 159,600
- --------------------------------------------------------------------------------------------------------
485,825
- --------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
31
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
FEDERATED STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- --------------------------------------------------------------------------------------------------------
<S> <C>
PUBLISHING -- 3.0%
11,400 News Corp. Ltd. ADR............................................................. $ 226,575
5,800 The Reader's Digest Association, Inc. .......................................... 137,025
- --------------------------------------------------------------------------------------------------------
363,600
- --------------------------------------------------------------------------------------------------------
RETAIL TRADE -- 4.8%
2,300 Dayton-Hudson Corp. ............................................................ 155,250
16,400 K-Mart Corp. (a)................................................................ 189,625
6,200 Walmart Corp. .................................................................. 244,513
- --------------------------------------------------------------------------------------------------------
589,388
- --------------------------------------------------------------------------------------------------------
SERVICES -- 3.4%
900 ABB AB ADR...................................................................... 105,975
1 Telecom-TCI Ventures, Class A Shares (a)........................................ 23
4,000 Tricon Global Restaurants, Inc. (a)............................................. 116,250
2,900 Viacom Inc., Class A Shares (a)................................................. 118,538
1,900 Viacom Inc., Class B Shares (a)................................................. 78,731
- --------------------------------------------------------------------------------------------------------
419,517
- --------------------------------------------------------------------------------------------------------
STEEL & IRON -- 0.6%
7,800 LTV Corp. ...................................................................... 76,050
- --------------------------------------------------------------------------------------------------------
TECHNOLOGY -- 10.6%
3,300 Amp, Inc. ...................................................................... 138,600
2,500 Cabletron Systems, Inc. (a)..................................................... 37,500
9,800 First Data Corp. ............................................................... 286,650
1,800 General Motors Corp., Class H Shares............................................ 66,488
1,200 International Business Machines Corp. .......................................... 125,475
900 Matsushita Electric Industrial Co., Ltd. ADR.................................... 136,800
16,500 Novell Inc. (a)................................................................. 123,750
2,049 Raytheon Co., Class A Shares.................................................... 101,017
4,400 Seagate Technology, Inc. (a).................................................... 84,700
3,200 Storage Technology Corp. (a).................................................... 198,200
- --------------------------------------------------------------------------------------------------------
1,299,180
- --------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 2.8%
2,500 GTE Corp. ...................................................................... 130,625
5,100 MCI Communications Corp. ....................................................... 218,343
- --------------------------------------------------------------------------------------------------------
348,968
- --------------------------------------------------------------------------------------------------------
TOBACCO -- 2.2%
700 Loews Corp. .................................................................... 74,288
2,000 Philip Morris Co. .............................................................. 90,625
3,000 UST, Inc. ...................................................................... 110,813
- --------------------------------------------------------------------------------------------------------
275,726
- --------------------------------------------------------------------------------------------------------
TRANSPORTATION -- 1.9%
3,200 CNF Transportation, Inc. ....................................................... 122,800
3,300 Ryder Systems Inc. ............................................................. 108,075
- --------------------------------------------------------------------------------------------------------
230,875
- --------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
32
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
FEDERATED STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- --------------------------------------------------------------------------------------------------------
<S> <C>
UTILITIES -- 8.6%
2,400 CMS Energy Corp. ............................................................... $ 105,750
1,700 Coastal Corp. .................................................................. 105,293
1,600 Columbia Gas Systems Inc. ...................................................... 125,700
6,500 Entergy Corp. .................................................................. 194,593
4,900 Houston Industries, Inc. ....................................................... 130,768
5,500 PG&E Corp. ..................................................................... 167,406
3,200 Public Service Enterprise Group Inc. ........................................... 101,400
2,900 U.S. West Communications Group.................................................. 130,863
- --------------------------------------------------------------------------------------------------------
1,061,773
- --------------------------------------------------------------------------------------------------------
WASTE MANAGEMENT -- 1.7%
7,600 Waste Management Inc. .......................................................... 209,000
- --------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK (Cost -- $10,214,913)........................................ 11,575,168
- --------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
REPURCHASE AGREEMENT -- 5.8%
$715,000 Citibank, 6.293% due 1/2/98; Proceeds at maturity -- $715,250;
(Fully collateralized by U.S. Treasury Notes, 6.625% due 4/30/02;
Market value $734,963) (Cost -- $715,000)...................................... 715,000
- ---------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $10,929,913*)............................... $12,290,168
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(a) Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
33
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
MID CAP DISCIPLINED EQUITY FUND
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
-------------------------------------------------------------------------------------------------------
<S> <C>
COMMON STOCK -- 86.4%
- --------------------------------------------------------------------------------------------------------
AUTOMOTIVE & TRANSPORTATION -- 2.5%
250 Airborne Freight Corp. .......................................................... $ 15,531
700 CNF Transportation Inc. ......................................................... 26,862
210 Continental Airlines Inc., Class B Shares (a).................................... 10,106
140 Eaton Corp. ..................................................................... 12,495
200 GATX Corp. ...................................................................... 14,512
480 Kansas City Southern Industries, Inc. ........................................... 15,240
340 Lear Corp. (a)................................................................... 16,150
850 Overseas Shipholding Group, Inc. ................................................ 18,541
700 Superior Industries International, Inc. ......................................... 18,769
- --------------------------------------------------------------------------------------------------------
148,206
- --------------------------------------------------------------------------------------------------------
CONSTRUCTION SERVICES -- 0.2%
680 Clayton Homes Inc. .............................................................. 12,240
- --------------------------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY -- 16.5%
610 Accustaff Inc. (a)............................................................... 14,030
280 AH Belo Corp., Class A Shares.................................................... 15,715
340 Alberto Culver Co., Class A Shares............................................... 9,180
280 Barnes & Noble Inc. (a).......................................................... 9,345
440 Bed Bath & Beyond Inc. (a)....................................................... 16,940
510 Borders Group Inc. (a)........................................................... 15,969
680 Cendant Corp. (a)................................................................ 23,378
190 Chancellor Media Corp. (a)....................................................... 14,179
200 Chris-Craft Industries Inc. (a).................................................. 10,462
580 Cintas Corp. .................................................................... 22,620
240 Circus Circus Enterprise Inc. (a)................................................ 4,920
850 CompUSA Inc. (a)................................................................. 26,350
267 Consolidated Stores Corp. (a).................................................... 11,731
420 Costco Cos. Inc. ................................................................ 18,742
266 CVS Corp. ....................................................................... 17,041
560 Dial Corp. ...................................................................... 11,655
687 Dollar General Corp. ............................................................ 24,904
1,000 Family Dollar Stores Inc. ....................................................... 29,312
300 Fred Meyer Inc. (a).............................................................. 10,913
810 General Nutrition Co., Inc. (a).................................................. 27,540
800 Harley Davidson Inc. ............................................................ 21,900
480 Herman Miller Inc. .............................................................. 26,190
420 Hillenbrand Industries, Inc. .................................................... 21,499
330 Hon Industries, Inc. ............................................................ 19,470
300 International Game Technology.................................................... 7,575
520 Jones Apparel Group Inc. (a)..................................................... 22,360
580 Kelly Services Inc., Class A Shares.............................................. 17,400
440 Kohl's Corp. (a)................................................................. 29,975
350 Leggett & Platt Inc. ............................................................ 14,656
180 McGraw-Hill Cos. Inc. ........................................................... 13,320
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
34
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
MID CAP DISCIPLINED EQUITY FUND
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- --------------------------------------------------------------------------------------------------------
<S> <C>
CONSUMER DISCRETIONARY -- 16.5% (CONTINUED)
280 Meredith Corp. .................................................................. $ 9,993
280 National Service Industries Inc. ................................................ 13,877
280 New York Times Co., Class A Shares............................................... 18,515
960 Office Depot Inc. (a)............................................................ 22,980
690 Officemax Inc. (a)............................................................... 9,833
700 Ogden Corp. ..................................................................... 19,731
480 Omnicom Group.................................................................... 20,340
390 Paychex Inc. .................................................................... 19,744
300 Payless Shoesource Inc. (a)...................................................... 20,138
1,000 Planet Hollywood International Inc., Class A Shares (a).......................... 13,250
420 Premark International Inc. ...................................................... 12,180
536 Promus Hotel Corp. (a)........................................................... 22,512
420 Reynolds & Reynolds Co., Class A Shares.......................................... 7,744
420 Robert Half International Inc. (a)............................................... 16,800
280 Ross Stores Inc. ................................................................ 10,185
1,020 Staples Inc. (a)................................................................. 28,305
280 Starbucks Corp. (a).............................................................. 10,745
560 Stewart Enterprises Inc., Class A Shares......................................... 26,110
240 Tiffany & Co. ................................................................... 8,655
560 TJX Cos., Inc. .................................................................. 19,250
790 Unifi Inc. ...................................................................... 32,143
1,400 Unisource Worldwide Inc. ........................................................ 19,950
345 US Industries Inc. (a)........................................................... 10,393
1,350 US Office Products Co. (a)....................................................... 26,494
50 Washington Post Co., Class B Shares (b).......................................... 24,325
- --------------------------------------------------------------------------------------------------------
973,463
- --------------------------------------------------------------------------------------------------------
CONSUMER STAPLES -- 3.7%
1,850 Coca-Cola Enterprises Inc. (b)................................................... 65,791
470 Dean Foods Co. .................................................................. 27,965
400 Dole Foods Co. Inc. (b).......................................................... 18,300
420 International Multifoods Corp. .................................................. 11,891
540 Interstate Bakeries Corp. ....................................................... 20,182
560 J.M. Smucker Co., Class A Shares................................................. 13,230
850 Lance Inc. ...................................................................... 22,366
1,180 Tyson Foods Inc., Class A Shares (b)............................................. 24,190
410 Universal Corp. ................................................................. 16,861
- --------------------------------------------------------------------------------------------------------
220,776
- --------------------------------------------------------------------------------------------------------
ENERGY -- 3.8%
280 BJ Services Co. (a).............................................................. 20,142
1,000 Ensco International Inc. (a)..................................................... 33,500
900 Global Marine Inc. (a)........................................................... 22,050
1,000 Nabors Industries Inc. (a)(b).................................................... 31,438
480 Noble Affiliates Inc. ........................................................... 16,920
400 Noble Drilling Corp. (a)......................................................... 12,250
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
35
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
MID CAP DISCIPLINED EQUITY FUND
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- --------------------------------------------------------------------------------------------------------
<S> <C>
ENERGY -- 3.8% (CONTINUED)
420 Pioneer Natural Resources Co. ................................................... $ 12,154
700 Seagull Energy Corp. ............................................................ 14,438
140 Smith International Inc. (a)..................................................... 8,593
370 Tidewater Inc. .................................................................. 20,396
400 Transocean Offshore Inc. ........................................................ 19,275
310 Weatherford Enterra Inc. (a)..................................................... 13,563
- --------------------------------------------------------------------------------------------------------
224,719
- --------------------------------------------------------------------------------------------------------
FINANCIALS -- 16.9%
640 AFLAC Inc. ...................................................................... 32,720
780 A.G. Edwards Inc. ............................................................... 31,005
480 AMBAC Inc. ...................................................................... 22,080
260 American Bankers Insurance Group, Inc. (a)....................................... 11,944
280 Amsouth Bancorp. ................................................................ 15,207
300 Associated Banc Corp. ........................................................... 16,537
380 Bear, Stearns & Co. Inc. ........................................................ 18,050
220 Capital One Financial Corp. ..................................................... 11,921
520 City National Corp. ............................................................. 19,207
700 ContiFinancial Corp. (a)......................................................... 17,631
360 Crestar Financial Corp. ......................................................... 20,520
650 Dime Bancorp. Inc. .............................................................. 19,662
200 Enhance Financial Services Group Inc. ........................................... 11,900
220 Everest Reinsurance Holdings Inc. ............................................... 9,075
280 Finova Group Inc. ............................................................... 13,912
28 First Empire State Corp. ........................................................ 13,020
835 First of America Bank Corp. ..................................................... 64,399
280 First Security Corp. ............................................................ 11,725
290 First Tennessee National Corp. .................................................. 19,357
315 First Virginia Banks Inc. ....................................................... 16,281
870 Firstar Corp. ................................................................... 36,921
660 Franklin Resources Inc. (b)...................................................... 57,379
780 Hibernia Corp., Class A Shares................................................... 14,674
590 Marshall & Ilsley Corp. (b)...................................................... 36,654
565 Mercantile Bancorp., Inc. ....................................................... 34,747
690 Mercantile Bankshares Corp. ..................................................... 26,996
300 Mercury General Corp. ........................................................... 16,575
820 Northern Trust Corp. ............................................................ 57,195
420 Old Republic International Corp. ................................................ 15,619
825 PaineWebber Group, Inc. ......................................................... 28,514
390 PMI Group Inc. .................................................................. 28,202
280 Provident Co., Inc. ............................................................. 10,815
740 Regions Financial Corp. ......................................................... 31,219
630 South Trust Corp. ............................................................... 39,966
615 Summit Bancorp. ................................................................. 32,749
530 T. Rowe Price Associates Inc. ................................................... 33,324
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
36
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
MID CAP DISCIPLINED EQUITY FUND
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- --------------------------------------------------------------------------------------------------------
<S> <C>
FINANCIALS -- 16.9% (CONTINUED)
420 Torchmark Corp. ................................................................. $ 17,666
560 20th Century Industries.......................................................... 14,560
440 Union Planters Corp. ............................................................ 29,893
100 Unionbancal Corp. ............................................................... 10,750
420 Wilminton Trust Corp. ........................................................... 26,198
- --------------------------------------------------------------------------------------------------------
996,769
- --------------------------------------------------------------------------------------------------------
HEALTH CARE -- 5.9%
300 Allegiance Corp. ................................................................ 10,631
360 Bergen Brunswig Corp., Class A Shares............................................ 15,165
670 Beverly Enterprises Inc. (a)..................................................... 8,710
440 Biogen Inc. (a).................................................................. 16,005
370 Chiron Corp. (a)................................................................. 6,290
900 Covance Inc. (a)................................................................. 17,887
560 Depuy Inc. ...................................................................... 16,100
500 Diagnostic Products Corp. ....................................................... 13,875
280 Dura Pharmaceuticals Inc. (a).................................................... 12,845
386 Foundation Health Systems Inc., Class A Shares (a)............................... 8,637
440 Genzyme Corp. (a)................................................................ 12,210
9 Genzyme Corp. - Tissue Repair (a)................................................ 62
500 Health Care & Retirement Corp. (a)............................................... 20,125
1,575 Health Management Associates Inc., Class A Shares (b)............................ 39,769
200 Healthcare Compare Corp. (a)..................................................... 10,225
140 Lincare Holdings Inc. (a)........................................................ 7,980
420 McKesson Corp. .................................................................. 45,439
730 Mylan Laboratories Inc. ......................................................... 15,284
420 Omnicare Inc. ................................................................... 13,020
440 Oxford Health Plans Inc. (a)..................................................... 6,847
270 Stryker Corp. ................................................................... 10,058
400 Vencor Inc. (a).................................................................. 9,775
840 Watson Pharmaceuticals Inc. (a).................................................. 27,248
100 Wellpoint Health Networks Inc. (a)............................................... 4,225
- --------------------------------------------------------------------------------------------------------
348,412
- --------------------------------------------------------------------------------------------------------
INTEGRATED OILS -- 1.1%
270 Murphy Oil Corp. ................................................................ 14,631
790 Tosco Corp. ..................................................................... 29,872
700 Valero Energy Corp. ............................................................. 22,006
- --------------------------------------------------------------------------------------------------------
66,509
- --------------------------------------------------------------------------------------------------------
MATERIALS & PROCESSING -- 6.7%
1,120 AK Steel Holdings Corp. ......................................................... 19,810
330 Alumax Inc. (a).................................................................. 11,220
210 BetzDearborn Inc. ............................................................... 12,823
360 Bosie Cascade Corp. ............................................................. 10,890
420 Bowater Inc. .................................................................... 18,664
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
37
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
MID CAP DISCIPLINED EQUITY FUND
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- --------------------------------------------------------------------------------------------------------
<S> <C>
MATERIALS & PROCESSING -- 6.7% (CONTINUED)
300 Carramerica Realty Corp. ........................................................ $ 9,506
1,150 Crompton & Knowles Corp. ........................................................ 30,475
280 Cytec Industries Inc. (a)........................................................ 13,142
280 Ecolab Inc. ..................................................................... 15,522
200 Ferro Corp. ..................................................................... 4,862
900 Health and Retirement Property Trust............................................. 18,000
560 IMC Global Inc. ................................................................. 18,340
980 International Specialty Products Inc. (a)........................................ 14,639
1,360 LTV Corp. ....................................................................... 13,260
220 Lubrizol Corp. .................................................................. 8,112
850 Lyondell Petrochemical Co. ...................................................... 22,525
330 Martin Marietta Materials, Inc. ................................................. 12,066
290 Olin Corp. ...................................................................... 13,594
200 Rayonier, Inc. .................................................................. 8,513
410 Sealed Air Corp. (a)............................................................. 25,318
700 Solutia Inc. .................................................................... 18,681
380 USX-US Steel Group, Inc. ........................................................ 11,875
420 Vulcan Materials Co. ............................................................ 42,893
580 Witco Corp. ..................................................................... 23,671
- --------------------------------------------------------------------------------------------------------
398,401
- --------------------------------------------------------------------------------------------------------
PRODUCER DURABLES -- 5.3%
201 Aeroquip-Vickers Inc. ........................................................... 9,861
700 AGCO Corp. ...................................................................... 20,475
560 American Power Conversion Corp. (a).............................................. 13,230
170 Crane Co. ....................................................................... 7,374
480 Danaher Corp. ................................................................... 30,300
560 Gencorp Inc. .................................................................... 14,000
380 Hubbell Inc., Class B Shares (b)................................................. 18,739
610 Jacobs Engineering Group Inc. (a)................................................ 15,479
140 Kennametal Inc. ................................................................. 7,254
800 Mark IV Industries Inc. ......................................................... 17,500
800 Molex Inc. ...................................................................... 25,700
220 Precision Castparts Corp. ....................................................... 13,269
370 Sundstrand Corp. ................................................................ 18,639
300 Thiokol Corp. ................................................................... 24,375
440 US Filter Corp. (a).............................................................. 13,173
1,157 USA Waste Services Inc. (a)...................................................... 45,412
690 Watts Industries, Inc., Class A Shares........................................... 19,536
- --------------------------------------------------------------------------------------------------------
314,316
- --------------------------------------------------------------------------------------------------------
TECHNOLOGY -- 11.3%
650 ADC Telecommunications Inc. (a).................................................. 27,137
540 Altera Corp. (a)................................................................. 17,887
560 America Online Inc. (a).......................................................... 49,945
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
38
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
MID CAP DISCIPLINED EQUITY FUND
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- --------------------------------------------------------------------------------------------------------
<S> <C>
TECHNOLOGY -- 11.3% (CONTINUED)
920 Analog Devices Inc. (a).......................................................... $ 25,472
440 Arrow Electronics Inc. (a)....................................................... 14,272
370 Atmel Corp. (a).................................................................. 6,868
280 AVX Corp. ....................................................................... 5,162
800 BMC Software Inc. (a)............................................................ 52,500
1,400 Cadence Design Systems Inc. (a)(b)............................................... 34,300
420 Comdisco Inc. ................................................................... 14,044
1,320 Compuware Corp. (a)(b)........................................................... 42,240
400 Diebold Inc. .................................................................... 20,250
280 Keane Inc. (a)................................................................... 11,375
200 Lexmark International Group Inc., Class A Shares................................. 7,600
500 Linear Technology Corp. ......................................................... 28,812
1,020 Maxim Integrated Products Inc. (a)............................................... 35,190
300 NCR Corp. (a).................................................................... 8,344
200 Networks Associates Inc. (a)..................................................... 10,575
300 Policy Management Systems Corp. (a).............................................. 20,869
1,100 Quantum Corp. (a)................................................................ 22,069
560 SCI Systems Inc. (a)............................................................. 24,395
480 Solectron Corp. (a).............................................................. 19,950
280 Sterling Commerce Inc. (a)....................................................... 10,763
590 Storage Technology Corp. (a)..................................................... 36,543
1,070 Sunguard Data Systems Inc. (a)................................................... 33,170
780 Symantec Corp. (a)............................................................... 17,111
300 Tech Data Corp. (a).............................................................. 11,663
100 Tektronix Inc. .................................................................. 3,969
510 Teradyne Inc. (a)................................................................ 16,320
780 VLSI Technology Inc. (a)......................................................... 18,428
550 Xilinx Inc. (a).................................................................. 19,284
- --------------------------------------------------------------------------------------------------------
666,507
- --------------------------------------------------------------------------------------------------------
UTILITIES -- 12.5%
960 AES Corp. (a)(b)................................................................. 44,760
1,140 Allegheny Power System, Inc. (a)(b).............................................. 37,050
420 Baltimore Gas & Electric Co. .................................................... 14,306
400 Black Hills Corp. ............................................................... 14,100
480 Boston Edison Co. ............................................................... 18,180
740 Calenergy Inc. (a)(b)............................................................ 21,275
370 Century Telephone Enterprise Inc. ............................................... 18,431
1,050 CMS Energy Corp. (b)............................................................. 46,266
260 Columbia Gas System, Inc. ....................................................... 20,426
330 Consolidated Natural Gas Co. .................................................... 19,965
150 El Paso Natural Gas Co. ......................................................... 9,975
310 Florida Progress Corp. (b)....................................................... 12,167
770 Illinova Corp. .................................................................. 20,742
340 IPALCO Enterprises, Inc. (b)..................................................... 14,259
730 Keyspan Energy Corp. (b)......................................................... 26,873
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
39
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997
MID CAP DISCIPLINED EQUITY FUND
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
-------------------------------------------------------------------------------------------------------
<S> <C>
UTILITIES -- 12.5% (CONTINUED)
300 KU Energy Corp. ................................................................. $ 11,775
850 LCI International Inc. (a)....................................................... 26,138
390 LG&E Energy Corp. ............................................................... 9,652
280 Mapco Inc. ...................................................................... 12,950
420 MCN Energy Group Inc. ........................................................... 16,957
220 Minnesota Power & Light Co. ..................................................... 9,584
430 National Fuel Gas Co. (b)........................................................ 20,936
810 New Century Energies Inc. (b).................................................... 38,829
1,400 Nextel Communications Inc. (a)................................................... 36,400
680 Nipsco Industries Inc. (b)....................................................... 33,618
750 Northeast Utilities.............................................................. 8,859
920 Pinnacle West Capital Corp. (b).................................................. 38,985
1,110 SCANA Corp. (b).................................................................. 33,231
380 Southern New England Telecommunications Corp. ................................... 19,119
1,210 Teco Energy Inc. (b)............................................................. 34,031
370 Telephone & Data Systems, Inc. .................................................. 17,228
740 360 Communications Co. (a)....................................................... 14,939
660 Wisconsin Energy Corp. (b)....................................................... 18,975
- --------------------------------------------------------------------------------------------------------
740,981
- --------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK (Cost -- $4,576,830).......................................... 5,111,299
- -------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C>
SHORT-TERM INVESTMENTS -- 13.6%
- ---------------------------------------------------------------------------------------------------------
U.S. TREASURY OBLIGATION -- 0.6%
$ 35,000 U.S. Treasury Bill, 5.100% due 3/12/98 (Cost -- $34,659) (c).................... 34,659
- ---------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 13.0%
766,000 Morgan Stanley & Co. Inc., 6.200% due 1/2/98; Proceeds at maturity -- $766,264;
(Fully collateralized by U.S. Treasury Notes, 6.250% due 5/31/00;
Market value -- $781,473) (Cost -- $766,000).................................... 766,000
- ---------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS (Cost -- $800,659)................................. 800,659
- ---------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $5,377,489**)................................ $5,911,958
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(a) Non-income producing security.
(b) Security has been segregated by custodian for open futures contracts.
(c) Security serves as collateral for futures contracts.
** Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
40
<PG$PCN>
- --------------------------------------------------------------------------------
BOND RATINGS
All ratings are by Standard & Poor's Ratings Service ("Standard & Poor's"),
except those identified by an asterisk (*) are rated by Moody's Investors
Service, Inc. ("Moody's"). The definitions of the applicable rating symbols are
set forth below:
Standard & Poor's -- Ratings from "AA" to "CCC" may be modified by the addition
of a plus (+) or minus (-) sign to show relative standings within the major
rating categories.
<TABLE>
<S> <C> <C>
AAA -- Bonds rated "AAA" have the highest rating assigned by Standard & Poor's. Capacity
to pay interest and repay principal is extremely strong.
AA -- Bonds rated "AA" have a very strong capacity to pay interest and repay principal
and differ from the highest rated issue only in a small degree.
A -- Bonds rated "A" have a strong capacity to pay interest and repay principal although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB -- Bonds 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 in higher rated categories.
BB, B and CCC -- Bonds 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.
</TABLE>
Moody's -- Numerical modifiers 1, 2, and 3 may be applied to each generic rating
from "Aa" to "B", 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 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 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 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.
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 therefore 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 payment or of maintenance of other terms of the
contract over any long period of time may be small.
NR -- Indicates that the bond is not rated by Standard & Poor's or Moody's.
</TABLE>
41
<PG$PCN>
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 1997
<TABLE>
<CAPTION>
LAZARD MFS
TRAVELERS INTERNATIONAL EMERGING FEDERATED
QUALITY BOND STOCK GROWTH HIGH YIELD
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS:
Investments -- Cost................................................ $8,832,662 $12,931,694 $61,115,592 $12,674,264
Short-term investments -- Cost..................................... 551,000 1,238,000 4,599,393 616,000
Foreign currency -- Cost........................................... -- 10,275 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Investments, at value.............................................. $8,895,492 $13,544,473 $66,900,463 $13,192,348
Short-term investments, at value................................... 551,000 1,238,000 4,599,393 616,000
Foreign currency, at value......................................... -- 9,257 -- --
Cash............................................................... 111 888 343,806 678
Dividends and interest receivable.................................. 109,728 14,460 12,283 236,294
Receivable for open forward foreign currency contracts (Note 7).... -- 4 -- --
Receivable from Fund shares sold................................... -- -- 192,329 25,978
Receivable from securities sold.................................... -- -- 261,878 --
Receivable from affiliate.......................................... 21,978 30,272 -- 6,731
Receivable from broker -- variation margin......................... -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS....................................................... 9,578,309 14,837,354 72,310,152 14,078,029
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payables for Fund shares purchased................................. 82,325 456,721 -- --
Payable for securities purchased................................... -- 117,759 1,912,359 6,728
Administration fees payable........................................ -- -- 5,447 --
Payable for open forward foreign currency contracts (Note 7)....... -- 559 -- --
Accrued expenses................................................... 27,834 33,261 45,293 21,816
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES.................................................. 110,159 608,300 1,963,099 28,544
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS..................................................... $9,468,150 $14,229,054 $70,347,053 $14,049,485
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Paid-in capital.................................................... $9,347,657 $13,647,409 $65,169,197 $13,503,920
Undistributed (overdistributed) net investment income.............. 1,050 (53,470) -- --
Accumulated net realized gain (loss) on security transactions,
foreign currencies and futures contracts......................... 56,613 21,922 (606,979) 27,481
Net unrealized appreciation of investments, futures contracts and
foreign currencies............................................... 62,830 613,193 5,784,835 518,084
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS..................................................... $9,468,150 $14,229,054 $70,347,053 $14,049,485
- -----------------------------------------------------------------------------------------------------------------------------------
SHARES OUTSTANDING................................................... 913,633 1,230,038 5,600,999 1,238,449
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, PER SHARE........................................... $10.36 $11.57 $12.56 $11.34
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
MID CAP
FEDERATED DISCIPLINED
STOCK EQUITY
PORTFOLIO FUND
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Investments -- Cost................................................ $10,214,913 $4,576,830
Short-term investments -- Cost..................................... 715,000 800,659
Foreign currency -- Cost........................................... -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Investments, at value.............................................. $11,575,168 $5,111,299
Short-term investments, at value................................... 715,000 800,659
Foreign currency, at value......................................... -- --
Cash............................................................... 751 200,240
Dividends and interest receivable.................................. 20,252 3,984
Receivable for open forward foreign currency contracts (Note 7).... -- --
Receivable from Fund shares sold................................... 78,880 --
Receivable from securities sold.................................... -- 167,375
Receivable from affiliate.......................................... 9,648 24,021
Receivable from broker -- variation margin......................... -- 3,500
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS....................................................... 12,399,699 6,311,078
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payables for Fund shares purchased................................. -- --
Payable for securities purchased................................... 277,073 115,011
Administration fees payable........................................ -- --
Payable for open forward foreign currency contracts (Note 7)....... -- --
Accrued expenses................................................... 22,637 27,013
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES.................................................. 299,710 142,024
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS..................................................... $12,099,989 $6,169,054
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Paid-in capital.................................................... $10,591,062 $5,468,762
Undistributed (overdistributed) net investment income.............. 1,439 --
Accumulated net realized gain (loss) on security transactions,
foreign currencies and futures contracts......................... 147,233 146,703
Net unrealized appreciation of investments, futures contracts and
foreign currencies............................................... 1,360,255 553,589
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS..................................................... $12,099,989 $6,169,054
- -----------------------------------------------------------------------------------------------------------------------------------
SHARES OUTSTANDING................................................... 874,887 494,756
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, PER SHARE........................................... $13.83 $12.47
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
42
<PG$PCN>
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
TRAVELERS LAZARD MFS MID CAP
QUALITY INTERNATIONAL EMERGING FEDERATED FEDERATED DISCIPLINED
BOND STOCK GROWTH HIGH YIELD STOCK EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO(1)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest.................................... $421,855 $ 39,384 $ 148,911 $ 724,493 $ 17,137 $ 26,733
Dividends................................... -- 127,242 61,092 33,023 136,206 30,574
Less: Foreign withholding tax............... -- (15,657) -- -- (953) --
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME..................... 421,855 150,969 210,003 757,516 152,390 57,307
- ---------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)........... 20,799 65,044 287,384 50,231 46,078 22,265
Audit and legal............................. 17,750 17,321 28,750 15,000 15,000 17,650
Pricing service fees........................ 8,600 7,710 7,750 1,500 -- --
Shareholder communications.................. 8,050 3,319 8,000 3,300 2,600 4,300
Shareholder and system servicing fees....... 7,150 7,187 8,000 7,110 6,500 4,915
Administration fees (Note 2)................ 3,860 4,730 22,991 4,637 4,424 1,907
Custody..................................... 3,500 29,773 37,500 3,750 8,000 2,300
Trustees' fees.............................. 2,000 2,000 2,000 2,000 2,000 2,000
Other....................................... 1,000 1,875 2,024 500 1,500 2,610
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES.............................. 72,709 138,959 404,399 88,028 86,102 57,947
Less: Investment advisory and administration
fee waivers
and expense reimbursement (Note 2)....... (24,460) (40,408) (40,379) (14,613) (16,063) (27,736)
- ---------------------------------------------------------------------------------------------------------------------------------
NET EXPENSES................................ 48,249 98,551 364,020 73,415 70,039 30,211
- ---------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS).................. 373,606 52,418 (154,017) 684,101 82,351 27,096
- ---------------------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS,
FUTURES CONTRACTS AND FOREIGN CURRENCIES
(NOTES 3, 5 AND 7):
Net Realized Gain (Loss) From:
Securities transactions (excluding
short-term securities).................. 82,605 81,543 726,334 124,459 835,698 431,766
Futures contracts........................ -- -- -- -- -- 123,212
Foreign currency transactions............ -- (40,732) (9,497) -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
NET REALIZED GAIN........................... 82,605 40,811 716,837 124,459 835,698 554,978
- ---------------------------------------------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation
(Depreciation) of Investments,
Futures Contracts and Foreign Currencies:
Beginning of year........................ 48,017 311,067 (19,224) 209,283 333,273 --
End of year.............................. 62,830 613,193 5,784,835 518,084 1,360,255 553,589
- ---------------------------------------------------------------------------------------------------------------------------------
INCREASE IN NET UNREALIZED APPRECIATION..... 14,813 302,126 5,804,059 308,801 1,026,982 553,589
- ---------------------------------------------------------------------------------------------------------------------------------
NET GAIN ON INVESTMENTS, FUTURES CONTRACTS AND
FOREIGN CURRENCIES.......................... 97,418 342,937 6,520,896 433,260 1,862,680 1,108,567
- ---------------------------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS........ $471,024 $395,355 $6,366,879 $1,117,361 $1,945,031 $1,135,663
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the period from April 1, 1997 (commencement of operations) to December
31, 1997.
SEE NOTES TO FINANCIAL STATEMENTS.
43
<PG$PCN>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
LAZARD MFS MID CAP
TRAVELERS INTERNATIONAL EMERGING FEDERATED FEDERATED DISCIPLINED
QUALITY BOND STOCK GROWTH HIGH YIELD STOCK EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO(1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss)......... $ 373,606 $ 52,418 $ (154,017) $ 684,101 $ 82,351 $ 27,096
Net realized gain.................... 82,605 40,811 716,837 124,459 835,698 554,978
Increase in net unrealized
appreciation...................... 14,813 302,126 5,804,059 308,801 1,026,982 553,589
- --------------------------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM
OPERATIONS........................ 471,024 395,355 6,366,879 1,117,361 1,945,031 1,135,663
- --------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income................ (372,556) (83,633) -- (674,991) (80,912) (27,096)
Net realized gain.................... (25,992) (43,960) (1,166,235) (108,965) (688,465) (408,275)
Capital.............................. -- -- (28,057) -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM
DISTRIBUTIONS TO SHAREHOLDERS..... (398,548) (127,593) (1,194,292) (783,956) (769,377) (435,371)
- --------------------------------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 9):
Net proceeds from sale of shares..... 3,953,455 10,987,549 51,846,752 7,584,598 11,893,958 5,057,979
Net asset value of shares issued for
reinvestment of dividends......... 398,548 127,591 1,194,292 783,956 769,377 435,371
Cost of shares reacquired............ (228,848) (1,476,177) (790,424) (33,577) (5,118,527) (24,588)
- --------------------------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM FUND
SHARE TRANSACTIONS................ 4,123,155 9,638,963 52,250,620 8,334,977 7,544,808 5,468,762
- --------------------------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS................. 4,195,631 9,906,725 57,423,207 8,668,382 8,720,462 6,169,054
Beginning of year.................... 5,272,519 4,322,329 12,923,846 5,381,103 3,379,527 --
- --------------------------------------------------------------------------------------------------------------------------------
END OF YEAR*......................... $9,468,150 $14,229,054 $70,347,053 $14,049,485 $12,099,989 $6,169,054
- --------------------------------------------------------------------------------------------------------------------------------
* Includes undistributed
(overdistributed) net investment
income of: $1,050 $(53,470) -- -- $1,439 --
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the period from April 1, 1997 (commencement of operations) to December
31, 1997.
SEE NOTES TO FINANCIAL STATEMENTS.
44
<PG$PCN>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) FOR THE PERIOD ENDED
DECEMBER 31, 1996
<TABLE>
<CAPTION>
LAZARD MFS
TRAVELERS INTERNATIONAL EMERGING FEDERATED FEDERATED
QUALITY BOND STOCK GROWTH HIGH YIELD STOCK
PORTFOLIO(1) PORTFOLIO(2) PORTFOLIO(1) PORTFOLIO(1) PORTFOLIO(1)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income...................... $ 97,521 $ 7,084 $ 33,395 $ 154,634 $ 17,122
Net realized gain (loss)................... 31,374 (5,063) 2,110 16,573 29,045
Increase in net unrealized appreciation
(depreciation).......................... 48,017 311,067 (19,224) 209,283 333,273
- ---------------------------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS..... 176,912 313,088 16,281 380,490 379,440
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income...................... (97,521) -- (33,395) (153,447) (17,122)
Net realized gain.......................... (31,374) -- (12,421) (16,573) (29,045)
Capital.................................... -- -- (13,669) -- (1,834)
- ---------------------------------------------------------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM DISTRIBUTIONS
TO SHAREHOLDERS......................... (128,895) -- (59,485) (170,020) (48,001)
- ---------------------------------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 9):
Net proceeds from sale of shares........... 5,094,655 4,009,241 12,907,565 5,000,613 3,000,087
Net asset value of shares issued for
reinvestment of dividends............... 129,847 -- 59,485 170,020 48,001
Cost of shares reacquired.................. -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM FUND SHARE
TRANSACTIONS............................ 5,224,502 4,009,241 12,967,050 5,170,633 3,048,088
- ---------------------------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS....................... 5,272,519 4,322,329 12,923,846 5,381,103 3,379,527
NET ASSETS:
Beginning of period........................ -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
END OF PERIOD*............................. $5,272,519 $4,322,329 $12,923,846 $5,381,103 $3,379,527
- ---------------------------------------------------------------------------------------------------------------------------------
* Includes undistributed net investment
income of: ................................ -- $9,721 -- $1,187 --
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the period from August 30, 1996 (commencement of operations) to December
31, 1996.
(2) For the period from August 1, 1996 (commencement of operations) to December
31, 1996.
SEE NOTES TO FINANCIAL STATEMENTS.
45
<PG$PCN>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Travelers Quality Bond, Lazard International Stock, MFS Emerging
Growth, Federated High Yield, Federated Stock Portfolios and Mid Cap Disciplined
Equity Fund ("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 eight other
separate investment portfolios: U.S. Government Securities, Social Awareness
Stock, Utilities, 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 price on such
markets or, if there were no sales during the day, at current quoted bid price;
securities primarily traded on foreign exchanges are generally valued at the
closing values of such securities on their respective exchanges, except that
when a significant occurrence exists subsequent to the time a value was so
established and it is likely to have significantly changed the value, then the
fair value of those securities will be determined by consideration of other
factors by or under the direction of the Board of Trustees; securities traded in
the over-the-counter market are valued on the basis of the bid price at the
close of business on each day; U.S. government agencies and obligations are
valued at the mean between the last reported bid and ask prices; (c) securities
maturing within 60 days are valued at cost plus accreted discount or minus
amortized premium, which approximates 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 an accrual
basis and dividend income is recorded on the ex-dividend date; foreign dividends
are recorded on the ex-dividend date or as soon as practical after the Portfolio
determines the existence of a dividend declaration after exercising reasonable
due diligence; (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 accounting records of
the Portfolios are maintained in U.S. dollars. All assets and liabilities
denominated in foreign currencies are translated into U.S. dollars based on the
rate of exchange of such currencies against U.S. dollars on the date of
valuation. Purchases and sales of securities, income and expenses are translated
at the rate of exchange quoted on the respective date that such transactions are
recorded. Differences between income or expense amounts recorded and collected
or paid are adjusted when reported by the custodian bank; (i) 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; (j) 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, 1997,
reclassifications were made to the Portfolios' capital accounts to reflect
permanent book/tax differences and income and gains available for distributions
under income tax regulations. Accordingly, a portion of overdistributed net
investment income amounting to $795, $7,788 and $1,690 were reclassified to
paid-in capital for Lazard International Stock, MFS Emerging Growth and
Federated High Yield Portfolios, respectively. In addition, a portion of
accumulated net realized gain amounting to $27,016 was reclassified to paid-in
capital for MFS Emerging Growth Portfolio. Net investment income, net realized
gains and net assets for each Portfolio were not affected by these changes; and
(k) estimates and assumptions are required to be made regarding assets,
liabilities and changes in net assets resulting from operations when financial
statements are prepared. Changes in the economic environment, financial markets
and any other parameters used in determining these estimates could cause actual
results to differ.
In addition, the Lazard International Stock and MFS Emerging Growth
Portfolios may enter into forward exchange contracts in order to hedge against
foreign currency risk. These contracts are marked to market daily, by
recognizing the difference between the contract exchange rate and the current
market rate as an unrealized gain or loss. Realized gains or losses are
recognized when the contracts are settled.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS
Travelers Asset Management International Corporation ("TAMIC"), an indirect
wholly owned subsidiary of Travelers Group Inc., acts as investment adviser to
the Travelers Quality Bond ("TQB"), Lazard International Stock ("LIS"), MFS
Emerging Growth ("MEG"), Federated High Yield ("FHY"), Federated Stock ("FSP")
Portfolios and Mid Cap Disciplined Equity Fund ("MCDE"). TQB, LIS, MEG, FHY, FSP
and MCDE each pay TAMIC an investment advisory fee
46
<PG$PCN>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
calculated at the annual rate of 0.3233%, 0.825%, 0.75%, 0.65%, 0.625% and
0.70%, respectively, of the average daily net assets. This fee is calculated
daily and paid monthly.
TAMIC has entered into sub-advisory agreements with Lazard Freres Asset
Management ("Lazard"), Massachusetts Financial Services ("MFS"), Federated
Investment Counseling ("Federated") and Travelers Investment Management Co.,
Inc. ("TIMCO"). Pursuant to each sub-advisory agreement, Lazard, MFS and TIMCO
are responsible for the day-to-day portfolio operations and investment decisions
for LIS, MEG and MCDE, respectively. Federated is responsible for the day-to-day
portfolio operations and investment decisions for FHY and FSP. As a result, the
following fees are paid and calculated at an annual rate:
- TAMIC pays Lazard 0.475% of LIS's average daily net assets.
- TAMIC pays MFS 0.375% of MEG's average daily net assets.
- TAMIC pays Federated 0.40% and 0.375% of the average daily net
assets of FHY and FSP, respectively.
- MCDE pays TIMCO 0.35% of MCDE's average daily net assets.
These fees are calculated daily and paid monthly.
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 its average daily net assets. Travelers
Insurance has entered into a sub-administrative service agreement with Mutual
Management Corp. ("MMC"), formerly known as Smith Barney Mutual Funds Management
Inc., a subsidiary of Salomon Smith Barney Holdings Inc. Travelers Insurance
pays MMC, as sub-administrator, a fee calculated at an annual rate of 0.06% of
the average daily net assets of the Portfolios. This fee is calculated daily and
paid monthly.
For the year ended December 31, 1997, Travelers Insurance waived all or
part of its fees in the amounts of $24,460, $40,408, $40,379, $14,613, $16,063
and $24,172 for TQB, LIS, MEG, FHY, FSP and MCDE, respectively, and agreed to
reimburse MCDE for expenses in the amount of $3,564.
One Trustee and all officers of the Trust are employees of Travelers Group
Inc., or its subsidiaries.
3. INVESTMENTS
The aggregate costs of purchases and proceeds from sales of investments
(including maturities, but excluding short-term securities), during the year
ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO PURCHASES SALES
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Travelers Quality Bond Portfolio............................................ $20,615,834 $16,553,687
Lazard International Stock Portfolio........................................ 10,509,761 1,589,714
MFS Emerging Growth Portfolio............................................... 84,672,900 33,946,318
Federated High Yield Portfolio.............................................. 10,661,050 3,339,300
Federated Stock Portfolio................................................... 12,033,710 5,640,828
Mid Cap Disciplined Equity Fund............................................. 6,909,192 2,764,128
- ---------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1997, aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED NET UNREALIZED
PORTFOLIO APPRECIATION DEPRECIATION APPRECIATION
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Travelers Quality Bond Portfolio............................ $ 69,063 $ (6,233) $ 62,830
Lazard International Stock Portfolio........................ 1,347,816 (735,037) 612,779
MFS Emerging Growth Portfolio............................... 9,051,073 (3,266,202) 5,784,871
Federated High Yield Portfolio.............................. 669,290 (151,206) 518,084
Federated Stock Portfolio................................... 1,618,443 (258,188) 1,360,255
Mid Cap Disciplined Equity Fund............................. 709,517 (175,048) 534,469
- --------------------------------------------------------------------------------------------------------
</TABLE>
47
<PG$PCN>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. REPURCHASE AGREEMENTS
The Portfolios purchase (and their custodians take 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
The LIS, MEG and MCDE Portfolios may from time to time enter into futures
contracts.
Initial margin deposits made upon entering into futures contracts are
recognized as assets. Securities equal to the initial margin amount are
segregated by the custodian in the name of the broker. Additional securities are
also segregated up to the current market value of the futures contracts. 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 received or made 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 Portfolio records 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 enter into such contracts to hedge a portion of their
portfolios. The Portfolios bear the market risk that arises from changes in the
value of the financial instruments and securities indices (futures contracts).
At December 31, 1997, MCDE had the following open futures contracts:
<TABLE>
<CAPTION>
EXPIRATION # OF BASIS MARKET UNREALIZED
MONTH/YEAR CONTRACTS VALUE VALUE GAIN
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FUTURES CONTRACTS TO BUY:
Mid Cap 400 Index...................... 3/98 5 $818,755 $837,875 $ 19,120
- ------------------------------------------------------------------------------------------------------------
</TABLE>
6. OPTIONS CONTRACTS
The LIS, MEG, FHY and MCDE Portfolios may from time to time enter into
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 a closing sales transaction, 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 Portfolio exercises 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 Portfolios exercise a call
option, the cost of the security which the Portfolios purchase upon exercise
will be increased by the premium originally paid.
At December 31, 1997, the Portfolios had no open purchased put or call
option contracts.
When Portfolios write a covered call or put option, an amount equals to the
premium received by the Portfolios is recorded as a liability, the value of
which is marked-to-market daily. When a written option expires, the Portfolios
realize a gain. When the Portfolios enter into a closing purchase transaction,
the Portfolios realize a gain or loss depending upon whether the cost of the
closing transaction is greater or less than the premium originally received,
without regard to any unrealized gain or loss on the underlying security, and
the liability related to such option is eliminated. When a written call option
is exercised, the cost of the security sold will be decreased by the premium
originally received. When a put option is exercised, the amount of the premium
originally received will reduce the cost of the security which the Portfolios
purchased upon exercise. When written index options are exercised, settlement is
made in cash.
The risk associated with purchasing options is limited to the premium
originally paid. The Portfolios enter into options for hedging purposes. The
risk in writing a covered call option is that the Portfolios give up the
opportunity to participate in any increase in the price of the underlying
security beyond the exercise price. The risk in writing a put option is that the
Portfolios are exposed to the risk of a loss if the market price of the
underlying security declines.
During the year ended December 31, 1997, the Portfolios did not write any
options.
48
<PG$PCN>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. FORWARD FOREIGN CURRENCY CONTRACTS
LIS and MFS may enter into forward foreign currency contracts.
At December 31, 1997, LIS had open forward foreign currency contracts as
described below. The Portfolio bears the market risk that arises from changes in
foreign currency exchange rates. The unrealized gain (loss) on the contracts
reflected in the accompanying financial statements were as follows:
<TABLE>
<CAPTION>
LOCAL MARKET SETTLEMENT UNREALIZED
FOREIGN CURRENCY CURRENCY VALUE DATE GAIN (LOSS)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TO BUY:
German Deutschemark............................... 48,404 $26,928 1/5/98 $(559)
Japanese Yen...................................... 922,294 7,099 1/5/98 4
- ---------------------------------------------------------------------------------------------------------
Net Unrealized Loss on Forward Foreign Currency
Contracts....................................... $(555)
- ---------------------------------------------------------------------------------------------------------
</TABLE>
8. FOREIGN SECURITIES
Investing in securities of foreign companies and foreign governments
involves special risks and considerations not typically associated with
investing in U.S. companies and the U.S. government. These risks include
revaluation of currencies and future adverse political and economic
developments. Moreover, securities of many foreign companies and foreign
governments and their markets may be less liquid and their prices more volatile
than those of securities of comparable U.S. companies and the U.S. government.
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
Portfolio were as follows:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
TRAVELERS QUALITY BOND PORTFOLIO(1):
Shares sold................................................. 387,874 509,203
Shares issued on reinvestment............................... 25,688 12,856
Shares redeemed............................................. (21,988) --
- -------------------------------------------------------------------------------------------------------
Net Increase................................................ 391,574 522,059
- -------------------------------------------------------------------------------------------------------
LAZARD INTERNATIONAL STOCK PORTFOLIO(2):
Shares sold................................................. 946,470 400,880
Shares issued on reinvestment............................... 11,082 --
Shares redeemed............................................. (128,394) --
- -------------------------------------------------------------------------------------------------------
Net Increase................................................ 829,158 400,880
- -------------------------------------------------------------------------------------------------------
MFS EMERGING GROWTH PORTFOLIO(1):
Shares sold................................................. 4,341,790 1,219,526
Shares issued on reinvestment............................... 101,412 5,638
Shares redeemed............................................. (67,367) --
- -------------------------------------------------------------------------------------------------------
Net Increase................................................ 4,375,835 1,225,164
- -------------------------------------------------------------------------------------------------------
</TABLE>
49
<PG$PCN>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
FEDERATED HIGH YIELD PORTFOLIO(1):
Shares sold................................................. 655,864 500,058
Shares issued on reinvestment............................... 69,193 16,317
Shares redeemed............................................. (2,983) --
- -------------------------------------------------------------------------------------------------------
Net Increase................................................ 722,074 516,375
- -------------------------------------------------------------------------------------------------------
FEDERATED STOCK PORTFOLIO(1):
Shares sold................................................. 916,896 300,008
Shares issued on reinvestment............................... 55,752 4,324
Shares redeemed............................................. (402,093) --
- -------------------------------------------------------------------------------------------------------
Net Increase................................................ 570,555 304,332
- -------------------------------------------------------------------------------------------------------
MID CAP DISCIPLINED EQUITY FUND(3):
Shares sold................................................. 461,398 --
Shares issued on reinvestment............................... 35,196 --
Shares redeemed............................................. (1,838) --
- -------------------------------------------------------------------------------------------------------
Net Increase................................................ 494,756 --
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the period ended December 31, 1996, transactions are for the period from
August 30, 1996 (commencement of operations) to December 31, 1996.
(2) For the period ended December 31, 1996, transactions are for the period from
August 1, 1996 (commencement of operations) to December 31, 1996.
(3) For the period from April 1, 1997 (commencement of operations) to December
31, 1997.
50
<PG$PCN>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
For a share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
TRAVELERS QUALITY BOND PORTFOLIO 1997 1996(1)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR.............................................. $ 10.10 $ 10.00
- -------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income(2)...................................................... 0.43 0.19
Net realized and unrealized gain.............................................. 0.29 0.16
- -------------------------------------------------------------------------------------------------------
Total Income From Operations.................................................... 0.72 0.35
- -------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income......................................................... (0.43) (0.19)
Net realized gain............................................................. (0.03) (0.06)
- -------------------------------------------------------------------------------------------------------
Total Distributions............................................................. (0.46) (0.25)
- -------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR.................................................... $ 10.36 $ 10.10
- -------------------------------------------------------------------------------------------------------
TOTAL RETURN.................................................................... 7.14% 3.56%++
- -------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S)................................................. $ 9,468 $ 5,273
- -------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(2)(3)................................................................ 0.75% 0.75%+
Net investment income......................................................... 5.80 5.62+
- -------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE......................................................... 295% 35%
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the period from August 30, 1996 (commencement of operations) to December
31, 1996.
(2) Travelers Insurance has waived part or all of its fees for the year ended
December 31, 1997 and the period ended December 31, 1996. In addition,
Travelers Insurance has agreed to reimburse the Portfolio for $10,901 of the
Portfolio's expenses for the period ended December 31, 1996. If such fees
were not waived or reimbursed, the per share decrease in net investment
income and the actual expense ratios would have been as follows:
<TABLE>
<CAPTION>
PER SHARE DECREASES EXPENSE RATIOS WITHOUT
IN NET INVESTMENT INCOME FEE WAIVERS AND REIMBURSEMENT
------------------------ ------------------------------
<S> <C> <C>
1997 $ 0.03 1.13%
1996 0.03 1.76+
</TABLE>
(3) As a result of a voluntary expense limitation, the ratio of expenses to
average net assets will not exceed 0.75%.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
51
<PG$PCN>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
LAZARD INTERNATIONAL STOCK PORTFOLIO 1997 1996(1)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR............................................. $10.78 $ 10.00
- ------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income(2)..................................................... 0.05 0.02
Net realized and unrealized gain............................................. 0.87 0.76
- ------------------------------------------------------------------------------------------------------
Total Income From Operations................................................... 0.92 0.78
- ------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income........................................................ (0.09) --
Net realized gain............................................................ (0.04) --
- ------------------------------------------------------------------------------------------------------
Total Distributions............................................................ (0.13) --
- ------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR................................................... $11.57 $ 10.78
- ------------------------------------------------------------------------------------------------------
TOTAL RETURN................................................................... 8.50% 7.80%++
- ------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S)................................................ $14,229 $ 4,322
- ------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(2)(3)............................................................... 1.25% 1.25%+
Net investment income........................................................ 0.66 0.42+
- ------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE........................................................ 22% 9%
- ------------------------------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE ON EQUITY TRANSACTIONS........................... $0.04 $0.01
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the period from August 1, 1996 (commencement of operations) to December
31, 1996.
(2) Travelers Insurance has waived part or all of its fees for the year ended
December 31, 1997 and the period ended December 31, 1996. In addition,
Travelers Insurance has agreed to reimburse the Portfolio for $12,454 of the
Portfolio's expenses for the period ended December 31, 1996. If such fees
were not waived or reimbursed, the per share decrease in net investment
income and the actual expense ratios would have been as follows:
<TABLE>
<CAPTION>
PER SHARE DECREASES EXPENSE RATIOS WITHOUT
IN NET INVESTMENT INCOME FEE WAIVERS AND REIMBURSEMENT
------------------------ ------------------------------
<S> <C> <C>
1997 $ 0.03 1.76%
1996 0.07 2.87+
</TABLE>
(3) As a result of a voluntary expense limitation, the ratio of expenses to
average net assets will not exceed 1.25%.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
52
<PG$PCN>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
MFS EMERGING GROWTH PORTFOLIO 1997 1996(1)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR............................................ $10.55 $10.00
- -----------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income (loss)(2)............................................. (0.03) 0.03
Net realized and unrealized gain............................................ 2.26 0.57
- -----------------------------------------------------------------------------------------------------
Total Income From Operations.................................................. 2.23 0.60
- -----------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income....................................................... -- (0.03)
Net realized gain........................................................... (0.21) (0.01)
Capital..................................................................... (0.01) (0.01)
- -----------------------------------------------------------------------------------------------------
Total Distributions........................................................... (0.22) (0.05)
- -----------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR.................................................. $12.56 $10.55
- -----------------------------------------------------------------------------------------------------
TOTAL RETURN.................................................................. 21.15% 6.00%++
- -----------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S)............................................... $70,347 $12,924
- -----------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(2)(3).............................................................. 0.95% 0.95%+
Net investment income (loss)................................................ (0.40) 0.55+
- -----------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE....................................................... 94% 49%
- -----------------------------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE ON EQUITY TRANSACTIONS.......................... $0.06 $0.03
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) For the period from August 30, 1996 (commencement of operations) to December
31, 1996.
(2) Travelers Insurance has waived part or all of its fees for the year ended
December 31, 1997 and the period ended December 31, 1996. In addition,
Travelers Insurance has agreed to reimburse the Portfolio for $16,407 of the
Portfolio's expenses for the period ended December 31, 1996. If such fees
were not waived or reimbursed, the per share decrease in net investment
income and the actual expense ratios would have been as follows:
<TABLE>
<CAPTION>
PER SHARE DECREASES EXPENSE RATIOS WITHOUT
IN NET INVESTMENT INCOME FEE WAIVERS AND REIMBURSEMENT
------------------------ ------------------------------
<S> <C> <C>
1997 $ 0.01 1.05%
1996 0.06 2.09+
</TABLE>
(3) As a result of a voluntary expense limitation, the ratio of expenses to
average net assets will not exceed 0.95%.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
53
<PG$PCN>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
FEDERATED HIGH YIELD PORTFOLIO 1997 1996(1)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR............................................. $10.42 $ 10.00
- ------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income(2)..................................................... 0.60 0.31
Net realized and unrealized gain............................................. 1.01 0.46
- ------------------------------------------------------------------------------------------------------
Total Income From Operations................................................... 1.61 0.77
- ------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income........................................................ (0.60) (0.31)
Net realized gain............................................................ (0.09) (0.04)
- ------------------------------------------------------------------------------------------------------
Total Distributions............................................................ (0.69) (0.35)
- ------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR................................................... $11.34 $ 10.42
- ------------------------------------------------------------------------------------------------------
TOTAL RETURN................................................................... 15.45% 7.61%++
- ------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S)................................................ $14,049 $ 5,381
- ------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(2)(3)............................................................... 0.95% 0.95%+
Net investment income........................................................ 8.82 8.78+
- ------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE........................................................ 43% 23%
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the period from August 30, 1996 (commencement of operations) to December
31, 1996.
(2) Travelers Insurance has waived part or all of its fees for the year ended
December 31, 1997 and the period ended December 31, 1996. In addition,
Travelers Insurance has agreed to reimburse the Portfolio for $9,268 of the
Portfolio's expenses for the period ended December 31, 1996. If such fees
were not waived or reimbursed, the per share decrease in net investment
income and the actual expense ratios would have been as follows:
<TABLE>
<CAPTION>
PER SHARE DECREASES EXPENSE RATIOS WITHOUT
IN NET INVESTMENT INCOME FEE WAIVERS AND REIMBURSEMENT
------------------------ ------------------------------
<S> <C> <C>
1997 $ 0.01 1.14%
1996 0.04 2.19+
</TABLE>
(3) As a result of a voluntary expense limitation, the ratio of expenses to
average net assets will not exceed 0.95%.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
54
<PG$PCN>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
FEDERATED STOCK PORTFOLIO 1997 1996(1)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR............................................. $11.10 $ 10.00
- ------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income(2)..................................................... 0.10 0.06
Net realized and unrealized gain............................................. 3.60 1.20
- ------------------------------------------------------------------------------------------------------
Total Income From Operations................................................... 3.70 1.26
- ------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income........................................................ (0.10) (0.06)
Net realized gain............................................................ (0.87) (0.09)
Capital...................................................................... -- (0.01)
- ------------------------------------------------------------------------------------------------------
Total Distributions............................................................ (0.97) (0.16)
- ------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR................................................... $13.83 $ 11.10
- ------------------------------------------------------------------------------------------------------
TOTAL RETURN................................................................... 33.41% 12.61%++
- ------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S)................................................ $12,100 $ 3,380
- ------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(2)(3)............................................................... 0.95% 0.95%+
Net investment income........................................................ 1.11 1.55+
- ------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE........................................................ 74% 11%
- ------------------------------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE ON EQUITY TRANSACTIONS........................... $0.05 $0.05
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the period from August 30, 1996 (commencement of operations) to December
31, 1996.
(2) Travelers Insurance has waived part or all of its fees for the year ended
December 31, 1997 and the period ended December 31, 1996. In addition,
Travelers Insurance has agreed to reimburse the Portfolio for $15,460 of the
Portfolio's expenses for the period ended December 31, 1996. If such fees
were not waived or reimbursed, the per share decrease in net investment
income and the actual expense ratios would have been as follows:
<TABLE>
<CAPTION>
PER SHARE DECREASES EXPENSE RATIOS WITHOUT
IN NET INVESTMENT INCOME FEE WAIVERS AND REIMBURSEMENT
------------------------ ------------------------------
<S> <C> <C>
1997 $ 0.02 1.16%
1996 0.08 3.03+
</TABLE>
(3) As a result of a voluntary expense limitation, the ratio of expenses to
average net assets will not exceed 0.95%.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
55
<PG$PCN>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of beneficial interest outstanding throughout the period:
<TABLE>
<CAPTION>
MID CAP DISCIPLINED EQUITY FUND 1997(1)
- -------------------------------------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD............................................ $ 10.00
- -------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income(2)...................................................... 0.06
Net realized and unrealized gain.............................................. 3.37
- -------------------------------------------------------------------------------------------------------
Total Income From Operations.................................................... 3.43
- -------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income......................................................... (0.06)
Net realized gain............................................................. (0.90)
- -------------------------------------------------------------------------------------------------------
Total Distributions............................................................. (0.96)
- -------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.................................................. $ 12.47
- -------------------------------------------------------------------------------------------------------
TOTAL RETURN++.................................................................. 34.38%
- -------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000'S)............................................... $ 6,169
- -------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS+:
Expenses(2)(3)................................................................ 0.95%
Net investment income......................................................... 0.85
- -------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE......................................................... 74%
- -------------------------------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE ON EQUITY TRANSACTIONS............................ $0.05
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the period from April 1, 1997 (commencement of operations) to December
31, 1997.
(2) Travelers Insurance has waived all of its fees for the period ended December
31, 1997. In addition, Travelers Insurance has agreed to reimburse the
Portfolio for $3,564 of the Portfolio's expenses for the period ended
December 31, 1997. If such fees were not waived or reimbursed, the per share
decrease in net investment income would have been $0.08 and the actual
expense ratio would have been 1.82% (annualized).
(3) As a result of voluntary expense limitation, the ratio of expenses to
average net assets will not exceed 0.95%.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
56
<PG$PCN>
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees of
The Travelers Series Trust:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of the Travelers Quality Bond, Lazard
International Stock, MFS Emerging Growth, Federated High Yield, Federated Stock
Portfolios and Mid Cap Disciplined Equity Fund ("Portfolios") of the Travelers
Series Trust ("Trust") as of December 31, 1997, and the related statements of
operations for the year then ended and for the period from April 1, 1997
(commencement of operations) to December 31, 1997 with respect to Mid Cap
Disciplined Equity Fund, the statements of changes in net assets and the
financial highlights for the year ended December 31, 1997 and for the period
from April 1, 1997 to December 31, 1997 with respect to the Mid Cap Disciplined
Equity Fund, and for the period from August 30, 1996 (commencement of
operations) to December 31, 1996 with respect to the Travelers Quality Bond, MFS
Emerging Growth, Federated High Yield and Federated Stock Portfolios and for the
period from August 1, 1996 (commencement of operations) to December 31, 1996
with respect to the Lazard International Stock Portfolio. These financial
statements and financial highlights are the responsibility of the Trust's
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, 1997, by correspondence with the custodian. As to securities
purchased or sold but not yet received or delivered, we performed other
appropriate auditing procedures. 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
Portfolios as of December 31, 1997, the result of their operations, changes in
their net assets and their financial highlights for the periods referred to
above, in conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
New York, New York
February 10, 1998
57
<PG$PCN>
- --------------------------------------------------------------------------------
TAX INFORMATION (UNAUDITED)
For Federal tax purposes the Trust hereby designates for the fiscal year ended
December 31, 1997:
- Percentages of ordinary dividends paid as qualifying for the corporate
dividends received deduction:
<TABLE>
<S> <C>
Federated High Yield Portfolio................................. 2.89%
Federated Stock Portfolio...................................... 11.78
Mid Cap Disciplined Equity Fund................................ 7.47
</TABLE>
- The Taxpayer Relief Act of 1997 enacted differing rates of tax on various
long-term capital gains transactions. As a result, the Trust designates:
- Total long-term capital distributions paid which are considered "28
percent rate gains":
<TABLE>
<S> <C>
MFS Emerging Growth Portfolio............................. $41,882
Federated High Yield Portfolio............................ 38,726
Federated Stock Portfolio................................. 82,651
</TABLE>
- Total long-term capital gain distributions paid which are considered
"20 percent rate gains":
<TABLE>
<S> <C>
Mid Cap Disciplined Equity Fund........................... $72,562
</TABLE>
A total of 27.57% of the ordinary distributions paid by the Travelers Quality
Bond Portfolio from net investment income are derived from Federal obligations
that may be exempt from taxation at the state level.
58
<PG$PCN>
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<PG$PCN>
Investment Advisers
TRAVELERS ASSET MANAGEMENT INTERNATIONAL CORPORATION
Hartford, Connecticut
Independent Auditors
KPMG PEAT MARWICK LLP
New York, New York
Custodians
PNC BANK, N.A.
THE CHASE MANHATTAN BANK, N.A.
This report is prepared for the general information of contract owners and is
not an offer of shares of The Travelers Series Trust: Travelers Quality Bond,
Lazard International Stock, MFS Emerging Growth, Federated High Yield, Federated
Stock Portfolios and Mid Cap Disciplined Equity Fund. It should not be used in
connection with any offer except in conjunction with the Prospectuses for the
Variable Annuity and Variable Universal Life Insurance products offered by The
Travelers Insurance Company and the Prospectuses for the underlying funds, which
collectively contain all pertinent information, including the applicable sales
commissions.
Series Trust (Annual) (12-97) Printed in U.S.A.
<PG$PCN>
THE TRAVELERS VARIABLE
PRODUCTS FUNDS
ANNUAL REPORTS
DECEMBER 31, 1997
[PHOTO]
THE TRAVELERS SERIES TRUST:
EQUITY INCOME PORTFOLIO
LARGE CAP PORTFOLIO
[TRAVELERS LIFE & ANNUITY LOGO]
The Travelers Insurance Company
The Travelers Life and Annuity Company
One Tower Square
Hartford, CT 06183
<PG$PCN>
CONTENTS
<TABLE>
<S> <C> <C>
MARKET ENVIRONMENT 3 A review of what happened in world markets during
the last year
EQUITY INCOME PORTFOLIO
PERFORMANCE 4 How the fund has done over time.
FUND TALK 5 The manager's review of fund performance, strategy
and outlook.
INVESTMENTS 6 A complete list of the fund's investments with their
market values.
FINANCIAL STATEMENTS 10 Statements of assets and liabilities, operations, and
changes in net assets, as well as financial highlights.
LARGE CAP PORTFOLIO
PERFORMANCE 12 How the fund has done over time.
FUND TALK 13 The manager's review of fund performance, strategy
and outlook.
INVESTMENTS 14 A complete list of the fund's investments with their
market values.
FINANCIAL STATEMENTS 17 Statements of assets and liabilities, operations, and
changes in net assets, as well as financial highlights.
NOTES 19 Notes to the financial statements.
REPORT OF INDEPENDENT ACCOUNTANTS 21 The auditors' opinion.
DISTRIBUTIONS 22
</TABLE>
This report and the financial statements contained herein are submitted for the
general information of the shareholders of the funds. This report is not
authorized for distribution to prospective investors in the funds unless
preceded or accompanied by an effective prospectus.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY
DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC, FEDERAL RESERVE
BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
Neither of the funds is a bank.
ANNUAL REPORT 2
<PG$PCN>
MARKET ENVIRONMENT
Despite an infectious currency crisis that erupted in Southeast Asia in
October, most stock and bond markets around the globe posted another year of
positive returns. Sustained corporate earnings growth, low interest-rate levels
and an overall lack of inflationary concern provided a favorable investing
backdrop. The U.S. and European stock markets continued to perform well, with
U.S. stocks posting their third consecutive year of strong results. The
problems in Southeast Asia, though, reverberated throughout the world, with
investors becoming increasingly concerned toward the end of the period
regarding the sustain ability of corporate earnings. The U.S. bond market
enjoyed a nice run in 1997.
U.S. STOCK MARKETS
The U.S. stock market went through many phases during 1997. Entering the
year,the market was still being dominated by an extremely narrow contingent of
well-known, large-capitalization stocks. In fact, much of the Standard & Poor's
500 Index 12-month gain of 33.36% came from these bigger stocks. Stock prices
soared to historic highs and the Dow Jones Industrial Average hurtled past the
8000-point mark in August.
But, investors became increasingly concerned about the market's ability to
sustain its lofty performance levels. In mid August, several large
multinationals -- companies that derive a significant portion of their revenues
from overseas operations -- justified these concerns by announcing earnings
disappointments. These announcements triggered a slowdown among larger-cap
stocks, while smaller- and medium-sized stocks gained momentum. From August
through December, the S&P MidCap 400 Index -- a measure of mid-sized stock
performance -- returned 6.50%, while the S&P 500 returned 2.43%.
In late October, economic turmoil shook Southeast Asia. Since this region
accounts for a significant portion of world economic growth, shock tremors
rippled through developed markets such as those in the U.S. and Europe, as well
as emerging-market nations in Eastern Europe and Latin America. In New York,
the uncertainty was punctuated by a 554--point drop in the Dow one day and a
337-point recovery the next.
In terms of industry groups, moderate economic growth coupled with nonexistent
inflation translated into near nirvana for the finance sector. Banks and
brokerages demonstrated their ability to sustain impressive earnings growth as
borrowing demand remained high and cash flows were healthy. Consolidation in
the form of merger and acquisition activity also brought positive results to
the group.Due to strong oil exploration and production demand, the energy
service sector also fared nicely. Demand for offshore drilling, in particular,
was very high and the industry enjoyed favorable pricing trends.
Technology stocks were a mixed bag in 1997, with the group experiencing a
decent rally through the first half of the year. The second-half Asian crisis,
however,proved particularly harmful to many technology companies with Asian
business ties. With Asia accounting for a considerable amount of the world's
technology production, the region's economic troubles were far-reaching. Going
into 1998,many money managers -- sensing an economic slowdown due to Asia --
were concentrating on stocks that were less cyclical, or economically
sensitive.
FOREIGN STOCK MARKETS
Stock markets around the world reacted differently in 1997. Europe -- bolstered
by continued economic reform and a convergence in monetary policy -- posted
strong overall returns as Finland, Italy, Spain, Switzerland and the United
Kingdom led the way. The Morgan Stanley Capital International (MSCI) Europe
Index returned 24.17% during the period. In contrast, the MSCI EAFE Index,which
measures the performance of Europe, Australia and the Far East, reflected the
problems brought on by the Asian crisis. The MSCI EAFE returned 2.01% for the
period. Japan and Hong Kong were two noteworthy laggards, as economic recovery
in Japan trudged along and Hong Kong felt the brunt of Asia's woes. Emerging
market equity performance was solid through the first half of the period, but
trailed off some in the second. Uncertainty in Asia and South Korea made some
investors question the well-being of other pivotal emerging-market nations such
as Russia, which proved particularly vulnerable to the Asian dilemma.
U.S. BOND MARKETS
Bonds benefited from low interest rates -- which in turn drove prices upward --
as well as a distinct lack of inflation indicators. The Lehman Brothers
Aggregate Bond Index -- a measure of the U.S. taxable bond market -- returned
9.65% during the year. The Federal Reserve Board's raising of a key short-term
interest rate in March proved to be one of the few obstacles to the bond
market. Bonds rallied from April through mid-September, buoyed in large part by
encouraging economic data and the Fed's reluctance to raise rates further.
Additionally,while the Asian crisis brought some equity markets to their knees,
many bond markets welcomed wary stock investors in search of lower volatility.
Interest rates reached attractive levels, with the yield on the 30-year
Treasury bond going below the 6% mark in November. Corporate bonds performed
reasonably well due to continued economic growth and high demand for yield.
Mortgage-backed bonds also fared relatively well, in spite of increased
refinancing activity due to the lower rates.
FOREIGN BOND MARKETS
While low inflation and steady growth boosted the U.S. bond market, results
were varied on the international front. The Salomon Brothers World Government
Bond Index -- a measure of government bond market performance in developed
nations-- returned 0.23% for the 12 months that ended December 31, 1997. In
Europe,countries continued to make progress in the drive toward meeting
European Monetary Union requirements. But a strong dollar relative to many
currencies eroded gains for U.S.-based investors. Japan -- one of the more
significant components of the Salomon Brothers index -- continued to struggle
as economic reform continued to develop slowly. The often-volatile world of
emerging-market debt also had mixed results, as Asian concerns trickled into
these regions. Brazil and Argentina performed well, while Ecuador stumbled due
to political uncertainty. Nevertheless,The J.P. Morgan Emerging Markets Bond
Index still managed to return 16.15% during the period.
3 ANNUAL REPORT
<PG$PCN>
EQUITY INCOME PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance: total
percentage change in value or the growth of a hypothetical $10,000 investment.
Total return reflects the change in the value of an investment, assuming
reinvestment of the fund's dividend income and capital gains (the profits the
fund earns when it sells securities that have grown in value).
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
CUMULATIVE TOTAL RETURNS
- -------------------------------------------------------------------
PERIODS ENDED DECEMBER 31, 1997 PAST 1 LIFE OF
YEAR FUND
<S> <C> <C>
Equity-Income Portfolio 32.05% 47.49%
S&P 500(R) 33.36% 52.61%
</TABLE>
CUMULATIVE TOTAL RETURNS show the fund's performance in percentage terms over a
set period -- in this case, one year or since the fund started on August 30,
1996.
You can compare the fund's return to the performance of the Standard & Poor's
500 Index -- a widely recognized, unmanaged index of common stocks. This
benchmark includes reinvested dividends and capital gains, if any.
If certain fund expenses had not been reimbursed, the total returns would have
been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT INCLUDE
ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. IF
PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL CHARGES, THE
TOTAL RETURNS WOULD BE LOWER.
Past performance is no guarantee of future results. Principal and investment
return will vary and you may have a gain or loss when you withdraw your money.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
- -------------------------------------------------------------------
PERIODS ENDED DECEMBER 31, 1997 PAST 1 LIFE OF
YEAR FUND
<S> <C> <C>
Equity-Income Portfolio 32.05% 33.83%
S&P 500 33.36% 37.31%
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate each
year.
[X] UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how it will do tomorrow. The stock
market, for example, has a history of growth in the long run and volatility in
the short run. In turn, the share price and return of a fund that invests in
stocks will vary. That means if you sell your shares during a market downturn,
you might lose money. But if you can ride out the market's ups and downs, you
may have a gain.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
$10,000 OVER LIFE OF FUND
- -------------------------------------------------------------------
Travelers Equity-Income S&P 500
<S> <C> <C>
1996/08/30 10000.00 10000.00
1996/09/30 10360.00 10562.80
1996/10/31 10720.00 10854.12
1996/11/30 11370.00 11674.59
1996/12/31 11168.65 11443.31
1997/01/31 11662.13 12158.29
1997/02/28 11843.74 12253.61
1997/03/31 11379.28 11750.11
1997/04/30 11803.35 12451.59
1997/05/31 12621.21 13209.64
1997/06/30 13206.83 13801.44
1997/07/31 14206.43 14899.62
1997/08/31 13590.52 14064.94
1997/09/30 14277.11 14835.28
1997/10/31 13832.85 14339.78
1997/11/30 14347.79 15003.57
1997/12/31 14748.68 15261.18
</TABLE>
Let's say hypothetically that $10,000 was invested in the Equity Income
Portfolio on August 30, 1996, when the fund started. As the chart shows, by
December 31, 1997, the investment would have grown to $14,749 -- a 47.49%
increase. With reinvested dividends and capital gains, if any, a $10,000
investment in the S&P 500 would have grown to $15,261 over the same period -- a
52.61% increase.
<TABLE>
<CAPTION>
INVESTMENT SUMMARY
- -----------------------------------------------------------------
TOP FIVE STOCKS AS OF DECEMBER 31, 1997
- -----------------------------------------------------------------
% OF FUND'S
INVESTMENTS
<S> <C>
General Electric Co. 3.6
Philip Morris Companies, Inc. 2.9
American Express Co. 2.4
Fannie Mae 2.3
British Petroleum PLC ADR 1.9
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 19976
- -----------------------------------------------------------------
% OF FUND'S
INVESTMENTS
<S> <C>
Finance 25.7
Energy 10.5
Utilities 9.0
Industrial Machinery & Equipment 6.9
Basic Industries 6.9
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
ASSET ALLOCATION AS OF DECEMBER 31, 1997*
- -----------------------------------------------------------------
% OF FUND'S
INVESTMENTS
<S> <C>
Stocks 90.5%
Convertible securities 3.2%
Short-term investments 6.3%
* Foreign investments 7.4%
</TABLE>
ANNUAL REPORT 4
<PG$PCN>
EQUITY INCOME PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
[PHOTO]
An interview with Stephen Petersen,
Portfolio Manager of Equity Income Portfolio
Q. STEVE, HOW DID THE FUND PERFORM OVER THE PAST YEAR RELATIVE TO THE STANDARD
& POOR'S 500 INDEX?
A. While it performed well on an absolute basis, the fund underperformed the
S&P 500 index, which returned 33.36% for the 12-month period ending December
31, 1997.
Q. WHY DID THE FUND UNDERPERFORM THE INDEX?
A. Mainly because the fund's equity-income style of management -- which favors
companies that pay high dividends instead of high-growth companies -- was not
as effective in the strong market of 1997 as some other management styles. To
be in line with the fund's management style, I could not invest in some of the
year's top-performing companies because they did not pay dividends.
Q. STILL, ON AN ABSOLUTE BASIS, THE FUND DID WELL OVER THE PERIOD . . .
A. That's true. Within the context of an equity-income management style, many
of the fund's top holdings did very well over the period. One standout
performer was the fund's largest holding, General Electric. This company showed
strong earnings growth and solid underlying fundamentals. Fannie Mae, which
packages and facilitates mortgage loans, also turned in a solid performance
over the period. In addition to strong individual stock selection, the fund
also benefited from its sector weightings. It was overweighted relative to the
index in the financial sector -- which outperformed the market -- and
underweighted compared to the index in the utility sector -- which
underperformed the market.
Q. FINANCIAL HOLDINGS MADE UP ALMOST 26% OF THE FUND AT THE END OF THE PERIOD.
WHY DID THIS SECTOR PERFORM SO WELL OVER THE PAST YEAR?
A. In general, financial stocks move in step with interest rates. That is, when
interest rates go down, financial stocks usually do well, and, conversely, when
rates go up, financial stocks tend to turn in weaker performances. So it was
good news for the sector that interest rates trended downward in 1997. The
sector also benefited from a fair amount of consolidation. Some standout
financial stocks over the period were Bank of New York and Allstate Insurance.
Q. YOU FREQUENTLY MENTION YOUR EQUITY-INCOME STYLE OF INVESTING. WHAT DO YOU
LOOK FOR IN COMPANIES, AND WHAT IS A GOOD EXAMPLE OF A CLASSIC EQUITY-INCOME
HOLDING?
A. As I've noted, the fund looks for companies that pay shareholders
higher-than-average dividends. Usually, these are big, mature companies that
have recently performed poorly or were not able to grow as fast as the rest of
the market. So to compensate shareholders, they pay high dividends when earned.
The fund also looks for high-quality stocks that are currently out of favor. A
good example of a classic equity-income stock is Philip Morris. This company
has been able to grow its earnings-per-share consistently over the past 20
years. However, right now the market doesn't like the company because of
pending litigation, leaving investors concerned about the true valuation of the
company. So, with Philip Morris you have a company that grew earnings as well
as Coca-Cola or Gillette over the period, but traded at a discounted valuation
compared to the rest of the market and paid a very high dividend yield.
Q. DID YOU HAVE ANY REGRETS OVER THE PERIOD?
A. Sure. I wish I had reduced the fund's exposure to cyclical stocks -- those
stocks that tend to perform well when the economy is up and poorly when the
economy is weak -- during the fourth quarter of 1997. These stocks were hit
hard when Southeast Asian markets plummeted.
Q. STEVE, HOW DOES THE FUND LOOK GOING FORWARD?
A. On the positive side, it looks like pretty much all of the factors that
allowed the market to perform well in 1997 still exist -- little to no
inflation, low interest rates and a fairly benign political environment. On the
negative side, I expect the market declines throughout Asia to have an impact
on the earnings of a number of companies, especially cyclical companies. In
addition, the U.S. dollar continues to remain stronger than most European
currencies, which hurts U.S.-based multinationals when they try to price their
goods against foreign companies. Overall, while I think that the fund will have
some challenges going forward -- mostly due to factors outside the United
States -- the general environment still looks pretty good.
The views expressed in this report reflect those of the portfolio manager only
through the end of the period of the report as stated on the cover. The
manager's views are subject to change at any time based on market and other
conditions.
[X] FUND FACTS
GOAL: seeks reasonable income by investing primarily in income-producing equity
securities to provide current income and increase the value of the fund's
shares
START DATE: August 30, 1996
SIZE: as of December 31, 1997, more than $22 million
MANAGER: Stephen Petersen, since inception; joined Fidelity in 1980
5 ANNUAL REPORT
<PG$PCN>
EQUITY INCOME PORTFOLIO
INVESTMENTS DECEMBER 31, 1997
Showing Percentage of Total Value of Investment in Securities
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
COMMON STOCKS -- 90.5%
- -------------------------------------------------------------------------------------------
SHARES VALUE (NOTE 1)
<S> <C> <C>
AEROSPACE & DEFENSE - 4.7%
AEROSPACE & DEFENSE - 3.5%
AlliedSignal, Inc. . . . . . . . . . . . . . . . 4,600 $ 179,551
Boeing Co. . . . . . . . . . . . . . . . . . . . 742 36,312
GenCorp, Inc. . . . . . . . . . . . . . . . . . . 1,400 35,000
Gulfstream Aerospace Corp. (a) . . . . . . . . . 600 17,550
Harsco Corp. . . . . . . . . . . . . . . . . . . 1,400 60,375
Lockheed Martin Corp. . . . . . . . . . . . . . . 2,100 206,850
Textron, Inc. . . . . . . . . . . . . . . . . . . 1,400 87,500
Thiokol Corp. . . . . . . . . . . . . . . . . . . 300 24,375
United Technologies Corp. . . . . . . . . . . . . 2,100 152,906
--------------
800,419
--------------
DEFENSE ELECTRONICS - 1.2%
Northrop Grumman Corp. . . . . . . . . . . . . . 700 80,500
Raytheon Co.:
Class A . . . . . . . . . . . . . . . . . . . 127 6,263
Class B . . . . . . . . . . . . . . . . . . . 3,500 176,750
--------------
263,513
--------------
TOTAL AEROSPACE & DEFENSE . . . . . . . . . . . . 1,063,932
--------------
BASIC INDUSTRIES - 6.9%
CHEMICALS & PLASTICS - 3.3%
Air Products & Chemicals, Inc. . . . . . . . . . 600 49,350
du Pont (E.I.) de Nemours & Co. . . . . . . . . . 1,600 96,100
Goodrich (B.F.) Co. . . . . . . . . . . . . . . . 1,200 49,725
Great Lakes Chemical Corp. . . . . . . . . . . . 1,200 53,850
Hercules, Inc. . . . . . . . . . . . . . . . . . 1,700 85,106
Millennium Chemicals, Inc. . . . . . . . . . . . 1,300 30,631
Monsanto Co. . . . . . . . . . . . . . . . . . . 1,200 49,950
Nalco Chemical Co. . . . . . . . . . . . . . . . 1,100 43,519
Olin Corp. . . . . . . . . . . . . . . . . . . . 1,500 70,313
Solutia, Inc. . . . . . . . . . . . . . . . . . . 1,600 42,700
Union Carbide Corp. . . . . . . . . . . . . . . . 2,400 103,050
Witco Corp. . . . . . . . . . . . . . . . . . . . 1,900 77,544
--------------
751,838
--------------
IRON & STEEL - 0.4%
Dofasco Inc. . . . . . . . . . . . . . . . . . . 1,900 30,569
Inland Steel Industries, Inc. . . . . . . . . . . 1,900 32,538
USX-U.S. Steel Group . . . . . . . . . . . . . . 1,100 34,375
--------------
97,482
--------------
METALS & MINING - 1.3%
Alcan Aluminium Ltd. . . . . . . . . . . . . . . 1,500 41,342
Alumax, Inc. (a) . . . . . . . . . . . . . . . . 2,211 75,174
Aluminum Co. of America . . . . . . . . . . . . . 2,000 140,750
Kaiser Aluminum Corp. (a) . . . . . . . . . . . . 1,100 9,694
Phelps Dodge Corp. . . . . . . . . . . . . . . . 300 18,675
--------------
285,635
--------------
PAPER & FOREST PRODUCTS - 1.9%
Boise Cascade Corp. . . . . . . . . . . . . . . . 1,000 30,250
Champion International Corp. . . . . . . . . . . 1,300 58,906
Domtar, Inc. . . . . . . . . . . . . . . . . . . 2,500 17,401
Georgia-Pacific Corp. . . . . . . . . . . . . . . 500 30,375
Georgia-Pacific Corp. (Timber Group) (a) . . . . 500 11,344
Kimberly-Clark Corp. . . . . . . . . . . . . . . 3,600 177,525
Weyerhaeuser Co. . . . . . . . . . . . . . . . . 2,200 107,938
--------------
433,739
--------------
TOTAL BASIC INDUSTRIES . . . . . . . . . . . . . 1,568,694
--------------
CONSTRUCTION & REAL ESTATE - 0.8%
BUILDING MATERIALS - 0.4%
American Standard Companies, Inc. (a) . . . . . . 1,400 53,638
Masco Corp. . . . . . . . . . . . . . . . . . . . 1,000 50,875
--------------
104,513
--------------
ENGINEERING - 0.1%
EG & G, Inc. . . . . . . . . . . . . . . . . . . 1,000 20,813
--------------
REAL ESTATE INVESTMENT TRUSTS - 0.3%
Equity Residential Properties Trust (SBI) . . . . 1,300 65,731
--------------
TOTAL CONSTRUCTION & REAL ESTATE . . . . . . . . 191,057
--------------
DURABLES - 4.1%
AUTOS, TIRES, & ACCESSORIES - 2.2%
Chrysler Corp. . . . . . . . . . . . . . . . . . 4,000 140,750
Cummins Engine Co., Inc. . . . . . . . . . . . . 300 17,719
Eaton Corp. . . . . . . . . . . . . . . . . . . . 1,000 89,250
General Motors Corp. . . . . . . . . . . . . . . 2,100 127,313
Johnson Controls, Inc. . . . . . . . . . . . . . 1,000 47,750
Meritor Automotive, Inc. . . . . . . . . . . . . 1,300 27,381
Modine Manufacturing Co. . . . . . . . . . . . . 600 20,475
TRW, Inc. . . . . . . . . . . . . . . . . . . . . 500 26,875
Volvo AB ADR Class B . . . . . . . . . . . . . . 500 13,500
--------------
511,013
--------------
CONSUMER DURABLES - 0.9%
Minnesota Mining & Manufacturing Co. . . . . . . 2,400 196,950
--------------
CONSUMER ELECTRONICS - 0.5%
Maytag Co. . . . . . . . . . . . . . . . . . . . 2,200 82,088
Sunbeam-Oster, Inc. . . . . . . . . . . . . . . . 300 12,638
Whirlpool Corp. . . . . . . . . . . . . . . . . . 400 22,000
--------------
116,726
--------------
TEXTILES & APPAREL - 0.5%
Dexter Corp. . . . . . . . . . . . . . . . . . . 900 38,869
Kellwood Co. . . . . . . . . . . . . . . . . . . 900 27,000
Unifi, Inc. . . . . . . . . . . . . . . . . . . . 1,400 56,963
--------------
122,832
--------------
TOTAL DURABLES . . . . . . . . . . . . . . . . . 947,521
--------------
ENERGY - 9.5%
ENERGY SERVICES - 1.8%
Dresser Industries, Inc. . . . . . . . . . . . . 2,400 100,650
Halliburton Co. . . . . . . . . . . . . . . . . . 2,100 109,069
Schlumberger Ltd. . . . . . . . . . . . . . . . . 2,400 193,200
--------------
402,919
--------------
OIL & GAS - 7.7%
Amerada Hess Corp. . . . . . . . . . . . . . . . 900 49,388
Amoco Corp. . . . . . . . . . . . . . . . . . . . 1,200 102,150
Atlantic Richfield Co. . . . . . . . . . . . . . 2,400 192,300
British Petroleum PLC ADR . . . . . . . . . . . . 5,381 428,798
Burlington Resources, Inc. . . . . . . . . . . . 700 31,369
Coastal Corp. (The) . . . . . . . . . . . . . . . 600 37,163
Exxon Corp. . . . . . . . . . . . . . . . . . . . 800 48,950
Kerr-McGee Corp. . . . . . . . . . . . . . . . . 400 25,325
Mobil Corp. . . . . . . . . . . . . . . . . . . . 1,400 101,063
Occidental Petroleum Corp. . . . . . . . . . . . 3,800 111,388
Phillips Petroleum Co. . . . . . . . . . . . . . 1,400 68,075
Royal Dutch Petroleum Co. . . . . . . . . . . . . 5,100 276,356
Santa Fe Energy Resources, Inc. . . . . . . . . . 1,000 11,250
Texaco, Inc. . . . . . . . . . . . . . . . . . . 130 7,069
Total SA sponsored ADR . . . . . . . . . . . . . 1,900 105,450
USX-Marathon Group . . . . . . . . . . . . . . . 3,000 101,250
Unocal Corp. . . . . . . . . . . . . . . . . . . 1,125 43,664
Valero Energy Corp. . . . . . . . . . . . . . . . 600 18,863
--------------
1,759,871
--------------
TOTAL ENERGY . . . . . . . . . . . . . . . . . . 2,162,790
--------------
</TABLE>
See accompanying notes which are an integral part of the financial statements.
ANNUAL REPORT 6
<PG$PCN>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
COMMON STOCKS - CONTINUED
- -------------------------------------------------------------------------------------------
SHARES VALUE (NOTE 1)
<S> <C> <C>
FINANCE - 25.2%
BANKS - 10.1%
Banc One Corp. . . . . . . . . . . . . . . . . . 3,600 $ 195,525
Bank of New York Co., Inc. . . . . . . . . . . . 6,600 381,563
Bank of Nova Scotia . . . . . . . . . . . . . . . 800 37,690
BankBoston Corp. . . . . . . . . . . . . . . . . 1,200 112,725
BankAmerica Corp. . . . . . . . . . . . . . . . . 4,300 313,900
Canadian Imperial Bank of Commerce . . . . . . . 1,400 43,678
Chase Manhattan Corp. . . . . . . . . . . . . . . 900 98,550
Citicorp . . . . . . . . . . . . . . . . . . . . 900 113,794
Comerica, Inc. . . . . . . . . . . . . . . . . . 1,400 126,350
National Bank of Canada . . . . . . . . . . . . . 3,500 57,780
NationsBank Corp. . . . . . . . . . . . . . . . . 4,700 285,819
Norwest Corp. . . . . . . . . . . . . . . . . . . 3,400 131,325
Royal Bank of Canada . . . . . . . . . . . . . . 2,100 111,056
U.S. Bancorp . . . . . . . . . . . . . . . . . . 1,500 167,906
Wells Fargo & Co. . . . . . . . . . . . . . . . . 400 135,775
--------------
2,313,436
--------------
CREDIT & OTHER FINANCE - 5.1%
American Express Co. . . . . . . . . . . . . . . 6,100 544,425
Beneficial Corp. . . . . . . . . . . . . . . . . 800 66,500
First Chicago NBD Corp. . . . . . . . . . . . . . 3,300 275,550
Fleet Financial Group, Inc. . . . . . . . . . . . 1,300 97,419
Household International, Inc. . . . . . . . . . . 1,000 127,563
Transamerica Corp. . . . . . . . . . . . . . . . 600 63,900
--------------
1,175,357
--------------
FEDERAL SPONSORED CREDIT - 2.3%
Fannie Mae . . . . . . . . . . . . . . . . . . . 9,100 519,269
--------------
INSURANCE - 6.2%
Aetna, Inc. . . . . . . . . . . . . . . . . . . . 600 42,338
Allstate Corp. . . . . . . . . . . . . . . . . . 4,600 418,025
American Bankers Insurance Group, Inc. . . . . . 2,200 101,063
American Financial Group, Inc. . . . . . . . . . 1,400 56,438
CIGNA Corp. . . . . . . . . . . . . . . . . . . . 400 69,225
Edperbrascan Corp. Ltd., Class A (vtg.) . . . . . 7,050 128,222
Fremont General Corp. . . . . . . . . . . . . . . 2,200 120,450
General Re Corp. . . . . . . . . . . . . . . . . 400 84,800
Hartford Financial Services Group, Inc. . . . . . 2,000 187,125
Highlands Insurance Group, Inc. (a) . . . . . . . 800 22,700
MBIA, Inc. . . . . . . . . . . . . . . . . . . . 300 20,044
Marsh & McLennan Companies, Inc. . . . . . . . . 400 29,825
Reliastar Financial Corp. . . . . . . . . . . . . 3,100 127,681
--------------
1,407,936
--------------
SAVINGS & LOANS - 1.2%
Washington Mutual, Inc. . . . . . . . . . . . . . 4,130 263,546
--------------
SECURITIES INDUSTRY - 0.3%
Bear Stearns Companies, Inc. . . . . . . . . . . 420 19,950
Lehman Brothers Holdings, Inc. . . . . . . . . . 1,100 56,100
--------------
76,050
--------------
TOTAL FINANCE . . . . . . . . . . . . . . . . . . 5,755,594
--------------
HEALTH - 5.1%
DRUGS & PHARMACEUTICALS - 3.3%
American Home Products Corp. . . . . . . . . . . 2,400 183,600
Bristol-Myers Squibb Co. . . . . . . . . . . . . 2,400 227,100
Merck & Co., Inc. . . . . . . . . . . . . . . . . 900 95,625
Pharmacia & Upjohn, Inc. . . . . . . . . . . . . 1,200 43,950
Schering-Plough Corp. . . . . . . . . . . . . . . 3,200 198,800
--------------
749,075
--------------
MEDICAL EQUIPMENT & SUPPLIES - 1.0%
Allegiance Corp. . . . . . . . . . . . . . . . . 1,360 48,195
Bausch & Lomb, Inc. . . . . . . . . . . . . . . . 600 23,775
Baxter International, Inc. . . . . . . . . . . . 2,000 100,875
Johnson & Johnson . . . . . . . . . . . . . . . . 900 59,288
--------------
232,133
--------------
MEDICAL FACILITIES MANAGEMENT - 0.8%
Columbia/HCA Healthcare Corp. . . . . . . . . . . 6,000 177,750
--------------
TOTAL HEALTH . . . . . . . . . . . . . . . . . . 1,158,958
--------------
HOLDING COMPANIES - 0.6%
CINergy Corp. . . . . . . . . . . . . . . . . . . 1,400 53,638
Norfolk Southern Corp. . . . . . . . . . . . . . 2,900 89,356
--------------
142,994
--------------
INDUSTRIAL MACHINERY & EQUIPMENT - 6.9%
ELECTRICAL EQUIPMENT - 3.7%
Emerson Electric Co. . . . . . . . . . . . . . . 400 22,575
General Electric Co. . . . . . . . . . . . . . . 11,300 829,138
--------------
851,713
--------------
INDUSTRIAL MACHINERY & EQUIPMENT - 2.2%
Caterpillar, Inc. . . . . . . . . . . . . . . . . 600 29,138
Cooper Industries, Inc. . . . . . . . . . . . . . 500 24,500
Harnischfeger Industries, Inc. . . . . . . . . . 700 24,719
Ingersoll-Rand Co. . . . . . . . . . . . . . . . 1,650 66,825
Parker-Hannifin Corp. . . . . . . . . . . . . . . 1,650 75,694
Stewart & Stevenson Services, Inc. . . . . . . . 1,300 33,150
Tyco International Ltd. . . . . . . . . . . . . . 5,370 241,986
--------------
496,012
--------------
POLLUTION CONTROL - 1.0%
Browning-Ferris Industries, Inc. . . . . . . . . 2,714 100,418
Waste Management, Inc. . . . . . . . . . . . . . 3,500 96,250
Zurn Industries, Inc. . . . . . . . . . . . . . . 800 25,150
--------------
221,818
--------------
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT . . . . . 1,569,543
--------------
MEDIA & LEISURE - 3.3%
BROADCASTING - 0.7%
CBS Corp. . . . . . . . . . . . . . . . . . . . . 5,808 170,973
--------------
ENTERTAINMENT - 0.9%
MGM Grand, Inc. (a) . . . . . . . . . . . . . . . 900 32,456
Viacom, Inc. Class B (non-vtg.) (a) . . . . . . . 4,200 174,038
--------------
206,494
--------------
LEISURE DURABLES & TOYS - 0.2%
Brunswick Corp. . . . . . . . . . . . . . . . . . 1,300 39,406
--------------
LODGING & GAMING - 0.5%
ITT Corp. (a) . . . . . . . . . . . . . . . . . . 1,300 107,738
--------------
PUBLISHING - 1.0%
ACNielsen Corp. (a) . . . . . . . . . . . . . . . 1,766 43,046
Cognizant Corp. . . . . . . . . . . . . . . . . . 900 40,106
Dun & Bradstreet Corp. . . . . . . . . . . . . . 900 27,844
Harcourt General, Inc. . . . . . . . . . . . . . 1,400 76,650
McGraw-Hill, Inc. . . . . . . . . . . . . . . . . 600 44,400
232,046
--------------
TOTAL MEDIA & LEISURE . . . . . . . . . . . . . . 756,657
--------------
NONDURABLES - 6.7%
BEVERAGES - 0.3%
PepsiCo, Inc. . . . . . . . . . . . . . . . . . . 400 14,575
Seagram Co. Ltd. . . . . . . . . . . . . . . . . 1,500 48,529
--------------
63,104
--------------
FOODS - 1.2%
CPC International, Inc. . . . . . . . . . . . . . 700 75,425
General Mills, Inc. . . . . . . . . . . . . . . . 1,181 84,589
Heinz (H.J.) Co. . . . . . . . . . . . . . . . . 1,000 50,813
</TABLE>
See accompanying notes which are an integral part of the financial statements.
7 ANNUAL REPORT
<PG$PCN>
EQUITY INCOME PORTFOLIO
INVESTMENTS - CONTINUED
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
COMMON STOCKS - CONTINUED
- -------------------------------------------------------------------------------------------
SHARES VALUE (NOTE 1)
<S> <C> <C>
NONDURABLES - CONTINUED
FOODS - CONTINUED
Ralcorp Holdings, Inc. (a) . . . . . . . . . . . 500 $ 8,469
Ralston Purina Co. . . . . . . . . . . . . . . . 700 65,056
--------------
284,352
--------------
HOUSEHOLD PRODUCTS - 0.8%
Dial Corp. . . . . . . . . . . . . . . . . . . . 1,300 27,056
Premark International, Inc. . . . . . . . . . . . 1,200 34,800
Rubbermaid, Inc. . . . . . . . . . . . . . . . . 2,600 65,000
Unilever NV ADR . . . . . . . . . . . . . . . . . 700 43,706
--------------
170,562
--------------
TOBACCO - 4.4%
BAT Industries PLC sponsored ADR . . . . . . . . 200 3,750
Dimon, Inc. . . . . . . . . . . . . . . . . . . . 500 13,125
Gallaher Group PLC sponsored ADR . . . . . . . . 2,600 55,575
Philip Morris Companies, Inc. . . . . . . . . . . 14,800 670,625
RJR Nabisco Holdings Corp. . . . . . . . . . . . 6,540 245,250
Universal Corp. . . . . . . . . . . . . . . . . . 600 24,675
--------------
1,013,000
--------------
TOTAL NONDURABLES . . . . . . . . . . . . . . . . 1,531,018
--------------
PRECIOUS METALS - 0.2%
Newmont Mining Corp. . . . . . . . . . . . . . . 1,800 52,875
--------------
RETAIL & WHOLESALE - 3.8%
APPAREL STORES - 1.1%
Footstar, Inc. (a) . . . . . . . . . . . . . . . 900 24,188
Limited, Inc. (The) . . . . . . . . . . . . . . . 2,500 63,750
Payless ShoeSource, Inc. (a) . . . . . . . . . . 800 53,700
TJX Companies, Inc. . . . . . . . . . . . . . . . 3,000 103,125
--------------
244,763
--------------
DRUG STORES - 0.2%
CVS Corp. . . . . . . . . . . . . . . . . . . . . 700 44,844
--------------
GENERAL MERCHANDISE STORES - 2.1%
Dayton Hudson Corp. . . . . . . . . . . . . . . . 1,000 67,500
Federated Department Stores, Inc. (a) . . . . . . 1,800 77,513
May Department Stores Co. (The) . . . . . . . . . 300 15,806
Wal-Mart Stores, Inc. . . . . . . . . . . . . . . 8,000 315,500
--------------
476,319
--------------
GROCERY STORES - 0.1%
American Stores Co. . . . . . . . . . . . . . . . 700 14,394
--------------
RETAIL & WHOLESALE, MISCELLANEOUS - 0.3%
Tandy Corp. . . . . . . . . . . . . . . . . . . . 1,300 50,131
Toys "R" Us, Inc. (a) . . . . . . . . . . . . . . 900 28,294
--------------
78,425
--------------
TOTAL RETAIL & WHOLESALE . . . . . . . . . . . . 858,745
--------------
SERVICES - 1.0%
LEASING & RENTAL - 0.2%
Ryder Systems, Inc. . . . . . . . . . . . . . . . 1,200 39,300
--------------
PRINTING - 0.6%
Deluxe Corp. . . . . . . . . . . . . . . . . . . 1,600 55,200
Donnelley (R.R.) & Sons Co. . . . . . . . . . . . 1,500 55,875
New England Business Service, Inc. . . . . . . . 700 23,625
--------------
134,700
--------------
SERVICES - 0.2%
Block (H & R), Inc. . . . . . . . . . . . . . . . 1,300 58,256
--------------
TOTAL SERVICES . . . . . . . . . . . . . . . . . 232,256
--------------
TECHNOLOGY - 2.3%
COMPUTER SERVICES & SOFTWARE - 0.8%
Electronic Data Systems Corp. . . . . . . . . . . 3,300 144,994
First Data Corp. . . . . . . . . . . . . . . . . 900 26,325
--------------
171,319
--------------
COMPUTERS & OFFICE EQUIPMENT - 0.8%
Digital Equipment Corp. (a) . . . . . . . . . . . 300 11,100
International Business Machines Corp. . . . . . . 1,300 135,931
Unisys Corp. . . . . . . . . . . . . . . . . . . 1,300 17,845
Xerox Corp. . . . . . . . . . . . . . . . . . . . 200 14,763
--------------
179,639
--------------
ELECTRONICS - 0.3%
AMP, Inc. . . . . . . . . . . . . . . . . . . . . 1,300 54,600
Thomas & Betts Corp. . . . . . . . . . . . . . . 500 23,625
--------------
78,225
--------------
PHOTOGRAPHIC EQUIPMENT - 0.4%
Eastman Kodak Co. . . . . . . . . . . . . . . . . 900 54,731
Polaroid Corp. . . . . . . . . . . . . . . . . . 900 43,819
--------------
98,550
--------------
TOTAL TECHNOLOGY . . . . . . . . . . . . . . . . 527,733
--------------
TRANSPORTATION - 0.9%
AIR TRANSPORTATION - 0.2%
Viad Corp. . . . . . . . . . . . . . . . . . . . 2,300 44,419
--------------
RAILROADS - 0.7%
CSX Corp. . . . . . . . . . . . . . . . . . . . . 3,100 167,400
--------------
TOTAL TRANSPORTATION . . . . . . . . . . . . . . 211,819
--------------
UTILITIES - 8.5%
ELECTRIC UTILITY - 3.1%
Allegheny Energy, Inc. . . . . . . . . . . . . . 2,800 91,000
American Electric Power Co., Inc. . . . . . . . . 2,600 134,225
Central Maine Power Co. . . . . . . . . . . . . . 1,500 22,875
Consolidated Edison Co. of
New York, Inc. . . . . . . . . . . . . . . . 1,200 49,200
DPL, Inc. . . . . . . . . . . . . . . . . . . . . 1,600 46,000
Duke Energy Corp. . . . . . . . . . . . . . . . . 1,022 56,593
Entergy Corp. . . . . . . . . . . . . . . . . . . 3,800 113,763
Illinova Corp. . . . . . . . . . . . . . . . . . 800 21,550
Niagara Mohawk Power Corp. (a) . . . . . . . . . 2,300 24,150
PECO Energy Co. . . . . . . . . . . . . . . . . . 600 14,550
PG&E Corp. . . . . . . . . . . . . . . . . . . . 1,800 54,788
PacifiCorp. . . . . . . . . . . . . . . . . . . . 800 21,850
Pinnacle West Capital Corp. . . . . . . . . . . . 1,200 50,850
--------------
701,394
--------------
GAS - 1.1%
MCN Corp. . . . . . . . . . . . . . . . . . . . . 1,200 48,450
Nova Corp. . . . . . . . . . . . . . . . . . . . 2,900 27,589
Pacific Enterprises . . . . . . . . . . . . . . . 2,300 86,538
Questar Corp. . . . . . . . . . . . . . . . . . . 2,000 89,250
--------------
251,827
--------------
TELEPHONE SERVICES - 4.3%
AT&T Corp. . . . . . . . . . . . . . . . . . . . 800 49,000
ALLTEL Corp. . . . . . . . . . . . . . . . . . . 1,300 53,381
Ameritech Corp. . . . . . . . . . . . . . . . . . 2,100 169,050
BCE, Inc. . . . . . . . . . . . . . . . . . . . . 1,100 36,665
Bell Atlantic Corp. . . . . . . . . . . . . . . . 3,405 309,855
BellSouth Corp. . . . . . . . . . . . . . . . . . 2,400 135,150
MCI Communications Corp. . . . . . . . . . . . . 700 29,969
SBC Communications, Inc. . . . . . . . . . . . . 1,700 124,525
Sprint Corp. . . . . . . . . . . . . . . . . . . 800 46,900
WorldCom, Inc. (a) . . . . . . . . . . . . . . . 900 27,225
--------------
981,720
--------------
TOTAL UTILITIES . . . . . . . . . . . . . . . . . 1,934,941
--------------
TOTAL COMMON STOCKS
(COST $18,930,793) . . . . . . . . . . . . . 20,667,127
--------------
</TABLE>
See accompanying notes which are an integral part of the financial statements.
ANNUAL REPORT 8
<PG$PCN>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS -- 1.5%
- -------------------------------------------------------------------------------------------
SHARES VALUE (NOTE 1)
<S> <C> <C>
CONSTRUCTION & REAL ESTATE - 0.1%
REAL ESTATE INVESTMENT TRUSTS - 0.1%
Vornado Realty Trust, Series A, $3.25 . . . . . . 300 $ 19,800
--------------
ENERGY - 0.4%
OIL & GAS - 0.4%
Occidental Petroleum Corp. $3.00 . . . . . . . . 1,100 91,300
--------------
FINANCE - 0.5%
INSURANCE - 0.3%
Aetna, Inc. Class C 6 1/4%, PRIDES . . . . . . . 300 21,450
Conseco, Inc. $4.27875 . . . . . . . . . . . . . 300 46,800
--------------
68,250
--------------
SAVINGS & LOANS - 0.1%
Ahmanson (H.F.) & Co.,
Series D, $3.00 . . . . . . . . . . . . . . . 200 27,500
--------------
SECURITIES INDUSTRY - 0.1%
Salomon, Inc. $2.03 DECS . . . . . . . . . . . . 500 20,500
--------------
TOTAL FINANCE . . . . . . . . . . . . . . . . . . 116,250
--------------
UTILITIES - 0.5%
CELLULAR - 0.2%
AirTouch Communications, Inc.
Class B $1.74 DECS . . . . . . . . . . . . . 1,000 35,625
--------------
ELECTRIC UTILITY - 0.1%
Houston Industries, Inc. $3.215 ACES . . . . . . 600 34,238
--------------
TELEPHONE SERVICES - 0.2%
US West, Inc., Series D $2.25 . . . . . . . . . . 800 49,350
--------------
TOTAL UTILITIES . . . . . . . . . . . . . . . . . 119,213
--------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(COST $349,857) . . . . . . . . . . . . . . . 346,563
--------------
<CAPTION>
- -------------------------------------------------------------------------------------------
CONVERTIBLE BONDS -- 1.7%
- -------------------------------------------------------------------------------------------
MOODY'S RATINGS PRINCIPAL
(UNAUDITED) AMOUNT
<S> <C> <C>
ENERGY - 0.6%
ENERGY SERVICES - 0.1%
Baker Hughes, Inc.
0%, 5/5/08 . . . . . . . . . . . . . A2 $ 18,000 15,570
--------------
OIL & GAS - 0.5%
Pennzoil Co.
4 3/4%,10/1/03 . . . . . . . . . . . . . Baa3 80,000 108,200
--------------
TOTAL ENERGY . . . . . . . . . . . . . . . . . . 123,770
--------------
FINANCE - 0.0%
INSURANCE - 0.0%
Loews Corp.
3 1/8%, 9/15/07 . . . . . . . . . . . . . A2 8,000 8,000
--------------
MEDIA & LEISURE - 0.5%
BROADCASTING - 0.3%
Time Warner, Inc. liquid yield
option notes 0%, 6/22/13 . . . . . . . . Ba1 143,000 73,109
--------------
PUBLISHING - 0.2%
News America Holdings, Inc.
liquid yield option notes
0%, 3/11/13 . . . . . . . . . . . . . . . Baa3 88,000 41,580
--------------
TOTAL MEDIA & LEISURE . . . . . . . . . . . . . . 114,689
--------------
<CAPTION>
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) AMOUNT NOTE
<S> <C> <C>
RETAIL & WHOLESALE - 0.5%
RETAIL & WHOLESALE, MISCELLANEOUS - 0.5%
Home Depot, Inc.
3 1/4%, 10/1/01 . . . . . . . . . . . . . . A1 $ 90,000 $ 120,150
SERVICES - 0.1%
ADT Operations, Inc. liquid yield
option notes 0%, 7/6/10 . . . . . . . . . Ba1 19,000 23,358
--------------
TOTAL CONVERTIBLE BONDS
(COST $372,251) . . . . . . . . . . . . . . . 389,967
--------------
<CAPTION>
- -------------------------------------------------------------------------------------------
CASH EQUIVALENTS -- 6.3%
- -------------------------------------------------------------------------------------------
<S> <C> <C>
SHARES
Taxable Central Cash Fund (b)
(Cost $1,425,526) . . . . . . . . . . . . . . 1,425,526 1,425,526
--------------
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $21,078,427) . . . . . . . . . . . . . $ 22,829,183
==============
</TABLE>
SECURITY TYPE ABBREVIATIONS
ACES - Automatic Common Exchange Securities
DECS - Dividend Enhanced Convertible
Stock/Debt Exchangeable for
Common Stock
PRIDES - Preferred Redeemable
Increased Dividend Equity Securities
LEGEND
(a) Non-income producing
(b) At period end, the seven-day yield of the Taxable Central Cash Fund was
5.69%. The yield refers to the income earned by investing in the fund over
the seven-day period, expressed as an annual percentage.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities, aggregated
$21,111,970 and $5,462,036, respectively.
The fund placed a portion of its portfolio transactions with brokerage firms
which are affiliates of Fidelity Management & Research Company or Travelers
Asset Management International Corporation. The commissions paid to these
affiliated firms amounted to $1,133 and $30, respectively, for the period (see
Note 4 of Notes to Financial Statements).
INCOME TAX INFORMATION
At December 31, 1997, the aggregate cost of investment securities for income
tax purposes was $21,091,511. Net unrealized appreciation aggregated
$1,737,672, of which $2,180,489 related to appreciated investment securities
and $442,817 related to depreciated investment securities.
The fund hereby designates approximately $40,000 as a capital gain dividend for
the purpose of the dividend paid deduction.
See accompanying notes which are an integral part of the financial statements.
9 ANNUAL REPORT
<PG$PCN>
EQUITY INCOME PORTFOLIO
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- -------------------------------------------------------------------------------------------
DECEMBER 31, 1997
<S> <C> <C>
ASSETS
Investment in securities, at value
(cost $21,078,427) -- See
accompanying schedule . . . . . . . . . . . . $ 22,829,183
Receivable for investments sold . . . . . . . . . 84,676
Receivable for fund shares sold . . . . . . . . . 87,891
Dividends receivable . . . . . . . . . . . . . . 39,424
Interest receivable . . . . . . . . . . . . . . . 7,598
-----------------
TOTAL ASSETS . . . . . . . . . . . . . . . . 23,048,772
LIABILITIES
Payable for investments purchased . . . . . . . . $ 822,300
Payable for fund shares redeemed . . . . . . . . 63,240
Accrued management fee . . . . . . . . . . . . . 5,803
Other payables and accrued expenses . . . . . . . 18,177
---------------
TOTAL LIABILITIES . . . . . . . . . . . . . . 909,520
-----------------
NET ASSETS . . . . . . . . . . . . . . . . . . . $ 22,139,252
=================
Net Assets consist of:
Paid in capital . . . . . . . . . . . . . . . . . $ 20,317,184
Accumulated undistributed net
realized gain (loss) on investments
and foreign currency transactions . . . . . . 71,313
Net unrealized appreciation
(depreciation) on investments
and assets and liabilities in
foreign currencies . . . . . . . . . . . . . 1,750,755
-----------------
Net Assets, for 1,592,071
shares outstanding . . . . . . . . . . . . . $ 22,139,252
=================
Net Asset Value, offering price
and redemption price per share
($22,139,252 divided by 1,592,071 shares) . . $13.91
======
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
<S> <C> <C>
INVESTMENT INCOME
Dividends . . . . . . . . . . . . . . . . . . . . $ 233,635
Interest . . . . . . . . . . . . . . . . . . . . 39,607
-----------------
TOTAL INCOME . . . . . . . . . . . . . . . . 273,242
EXPENSES
Management fee . . . . . . . . . . . . . . . . . $ 80,431
Transfer agent fees . . . . . . . . . . . . . . . 3,441
Accounting fees and expenses . . . . . . . . . . 60,008
Noncinterested trustees' compensation . . . . . . 4,833
Custodian fees and expenses . . . . . . . . . . . 22,548
Audit . . . . . . . . . . . . . . . . . . . . . . 31,180
Miscellaneous . . . . . . . . . . . . . . . . . . 1,766
---------------
Total expenses before reductions . . . . . . 204,207
Expense reductions . . . . . . . . . . . . . (102,212) 101,995
--------------- -----------------
NET INVESTMENT INCOME . . . . . . . . . . . . . . 171,247
-----------------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on:
Investment securities . . . . . . . . . . . . 899,760
Foreign currency transactions . . . . . . . . (30) 899,730
---------------
Change in net unrealized
appreciation (depreciation) on:
Investment securities . . . . . . . . . . . . 1,438,706
Assets and liabilities in
foreign currencies . . . . . . . . . . . . (1) 1,438,705
--------------- -----------------
NET GAIN (LOSS) . . . . . . . . . . . . . . . . . 2,338,435
-----------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS . . . . . . . . . . $ 2,509,682
=================
</TABLE>
See accompanying notes which are an integral part of the financial statements.
ANNUAL REPORT 10
<PG$PCN>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------
AUGUST 30, 1996
(COMMENCEMENT
YEAR ENDED OF OPERATIONS) TO
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 171,247 $ 25,456
Net realized gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . 899,730 13,230
Change in net unrealized appreciation (depreciation) . . . . . . . . . . . . . . 1,438,705 312,050
--------------- ------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS . . . . . . . . 2,509,682 350,736
--------------- ------------------
Distributions to shareholders
From net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . (171,176) (25,784)
From net realized gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . (841,389) --
--------------- ------------------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,012,565) (25,784)
--------------- ------------------
Share transactions
Net proceeds from sales of shares . . . . . . . . . . . . . . . . . . . . . . . 20,040,415 3,249,728
Reinvestment of distributions . . . . . . . . . . . . . . . . . . . . . . . . . 1,012,565 25,784
Cost of shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,011,242) (67)
--------------- ------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS . . . . 17,041,738 3,275,445
--------------- ------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS . . . . . . . . . . . . . . . . . . . 18,538,855 3,600,397
NET ASSETS
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,600,397 --
--------------- ------------------
End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,139,252 $ 3,600,397
=============== ==================
OTHER INFORMATION
Shares
Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,503,025 322,467
Issued in reinvestment of distributions . . . . . . . . . . . . . . . . . . . . 74,849 2,286
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (310,550) (6)
--------------- ------------------
Net increase (decrease) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,267,324 324,747
=============== ==================
</TABLE>
See accompanying notes which are an integral part of the financial statements.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------------------------------------------------------
AUGUST 30, 1996
(COMMENCEMENT
YEAR ENDED OF OPERATIONS) TO
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period . . . . . . . . . . . . . . . . . . . . . . . $ 11.09 $ 10.00
--------------- ------------------
Income from Investment Operations
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21(D) .08
Net realized and unrealized gain (loss) . . . . . . . . . . . . . . . . . . . . 3.32 1.09
--------------- ------------------
Total from investment operations . . . . . . . . . . . . . . . . . . . . . . . 3.53 1.17
--------------- ------------------
Less Distributions
From net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . (.12) (.08)
From net realized gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . (.59) --
--------------- ------------------
Total distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (.71) (.08)
--------------- ------------------
Net asset value, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13.91 $ 11.09
=============== ==================
TOTAL RETURN(B, C) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32.05% 11.69%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) . . . . . . . . . . . . . . . . . . . . . . $ 22,139 $ 3,600
Ratio of expenses to average net assets . . . . . . . . . . . . . . . . . . . . . . .95%(E) .95%(A,E)
Ratio of net investment income to average net assets . . . . . . . . . . . . . . . 1.60% 2.34%(A)
Portfolio turnover rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52% 14%(A)
Average commission rate(F) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .0186 $ .0168
</TABLE>
(A) Annualizedd
(B) Total returns for periods of less than one year are not annualized.
(C) The total returns would have been lower had certain expenses not been
reduced during the periods shown (see Note 5 of Notes to Financial
Statements).
(D) Net investment income per share has been calculated based on average
shares outstanding during the period.
(E) The Travelers agreed to reimburse a portion of the fund's expenses during
the period. Without this reimbursement, the fund's expense ratio would
have been higher (see Note 5 of Notes to Financial Statements).
(F) A fund is required to disclose its average commission rate per share for
security trades on which commissions are charged. This amount may vary
from period to period and fund to fund depending on the mix of trades
executed in various markets where trading practices and commission rate
structures may differ.
11 ANNUAL REPORT
<PG$PCN>
LARGE CAP PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance: total
percentage change in value or the growth of a hypothetical $10,000 investment.
Total return reflects the change in the value of an investment assuming
reinvestment of the fund's dividend income and capital gains (the profits the
fund earns when it sells securities that have grown in value).
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
CUMULATIVE TOTAL RETURNS
- -------------------------------------------------------------------
PERIODS ENDED DECEMBER 31, 1997 PAST 1 LIFE OF
YEAR FUND
<S> <C> <C>
Large Cap Portfolio 23.41% 39.82%
S&P 500(R) 33.36% 52.61%
</TABLE>
CUMULATIVE TOTAL RETURNS show the fund's performance in percentage terms over a
set period -- in this case, one year or since the fund started on August 30,
1996.
You can compare the fund's return to the performance of the Standard & Poor's
500 Index -- a widely recognized, unmanaged index of common stocks. This
benchmark includes reinvested dividends and capital gains, if any.
If certain fund expenses had not been reimbursed, the total returns would have
been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT INCLUDE
ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. IF
PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL CHARGES, THE
TOTAL RETURNS WOULD BE LOWER.
Past performance is no guarantee of future results. Principal and investment
return will vary and you may have a gain or loss when you withdraw your money.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
- -------------------------------------------------------------------
PERIODS ENDED DECEMBER 31, 1997 PAST 1 LIFE OF
YEAR FUND
<S> <C> <C>
Large Cap Portfolio 23.41% 28.58%
S&P 500 33.36% 37.31%
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate each
year.
[X] UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how it will do tomorrow. The stock
market, for example, has a history of growth in the long run and volatility in
the short run. In turn, the share price and return of a fund that invests in
stocks will vary. That means if you sell your shares during a market downturn,
you might lose money. But if you can ride out the market's ups and downs, you
may have a gain.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
$10,000 OVER LIFE OF FUND
- ---------------------------------------------------------------------
Travelers Large Cap S&P 500
<S> <C> <C>
1996/08/30 10000.00 10000.00
1996/09/30 10640.00 10562.80
1996/10/31 10790.00 10854.12
1996/11/30 11640.00 11674.59
1996/12/31 11329.54 11443.31
1997/01/31 11921.61 12158.29
1997/02/28 11749.69 12253.61
1997/03/31 11191.15 11750.11
1997/04/30 11688.76 12451.59
1997/05/31 12460.56 13209.64
1997/06/30 12846.47 13801.44
1997/07/31 13780.75 14899.62
1997/08/31 13293.30 14064.94
1997/09/30 13953.39 14835.28
1997/10/31 13425.32 14339.78
1997/11/30 13750.29 15003.57
1997/12/31 13981.77 15261.18
</TABLE>
Let's say hypothetically that $10,000 was invested in the Large Cap Portfolio
on August 30, 1996, when the fund started. As the chart shows, by December 31,
1997, the investment would have grown to $13,982 -- a 39.82% increase. With
reinvested dividends and capital gains, if any, a $10,000 investment in the S&P
500 would have grown to $15,261 over the same period -- a 52.61% increase.
<TABLE>
<CAPTION>
INVESTMENT SUMMARY
- -------------------------------------------------------------------
TOP FIVE STOCKS AS OF DECEMBER 31, 1997
- -------------------------------------------------------------------
% OF FUND'S
INVESTMENTS
<S> <C>
Philip Morris Companies, Inc. 3.1
International Business Machines Corp. 3.1
Bristol-Myers Squibb Co. 2.1
Tyco International Ltd. 2.1
Cendant Corp. 2.0
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1997
- -------------------------------------------------------------------
% OF FUND'S
INVESTMENTS
<S> <C>
Technology 18.6
Health 14.4
Finance 11.8
Nondurables 9.1
Industrial Machinery & Equipment 7.7
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
ASSET ALLOCATION AS OF DECEMBER 31, 1997*
- -------------------------------------------------------------------
% OF FUND'S
INVESTMENTS
<S> <C>
Stocks 90.5%
Short-term investments 9.5%
* Foreign investments 4.6%
</TABLE>
ANNUAL REPORT 12
<PG$PCN>
LARGE CAP PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
[PHOTO]
An interview with Thomas Sprague,
Portfolio Manager of Large Cap Portfolio
Q. HOW DID THE FUND PERFORM COMPARED TO ITS BENCHMARK, TOM?
A. For the 12 months that ended December 31, 1997, the fund underperformed the
33.36% return of the Standard & Poor's 500 Index.
Q. WHAT CAUSED THE FUND TO PERFORM AS IT DID?
A. Shifting market tides played a big role. Through much of the first half of
the period, the stock market was dominated by the largest 25 or 30 stocks in
the S&P 500. When the market is that narrow and the top stocks have excessive
valuations, even funds with a large-cap bias like this one have difficulty
competing against the S&P. During the second half, though, this trend was
reversed. Several big companies announced earnings shortfalls and smaller
stocks began to outperform. This "broadening" helped the fund versus the index,
but not enough to make up the difference, especially since the market became
narrow once again during the last part of the period.
Q. WERE THERE ANY OTHER FACTORS THAT AFFECTED PERFORMANCE?
A. Relative to the S&P 500, the fund's significant exposure to technology
stocks was a minus. Because the fund seeks growth, the technology industry is
usually well-represented in the portfolio. For a couple of reasons, however --
namely the shift toward less expensive personal computers and the Asian crisis
we saw in late October -- technology stocks didn't fare very well in 1997.
Several of the fund's semiconductor-related positions took it on the chin as a
result. On a positive note, the fund's energy positions contributed nicely.
Specifically, companies that provide equipment and services to help exploration
companies search for oil and gas enjoyed a solid year. Energy stocks such as
Exxon, Mobil and Texaco increased their exploration activity, and demand for
drilling equipment and services remained high. Benefactors within the fund
included Schlumberger, Halliburton and Dresser.
Q. DID YOU FOLLOW ANY PARTICULAR THEMES DURING THE PERIOD?
A. One interesting area revolved around the much-discussed "year 2000" issue.
Most computer programs that have been written in the past 20 or 30 years have
two entry fields for the year instead of four. For instance, most computer
systems read "97" as being 1997. When the year 2000 arrives, computers will
read "00" as being 1900, which has the potential to cause many problems. The
fund's position in Comdisco -- one of its top 10 holdings at the close of the
period -- was in part, a play on this. Part of Comdisco's business is disaster
recovery: If a company's computer network shuts down due to unforeseen
circumstances, Comdisco's reserve systems can help get that company up and
running again quickly. These same reserve computer systems are a logical
choice as a testing ground for updated year-2000 compliant software. My
thinking was that the market would recognize during the period that companies
with these capabilities could benefit from additional future demand.
Q. CAN YOU RATE THE PERFORMANCE OF SOME OF THE FUND'S INDIVIDUAL STOCKS?
A. Analysts International and Computer Horizons -- two other companies focused
on the aforementioned year 2000 issue -- performed well, as did Bergen
Brunswig, a health-care stock being acquired by Cardinal Health.
Disappointments included semiconductor stock Adaptec and Vencor, a supplier to
the nursing home industry. Adaptec suffered from the Asian problems I
mentioned, while Vencor -- which the fund no longer owns -- was hurt by
regulatory developments within its industry.
Q. WHAT'S YOUR TAKE ON THE PROBLEMS IN ASIAN MARKETS AND HOW WAS THE FUND
AFFECTED?
A. I think the crisis in Southeast Asia reflects a serious, fundamental change
that will affect financial markets everywhere. We've already seen business
slowdowns from U.S. companies that have exposure to that region. As I mentioned
earlier, the fund's semiconductor-related stocks were hit the hardest. The
typical high-tech company generates 10% to 20% of its sales from Southeast
Asia, and since that region's economic growth has now been stunted, these
companies may see sales growth suffer. I'm worried that this weakness could
spread to other countries such as China and Japan, and other industries, such
as financial services and energy. Some of the fund's holdings, however --
particularly those that have manufacturing operations in Southeast Asia -- may
benefit from a cost point of view. Overall, though, I'd characterize the market
events of late October as being much more of a negative than a positive.
Q. WHAT'S YOUR OUTLOOK?
A. I'm concerned that the comfortable economic situation we've had for the past
few years may be over. The international volatility we've seen may linger for
awhile, which could place pressure on corporate earnings. Consumer nondurable
industries -- such as food and health care -- may be an attractive area in the
next few months because demand appears relatively stable and exposure tends to
be limited to the U.S. and Europe.
The views expressed in this report reflect those of the portfolio manager only
through the end of the period of the report as stated on the cover. The
manager's views are subject to change at any time based on market and other
conditions.
[X] FUND FACTS
GOAL: long-term growth of capital by investing primarily in equity securities
of companies with large market capitalizations
START DATE: August 30, 1996
SIZE: as of December 31, 1997, more $12 million
MANAGER: Thomas Sprague, since inception; joined Fidelity in 1989
13 ANNUAL REPORT
<PG$PCN>
LARGE CAP PORTFOLIO
INVESTMENTS DECEMBER 31, 1997
Showing Percentage of Total Value of Investment in Securities
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
COMMON STOCKS -- 90.5%
- -------------------------------------------------------------------------------------------
SHARES VALUE (NOTE 1)
<S> <C> <C>
AEROSPACE & DEFENSE - 1.7%
AEROSPACE & DEFENSE - 1.4%
AlliedSignal, Inc. . . . . . . . . . . . . . . . 1,500 $ 58,392
Gulfstream Aerospace Corp. (a) . . . . . . . . . 800 23,400
Lockheed Martin Corp. . . . . . . . . . . . . . . 600 59,100
Sundstrand Corp. . . . . . . . . . . . . . . . . 700 35,263
--------------
176,155
--------------
DEFENSE ELECTRONICS - 0.3%
Litton Industries, Inc. (a) . . . . . . . . . . . 600 34,500
--------------
TOTAL AEROSPACE & DEFENSE . . . . . . . . . . . . 210,655
--------------
BASIC INDUSTRIES - 2.0%
PACKAGING & CONTAINERS - 1.3%
Owens-Illinois, Inc. (a) . . . . . . . . . . . . 4,100 155,544
--------------
PAPER & FOREST PRODUCTS - 0.7%
Fort James Corp. . . . . . . . . . . . . . . . . 2,262 86,522
--------------
TOTAL BASIC INDUSTRIES . . . . . . . . . . . . . 242,066
--------------
CONSTRUCTION & REAL ESTATE - 0.1%
BUILDING MATERIALS - 0.1%
Sherwin-Williams Co. . . . . . . . . . . . . . . 600 16,650
--------------
DURABLES - 0.8%
HOME FURNISHINGS - 0.8%
Leggett & Platt, Inc. . . . . . . . . . . . . . . 2,400 100,500
--------------
ENERGY - 6.8%
ENERGY SERVICES - 3.3%
Dresser Industries, Inc. . . . . . . . . . . . . 2,700 113,231
Halliburton Co. . . . . . . . . . . . . . . . . . 2,800 145,425
Noble Drilling Corp. (a) . . . . . . . . . . . . 2,500 76,563
Schlumberger Ltd. . . . . . . . . . . . . . . . . 1,000 80,500
--------------
415,719
--------------
OIL & GAS - 3.5%
British Petroleum PLC ADR . . . . . . . . . . . . 1,024 81,600
Burlington Resources, Inc. . . . . . . . . . . . 1,000 44,813
Coastal Corp. (The) . . . . . . . . . . . . . . . 1,300 80,519
Royal Dutch Petroleum Co. . . . . . . . . . . . . 1,100 59,606
Texaco, Inc. . . . . . . . . . . . . . . . . . . 1,800 97,875
Total SA sponsored ADR . . . . . . . . . . . . . 400 22,200
Valero Energy Corp. . . . . . . . . . . . . . . . 1,400 44,013
--------------
430,626
--------------
TOTAL ENERGY . . . . . . . . . . . . . . . . . . 846,345
--------------
FINANCE - 11.8%
BANKS - 3.0%
Bank of New York Co., Inc. . . . . . . . . . . . 2,000 115,625
BankAmerica Corp. . . . . . . . . . . . . . . . . 500 36,500
Citicorp . . . . . . . . . . . . . . . . . . . . 500 63,219
NationsBank Corp. . . . . . . . . . . . . . . . . 2,500 152,031
--------------
367,375
--------------
CREDIT & OTHER FINANCE - 2.3%
American Express Co. . . . . . . . . . . . . . . 1,300 116,025
Associates First Capital Corp. . . . . . . . . . 600 42,675
Fleet Financial Group, Inc. . . . . . . . . . . . 800 59,950
Household International, Inc. . . . . . . . . . . 500 63,781
--------------
282,431
--------------
FEDERAL SPONSORED CREDIT - 1.8%
Freddie Mac . . . . . . . . . . . . . . . . . . . 1,000 41,938
Fannie Mae . . . . . . . . . . . . . . . . . . . 3,300 188,306
--------------
230,244
--------------
INSURANCE - 4.4%
Allstate Corp. . . . . . . . . . . . . . . . . . 1,300 118,138
AMBAC, Inc. . . . . . . . . . . . . . . . . . . . 2,700 124,200
CIGNA Corp. . . . . . . . . . . . . . . . . . . . 200 34,613
MBIA, Inc. . . . . . . . . . . . . . . . . . . . 2,000 133,625
UNUM Corp. . . . . . . . . . . . . . . . . . . . 2,400 130,500
--------------
541,076
--------------
SAVINGS & LOANS - 0.3%
Washington Mutual, Inc. . . . . . . . . . . . . . 600 38,288
--------------
TOTAL FINANCE . . . . . . . . . . . . . . . . . . 1,459,414
--------------
HEALTH - 14.4%
DRUGS & PHARMACEUTICALS - 8.5%
American Home Products Corp. . . . . . . . . . . 3,100 237,150
Bristol-Myers Squibb Co. . . . . . . . . . . . . 2,800 264,950
Lilly (Eli) & Co. . . . . . . . . . . . . . . . . 700 48,738
Merck & Co., Inc. . . . . . . . . . . . . . . . . 1,400 148,750
Pfizer, Inc. . . . . . . . . . . . . . . . . . . 1,300 96,931
Schering-Plough Corp. . . . . . . . . . . . . . . 2,600 161,525
SmithKline Beecham PLC ADR . . . . . . . . . . . 1,900 97,731
--------------
1,055,775
--------------
MEDICAL EQUIPMENT & SUPPLIES - 3.3%
Abbott Laboratories . . . . . . . . . . . . . . . 700 45,894
Baxter International, Inc. . . . . . . . . . . . 400 20,175
Bergen Brunswig Corp. Class A . . . . . . . . . . 1,250 52,656
Cardinal Health, Inc. . . . . . . . . . . . . . . 800 60,100
Johnson & Johnson . . . . . . . . . . . . . . . . 1,700 111,988
McKesson Corp. . . . . . . . . . . . . . . . . . 100 10,819
Medtronic, Inc. . . . . . . . . . . . . . . . . . 400 20,925
Omnicare, Inc. . . . . . . . . . . . . . . . . . 2,100 65,100
Sofamor/Danek Group, Inc. (a) . . . . . . . . . . 200 13,013
--------------
400,670
--------------
MEDICAL FACILITIES MANAGEMENT - 2.6%
Beverly Enterprises, Inc. . . . . . . . . . . . . 800 10,400
HEALTHSOUTH Corp. (a) . . . . . . . . . . . . . . 4,000 111,000
Health Management Associates, Inc.
Class A (a) . . . . . . . . . . . . . . . . . 3,450 87,113
Tenet Healthcare Corp. (a) . . . . . . . . . . . 3,400 112,625
--------------
321,138
--------------
TOTAL HEALTH 1,777,583
--------------
INDUSTRIAL MACHINERY & EQUIPMENT - 7.7%
ELECTRICAL EQUIPMENT - 2.5%
Alcatel Alsthom Compagnie Generale
d'Electricite SA sponsored ADR . . . . . . . 6,600 167,063
General Electric Co. . . . . . . . . . . . . . . 1,900 139,413
--------------
306,476
--------------
INDUSTRIAL MACHINERY & EQUIPMENT - 3.6%
Case Corp. . . . . . . . . . . . . . . . . . . . 1,400 84,613
Caterpillar, Inc. . . . . . . . . . . . . . . . . 200 9,713
Ingersoll-Rand Co. . . . . . . . . . . . . . . . 1,400 56,700
Stanley Works . . . . . . . . . . . . . . . . . . 800 37,750
Tyco International Ltd. . . . . . . . . . . . . . 5,700 256,856
--------------
445,632
--------------
POLLUTION CONTROL - 1.6%
Browning-Ferris Industries, Inc. . . . . . . . . 1,400 51,800
Ogden Corp. . . . . . . . . . . . . . . . . . . . 1,200 33,825
Thermo Instrument Systems, Inc. (a) . . . . . . . 550 18,941
USA Waste Services, Inc. (a) . . . . . . . . . . 1,300 51,025
Waste Management, Inc. . . . . . . . . . . . . . 1,800 49,500
--------------
205,091
--------------
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT . . . . . 957,199
--------------
</TABLE>
See accompanying notes which are an integral part of the financial statements.
ANNUAL REPORT 14
<PG$PCN>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
COMMON STOCKS - CONTINUED
- -------------------------------------------------------------------------------------------
SHARES VALUE (NOTE 1)
<S> <C> <C>
MEDIA & LEISURE - 4.3%
BROADCASTING - 0.7%
CBS Corp. . . . . . . . . . . . . . . . . . . . . 2,800 $ 82,425
Time Warner, Inc. . . . . . . . . . . . . . . . . 100 6,200
--------------
88,625
--------------
ENTERTAINMENT - 1.4%
Carnival Cruise Lines, Inc. Class A . . . . . . . 1,400 77,525
Disney (Walt) Co. . . . . . . . . . . . . . . . . 400 39,625
MGM Grand, Inc. (a) . . . . . . . . . . . . . . . 1,700 61,306
--------------
178,456
--------------
LODGING & GAMING - 1.1%
Marriott International, Inc. . . . . . . . . . . 1,400 96,950
Mirage Resorts, Inc. (a) . . . . . . . . . . . . 1,900 43,225
--------------
140,175
--------------
PUBLISHING - 0.5%
Cognizant Corp. . . . . . . . . . . . . . . . . . 1,300 57,931
--------------
RESTAURANTS - 0.6%
Papa John's International, Inc. . . . . . . . . . 100 3,488
Rainforest Cafe, Inc. (a) . . . . . . . . . . . . 2,000 66,000
--------------
69,488
--------------
TOTAL MEDIA & LEISURE . . . . . . . . . . . . . . 534,675
--------------
NONDURABLES - 9.1%
BEVERAGES - 1.2%
PepsiCo, Inc. . . . . . . . . . . . . . . . . . . 3,900 142,106
--------------
FOODS - 2.3%
ConAgra, Inc. . . . . . . . . . . . . . . . . . . 1,000 32,813
General Mills, Inc. . . . . . . . . . . . . . . . 100 7,163
Hershey Foods Corp. . . . . . . . . . . . . . . . 1,100 68,131
Quaker Oats Co. . . . . . . . . . . . . . . . . . 400 21,100
Ralston Purina Co. . . . . . . . . . . . . . . . 700 65,056
Sara Lee Corp. . . . . . . . . . . . . . . . . . 1,600 90,100
--------------
284,363
--------------
HOUSEHOLD PRODUCTS - 2.5%
Avon Products, Inc. . . . . . . . . . . . . . . . 1,000 61,375
Clorox Co. . . . . . . . . . . . . . . . . . . . 700 55,344
Gillette Co. . . . . . . . . . . . . . . . . . . 300 30,131
Procter & Gamble Co. . . . . . . . . . . . . . . 2,000 159,625
Rubbermaid, Inc. . . . . . . . . . . . . . . . . 100 2,500
--------------
308,975
--------------
TOBACCO - 3.1%
Philip Morris Companies, Inc. . . . . . . . . . . 8,600 389,688
--------------
TOTAL NONDURABLES . . . . . . . . . . . . . . . . 1,125,132
--------------
RETAIL & WHOLESALE - 6.4%
APPAREL STORES - 0.7%
Payless ShoeSource, Inc. (a) . . . . . . . . . . 900 60,413
TJX Companies, Inc. . . . . . . . . . . . . . . . 1,000 34,375
--------------
94,788
--------------
DRUG STORES - 1.1%
CVS Corp. . . . . . . . . . . . . . . . . . . . . 200 12,813
Rite Aid Corp. . . . . . . . . . . . . . . . . . 2,100 123,244
--------------
136,057
--------------
GENERAL MERCHANDISE STORES - 1.7%
Consolidated Stores Corp. (a) . . . . . . . . . . 2,200 96,663
Penney (J.C.) Co., Inc. . . . . . . . . . . . . . 500 30,156
Wal-Mart Stores, Inc. . . . . . . . . . . . . . . 2,100 82,819
--------------
209,638
--------------
GROCERY STORES - 1.6%
American Stores Co. . . . . . . . . . . . . . . . 1,900 39,069
Safeway, Inc. (a) . . . . . . . . . . . . . . . . 2,500 158,125
--------------
197,194
--------------
RETAIL & WHOLESALE, MISCELLANEOUS - 1.3%
Circuit City Stores, Inc. -
Circuit City Group . . . . . . . . . . . . . 1,600 56,900
Home Depot, Inc. . . . . . . . . . . . . . . . . 800 47,100
Toys "R" Us, Inc. (a) . . . . . . . . . . . . . . 1,700 53,444
--------------
157,444
--------------
TOTAL RETAIL & WHOLESALE . . . . . . . . . . . . 795,121
--------------
SERVICES - 4.5%
ADVERTISING - 0.6%
Omnicom Group, Inc. . . . . . . . . . . . . . . . 1,800 76,275
--------------
EDUCATIONAL SERVICES - 0.4%
Apollo Group, Inc. Class A (a) . . . . . . . . . 900 42,525
--------------
SERVICES - 3.5%
AccuStaff, Inc. (a) . . . . . . . . . . . . . . . 4,500 103,500
Cendant Corp. (a) . . . . . . . . . . . . . . . . 7,053 242,450
Computer Horizons Corp. (a) . . . . . . . . . . . 2,000 91,000
--------------
436,950
--------------
TOTAL SERVICES . . . . . . . . . . . . . . . . . 555,750
--------------
TECHNOLOGY - 18.6%
COMMUNICATIONS EQUIPMENT - 1.3%
Advanced Fibre Communication, Inc. (a) . . . . . 500 14,563
Aspect Telecommunications Corp. (a) . . . . . . . 4,100 85,588
Cisco Systems, Inc. (a) . . . . . . . . . . . . . 750 41,813
Lucent Technologies, Inc. . . . . . . . . . . . . 200 15,975
--------------
157,939
--------------
COMPUTER SERVICES & SOFTWARE - 5.1%
Analysts International Corp. . . . . . . . . . . 1,550 53,475
Automatic Data Processing, Inc. . . . . . . . . . 800 49,100
BMC Software, Inc. (a) . . . . . . . . . . . . . 700 45,938
Cadence Design Systems, Inc. (a) . . . . . . . . 2,300 56,350
Compuware Corp. (a) . . . . . . . . . . . . . . . 800 25,600
Electronic Data Systems Corp. . . . . . . . . . . 800 35,150
Equifax, Inc. . . . . . . . . . . . . . . . . . . 2,300 81,506
Keane, Inc. (a) . . . . . . . . . . . . . . . . . 400 16,250
Microsoft Corp. (a) . . . . . . . . . . . . . . . 1,200 155,100
Oracle Corp. (a) . . . . . . . . . . . . . . . . 250 5,578
SunGard Data Systems, Inc. (a) . . . . . . . . . 3,300 102,300
--------------
626,347
--------------
COMPUTERS & OFFICE EQUIPMENT - 9.0%
Adaptec, Inc. (a) . . . . . . . . . . . . . . . . 2,200 81,675
Comdisco, Inc. . . . . . . . . . . . . . . . . . 6,600 220,688
Compaq Computer Corp. . . . . . . . . . . . . . . 250 14,109
Comverse Technology, Inc. (a) . . . . . . . . . . 1,200 46,800
Digital Equipment Corp. (a) . . . . . . . . . . . 200 7,400
EMC Corp. (a) . . . . . . . . . . . . . . . . . . 1,800 49,388
Fore Systems, Inc. (a) . . . . . . . . . . . . . 7,500 114,375
International Business Machines Corp. . . . . . . 3,700 386,881
Pitney Bowes, Inc. . . . . . . . . . . . . . . . 2,000 179,875
Unisys Corp. (a) . . . . . . . . . . . . . . . . 1,400 19,425
--------------
1,120,616
--------------
ELECTRONIC INSTRUMENTS - 0.1%
Applied Materials, Inc. (a) . . . . . . . . . . . 300 9,038
--------------
ELECTRONICS - 3.1%
Altera Corp. (a) . . . . . . . . . . . . . . . . 1,500 49,688
Analog Devices, Inc. (a) . . . . . . . . . . . . 2,567 71,065
</TABLE>
See accompanying notes which are an integral part of the financial statements.
15 ANNUAL REPORT
<PG$PCN>
LARGE CAP PORTFOLIO
INVESTMENTS - CONTINUED
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
COMMON STOCKS - CONTINUED
- -------------------------------------------------------------------------------------------
SHARES VALUE (NOTE 1)
<S> <C> <C>
TECHNOLOGY - CONTINUED
ELECTRONICS - CONTINUED
Intel Corp. . . . . . . . . . . . . . . . . . . . 800 $ 56,200
Linear Technology Corp. . . . . . . . . . . . . . 1,000 57,625
Maxim Integrated Products, Inc. (a) . . . . . . . 1,400 48,300
Sanmina Corp. (a) . . . . . . . . . . . . . . . . 1,000 67,750
Vitesse Semiconductor Corp. (a) . . . . . . . . . 1,000 37,750
--------------
388,378
--------------
TOTAL TECHNOLOGY . . . . . . . . . . . . . . . . 2,302,318
--------------
TRANSPORTATION - 0.7%
RAILROADS - 0.7%
CSX Corp. . . . . . . . . . . . . . . . . . . . . 1,600 86,400
--------------
UTILITIES - 1.6%
TELEPHONE SERVICES - 1.6%
AT&T Corp. . . . . . . . . . . . . . . . . . . . 300 18,375
SBC Communications, Inc. . . . . . . . . . . . . 600 43,950
WorldCom, Inc. (a) . . . . . . . . . . . . . . . 4,600 139,150
--------------
201,475
--------------
TOTAL COMMON STOCKS
(Cost $9,985,970) . . . . . . . . . . . . . . 11,211,283
--------------
<CAPTION>
- -------------------------------------------------------------------------------------------
CASH EQUIVALENTS -- 9.5%
- -------------------------------------------------------------------------------------------
SHARES
<S> <C> <C>
Taxable Central Cash Fund (b)
(Cost $1,179,305) . . . . . . . . . . . . . . 1,179,305 1,179,305
--------------
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $11,165,275) . . . . . . . . . . . . . $ 12,390,588
==============
</TABLE>
LEGEND
(a) Non-income producing
(b) At period end, the seven-day yield of the Taxable Central Cash Fund was
5.69%. The yield refers to the income earned by investing in the fund over
the seven-day period, expressed as an annual percentage.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities, aggregated
$10,308,755 and $3,360,095, respectively.
The fund placed a portion of its portfolio transactions with brokerage firms
which are affiliates of Fidelity Management & Research Company or Travelers
Asset Management International Corporation. The commissions paid to these
affiliated firms amounted to $482 and $195, respectively, for the period (see
Note 4 of Notes to Financial Statements).
INCOME TAX INFORMATION
At December 31, 1997, the aggregate cost of investment securities for income
tax purposes was $11,165,275. Net unrealized appreciation aggregated
$1,225,313, of which $1,478,547 related to appreciated investment securities
and $253,234 related to depreciated investment securities.
The fund hereby designates approximately $137,000 as a capital gain dividend
for the purpose of the dividend paid deduction.
See accompanying notes which are an integral part of the financial statements.
16 ANNUAL REPORT
<PG$PCN>
LARGE CAP PORTFOLIO
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- -------------------------------------------------------------------------------------------
DECEMBER 31, 1997
<S> <C> <C>
ASSETS
Investment in securities, at value
(cost $11,165,275) -- See
accompanying schedule . . . . . . . . . . . . $ 12,390,588
Receivable for investments sold . . . . . . . . . 109,251
Receivable for fund shares sold . . . . . . . . . 92,394
Dividends receivable . . . . . . . . . . . . . . 10,755
Interest receivable . . . . . . . . . . . . . . . 3,965
Receivable for expense reductions . . . . . . . . 555
-----------------
TOTAL ASSETS . . . . . . . . . . . . . . . . 12,607,508
LIABILITIES
Payable for investments purchased . . . . . . . . $ 520,665
Other payables and accrued expenses . . . . . . . 17,256
--------------
TOTAL LIABILITIES . . . . . . . . . . . . . . 537,921
-----------------
NET ASSETS . . . . . . . . . . . . . . . . . . . $ 12,069,587
=================
Net Assets consist of:
Paid in capital . . . . . . . . . . . . . . . . . $ 10,842,416
Accumulated undistributed net
realized gain (loss) on investments
and foreign currency transactions . . . . . . 1,858
Net unrealized appreciation
(depreciation) on investments . . . . . . . . 1,225,313
-----------------
Net Assets, for 894,018
shares outstanding . . . . . . . . . . . . . $ 12,069,587
=================
Net Asset Value, offering price
and redemption price per share
($12,069,587 / 894,018 shares) . . . . . . . $13.50
======
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
<S> <C> <C>
INVESTMENT INCOME
Dividends . . . . . . . . . . . . . . . . . . . . $ 62,697
Interest . . . . . . . . . . . . . . . . . . . . 25,968
TOTAL INCOME . . . . . . . . . . . . . . . . 88,665
-----------------
EXPENSES
Management fee . . . . . . . . . . . . . . . . . $ 44,240
Transfer agent fees . . . . . . . . . . . . . . . 2,338
Accounting fees and expenses . . . . . . . . . . 60,002
Non-interested trustees' compensation . . . . . . 4,833
Custodian fees and expenses . . . . . . . . . . . 12,326
Audit . . . . . . . . . . . . . . . . . . . . . . 31,179
Miscellaneous . . . . . . . . . . . . . . . . . . 1,706
-------------
Total expenses before reductions . . . . . . 156,624
Expense reductions . . . . . . . . . . . . . (100,693) 55,931
------------- -----------------
NET INVESTMENT INCOME . . . . . . . . . . . . . . 32,734
-----------------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on
investment securities . . . . . . . . . . . . 184,372
Change in net unrealized
appreciation (depreciation) on
investment securities . . . . . . . . . . . . 879,845
-----------------
NET GAIN (LOSS) . . . . . . . . . . . . . . . . . 1,064,217
-----------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS . . . . . . . . . . $ 1,096,951
=================
</TABLE>
See accompanying notes which are an integral part of the financial statements.
17 ANNUAL REPORT
<PG$PCN>
LARGE CAP PORTFOLIO
FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------
AUGUST 30, 1996
(COMMENCEMENT
YEAR ENDED OF OPERATIONS) TO
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,734 $ 10,604
Net realized gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . 184,372 44,241
Change in net unrealized appreciation (depreciation) . . . . . . . . . . . . . . 879,845 345,468
-------------- -----------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS . . . . . . . . 1,096,951 400,313
-------------- -----------------
Distributions to shareholders
From net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . (32,734) (12,039)
From net realized gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . (225,320) --
-------------- -----------------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (258,054) (12,039)
-------------- -----------------
Share transactions
Net proceeds from sales of shares . . . . . . . . . . . . . . . . . . . . . . . 7,699,498 3,011,171
Reinvestment of distributions . . . . . . . . . . . . . . . . . . . . . . . . . 258,054 12,039
Cost of shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . (138,346) --
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS . . . . 7,819,206 3,023,210
-------------- -----------------
TOTAL INCREASE (DECREASE) IN NET ASSETS . . . . . . . . . . . . . . . . . . . 8,658,103 3,411,484
-------------- -----------------
NET ASSETS
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,411,484 --
-------------- -----------------
End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,069,587 $ 3,411,484
============== =================
OTHER INFORMATION
Shares
Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 582,424 301,006
Issued in reinvestment of distributions . . . . . . . . . . . . . . . . . . . . 20,100 1,054
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,566) --
-------------- -----------------
Net increase (decrease) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 591,958 302,060
============== =================
</TABLE>
See accompanying notes which are an integral part of the financial statements.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------------------------------------------------------
AUGUST 30, 1996
(COMMENCEMENT
YEAR ENDED OF OPERATIONS) TO
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period . . . . . . . . . . . . . . . . . . . . . . . $ 11.29 $ 10.00
-------------- -----------------
Income from Investment Operations
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .07(D) .04
Net realized and unrealized gain (loss) . . . . . . . . . . . . . . . . . . . . 2.54 1.29
-------------- -----------------
Total from investment operations . . . . . . . . . . . . . . . . . . . . . . . 2.61 1.33
-------------- -----------------
Less Distributions
From net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . (.04) (.04)
From net realized gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . (.36) --
-------------- -----------------
Total distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (.40) (.04)
-------------- -----------------
Net asset value, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13.50 $ 11.29
============== =================
TOTAL RETURN(B, C) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.41% 13.30%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) . . . . . . . . . . . . . . . . . . . . . . $ 12,070 $ 3,411
Ratio of expenses to average net assets . . . . . . . . . . . . . . . . . . . . . . .95%(E) .95%(A,E)
Ratio of net investment income to average net assets . . . . . . . . . . . . . . . .55% .98%(A)
Portfolio turnover rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60% 57%(A)
Average commission rate(F) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .0171 $ .0214
</TABLE>
(A) Annualized
(B) Total returns for periods of less than one year are not annualized.
(C) The total returns would have been lower had certain expenses not been
reduced during the periods shown (see Note 5 of Notes to Financial
Statements).
(D) Net investment income per share has been calculated based on average
shares outstanding during the period.
(E) The Travelers agreed to reimburse a portion of the fund's expenses during
the period. Without this reimbursement, the fund's expense ratio would
have been higher (see Note 5 of Notes to Financial Statements).
(F) A fund is required to disclose its average commission rate per share for
security trades on which commissions are charged. This amount may vary
from period to period and fund to fund depending on the mix of trades
executed in various markets where trading practices and commission rate
structures may differ.
18 ANNUAL REPORT
<PG$PCN>
NOTES TO FINANCIAL STATEMENTS
For the period ended December 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES.
Equity Income Portfolio and Large Cap Portfolio (the funds) are funds of The
Travelers Series Trust (the trust). The trust is registered under the
Investment Company Act of 1940, as amended (the 1940 Act), as an open-end
management investment company organized as a Massachusetts business trust. Each
fund is authorized to issue an unlimited number of shares. Shares of each fund
may only be purchased by insurance companies for the purpose of funding
variable annuity or variable life insurance contracts. The financial statements
have been prepared in conformity with generally accepted accounting principles
which requires management to make certain estimates and assumptions at the date
of the financial statements. The following summarizes the significant
accounting policies of the funds:
SECURITY VALUATION. Securities for which exchange quotations are readily
available are valued at the last sale price, or if no sale price, at the
closing bid price. Securities (including restricted securities) for which
exchange quotations are not readily available (and in certain cases debt
securities which trade on an exchange) are valued primarily using
dealer-supplied valuations or at their fair value as determined in good faith
under consistently applied procedures under the general supervision of the
Board of Trustees. Short-term securities with remaining maturities of sixty
days or less for which quotations are not readily available are valued at
amortized cost or original cost plus accrued interest, both of which
approximate current value.
FOREIGN CURRENCY TRANSLATION. The accounting records of the funds are
maintained in U.S. dollars. Investment securities and other assets and
liabilities denominated in a foreign currency are translated into U.S. dollars
at the prevailing rates of exchange at period end. Income receipts and expense
payments are translated into U.S. dollars at the prevailing exchange rate on
the respective dates of the transactions. Purchases and sales of securities are
translated into U.S. dollars at the contractual currency exchange rates
established at the time of each trade.
Net realized gains and losses on foreign currency transactions represent net
gains and losses from sales and maturities of foreign currency contracts,
disposition of foreign currencies, and the difference between the amount of net
investment income accrued and the U.S. dollar amount actually received. The
effects of changes in foreign currency exchange rates on investments in
securities are included with the net realized and unrealized gain or loss on
investment securities.
INCOME TAXES. As a qualified regulated investment company under Subchapter M of
the Internal Revenue Code, each fund is not subject to income taxes to the
extent that it distributes substantially all of its taxable income for the
fiscal year. The schedules of investments include information regarding income
taxes under the caption "Income Tax Information."
INVESTMENT INCOME. Dividend income is recorded on the ex-dividend date, except
certain dividends from foreign securities where the ex-dividend date may have
passed, are recorded as soon as the funds are informed of the ex-dividend date.
Non-cash dividends included in dividend income, if any, are recorded at the
fair market value of the securities received. Interest income, which includes
accretion of original issue discount, is accrued as earned. Investment income
is recorded net of foreign taxes withheld where recovery of such taxes is
uncertain.
EXPENSES. Most expenses of the trust can be directly attributed to a fund.
Expenses which cannot be directly attributed are apportioned between the funds
in the trust.
DISTRIBUTIONS TO SHAREHOLDERS. Distributions are recorded on the ex-dividend
date.
Income and capital gain distributions are determined in accordance with income
tax regulations which may differ from generally accepted accounting principles.
These differences, which may result in distribution reclassifications, are
primarily due to differing treatments for losses deferred due to wash sales.
Permanent book and tax basis differences relating to shareholder distributions
will result in reclassifications to paid in capital. Accumulated undistributed
net realized gain (loss) on investments and foreign currency transactions may
include temporary book and tax basis differences which will reverse in a
subsequent period. Any taxable income or gain remaining at fiscal year end is
distributed in the following year.
SECURITY TRANSACTIONS. Security transactions are accounted for as of trade
date. Gains and losses on securities sold are determined on the basis of
identified cost.
2. OPERATING POLICIES.
FOREIGN CURRENCY CONTRACTS. Certain funds use foreign currency contracts to
facilitate transactions in foreign-denominated securities. Losses may arise
from changes in the value of the foreign currency or if the counterparties do
not perform under the contracts' terms. The U.S. dollar value of foreign
currency contracts is determined using contractual currency exchange rates
established at the time of each trade. The cost of the foreign currency
contracts is included in the cost basis of the associated investment.
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the Securities
and Exchange Commission (the SEC), the funds, along with other affiliated
entities of Fidelity Management & Research Company (FMR), may transfer
uninvested cash balances into one or more joint trading accounts. These
balances are invested in one or more repurchase agreements for U.S. Treasury or
Federal Agency obligations.
REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency
securities are transferred to an account of the funds, or to the Joint Trading
Account, at a bank custodian. The securities are marked-to-market daily and
maintained at a value at least equal to the principal amount of the repurchase
agreement (including accrued interest). FMR, the funds' investment sub-adviser,
is
19 ANNUAL REPORT
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NOTES TO FINANCIAL STATEMENTS - CONTINUED
2. OPERATING POLICIES - CONTINUED
REPURCHASE AGREEMENTS - CONTINUED
responsible for determining that the value of the underlying securities remains
in accordance with the market value requirements stated above.
TAXABLE CENTRAL CASH FUND. Pursuant to an Exemptive Order issued by the SEC,
the funds may invest in the Taxable Central Cash Fund (the Cash Fund) managed
by Fidelity Investments Money Management, Inc. (formerly FMR Texas, Inc.), an
affiliate of FMR. The Cash Fund is an open-end money market fund available only
to investment companies and other accounts managed by FMR and its affiliates.
The Cash Fund seeks preservation of capital, liquidity, and current income by
investing in U.S. Treasury securities and repurchase agreements for these
securities. Income distributions from the Cash Fund are declared daily and paid
monthly from net interest income. Income distributions earned by the funds are
recorded as interest income in the accompanying financial statements.
RESTRICTED SECURITIES. The funds are permitted to invest in securities that are
subject to legal or contractual restrictions on resale. These securities
generally may be resold in transactions exempt from registration or to the
public if the securities are registered. Disposal of these securities may
involve time-consuming negotiations and expense, and prompt sale at an
acceptable price may be difficult. At the end of the period, the funds had no
investments in restricted securities.
3. PURCHASES AND SALES OF INVESTMENTS.
Information regarding purchases and sales of securities (other than short-term
securities), is included under the caption "Other Information" at the end of
each applicable fund's schedule of investments.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As each fund's investment adviser, Travelers Asset Management
International Corporation (TAMIC), an affiliate of The Travelers Insurance
Company (The Travelers), receives a fee that is computed daily at an annual
rate of .75% of each fund's average net assets. TAMIC, on behalf of each fund,
has entered into a sub-advisory agreement with FMR. For its services as each
fund's sub-adviser, FMR is paid a portion of TAMIC's management fee that is
computed at an annual rate of .45% of each fund's average net assets.
TRANSFER AGENT FEES. The Travelers is each fund's transfer, dividend
disbursing, and shareholder servicing agent. The trust, on behalf of each fund,
has entered into a sub-arrangement with Fidelity Investments Institutional
Operations Company, Inc. (FIIOC), an affiliate of FMR, under which FIIOC
performs each fund's transfer, dividend disbursing, and shareholder servicing
agent functions. For its services, FIIOC receives account fees and asset-based
fees that vary according to account size and type of account.
ACCOUNTING FEES. The trust, on behalf of each fund, has entered into a service
agent agreement with Fidelity Service Company, Inc. (FSC), an affiliate of
FMR, under which FSC maintains each fund's accounting records. The fee is based
on the level of average net assets for the month plus out-of-pocket expenses.
BROKERAGE COMMISSIONS. The funds placed a portion of their portfolio
transactions with brokerage firms which are affiliates of FMR or TAMIC. The
commissions paid to these affiliated firms are shown under the caption "Other
Information" at the end of each applicable fund's schedule of investments.
5. EXPENSE REDUCTIONS.
The Travelers voluntarily agreed to reimburse each fund's operating expenses
above an annual rate of .95% of average net assets. For the period, the
reimbursement reduced the expenses by $102,212 and $100,693 for Equity Income
Portfolio and Large Cap Portfolio, respectively. Through an arrangement between
The Travelers and Fidelity Investments Institutional Services Co., Inc. (FIIS),
an affiliate of FMR, FIIS has agreed to pay The Travelers a portion of these
reimbursements.
6. BENEFICIAL INTEREST.
At the end of the period, The Travelers, its affiliates and Separate Accounts
of The Travelers were record owners of 100% of the total outstanding shares of
the fund.
ANNUAL REPORT 20
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REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF THE TRAVELERS SERIES TRUST AND THE SHAREHOLDERS OF EQUITY
INCOME PORTFOLIO AND LARGE CAP PORTFOLIO:
In our opinion, the accompanying statements of assets and liabilities,
including the schedules of investments (except for Moody's and Standard &
Poor's ratings), and the related statements of operations and of changes in net
assets and the financial highlights present fairly, in all material respects,
the financial position of Equity Income Portfolio and Large Cap Portfolio
(funds of The Travelers Series Trust) at December 31, 1997, the results of
their operations for the year then ended, and the changes in their net assets
and the financial highlights for the periods indicated, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the The Travelers Series Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at December 31, 1997 by correspondence with the custodian and the
application of alternative auditing procedures where securities purchased were
not yet received by the custodian, provide a reasonable basis for the opinion
expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 9, 1998
21 ANNUAL REPORT
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DISTRIBUTIONS
The Board of Trustees of The Travelers Series Trust voted to pay to
shareholders of record at the opening of business on record date, the following
distributions derived from capital gains realized from sales of portfolio
securities, and dividends derived from net investment income:
<TABLE>
<CAPTION>
EQUITY INCOME PORTFOLIO
<S> <C> <C> <C>
Pay Date . . . . . . . . . . . . . . . 2/7/97 12/19/97 2/6/98
Record Date . . . . . . . . . . . . . . 2/7/97 12/19/97 2/6/98
Dividends . . . . . . . . . . . . . $.00 $.12 $.00
Short-Term
Capital Gains . . . . . . . . . . . . . $.03 $.55 $.03
Long-Term
Capital Gains . . . . . . . . . . . . . $.00 $.01 $.02
Long-Term
Capital Gain Breakdown:
28% rate . . . . . . . . . . . . 0% 100% 100%
20% rate . . . . . . . . . . . . 0% 0% 0%
LARGE CAP PORTFOLIO
Pay Date . . . . . . . . . . . . . . . 2/7/97 12/19/97 2/6/98
Record Date . . . . . . . . . . . . . . 2/7/97 12/19/97 2/6/98
Dividends . . . . . . . . . . . . . . . $.00 $.04 $.00
Short-Term
Capital Gains . . . . . . . . . . . . . $.14 $.14 $.00
Long-Term
Capital Gains . . . . . . . . . . . . . $.00 $.08 $.01
Long-Term
Capital Gain Breakdown:
28% rate . . . . . . . . . . . . 0% 100% 100%
20% rate . . . . . . . . . . . . 0% 0% 0%
</TABLE>
22
ANNUAL REPORT
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23
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INVESTMENT ADVISER
Travelers Asset Management International Corporation
Hartford, Connecticut
INVESTMENT SUB-ADVISER
Fidelity Management & Research Company
Boston, Massachusetts
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
Boston, Massachusetts
CUSTODIAN
Brown Brothers Harriman & Co.
Boston, Massachusetts
This report is prepared for the general information of contract owners and is
not an offer of shares of The Travelers Series Trust: Equity Income Portfolio
or Large Cap Portfolio. It should not be used in connection with any offer
except in conjunction with the Prospectuses for the Variable Annuity Insurance
products offered by the Travelers Insurance Company or the Travelers Life and
Annuity Company and the prospectuses for the underlying funds, which
collectively contain all pertinent information, including the applicable sales
commissions.
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