CONTENTS
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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 11 Statements of assets and liabilities, operations, and
changes in net assets, as well as financial highlights.
LARGE CAP PORTFOLIO
PERFORMANCE 13 How the fund has done over time.
FUND TALK 14 The manager's review of fund performance, strategy
and outlook.
INVESTMENTS 15 A complete list of the fund's investments with their
market values.
FINANCIAL STATEMENTS 18 Statements of assets and liabilities, operations, and
changes in net assets, as well as financial highlights.
NOTES 20 Notes to the financial statements.
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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.
MARKET ENVIRONMENT
With the exception of Asia and a number of emerging market economies,
most stock and bond markets around the world performed well during the
past six months. Despite an environment of ongoing financial and
political difficulties in Asian and emerging markets, the largest
blue-chip companies of Europe and the U.S. continued to post strong
performance. Throughout the period, investors sought the relative
stability and liquidity of more defensive large-cap stocks and highly
rated bond investments of developed countries, hoping these
investments would maintain steady earnings and be easier to sell in a
possible economic slowdown.
U.S. STOCK MARKETS
The U.S. stock market continued to perform well during the first six
months of 1998. The strong showing by the Standard & Poor's 500 Index,
however, was produced by a narrow contingent of large companies. In
fact, most of the Standard & Poor's 17.71% return for the six-month
period that ended June 30, 1998, came from these large-capitalization
stocks. The "narrow" market - one where a small number of stocks
perform well, and others are flat or produce losses - was further
demonstrated by the fact that 60% of all the companies on the New York
Stock Exchange declined during this period. During the first quarter
of 1998, a stable U.S. economy and a belief that the worst in Asia
might be over helped the stock market post strong gains. The S&P 500
index turned in a solid return of 13.95% through the end of March. The
S&P 500 and other market indexes continued to rally through May,
before falling sharply in mid-June amid renewed fears that Asia's
economic crisis would inhibit the growth in earnings of American
companies. In subsequent trading days, however, investors continued to
favor large-cap stocks, boosting the returns of the S&P 500 index
higher. During the second quarter of 1998, the S&P 500 index returned
3.30%, compared with a decline of 2.14% for the Standard & Poor's
MidCap 400 Index. Investors in small-cap stocks experienced a weak
second quarter as the Russell 2000 - a measure of small company stock
performance - lost 4.66%.
The pattern of a narrow market also was displayed in certain industry
groups. Pharmaceutical stocks performed well, helped by healthy
pipelines of new products, the ability to bring products to market
more rapidly and relaxed regulations that permitted more aggressive
advertising. Stable economic growth, coupled with nonexistent
inflation, buoyed the financial sector. Banks and brokerage houses
sustained impressive earnings growth; other financial services firms
benefited from merger and acquisition activity, exemplified by the
recently announced "megamerger" of Travelers and Citicorp.
While many technology stocks turned in very strong results, the sector
also experienced some mixed results over the past six months, due
primarily to the negative impact of the Asian crisis and the effect of
a strong dollar on foreign sales. Energy stocks also experienced weak
results, with the price of crude oil dipping below $12 dollars a
barrel near the end of June.
FOREIGN STOCK MARKETS
Overseas, blue-chip investments also performed well. While the Morgan
Stanley Capital International (MSCI) EAFE Index, which measures the
performance of Europe, Australasia, and the Far East, posted a solid
return of 16.05% for the six-month period, investors in developed
markets fared much better than those investing in troubled emerging
markets. The performance of the MSCI Pacific Index, however, lost
5.87% during the same period, emphasizing the negative impact Japan
and Hong Kong had on the MSCI EAFE index. Most economies in Europe
continued to thrive amidst an environment of relatively benign
inflation and reduced interest rates as many countries prepared for
the advent of the European Monetary Union in January 1999. Many
European companies embraced U.S.-style efficiencies through
restructuring and robust merger and acquisition activity. Over the
past six months, the MSCI Europe Index returned an impressive 26.66%.
Among the strongest European economies were Portugal, Spain, Italy and
the United Kingdom.
While the Japanese market showed signs of strength toward the end of
the period, Japanese stocks continued to suffer from eroding
confidence in the economy, bankruptcies and a depreciating currency.
The TOPIX Index - a measure of the Japanese market - was down 1.46%
over the six-month period. As economic and currency turmoil continued
in Asia, emerging markets also suffered during the period. The MSCI
Far East ex-Japan Free Index dropped 25.79% and the MSCI Emerging
Markets Free Index - a market capitalization weighted index of over
850 stocks traded in 22 world markets - was down 18.87% for the first
six months of 1998.
U.S. BOND MARKETS
Bond prices continued to move higher thanks to low interest rates and
a continued lack of inflationary pressure. The Lehman Brothers
Aggregate Bond Index - a broad gauge of the U.S. taxable bond market -
returned 3.93% during this six-month period. Against a backdrop of
continued economic woes in Asia and fears that U.S. corporate profits
would slow, investors from around the globe moved assets from stocks
and riskier bonds into highly rated corporate bonds and U.S.
Treasuries. As a result, bond yields, which move in the opposite
direction of bond prices, fell to their lowest levels in decades. The
yield on the benchmark 30-year bond fell to 5.62% from 5.93% during
the period. Mortgage-backed bonds experienced some weakness toward the
end of the period amid record mortgage refinancings.
FOREIGN BOND MARKETS
While U.S. based bonds topped most foreign bonds on the continued
strength of the U.S. dollar and benign inflation, the Salomon Brothers
World Government Bond Index - a measure of government bond market
performance in developed nations - returned 2.79% during the period.
Similar to foreign equities, however, it paid to be in the safer bond
sectors of developed countries and highly rated bonds. In comparison
to the World Government Bond Index, the J.P. Morgan Emerging Markets
Bond Index lost 0.25% during the first six months of 1998. Continued
turbulence in Japan as it struggled to initiate economic reforms
trickled into emerging markets and resulted in mixed results during
the period.
EQUITY INCOME PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change 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).
CUMULATIVE TOTAL RETURNS
PERIODS ENDED JUNE 30, 1998 PAST 6 PAST 1 LIFE OF
MONTHS YEAR FUND
Equity Income Portfolio 10.60% 23.51% 63.12%
S&P 500 (registered trademark) 17.71% 30.16% 79.64%
CUMULATIVE TOTAL RETURNS show the fund's performance in percentage
terms over a set period - in this case, six months, 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.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JUNE 30, 1998 PAST 1 LIFE OF
YEAR FUND
Equity Income Portfolio 23.51% 30.59%
S&P 500 30.16% 37.65%
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.
(CHECKMARK) 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 LONG-TERM GROWTH AND SHORT-TERM
VOLATILITY. 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.
(Mountain Graph Information)
$10,000 OVER LIFE OF FUND
TRAVELERS EQUITY-INCOME S&P 500
00149 SP001
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
1998/01/31 14663.85 15429.97
1998/02/28 15609.27 16542.78
1998/03/31 16354.09 17389.93
1998/04/30 16322.17 17564.87
1998/05/31 16098.72 17262.93
1998/06/30 16311.53 17964.15
IMATRL PRASUN SHR__CHT 19980630 19980714 162858 R00000000000025
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 June 30, 1998, the value of the investment would have
grown to $16,312 - a 63.12% increase on the initial investment. For
comparison, look at how the Standard & Poor's 500 Index did over the
same period. With reinvested dividends and capital gains, if any, the
same $10,000 investment would have grown to $17,964 - a 79.64%
increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1998
% OF FUND'S INVESTMENTS
General Electric Co. 3.8
American Express Co. 2.5
Bank of New York, Inc. 2.3
British Petroleum Co. PLC ADR 2.2
Citicorp 2.1
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1998
% OF FUND'S INVESTMENTS
FINANCE 26.9
ENERGY 11.1
UTILITIES 9.7
INDUSTRIAL MACHINERY & EQUIPMENT 7.0
BASIC INDUSTRIES 6.5
(Pie Chart Information)
ASSET ALLOCATION AS OF JUNE 30, 1998*
ROW: 1, COL: 1, VALUE: 94.0
ROW: 1, COL: 2, VALUE: 2.5
ROW: 1, COL: 3, VALUE: 3.5
% of fund's
investments
STOCKS 94.0%
CONVERTIBLE
SECURITIES 2.5%
SHORT-TERM INVESTMENTS 3.5%
* FOREIGN INVESTMENTS 8.2%
EQUITY INCOME PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
(Photograph of Stephen Peterson)
An interview with
Stephen Petersen,
Portfolio Manager of
Equity Income Portfolio
Q. STEVE, HOW DID THE FUND PERFORM OVER THE PAST YEAR?
A. It did well compared to similar funds. However, for the six- and
12-month periods that ended June 30, 1998, the fund underperformed the
Standard & Poor's 500 Index, which returned 17.71% for the six-month
period and 30.16% for the 12-month period.
Q. WHY DID THE FUND UNDERPERFORM THE S&P 500 INDEX?
A. As we've discussed in the past few reports, the S&P 500 has tended
to outperform the fund recently because the index is much more heavily
weighted in large-capitalization stocks than the fund. Over the
period, large-cap stocks continued to notably outperform the rest of
the market. So, given the fund's investment style of looking for value
stocks and income-producing stocks - which can range from large- to
small-cap equities - the fund was at a disadvantage compared to the
S&P over the past 12 months. Still, as I just mentioned, the fund
performed well against its peer group over the same period. It
benefited from strong individual stock selection and my focus on
earning income from common stocks rather than bonds, which
underperformed equities over the period.
Q. WHY DOESN'T THE FUND HOLD ONLY LARGE-CAP STOCKS, AT LEAST FOR THE
SHORT-TERM?
A. If I did hold just large-cap stocks, the fund's performance
probably would have been stronger over the past few years. But, as I
just noted, that would be inconsistent with the fund's long-term
strategy, which encourages me to own stocks of several different
capitalization sizes. In general, I feel that if I continue with the
fund's investment style, it will catch any short-term market trends
over the long run.
Q. WERE THERE OTHER FACTORS THAT AFFECTED HOW THE FUND PERFORMED
COMPARED TO THE S&P?
A. Yes, there were. What probably hurt the fund the most was its
investment in the energy sector, its second-largest sector. The energy
sector was negatively affected by declining oil prices largely due to
reduced demand in the worldwide oil market, mostly from Asian
countries still stinging from last fall's correction. On top of that,
weather patterns, including a relatively mild U.S. winter, had a
negative impact on oil demand. The fund's top sector, finance, also
had a fairly rough period. Many banks somewhat underperformed the
market as a result of a flurry of acquisition and merger activity in
the early part of year. Investors were concerned that their ability to
earn an adequate return on the acquisitions was lessening as bank
prices kept getting bid up. In addition, larger money-center banks
like BankAmerica were somewhat hurt by their exposure in Asia.
Cyclical stocks - stocks that tend to perform well in a strong economy
and poorly in a weak one, including companies ranging from basic
industries to manufacturing businesses - also were hurt by reduced
demand from Asia.
Q. WHAT SPECIFIC HOLDINGS BOOSTED THE FUND'S PERFORMANCE?
A. General Electric - the fund's number one holding - showed solid
earnings growth, and I consider it one of the best-managed companies
around. Another strong top-five stock was American Express. I bought
this stock as a turnaround, and it not only did so, but in addition
the American Express card has been gaining market share relative to
its competitors. Another strong performer was Citicorp. After a big
price run-up when Citicorp announced its upcoming merger with
Travelers, its stock price fell to pre-merger levels as the market was
unwilling to pay for the potential of the merger. Financially, we
thought it made sense to buy the stock at this lower price because of
the planned merger and cost-cutting steps Citicorp had taken recently.
Q. DID YOU HAVE ANY REGRETS OVER THE PERIOD?
A. Definitely, but one stands out. I failed to recognize how low
energy prices could go. I thought it was a temporary issue, but I
should have taken much more aggressive action.
Q. STEVE, HOW DOES THE OVERALL MARKET LOOK GOING FORWARD?
A. In general, the underlying economic conditions in the U.S. remain
very good. We have low inflation, low interest rates, low unemployment
and good consumer demand. In addition, the political environment is
still relatively benign, and the lack of major activity in Congress is
good for stock prices since change often creates uncertainty. Despite
good news at home, I will be paying close attention to what's
happening in Asia - especially Japan and China - since events in this
region could negatively affect the U.S. economy going forward.
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.
(CHECKMARK) FUND FACTS
GOAL: seeks reasonable income by investing
primarily in income-producing equity securities
START DATE: August 30, 1996
SIZE: as of June 30, 1998, more than $55 million
MANAGER: Stephen Petersen, since inception; joined
Fidelity in 1980
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EQUITY INCOME PORTFOLIO
INVESTMENTS JUNE 30, 1998 (UNAUDITED)
Showing Percentage of Value of Investment in Securities
COMMON STOCKS - 94.0%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 4.4%
AEROSPACE & DEFENSE - 3.2%
AlliedSignal, Inc. 9,600 $ 426,000
Gulfstream Aerospace Corp. (a) 600 27,900
Harsco Corp. 4,200 192,413
Lockheed Martin Corp. 3,400 359,975
Textron, Inc. 5,300 379,944
United Technologies Corp. 4,500 416,250
1,802,482
DEFENSE ELECTRONICS - 1.1%
Northrop Grumman Corp. 1,500 154,688
Raytheon Co. Class B 7,900 467,088
621,776
SHIP BUILDING & REPAIR - 0.1%
General Dynamics Corp. 2,000 93,000
TOTAL AEROSPACE & DEFENSE 2,517,258
BASIC INDUSTRIES - 6.5%
CHEMICALS & PLASTICS - 3.4%
Air Products & Chemicals, Inc. 2,900 116,000
du Pont (E.I.) de Nemours & Co. 3,300 246,263
Great Lakes Chemical Corp. 3,800 149,863
Hanna (M.A.) Co. 2,900 53,106
Hercules, Inc. 3,900 160,388
ICI (Imperial Chemical Industries) PLC ADR Class L 1,300 83,850
IMC Global, Inc. 2,000 60,250
Lawter International, Inc. 1,100 11,963
Millennium Chemicals, Inc. 2,100 71,138
Monsanto Co. 5,000 279,375
Nalco Chemical Co. 2,300 80,788
Octel Corp. 575 11,428
Olin Corp. 3,100 129,231
Solutia, Inc. 3,300 94,669
Union Carbide Corp. 4,400 234,850
Witco Corp. 4,800 140,400
1,923,562
IRON & STEEL - 0.4%
Dofasco, Inc. 3,900 63,638
Inland Steel Industries, Inc. 4,400 124,025
USX-U.S. Steel Group 2,000 66,000
253,663
METALS & MINING - 1.0%
Alcan Aluminium Ltd. 3,800 104,854
Alumax, Inc. 1,875 86,953
Aluminum Co. of America 4,200 276,938
Phelps Dodge Corp. 1,700 97,219
565,964
PACKAGING & CONTAINERS - 0.0%
Tupperware Corp. 400 11,250
PAPER & FOREST PRODUCTS - 1.7%
Boise Cascade Corp. 2,400 78,600
Champion International Corp. 3,300 162,319
Domtar, Inc. 5,300 35,568
SHARES VALUE (NOTE 1)
Georgia-Pacific Corp. 2,900 $ 170,919
Kimberly-Clark Corp. 6,600 302,775
Weyerhaeuser Co. 4,600 212,463
962,644
TOTAL BASIC INDUSTRIES 3,717,083
CONSTRUCTION & REAL ESTATE - 1.7%
BUILDING MATERIALS - 0.4%
American Standard Companies, Inc. (a) 3,000 134,063
Masco Corp. 2,000 121,000
255,063
ENGINEERING - 0.2%
EG & G, Inc. 1,800 54,000
Fluor Corp. 900 45,900
Foster Wheeler Corp. 1,200 25,725
125,625
REAL ESTATE INVESTMENT TRUSTS - 1.1%
Crescent Real Estate Equities, Inc. 1,700 57,163
Equity Office Properties Trust 2,000 56,750
Equity Residential Properties Trust (SBI) 2,700 128,081
Starwood Lodging Trust combined certificates (SBI) 7,724 373,166
615,160
TOTAL CONSTRUCTION & REAL ESTATE 995,848
DURABLES - 4.4%
AUTOS, TIRES, & ACCESSORIES - 2.8%
Chrysler Corp. 8,500 479,188
Eaton Corp. 2,100 163,275
Ford Motor Co. 1,300 76,700
General Motors Corp. 3,500 233,844
Johnson Controls, Inc. 2,200 125,813
Meritor Automotive, Inc. 3,200 76,800
Snap-On, Inc. 200 7,250
TRW, Inc. 3,700 202,113
Volvo AB ADR Class B 6,700 198,069
1,563,052
CONSUMER DURABLES - 0.6%
Minnesota Mining & Manufacturing Co. 4,200 345,188
CONSUMER ELECTRONICS - 0.4%
General Motors Corp. Class H 1,000 47,125
Maytag Corp. 3,500 172,813
Sunbeam Corp. 3,100 32,163
252,101
TEXTILES & APPAREL - 0.6%
Dexter Corp. 1,700 54,081
Intimate Brands, Inc. Class A 800 22,050
Kellwood Co. 2,200 78,650
NIKE, Inc. Class B 2,500 121,719
Unifi, Inc. 1,900 65,075
341,575
TOTAL DURABLES 2,501,916
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
ENERGY - 10.8%
ENERGY SERVICES - 1.2%
Dresser Industries, Inc. 4,900 $ 215,906
Halliburton Co. 4,500 200,531
Schlumberger Ltd. 4,100 280,081
696,518
OIL & GAS - 9.6%
Amerada Hess Corp. 3,700 200,956
Amoco Corp. 4,200 174,825
Anadarko Petroleum Corp. 1,000 67,188
Atlantic Richfield Co. 4,800 375,000
British Petroleum Co. PLC ADR 14,373 1,268,417
Burlington Resources, Inc. 4,100 176,556
Chevron Corp. 5,200 431,925
Coastal Corp. (The) 1,400 97,738
Elf Aquitaine SA sponsored ADR 1,600 113,600
Exxon Corp. 2,100 149,756
Kerr-McGee Corp. 700 40,513
Mobil Corp. 2,500 191,563
Occidental Petroleum Corp. 11,900 321,300
Phillips Petroleum Co. 3,300 159,019
Royal Dutch Petroleum Co. 10,700 586,494
Total SA sponsored ADR 10,300 673,363
Ultramar Diamond Shamrock Corp. 1,800 56,813
Unocal Corp. 2,325 83,119
USX-Marathon Group 6,300 216,169
Valero Refining & Marketing Co. 900 29,925
5,414,239
TOTAL ENERGY 6,110,757
FINANCE - 26.6%
BANKS - 12.1%
Banc One Corp. 11,100 619,519
Bank of New York, Inc. 21,500 1,304,781
Bank of Nova Scotia 3,700 91,760
BankAmerica Corp. 9,000 777,938
BankBoston Corp. 3,000 166,875
Chase Manhattan Corp. 3,600 271,800
Citicorp 7,800 1,164,150
Comerica, Inc. 4,600 304,750
National Bank of Canada 10,500 205,672
NationsBank Corp. 9,100 696,150
Norwest Corp. 7,500 280,313
Royal Bank of Canada 4,400 265,304
U.S. Bancorp 9,400 404,200
Wells Fargo & Co. 900 332,100
6,885,312
CREDIT & OTHER FINANCE - 5.7%
American Express Co. 12,200 1,390,800
Associates First Capital Corp. Class A 3,962 304,585
Beneficial Corp. 1,500 229,781
First Chicago NBD Corp. 6,000 531,750
Fleet Financial Group, Inc. 3,500 292,250
SHARES VALUE (NOTE 1)
Household International, Inc. 6,600 $ 328,350
Transamerica Corp. 1,200 138,150
3,215,666
FEDERAL SPONSORED CREDIT - 2.0%
Fannie Mae 18,300 1,111,725
INSURANCE - 5.3%
Aetna, Inc. 1,200 91,350
Allstate Corp. 9,600 879,000
CIGNA Corp. 2,500 172,500
Edperbrascan Corp. Class A 14,850 249,903
Fremont General Corp. 4,300 233,006
General Re Corp. 900 228,150
Hartford Financial Services Group, Inc. 4,100 468,938
Highland Insurance Group, Inc. (a) 1,800 33,300
Marsh & Mclennan Companies, Inc. 1,200 72,525
MBIA, Inc. 500 37,438
PMI Group, Inc. 1,000 73,375
Reliastar Financial Corp. 5,700 273,600
Torchmark Corp. 3,800 173,850
Travelers Property Casualty Corp. Class A 1,000 42,875
3,029,810
SAVINGS & LOANS - 1.0%
Washington Mutual, Inc. 12,945 562,299
SECURITIES INDUSTRY - 0.5%
Lehman Brothers Holdings, Inc. 2,100 162,881
Travelers Group, Inc. (The) 1,600 97,000
259,881
TOTAL FINANCE 15,064,693
HEALTH - 5.4%
DRUGS & PHARMACEUTICALS - 3.5%
American Home Products Corp. 10,200 527,850
Bristol-Myers Squibb Co. 5,100 586,181
Merck & Co., Inc. 1,800 240,750
Sankyo Co. Ltd. 2,000 45,491
Schering-Plough Corp. 6,700 613,888
2,014,160
MEDICAL EQUIPMENT & SUPPLIES - 0.8%
Allegiance Corp. 460 23,575
Bausch & Lomb, Inc. 1,200 60,150
Baxter International, Inc. 3,300 177,581
Johnson & Johnson 1,800 132,750
Pall Corp. 1,600 32,800
426,856
MEDICAL FACILITIES MANAGEMENT - 1.1%
Columbia/HCA Healthcare Corp. 12,600 366,975
Humana, Inc. (a) 2,600 81,088
United HealthCare Corp. 2,400 152,400
600,463
TOTAL HEALTH 3,041,479
HOLDING COMPANIES - 0.3%
CINergy Corp. 2,900 101,500
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
HOLDING COMPANIES - CONTINUED
U.S. Industries, Inc. 2,260 $ 55,935
157,435
INDUSTRIAL MACHINERY & EQUIPMENT - 6.8%
ELECTRICAL EQUIPMENT - 3.9%
General Electric Co. 23,700 2,156,673
Loral Space & Communications Ltd. (a) 1,400 39,550
2,196,223
INDUSTRIAL MACHINERY & EQUIPMENT - 2.0%
Cooper Industries, Inc. 900 49,444
Harnischfeger Industries, Inc. 1,900 53,794
Ingersoll-Rand Co. 3,550 156,422
Parker-Hannifin Corp. 3,550 135,344
Stewart & Stevenson Services, Inc. 2,200 39,600
Tyco International Ltd. 11,370 716,310
1,150,914
POLLUTION CONTROL - 0.9%
Browning-Ferris Industries, Inc. 5,314 184,662
Ogden Corp. 2,600 71,988
Waste Management, Inc. 7,900 276,500
533,150
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 3,880,287
MEDIA & LEISURE - 3.7%
BROADCASTING - 1.2%
CBS Corp. 7,308 232,029
Time Warner, Inc. 4,945 422,488
654,517
ENTERTAINMENT - 1.0%
King World Productions, Inc. (a) 2,000 51,000
MGM Grand, Inc. (a) 3,500 110,469
Viacom, Inc. Class B (non-vtg.) (a) 7,200 419,400
580,869
LEISURE DURABLES & TOYS - 0.1%
Brunswick Corp. 2,600 64,350
LODGING & GAMING - 0.1%
Mirage Resorts, Inc. (a) 2,300 49,019
PUBLISHING - 0.9%
ACNielsen Corp. (a) 3,566 90,042
Cognizant Corp. 1,800 113,400
Dun & Bradstreet Corp. 1,900 68,638
Harcourt General, Inc. 3,000 178,500
Reader's Digest Association, Inc. Class A (non-vtg.) 2,100 56,963
507,543
RESTAURANTS - 0.4%
McDonald's Corp. 3,500 241,500
TOTAL MEDIA & LEISURE 2,097,798
SHARES VALUE (NOTE 1)
NONDURABLES - 4.9%
BEVERAGES - 0.3%
Anheuser-Busch Companies, Inc. 2,500 $ 117,969
Seagram Co. Ltd. 1,300 53,098
171,067
FOODS - 1.2%
Bestfoods 3,300 191,606
Corn Products International, Inc. (a) 2,075 70,291
General Mills, Inc. 1,881 128,613
Heinz (H.J.) Co. 2,100 117,863
Ralston Purina Co. 1,400 163,538
671,911
HOUSEHOLD PRODUCTS - 1.0%
Avon Products, Inc. 900 69,750
Clorox Co. 1,300 123,988
Dial Corp. 2,500 64,844
Premark International, Inc. 1,200 38,700
Rubbermaid, Inc. 4,700 155,981
Unilever NV ADR 1,500 118,406
571,669
TOBACCO - 2.4%
Gallaher Group PLC sponsored ADR 5,500 120,313
Philip Morris Companies, Inc. 24,300 956,813
RJR Nabisco Holdings Corp. 12,040 285,950
1,363,076
TOTAL NONDURABLES 2,777,723
PRECIOUS METALS - 0.2%
Newmont Mining Corp. 3,800 89,775
RETAIL & WHOLESALE - 3.8%
APPAREL STORES - 1.0%
Charming Shoppes, Inc. (a) 2,900 13,775
Footstar, Inc. (a) 1,900 91,200
Limited, Inc. (The) 5,200 172,250
TJX Companies, Inc. 11,000 265,375
542,600
GENERAL MERCHANDISE STORES - 2.6%
Dayton Hudson Corp. 4,300 208,550
Federated Department Stores, Inc. (a) 4,500 242,156
Hudson's Bay Co. 3,100 71,177
Penney (J.C.), Inc. 900 65,081
Wal-Mart Stores, Inc. 14,500 880,875
1,467,839
RETAIL & WHOLESALE, MISCELLANEOUS - 0.2%
Tandy Corp. 2,300 122,044
TOTAL RETAIL & WHOLESALE 2,132,483
SERVICES - 0.9%
LEASING & RENTAL - 0.2%
Ryder Systems, Inc. 4,200 132,563
PRINTING - 0.4%
Donnelley (R.R.) & Sons Co. 3,100 141,825
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
SERVICES - CONTINUED
PRINTING - CONTINUED
New England Business Service, Inc. 1,000 $ 32,250
Wallace Computer Services, Inc. 2,400 57,000
231,075
SERVICES - 0.3%
Block (H & R), Inc. 2,700 113,738
Manpower, Inc. 1,900 54,506
168,244
TOTAL SERVICES 531,882
TECHNOLOGY - 2.8%
COMPUTER SERVICES & SOFTWARE - 0.8%
Electronic Data Systems Corp. 7,000 280,000
First Data Corp. 2,800 93,275
NCR Corp. (a) 2,000 65,000
438,275
COMPUTERS & OFFICE EQUIPMENT - 1.1%
Diebold, Inc. 1,100 31,763
International Business Machines Corp. 2,700 309,994
Unisys Corp. (a) 10,900 307,925
649,682
ELECTRONICS - 0.6%
AMP, Inc. 2,600 89,375
Motorola, Inc. 5,200 273,325
362,700
PHOTOGRAPHIC EQUIPMENT - 0.3%
Eastman Kodak Co. 1,200 87,675
Polaroid Corp. 1,700 60,456
148,131
TOTAL TECHNOLOGY 1,598,788
TRANSPORTATION - 1.5%
AIR TRANSPORTATION - 0.2%
Viad Corp. 4,700 130,425
RAILROADS - 1.3%
Burlington Northern Santa Fe Corp. 1,800 176,738
CSX Corp. 8,400 382,200
Norfolk Southern Corp. 5,900 175,894
734,832
TOTAL TRANSPORTATION 865,257
UTILITIES - 9.3%
ELECTRIC UTILITY - 2.9%
Allegheny Energy, Inc. 5,900 177,738
American Electric Power Co., Inc. 5,800 263,175
Central & South West Corp. 1,300 34,938
Central Maine Power Co. 3,100 60,450
Consolidated Edison, Inc. 2,400 110,550
DPL, Inc. 4,950 89,719
Duke Energy Corp. 2,022 119,804
Entergy Corp. 8,200 235,750
SHARES VALUE (NOTE 1)
FPL Group, Inc. 1,200 $ 75,600
Illinova Corp. 1,100 33,000
Niagara Mohawk Power Corp. (a) 7,300 109,044
PacifiCorp 1,200 27,150
PG&E Corp. 5,500 173,594
Pinnacle West Capital Corp. 2,400 108,000
1,618,512
GAS - 0.9%
MCN Energy Group, Inc. 4,500 111,938
Questar Corp. 7,800 153,075
Sempra Energy 7,368 204,462
Sonat, Inc. 1,700 65,663
535,138
TELEPHONE SERVICES - 5.5%
ALLTEL Corp. 2,700 125,550
Ameritech Corp. 8,900 399,388
AT&T Corp. 10,500 599,813
Bell Atlantic Corp. 13,610 620,956
BellSouth Corp. 5,800 389,325
GTE Corp. 4,000 222,500
MCI Communications Corp. 1,400 81,375
SBC Communications, Inc. 7,600 304,000
Sprint Corp. 1,700 119,850
Worldcom, Inc. (a) 4,900 237,344
3,100,101
TOTAL UTILITIES 5,253,751
TOTAL COMMON STOCKS 53,334,213
(Cost $49,226,730)
</TABLE>
<TABLE>
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CONVERTIBLE PREFERRED STOCKS - 1.3%
ENERGY - 0.1%
OIL & GAS - 0.1%
Occidental Petroleum Corp. $3.00 1,100 86,900
FINANCE - 0.3%
INSURANCE - 0.3%
Aetna, Inc. Class C, $4.76 PRIDES 700 52,588
Conseco, Inc. $4.279 600 97,200
149,788
INDUSTRIAL MACHINERY & EQUIPMENT - 0.2%
ELECTRICAL EQUIPMENT - 0.1%
Loral Space & Communications Ltd. 600 45,450
Series C, $3.00
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
Ingersoll Rand Co./Ingersoll Rand Finance $0.19 Growth PRIDES 2,100 41,738
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 87,188
MEDIA & LEISURE - 0.3%
BROADCASTING - 0.3%
MediaOne Group, Inc. Class D, $2.25 1,900 170,881
CONVERTIBLE PREFERRED STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
UTILITIES - 0.4%
CELLULAR - 0.2%
AirTouch Communications, Inc. Class B, $1.74 2,800 $ 135,100
ELECTRIC UTILITY - 0.2%
Houston Industries, Inc. $3.216 1,300 96,850
TOTAL UTILITIES 231,950
TOTAL CONVERTIBLE PREFERRED STOCKS 726,707
(Cost $653,194)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
CONVERTIBLE BONDS - 1.2%
MOODY'S RATINGS PRINCIPAL
(UNAUDITED) AMOUNT
ENERGY - 0.2%
OIL & GAS - 0.2%
Pennzoil Co. 4.75% 10/1/03 Baa3 $ 80,000 113,080
MEDIA & LEISURE - 0.4%
PUBLISHING - 0.4%
News America Holdings, Inc. liquid yield option notes 0% 3/11/13 Baa3 317,000 210,805
RETAIL & WHOLESALE - 0.3%
RETAIL & WHOLESALE, MISCELLANEOUS - 0.3%
Home Depot, Inc. 3.25% 10/1/01 A1 90,000 164,925
SERVICES - 0.1%
ADT Operations, Inc. liquid yield option notes 0% 7/6/10 Baa1 51,000 87,317
TECHNOLOGY - 0.2%
ELECTRONICS - 0.2%
Micron Technology, Inc. 7% 7/1/04 B1 70,000 65,406
Motorola, Inc. 0% 9/27/13 A1 93,000 67,076
132,482
TOTAL CONVERTIBLE BONDS 708,609
(Cost $576,269)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
CASH EQUIVALENTS - 3.5%
SHARES VALUE (NOTE 1)
Taxable Central Cash Fund (b) 1,961,573 $ 1,961,573
TOTAL INVESTMENT IN SECURITIES - 100% $ 56,731,102
(Cost $52,417,766)
</TABLE>
SECURITY TYPE ABBREVIATIONS
Growth
PRIDES - Growth Preferred
Redeemable Increased Dividend
Equity Securities
PRIDES - Preferred Redeemable
Increased Dividend Equity Securities
LEGEND
(a) Non-income producing
(b) At period end, the seven-day yield on the Taxable Central Cash
Fund was 5.61%. 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 $33,845,864 and $3,622,150, respectively (see Note 3 of
Notes to Financial Statements).
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 were $1,661 and $0 for the
period (see Note 4 of Notes to Financial Statements).
INCOME TAX INFORMATION
At June 30, 1998, the aggregate cost of investment securities for
income tax purposes was $52,427,902. Net unrealized appreciation
aggregated $4,303,200, of which $6,051,975 related to appreciated
investment securities and $1,748,775 related to depreciated investment
securities.
EQUITY INCOME PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 1998 (UNAUDITED)
ASSETS
Investment in securities, at value $ 56,731,102
(cost $52,417,766) -
See accompanying schedule
Cash 3,895
Receivable for investments sold 82,578
Receivable for fund shares sold 384,370
Dividends receivable 86,222
Interest receivable 9,848
TOTAL ASSETS 57,298,015
LIABILITIES
Payable for investments purchased $ 1,548,241
Payable for fund shares redeemed 142
Accrued management fee 5,620
Other payables and 35,851
accrued expenses
TOTAL LIABILITIES 1,589,854
NET ASSETS $ 55,708,161
Net Assets consist of:
Paid in capital $ 50,591,803
Undistributed net investment income 256,920
Accumulated undistributed net 546,147
realized gain (loss) on investments
and foreign currency transactions
Net unrealized appreciation 4,313,291
(depreciation) on investments
and assets and liabilities in
foreign currencies
NET ASSETS, for 3,632,835 $ 55,708,161
shares outstanding
NET ASSET VALUE, offering price $15.33
and redemption price per share
($55,708,161 (divided by) 3,632,835
shares)
<TABLE>
<CAPTION>
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STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
INVESTMENT INCOME $ 375,863
Dividends
Interest 62,629
TOTAL INCOME 438,492
EXPENSES
Management fee $ 144,615
Transfer agent fees 5,009
Accounting fees and expenses 30,102
Non-interested trustees' compensation 2,417
Custodian fees and expenses 21,312
Registration fees 2,145
Audit 15,438
Legal 2,213
Total expenses before reductions 223,251
Expense reductions (41,679) 181,572
NET INVESTMENT INCOME 256,920
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on:
Investment securities 574,881
Foreign currency transactions (153) 574,728
Change in net unrealized appreciation (depreciation) on:
Investment securities 2,562,580
Assets and liabilities in (44) 2,562,536
foreign currencies
NET GAIN (LOSS) 3,137,264
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 3,394,184
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997
Operations $ 256,920 $ 171,247
Net investment income
Net realized gain (loss) 574,728 899,730
Change in net unrealized appreciation (depreciation) 2,562,536 1,438,705
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 3,394,184 2,509,682
Distributions to shareholders - (171,176)
From net investment income
From net realized gain (99,894) (841,389)
TOTAL DISTRIBUTIONS (99,894) (1,012,565)
Share transactions 31,460,046 20,040,415
Net proceeds from sales of shares
Reinvestment of distributions 99,894 1,012,565
Cost of shares redeemed (1,285,321) (4,011,242)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS 30,274,619 17,041,738
TOTAL INCREASE (DECREASE) IN NET ASSETS 33,568,909 18,538,855
NET ASSETS
Beginning of period 22,139,252 3,600,397
End of period (including undistributed net investment
income of $256,920 and $0, respectively) $ 55,708,161 $ 22,139,252
OTHER INFORMATION
Shares
Sold 2,118,395 1,503,025
Issued in reinvestment of distributions 7,035 74,849
Redeemed (84,666) (310,550)
Net increase (decrease) 2,040,764 1,267,324
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
FINANCIAL HIGHLIGHTS
SIX MONTHS ENDED YEARS ENDED
JUNE 30, 1998 DECEMBER 31,
SELECTED PER-SHARE DATA (UNAUDITED) 1997 1996 E
Net asset value, beginning of period $ 13.91 $ 11.09 $ 10.00
Income from Investment Operations
Net investment income .10 D .21 D .08
Net realized and unrealized gain (loss) 1.37 3.32 1.09
Total from investment operations 1.47 3.53 1.17
Less Distributions
From net investment income - (.12) (.08)
From net realized gain (.05) (.59) -
Total distributions (.05) (.71) (.08)
Net asset value, end of period $ 15.33 $ 13.91 $ 11.09
TOTAL RETURN B, C 10.60% 32.05% 11.69%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $ 55,708 $ 22,139 $ 3,600
Ratio of expenses to average net assets .95% A, F .95% F .95% A, F
Ratio of net investment income to average net assets 1.34% A 1.60% 2.34% A
Portfolio turnover rate 20% A 52% 14% A
Average commission rate G $ .0223 $ .0186 $ .0168
A ANNUALIZED
B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE
NOT ANNUALIZED AND DO NOT REFLECT CHARGES ATTRIBUTABLE
TO YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. INCLUSION
OF THESE CHARGES WOULD REDUCE THE TOTAL RETURN SHOWN.
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 FOR THE PERIOD AUGUST 30, 1996 (COMMENCEMENT OF SALE OF SHARES)
TO DECEMBER 31, 1996.
F 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).
G 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.
</TABLE>
LARGE CAP PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change 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).
CUMULATIVE TOTAL RETURNS
PERIODS ENDED JUNE 30, 1998 PAST 6 PAST 1 LIFE OF
MONTHS YEAR FUND
Large Cap Portfolio 18.45% 28.92% 65.62%
S&P 500 (registered trademark) 17.71% 30.16% 79.64%
CUMULATIVE TOTAL RETURNS show the fund's performance in percentage
terms over a set period - in this case, six months, 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.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JUNE 30, 1998 PAST 1 LIFE OF
YEAR FUND
Large Cap Portfolio 28.92% 31.68%
S&P 500 30.16% 37.65%
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.
(CHECKMARK) 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 LONG-TERM GROWTH AND SHORT-TERM
VOLATILITY. 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.
(Mountain Graph Information)
$10,000 OVER LIFE OF FUND
TRAVELERS LARGE CAP S&P 500
00148 SP001
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
1998/01/31 14043.91 15429.97
1998/02/28 15152.51 16542.78
1998/03/31 15857.28 17389.93
1998/04/30 15909.10 17564.87
1998/05/31 15618.90 17262.93
1998/06/30 16562.05 17964.15
IMATRL PRASUN SHR__CHT 19980630 19980709 103859 R00000000000025
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 June 30, 1998, the value of the investment would have grown
to $16,562 - a 65.62% increase on the initial investment. For
comparison, look at how the Standard & Poor's 500 Index did over the
same period. With reinvested dividends and capital gains, if any, the
same $10,000 investment would have grown to $17,964 - a 79.64%
increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1998
% OF FUND'S INVESTMENTS
General Electric Co. 3.3
Merck & Co., Inc. 3.1
Microsoft Corp. 3.0
Coca-Cola Co. (The) 2.9
Bristol-Myers Squibb Co. 2.6
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1998
% OF FUND'S INVESTMENTS
TECHNOLOGY 19.9
HEALTH 19.2
NONDURABLES 9.6
FINANCE 9.4
RETAIL & WHOLESALE 8.3
(Pie Chart Information)
ASSET ALLOCATION AS OF JUNE 30, 1998*
ROW: 1, COL: 1, VALUE: 92.59999999999999
ROW: 1, COL: 2, VALUE: 7.4
% OF FUND'S
INVESTMENTS
STOCKS 92.6%
SHORT-TERM INVESTMENTS 7.4%
* FOREIGN INVESTMENTS 9.3%
LARGE CAP PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
(PHOTOGRAPH OF KAREN FIRESTONE)
NOTE TO SHAREHOLDERS:
Karen Firestone became Portfolio Manager of
Large Cap Portfolio on May 1, 1998
Q. HOW DID THE FUND PERFORM, KAREN?
A. For the six months that ended June 30, 1998, the fund outperformed
the Standard and Poor's 500 Index, which increased 17.71% during that
period. For the 12-month period that ended June 30, 1998, the fund
slightly lagged the S&P 500, which was up 30.16%.
Q. WHAT HAVE BEEN THE MAJOR DRIVERS OF THE FUND'S PERFORMANCE RELATIVE
TO THE MARKET?
A. I think most of the fund's improved performance in the six-month
period can be attributed to an increased weighting in some of the
large growth companies that led the market, companies such as
Microsoft, Wal-Mart, Merck, General Electric and Coca-Cola.
Q. HAVE YOU BEEN EMPHASIZING ANY PARTICULAR INDUSTRIES OR THEMES?
A. The strength of the domestic economy has led to high levels of
consumer spending, so I increased the fund's weighting in the retail
and wholesale sector to more than 8% by the end of June. Wal-Mart,
Gap and Home Depot were large positions to which I added during the
period. Also, the explosion of demand for new telecommunications
technologies has created numerous investment opportunities, and I have
been investing in companies that are positioned to take advantage of
this trend.
Q. COULD YOU DESCRIBE THE CHANGES TAKING PLACE IN THE
TELECOMMUNICATIONS INDUSTRY AND HOW IT IS DRIVING THESE STOCKS?
A. Sure. We are seeing a phenomenal surge in demand for data and voice
communications, either through wireless mechanisms such as cell phones
or through computer links such as the Internet and electronic mail.
This increase in demand benefits companies that produce the equipment
necessary to handle all of this information, such as Alcatel, the
French telecommunications systems company, which is a fund holding. At
the same time, higher volumes of information being sent around the
world benefit carriers such as Worldcom and RCN, which are also owned
by the fund. And third, the proliferation of low-cost equipment and
telecommunications capacity is spurring demand for more "content" -
such as music and videos - which benefits media-based companies in the
fund such as Tribune and Viacom.
Q. WHAT STOCKS DID WELL DURING THE PERIOD? WHAT STOCKS DID POORLY?
A. Both Dell Computer, which continues to gain market share with its
direct sales of computers through the mail, and the clothing retailer
Gap, whose fashions have become very popular, performed very well
toward the end of the period. On the other hand, it was announced
during the period that AT&T's acquisition of cable giant TCI would end
up hurting earnings per share for AT&T shareholders in the short term,
which hurt the long-distance carrier's stock. Another underperforming
stock in the period was Electronic Data Systems, the electronic
processing company, which experienced higher costs and lower prices.
Q. COULD YOU DESCRIBE YOUR INVESTMENT STYLE?
A. First, I make sure that the fund is well-diversified and is
represented in the different sectors of the economy. Then I look for
names in each sector that I think will outperform not only the market,
but the industry group as well. In particular, some of the things that
I look for are companies with exceptional top-line growth, increasing
market share, pricing flexibility, a culture of product innovation,
rising profit margins and, lastly, an ability to generate excess cash
flow that can be used to benefit shareholders over the long run.
Q. WHAT'S YOUR OUTLOOK FOR THE NEXT SIX MONTHS?
A. The U.S economy is very strong, and the American consumer is
continuing to support economic growth and invest in the stock market.
Should interest rates rise sharply, there would be competition for the
investing dollar, and the stock market would be at risk. In the near
term, however, I feel relatively positive about the U.S. stock market.
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.
(CHECKMARK) 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 June 30, 1998, more than $28 million
MANAGER: Karen Firestone, since May 1998; joined Fidelity in 1983
<TABLE>
<CAPTION>
<S> <C> <C> <C>
LARGE CAP PORTFOLIO
INVESTMENTS JUNE 30, 1998 (UNAUDITED)
Showing Percentage of Value of Investment in Securities
COMMON STOCKS - 92.6%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 0.8%
AEROSPACE & DEFENSE - 0.3%
Lockheed Martin Corp. 900 $ 95,288
DEFENSE ELECTRONICS - 0.5%
Raytheon Co. Class A 2,500 144,063
TOTAL AEROSPACE & DEFENSE 239,351
BASIC INDUSTRIES - 1.0%
CHEMICALS & PLASTICS - 0.3%
Monsanto Co. 1,800 100,575
PACKAGING & CONTAINERS - 0.7%
Owens Illinois, Inc. (a) 4,400 196,900
TOTAL BASIC INDUSTRIES 297,475
DURABLES - 1.6%
AUTOS, TIRES, & ACCESSORIES - 0.4%
Honda Motor Co. Ltd. sponsored ADR 1,400 100,013
HOME FURNISHINGS - 0.5%
Leggett & Platt, Inc. 5,700 142,500
TEXTILES & APPAREL - 0.7%
Boss (Hugo) AG 48 100,885
NIKE, Inc. Class B 2,300 111,981
212,866
TOTAL DURABLES 455,379
ENERGY - 2.6%
ENERGY SERVICES - 1.3%
Dresser Industries, Inc. 3,000 132,188
Halliburton Co. 3,100 138,144
Schlumberger Ltd. 1,400 95,638
365,970
OIL & GAS - 1.3%
Texaco, Inc. 1,400 83,563
Total SA sponsored ADR 3,800 248,425
Valero Refining & Marketing Co. 1,900 63,175
395,163
TOTAL ENERGY 761,133
FINANCE - 9.4%
BANKS - 2.2%
AmSouth Bancorp. 2,800 110,075
Banc One Corp. 2,400 133,950
Banco Bilbao Vizcaya SA (Reg.) 1,500 76,916
Bank of Ireland, Inc. 3,900 79,870
Bank of New York, Inc. 2,800 169,925
Societe Generale France Class A 300 62,202
632,938
CREDIT & OTHER FINANCE - 2.2%
American Express Co. 2,800 319,200
SHARES VALUE (NOTE 1)
Fleet Financial Group, Inc. 2,600 $ 217,100
Household International, Inc. 2,200 109,450
645,750
FEDERAL SPONSORED CREDIT - 2.0%
Fannie Mae 6,800 413,100
Freddie Mac 3,400 160,013
573,113
INSURANCE - 2.2%
AMBAC, Inc. 1,700 99,450
American International Group, Inc. 1,200 175,200
Hartford Financial Services Group, Inc. 1,300 148,688
MGIC Investment Corp. 2,100 119,831
UNUM Corp. 2,100 116,550
659,719
SAVINGS & LOANS - 0.8%
Charter One Financial, Inc. 4,800 161,700
Washington Mutual, Inc. 1,750 76,016
237,716
TOTAL FINANCE 2,749,236
HEALTH - 19.2%
DRUGS & PHARMACEUTICALS - 14.1%
American Home Products Corp. 9,300 481,275
Bristol-Myers Squibb Co. 6,700 770,081
Elan Corp. PLC ADR (a) 2,600 167,213
Immunex Corp. (a) 2,000 132,500
Lilly (Eli) & Co. 5,600 369,950
Merck & Co., Inc. 6,800 909,500
Pfizer, Inc. 2,000 217,375
Protein Design Labs, Inc. (a) 2,300 55,416
Sankyo Co. Ltd. 4,000 90,981
Schering-Plough Corp. 3,900 357,338
SmithKline Beecham PLC ADR 3,300 199,650
Warner-Lambert Co. 5,700 395,438
4,146,717
MEDICAL EQUIPMENT & SUPPLIES - 4.6%
Abbott Laboratories 5,300 216,638
Becton, Dickinson & Co. 2,100 163,013
Guidant Corp. 2,200 156,888
Johnson & Johnson 5,800 427,750
McKesson Corp. 900 73,125
Medtronic, Inc. 2,900 184,875
Sybron International, Inc. (a) 3,900 98,475
Techne Corp. 1,000 19,063
1,339,827
MEDICAL FACILITIES MANAGEMENT - 0.5%
Health Management Associates, Inc. 4,850 162,172
Class A (a)
TOTAL HEALTH 5,648,716
HOLDING COMPANIES - 0.5%
Tele-Communications, Inc. (TCI Ventures Group) Series A (a) 7,700 154,481
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
INDUSTRIAL MACHINERY & EQUIPMENT - 6.4%
ELECTRICAL EQUIPMENT - 5.4%
Alcatel Alsthom Compagnie Generale d'Electricite SA sponsored ADR 10,700 $ 435,356
General Electric Co. 10,600 964,584
Honeywell, Inc. 2,100 175,481
1,575,421
INDUSTRIAL MACHINERY & EQUIPMENT - 0.5%
Cooper Industries, Inc. 1,600 87,900
Ingersoll-Rand Co. 1,500 66,094
153,994
POLLUTION CONTROL - 0.5%
USA Waste Services, Inc. (a) 3,000 148,125
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 1,877,540
MEDIA & LEISURE - 7.9%
BROADCASTING - 2.2%
Cablevision Systems Corp. Class A (a) 1,700 141,950
CBS Corp. 7,800 247,650
Comcast Corp. Class A special 5,100 207,028
RCN Corp. 2,900 56,188
652,816
ENTERTAINMENT - 2.1%
Carnival Corp. Class A 4,300 170,388
Disney (Walt) Co. 1,800 189,113
Viacom, Inc. Class A (a) 4,600 269,100
628,601
LEISURE DURABLES & TOYS - 0.8%
Harley-Davidson, Inc. 2,700 104,625
Mattel, Inc. 3,000 126,938
231,563
PUBLISHING - 2.1%
Applied Graphics Technologies, Inc. (a) 1,800 82,350
Cognizant Corp. 2,600 163,800
Tribune Co. 4,100 282,131
World Color Press, Inc. (a) 2,200 77,000
605,281
RESTAURANTS - 0.7%
McDonald's Corp. 2,900 200,100
TOTAL MEDIA & LEISURE 2,318,361
NONDURABLES - 9.6%
BEVERAGES - 5.1%
Anheuser-Busch Companies, Inc. 2,800 132,125
Coca-Cola Co. (The) 9,900 846,450
PepsiCo, Inc. 8,200 337,738
Seagram Co. Ltd. 4,500 183,802
1,500,115
SHARES VALUE (NOTE 1)
FOODS - 0.6%
Nestle SA (Reg.) 60 $ 128,111
Raisio Group PLC 3,000 54,045
182,156
HOUSEHOLD PRODUCTS - 2.6%
Avon Products, Inc. 2,000 155,000
Clorox Co. 2,000 190,750
Colgate-Palmolive Co. 1,000 88,000
Gillette Co. 3,800 215,413
Procter & Gamble Co. 1,100 100,169
749,332
TOBACCO - 1.3%
Philip Morris Companies, Inc. 9,900 389,813
TOTAL NONDURABLES 2,821,416
RETAIL & WHOLESALE - 8.3%
APPAREL STORES - 1.4%
Abercrombie & Fitch Co. Class A (a) 5 220
Gap, Inc. 4,200 258,825
Limited, Inc. (The) 2,600 86,125
TJX Companies, Inc. 3,200 77,200
422,370
DRUG STORES - 0.6%
CVS Corp. 2,800 109,025
Walgreen Co. 1,900 78,494
187,519
GENERAL MERCHANDISE STORES - 2.8%
Dayton Hudson Corp. 4,500 218,250
Wal-Mart Stores, Inc. 9,800 595,350
813,600
GROCERY STORES - 1.4%
Dominicks Supermarkets, Inc. (a) 3,100 138,144
Safeway, Inc. (a) 6,700 272,606
410,750
RETAIL & WHOLESALE, MISCELLANEOUS - 2.1%
Best Buy Co., Inc. (a) 2,600 93,925
Castorama Dubois Investissemts SA 400 70,202
Home Depot, Inc. 3,400 282,413
Staples, Inc. (a) 5,600 162,050
608,590
TOTAL RETAIL & WHOLESALE 2,442,829
SERVICES - 2.3%
ADVERTISING - 1.3%
Omnicom Group, Inc. 3,800 189,525
Outdoor Systems, Inc. (a) 3,250 91,000
WPP Group PLC ADR 1,600 107,600
388,125
LEASING & RENTAL - 0.5%
Hertz Corp. Class A 3,600 159,525
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
SERVICES - CONTINUED
SERVICES - 0.5%
AccuStaff, Inc. (a) 4,400 $ 137,500
TOTAL SERVICES 685,150
TECHNOLOGY - 19.9%
COMMUNICATIONS EQUIPMENT - 3.6%
3Com Corp. (a) 5,500 168,781
Ascend Communications, Inc. (a) 3,100 153,644
Aspect Telecommunications Corp. (a) 2,700 73,913
Cisco Systems, Inc. (a) 3,550 326,822
Lucent Technologies, Inc. 3,100 257,881
Northern Telecom Ltd. 1,500 85,233
1,066,274
COMPUTER SERVICES & SOFTWARE - 8.5%
America Online, Inc. (a) 1,400 148,400
Cambridge Technology Partners Massachusetts, Inc. (a) 1,500 81,938
Computer Associates International, Inc. 2,800 155,575
Compuware Corp. (a) 2,000 102,250
Electronic Data Systems Corp. 4,100 164,000
Equifax, Inc. 2,700 98,044
First Data Corp. 3,500 116,594
Keane, Inc. (a) 1,600 89,600
Microsoft Corp. (a) 8,200 888,675
Oracle Corp. (a) 2,300 56,494
PeopleSoft, Inc. (a) 2,800 131,600
Saville System PLC sponsored ADR (a) 2,000 100,250
Shared Medical Systems Corp. 1,900 139,531
Siebel Systems, Inc. (a) 3,000 96,750
SunGard Data Systems, Inc. (a) 3,300 126,638
2,496,339
COMPUTERS & OFFICE EQUIPMENT - 4.2%
Comdisco, Inc. 2,200 41,800
Compaq Computer Corp. 5,800 164,575
Dell Computer Corp. (a) 3,700 343,406
EMC Corp. (a) 4,900 219,581
Hewlett-Packard Co. 1,500 89,813
Pitney-Bowes, Inc. 2,600 125,125
Tech Data Corp. (a) 1,300 55,738
Xerox Corp. 1,800 182,925
1,222,963
ELECTRONICS - 3.6%
Altera Corp. (a) 2,000 59,125
Analog Devices, Inc. (a) 1 16
Intel Corp. 6,500 481,813
Linear Technology Corp. 2,400 144,750
Maxim Integrated Products, Inc. (a) 2,400 76,050
Texas Instruments, Inc. 3,300 192,431
Thermo Instruments Systems, Inc. (a) 3,650 95,813
1,049,998
TOTAL TECHNOLOGY 5,835,574
SHARES VALUE (NOTE 1)
UTILITIES - 3.1%
TELEPHONE SERVICES - 3.1%
AT&T Corp. 2,400 $ 137,100
MCI Communications Corp. 3,400 197,625
Telecomunicacoes Brasileiras SA 1,600 174,700
sponsored ADR
Worldcom, Inc. (a) 8,400 406,875
916,300
TOTAL COMMON STOCKS 27,202,941
(Cost $24,922,353)
</TABLE>
CASH EQUIVALENTS - 7.4%
Taxable Central Cash Fund (b) 2,181,712 2,181,712
TOTAL INVESTMENT IN SECURITIES - 100% $ 29,384,653
(Cost $27,104,065)
LEGEND
(a) Non-income producing
(b) At period end, the seven-day yield on the Taxable Central Cash
Fund was 5.61%. 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 $28,226,271 and $15,471,867, respectively (see Note 3 of
Notes to Financial Statements).
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 were $3,496 and $0 for the
period (see Note 4 of Notes to Financial Statements).
INCOME TAX INFORMATION
At June 30, 1998, the aggregate cost of investment securities for
income tax purposes was $27,104,065. Net unrealized appreciation
aggregated $2,280,588, of which $2,781,938 related to appreciated
investment securities and $501,350 related to depreciated investment
securities.
LARGE CAP PORTFOLIO
FINANCIAL STATEMENTS
<TABLE>
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<S> <C> <C>
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998 (UNAUDITED)
ASSETS
INVESTMENT IN SECURITIES, AT VALUE $ 29,384,653
(COST $27,104,065) -
SEE ACCOMPANYING SCHEDULE
RECEIVABLE FOR INVESTMENTS SOLD 229,146
RECEIVABLE FOR FUND SHARES SOLD 95,077
DIVIDENDS RECEIVABLE 27,657
INTEREST RECEIVABLE 8,517
RECEIVABLE FROM TRAVELERS GROUP 10,714
FOR EXPENSE REDUCTIONS
TOTAL ASSETS 29,755,764
LIABILITIES
PAYABLE FOR INVESTMENTS PURCHASED $ 1,664,928
OTHER PAYABLES AND 28,137
ACCRUED EXPENSES
TOTAL LIABILITIES 1,693,065
NET ASSETS $ 28,062,699
NET ASSETS CONSIST OF:
PAID IN CAPITAL $ 23,573,573
UNDISTRIBUTED NET INVESTMENT INCOME 38,535
ACCUMULATED UNDISTRIBUTED NET REALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS 2,170,010
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 2,280,581
AND ASSETS AND LIABILITIES IN
FOREIGN CURRENCIES
NET ASSETS, FOR 1,756,075 $ 28,062,699
SHARES OUTSTANDING
NET ASSET VALUE, OFFERING PRICE $15.98
AND REDEMPTION PRICE PER SHARE ($28,062,699 (DIVIDED BY) 1,756,075 SHARES)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
INVESTMENT INCOME $ 96,008
DIVIDENDS
INTEREST 34,380
TOTAL INCOME 130,388
EXPENSES
MANAGEMENT FEE $ 73,270
TRANSFER AGENT FEES 2,967
ACCOUNTING FEES AND EXPENSES 30,061
NON-INTERESTED TRUSTEES' COMPENSATION 2,417
CUSTODIAN FEES AND EXPENSES 3,295
REGISTRATION FEES 4,139
AUDIT 19,204
LEGAL 2,213
TOTAL EXPENSES BEFORE REDUCTIONS 137,566
EXPENSE REDUCTIONS (45,713) 91,853
NET INVESTMENT INCOME 38,535
REALIZED AND UNREALIZED GAIN (LOSS)
NET REALIZED GAIN (LOSS) ON:
INVESTMENT SECURITIES 2,181,979
FOREIGN CURRENCY TRANSACTIONS (698) 2,181,281
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON:
INVESTMENT SECURITIES 1,055,275
ASSETS AND LIABILITIES IN (7) 1,055,268
FOREIGN CURRENCIES
NET GAIN (LOSS) 3,236,549
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 3,275,084
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997
OPERATIONS $ 38,535 $ 32,734
NET INVESTMENT INCOME
NET REALIZED GAIN (LOSS) 2,181,281 184,372
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) 1,055,268 879,845
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 3,275,084 1,096,951
DISTRIBUTIONS TO SHAREHOLDERS - (32,734)
FROM NET INVESTMENT INCOME
FROM NET REALIZED GAIN (10,808) (225,320)
TOTAL DISTRIBUTIONS (10,808) (258,054)
SHARE TRANSACTIONS 13,186,149 7,699,498
NET PROCEEDS FROM SALES OF SHARES
REINVESTMENT OF DISTRIBUTIONS 10,808 258,054
COST OF SHARES REDEEMED (468,121) (138,346)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS 12,728,836 7,819,206
TOTAL INCREASE (DECREASE) IN NET ASSETS 15,993,112 8,658,103
NET ASSETS
BEGINNING OF PERIOD 12,069,587 3,411,484
END OF PERIOD (INCLUDING UNDISTRIBUTED NET INVESTMENT
INCOME OF $38,535 AND $0, RESPECTIVELY) $ 28,062,699 $ 12,069,587
OTHER INFORMATION
SHARES
SOLD 893,621 582,424
ISSUED IN REINVESTMENT OF DISTRIBUTIONS 766 20,100
REDEEMED (32,330) (10,566)
NET INCREASE (DECREASE) 862,057 591,958
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
FINANCIAL HIGHLIGHTS
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1998
SELECTED PER-SHARE DATA (UNAUDITED) 1997 1996 E
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.50 $ 11.29 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .03 D .07 D .04
NET REALIZED AND UNREALIZED GAIN (LOSS) 2.46 2.54 1.29
TOTAL FROM INVESTMENT OPERATIONS 2.49 2.61 1.33
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME - (.04) (.04)
FROM NET REALIZED GAIN (.01) (.36) -
TOTAL DISTRIBUTIONS (.01) (.40) (.04)
NET ASSET VALUE, END OF PERIOD $ 15.98 $ 13.50 $ 11.29
TOTAL RETURN B, C 18.45% 23.41% 13.30%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 28,063 $ 12,070 $ 3,411
RATIO OF EXPENSES TO AVERAGE NET ASSETS .95% A, F .95% F .95% A, F
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS .40% A .55% .98% A
PORTFOLIO TURNOVER RATE 167% A 60% 57% A
AVERAGE COMMISSION RATE G $ .0272 $ .0171 $ .0214
A ANNUALIZED
B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE
NOT ANNUALIZED AND DO NOT REFLECT CHARGES ATTRIBUTABLE
TO YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. INCLUSION
OF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS SHOWN.
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 FOR THE PERIOD AUGUST 30, 1996 (COMMENCEMENT OF SALE
OF SHARES) TO DECEMBER 31, 1996.
F 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).
G 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.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 1998 (UNAUDITED)
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 permit 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 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. Purchase
and sales of securities, income receipts and expense payments are
translated into U.S. dollars at the prevailing exchange rate on the
respective dates of the transactions.
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, the difference
between the amount of net investment income accrued and the U.S.
dollar amount actually received, and gains and losses between trade
date and settlement on purchases and sales of securities. 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
among 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.
Undistributed net investment income and 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.
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 responsible for
determining that the value of the underlying securities remains in
accordance with the market value requirements stated above.
2. OPERATING POLICIES - CONTINUED
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.
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 Group (The Travelers), receives a fee that is computed daily
at an annualized 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
annualized 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 (excluding interest, taxes, brokerage commissions and
extraordinary expenses) above an annual rate of .95% of average net
assets. For the period, the reimbursement reduced the expenses by
$41,614 and $45,638 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.
In addition, the funds have entered into an arrangement with their
custodian whereby credits realized as a result of uninvested cash
balances were used to reduce a portion of the fund's expenses. During
the period, custodian fees were reduced by $65 and $75 for Equity
Income Portfolio and Large Cap Portfolio, respectively, under this
arrangement.
6. BENEFICIAL INTEREST.
At the end of the period, The Travelers, its affiliates and Separate
Accounts of The Travelers were record owners of 100% of the total
outstanding shares of the fund.
INVESTMENT ADVISER
Travelers Asset Management International Corporation
Hartford, Connecticut
INVESTMENT SUB-ADVISER
Fidelity Management & Research Company
Boston, Massachusetts
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
Boston, Massachusetts
TRANSFER AGENT AND SHAREHOLDER SERVICING AGENT
Fidelity Investments Institutional Operations Company, Inc.
CUSTODIAN
Brown Brothers Harriman & Co.
Boston, Massachusetts
This report is prepared for the general information of contract owners
and is not an offer of shares of The Travelers Series Trust: Equity
Income Portfolio or Large Cap Portfolio. It should not be used in
connection with any offer except in conjunction with the Prospectuses
for the Variable Annuity Insurance products offered by the Travelers
Insurance Company or the Travelers Life and Annuity Company and the
prospectuses for the underlying funds, which collectively contain all
pertinent information, including the applicable sales commissions.
THE TRAVELERS VARIABLE
PRODUCTS FUNDS
SEMI-ANNUAL REPORTS
JUNE 30, 1998
[PHOTO]
THE TRAVELERS SERIES TRUST:
TRAVELERS QUALITY BOND PORTFOLIO
LAZARD INTERNATIONAL STOCK PORTFOLIO
MFS EMERGING GROWTH PORTFOLIO
FEDERATED HIGH YIELD PORTFOLIO
FEDERATED STOCK PORTFOLIO
DISCIPLINED MID CAP STOCK PORTFOLIO
[TRAVELERS LIFE & ANNUITY LOGO]
A MEMBER OF TRAVELERSGROUP
THE TRAVELERS INSURANCE COMPANY
THE TRAVELERS LIFE AND ANNUITY COMPANY
ONE TOWER SQUARE
HARTFORD, CT 061834
<PG$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
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SEMI-ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST
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DEAR SHAREHOLDER:
We are pleased to provide the semi-annual reports for six of the nineteen
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 Disciplined Mid Cap Stock
Portfolio (formerly known as Mid-Cap Disciplined Equity Fund) ("Portfolios" and
"Fund") for the period ended June 30, 1998. In this letter, we briefly discuss
general economic and market conditions and outline each Portfolio's or Fund's
investment strategy. A market commentary and detailed summary of performance and
current holdings for each Portfolio or Fund can be found in the pages listed
below.
<TABLE>
<CAPTION>
MARKET SCHEDULE OF
SUBACCOUNT COMMENTARY INVESTMENTS
---------- ---------- -----------
<S> <C> <C>
Travelers Quality Bond Portfolio...................... 4 13
Lazard International Stock Portfolio.................. 4 14
MFS Emerging Growth Portfolio......................... 5 17
Federated High Yield Portfolio........................ 6 23
Federated Stock Portfolio............................. 7 32
Disciplined Mid Cap Stock Portfolio................... 8 36
</TABLE>
ECONOMIC REVIEW AND OUTLOOK
The U.S. economy continues to provide the domestic capital markets with the
almost ideal conditions of low interest rates, lower inflation and steady
economic growth. First quarter Gross Domestic Product ("GDP") growth was well
ahead of expectations and led to the prospect of a Federal Reserve Board ("Fed")
tightening midway through the first half of 1998. Reported inflation, however,
remains low and the Asian currency crisis has caused the Fed to lean toward a
more neutral stance.
Despite the strong first quarter, the U.S. economy has recently showed signs of
slowing down. While industrial production and retail sales have gone down, the
most compelling evidence of the slowdown comes from the bond market. For the
first time since 1990, the portion of the Treasury yield curve, defined by the
spread between the two-year and ten-year Treasury yields, is now slightly
inverted. (The yield curve shows the difference between short- and long-term
yields.) In the past, an inverted yield curve has often been a sign of an
economic downturn. The overall Treasury yield curve shows the difference between
3-month and 30-year Treasury yields.
Fed Chairman Alan Greenspan noted in his latest testimony on July 21, 1998, that
the Fed remains more concerned about inflation rather than an economic
recession. We see no indications of either an economic or earnings recession in
the near future and the risk in the stock market, in our view, is largely
lessened by this outlook.
The U.S. stock market posted handsome returns in the first half of 1998. On a
year-to-date basis, the Dow Jones Industrial Average ("DJIA") rose 13.2% while
the broader Standard & Poor's 500 Index ("S&P 500") gained 17.7%. At this pace,
the stock market would yet again produce another year of 30% or more
appreciation, a three-year run unprecedented in stock market history. The U.S.
bond market produced healthy returns as yields on 30-year U.S. Treasury bonds
fell to their lowest level since the introduction of these securities in 1977.
We look ahead to a slower U.S. economy in the second half of 1998. The absence
of inflationary pressures should keep long-term bond yields below 6% while the
combination of lofty corporate valuations and slower corporate earnings growth
in 1998 could find stocks at the upper end of their trading range for the rest
of the year.
EQUITY MARKET COMMENTARY
After three remarkable years of market appreciation averaging more than 30%
annually, the first quarter's total return of the S&P 500 of almost 15% was that
much more impressive. Since 1995, the stock market's climb has also been
supported by a dramatic increase in money flows into securities by domestic and
foreign investors, as well as corporate buybacks and merger activity. Low
domestic inflation and steady revenue gains have also contributed to the
expansion in the market's price-to-earnings. (A P/E ratio shows the relationship
between a stock's price and the company's earnings for the last four quarters.)
Stock market volatility increased significantly in the second quarter. Investor
focus shifted from the prospects of Fed monetary policy tightening to the Asian
crisis and eventually to hopes of reasonable corporate earnings growth for the
second
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quarter. Large-capitalization stocks posted a gain for the second quarter of
1998 while small-capitalization stocks declined and fell farther behind their
large-cap stock counterparts.
A seesaw pattern in stock prices persisted at the beginning of the second
quarter of 1998, as stock prices remained almost unchanged at the end of April
from a month earlier. Inflation, however, continued to remain low and, despite a
strong first quarter GDP report, a slowdown in the second half of 1998 became
more apparent. Bond prices stabilized as a result of such evidence in late April
and early May and stock prices recovered to the levels established at the end of
the first quarter.
Renewed concerns over Asia and slowing earnings growth rocked the stock market
in May. The S&P 500 declined by almost 2% while the Russell 2000 Index fell
nearly 5%. (The Russell 2000 Index is made up of 2,000 smaller-capitalized
U.S.-based companies whose common stocks trade on the New York, American or
Nasdaq stock exchanges.) Several companies provided early guidance about lower
second quarter earnings during the month of May. Investors, already worried
about record valuations in the stock market showed no mercy in their response to
such disappointments as some stock prices tumbled down by as much as 50%.
Growth stocks performed better than value stocks in the second quarter of 1998
in the large-cap universe. (Growth stock investing means investing in companies
that are likely to grow faster than the economy at large and investing with the
expectation that their faster growth will bring rising earnings.) In particular,
the technology, health care and consumer discretionary sectors performed quite
well while the energy sector underperformed significantly in the wake of falling
oil prices.
The widely anticipated earnings pre-announcement season at the end of June, when
companies confess to upcoming earnings shortfalls, was not as severe as in prior
quarters. Many stock market investors appear to have drawn a positive inference
from this event and the current outlook for second quarter earnings seems
favorable. Corporate earnings growth, however, is clearly slowing down and the
recent market strength and current valuations are both predicated on a healthy
earnings rebound in the second half of the year and into 1999.
Besides the historically high valuations for large-capitalization stocks, we
think the principal risk to the U.S. stock market remains on the earnings front.
If Asia stays in a protracted recession (a likely scenario at this point), a
slowdown in the global economy could take its toll on U.S. corporate profits. A
prolonged period of anemic earnings growth would trigger a correction in the
stock market through a contraction in the price-to-earnings multiple. We remain
cautious about the U.S. stock market in the short term but bullish over the
intermediate to long term.
Three trends predominated in the international stock markets during the latter
stages of the reporting period:
- - Large-capitalization stocks materially outperformed mid- and
small-capitalization stocks.
- - The stock markets of relatively mature, developed economies outperformed the
more volatile and less liquid emerging markets.
- - The strength of the U.S. dollar versus the currencies of the United States'
major trading partners largely negated returns earned in local currencies.
The latter months of 1997 and early 1998 were marked by a sense of crisis in the
international markets. The Southeast Asian currency collapse radiated outward,
engulfing not only some of the strongest regional economies (such as Taiwan and
Singapore) but also ultimately crushing the Korean economy and its currency. In
Japan, the largest Asian stock market and economy and a major regional lender,
the crisis contributed to an already deteriorating local Japanese outlook.
We believe the Asian currency and economic collapse has far-reaching and as yet
not fully understood implications for global capital markets. So far, rescue
efforts have centered on creating stability and stemming further precipitous
declines in currencies as well as consumer and business confidence, such as the
feverish year-end efforts of the International Monetary Fund ("IMF") and global
banks to prevent a total collapse of the Korean financial system. In light of
this turmoil, the strength of the U.S. dollar and bond market, to some degree,
have reflected investor preferences for liquidity, stability and strength.
But the intermediate effects of these financial woes on Asia cannot be denied:
Economic contraction and decline, massive bankruptcies and debt
restructurings/reschedulings, potential labor and civil unrest have resulted in
an investment climate of
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much greater risk. Whether or not government and business policy-makers have the
will and flexibility to make the correct rehabilitative choices remains
unanswerable and we believe another six to twelve months of uncertainties in
Asia is very likely.
Moreover, European and U.S. companies may not escape untouched as their exports
to Asia decline. Furthermore, competitive Asian-produced goods are likely to
flood domestic markets now that prices (in U.S. dollars) have declined
substantially. While many U.S. companies have already used the Asian economic
weakness as an explanation for earnings shortfalls from consensus expectations
in recent reporting periods, the severity of the downturn should really be felt
in 1998.
Yet despite the number of bearish influences at work on the non-U.S. markets in
the past six months, there continue to be many positive developments, such as:
- - The push for European monetary union has created favorable macroeconomic
conditions, the likes of which have not been seen for two decades. Interest
rates and inflation are now and are likely to remain subdued, thus heightening
demand for stocks from individuals and institutions. Eleven countries have
successfully reformed their economies and qualified for the first round
selections in the European Union ("EU").
- - Corporations in Europe are beginning to restructure, boosting investor returns
and for the first time aligning management interests with external shareholder
interests through equity incentives.
- - The strengthening of the U.S. dollar against its major trading partners in the
past 30 months has improved export competitiveness for many major European and
Asian exporters and led to an upturn in the consolidated European economy.
- - Restructuring of many industries continues (such as in financial services and
pharmaceuticals), improving economies of scale and eliminating inefficient
local and regional goods and service providers. At the same time, innovative
mid-size companies are finding access to capital and an open door to
technologies and processes that lower costs for businesses and consumers.
- - Much of Latin America has recovered from the "tequila crisis" of early 1995.
BOND MARKET COMMENTARY
Just when many investors were getting somewhat more comfortable with risk again,
the Asian financial crisis re-erupted in May and June. Unrest in Indonesia and
further weakness in the Japanese yen were some of the highlights in the latest
chapter of the Asian crisis. The region's turmoil sent Asia's stock markets down
again and caused major setbacks in most emerging country stock and bond markets.
In addition, heightened investor concerns about greater risk triggered yet
another crisis in Russia's fragile markets.
In reaction to the renewed troubles in Asia, the U.S. bond market rallied as
many global investors sought refuge in U.S. Treasury securities during the
reporting period. Combined with U.S. and Japanese intervention to stabilize the
yen, the rally in U.S. Treasurys helped to support the U.S. stock and bond
markets by the end of the second quarter of 1998. Within the U.S. bond markets,
investment-grade bonds barely performed better than U.S. Treasurys. Many
longer-maturity bonds could not keep pace with the strong performance of the
30-year U.S. Treasury bond.
Mortgage-backed security spreads widened and discount bonds performed better
than premium bonds, as mortgage prepayments remained high. Corporate bond
spreads widened due to heavy issuance (i.e., more supply) with the most widening
occurring in bonds issued by corporations that were more impacted by the Asian
crisis.
Municipal bonds performed poorly as heavy issuance and investor "sticker shock"
kept tax-exempt bond yields from declining as much as U.S. Treasurys. High-yield
bonds and emerging market bonds also lagged U.S. Treasurys during the second
quarter of 1998, although high-yield bonds are still ahead of U.S. Treasurys for
the first six months of 1998.
We continue to believe that interest rates in the U.S. will slowly move lower as
the crisis in Asia pushes U.S. GDP down to a 1% to 2% annual range in the second
half of 1998. Exports from the U.S. have declined sharply and the trade deficit
has widened rapidly. We expect even greater deterioration in the U.S. trade
deficit as Asian imports accelerate in the second half of the year. Inventory
growth in the U.S. was strong in the first half of 1998, and that condition
should slow projected U.S.
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economic growth in the second half of the year. In addition, we expect that
corporate profits will continue to be flat, which combined with high inventories
and weak commodity prices, should help to weaken capital spending during the
next several quarters.
Within the U.S. bond market, we anticipate that the yield curve will be steeper
six to twelve months from now. However, we think that the yield curve will
likely stay flat until it becomes clearer that the inflationary risks from
currently tight U.S. labor markets have passed. As rates decline, bond spreads
are likely to widen. In addition, bond spreads should widen more because of a
continuation of the flight to quality as well as the fact that the supply of
bonds should remain high at these rate levels.
TRAVELERS QUALITY BOND PORTFOLIO
The Travelers Quality Bond Portfolio ("Portfolio") seeks current income,
moderate capital volatility and total return. For the six months ended June 30,
1998, the Portfolio posted a 3.10% total return versus the Lehman
Government/Corporate Bond Index of 4.17%. (The Lehman Government/Corporate Bond
Index is a combination of publicly issued intermediate- and long-term U.S.
government bonds and corporate bonds.) Rates broke through the lower end of
their multi-year trading range in the first quarter of 1998. The Portfolio's
manager expects interest rates to move lower as pressure from Asia on businesses
impacted by international trade should help to keep inflation low and lower the
rate of U.S. economic growth. Moreover, the tight U.S. employment market should
keep U.S. economic growth positive. The biggest risk to the Portfolio's
manager's forecast is that the Asian impact on the international aspects of the
U.S. economy will be dwarfed by the strength of the rest of the economy.
During the reporting period, the Portfolio's manager remained bullish on bonds
and the Portfolio's duration was slightly longer than its benchmark. (Duration
is a measure of a fund's volatility relative to a given change in interest
rates.) In addition, the Portfolio was overweighted in corporate bonds early in
the reporting period, and that acted as a drag on Portfolio performance on a
relative basis during this time as investors sought out safe harbors because of
the Asian crisis.
LAZARD INTERNATIONAL STOCK PORTFOLIO
The Lazard International Equity Portfolio ("Portfolio") seeks capital
appreciation through investing primarily in the stocks of non-U.S. companies
(i.e., incorporated or organized outside the U.S.). The Portfolio had a total
return of 15.48% for the six months ended June 30, 1998, and slightly
outperformed the 15.10% posted by the Morgan Stanley Capital International
("MSCI") EAFE Index. (The MSCI EAFE Index consists of the equity total returns
for Europe, Australia, New Zealand and the Far East.)
After keeping pace with the market's torrid first quarter rise, the Portfolio
outpaced the MSCI EAFE Index during the second quarter of 1998. EAFE rose 1.1%
as Europe's 5.1% gain was tempered by continued weakness in Asia. Year to date,
the Portfolio rose nearly 19%, significantly ahead of EAFE's 15.9% gain.
Consolidation and corporate restructuring accelerated to unprecedented levels
during the second quarter of 1998. Global competition is forcing many companies
to radically alter the way they do business. European stock prices are rising as
companies embrace change to improve their return on capital by shedding non-core
activities and bolstering main business operations, primarily through strategic
mergers and acquisitions. Change is taking place in every industry, but none was
bigger than Germany's Daimler-Benz's surprise acquisition of Chrysler, creating
a global automotive powerhouse in the largest industrial takeover in history.
Before investors or even competitors could fully digest the ramifications of the
merger, Daimler Chrysler was already in talks to extend its capabilities with a
stake in Nissan Diesel (Japan's fourth-largest truck maker).
In telecom equipment, Alcatel (France) extended its global reach with the
acquisition of DSC Communications in the U.S. Alcatel also completed the initial
public offering ("IPO") of Alstom, its engineering and systems joint venture
with GEC. Over the past two years, Alcatel has successfully restructured itself
from a French conglomerate into a leading global telecom equipment company. In
consumer electronics, Philips Electronics (Netherlands) continued its own
aggressive restructuring by selling its unrelated PolyGram music and film
business to Seagram's (Canada, owner of Universal Studios). The Dutch group KPN
split its disparate telecommunication and postal services, leaving KPN as a
focused telecom company in a deregulating industry.
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In France, several companies sold their latest stakes in non-core companies to
put their assets to more productive use. Suez Lyonnaise des Eaux (France,
Utility) and St. Gobain (France, Glass) unwound each other's
cross-shareholdings. Suez Lyonnaise used its proceeds to strengthen its core
utility business by acquiring Societe Generale de Belgique (Belgium, Utility),
while St. Gobain applied its proceeds to a share repurchase program. Vivendi
(France, Environmental Services) sold its uncontrolling stake in Electrafina
(Belgium, oil/media company) to concentrate on its environmental service and
communication operations. European companies, in general, are years behind many
of their American counterparts, but they have begun in earnest the process to
boost returns and extract value for shareholders.
The Japanese stock market slipped 4.6% during the quarter but ended on an uptick
as talk of new economic recovery plans and the potential for financial industry
reform provided a glimmer of hope to investors. Sumitomo Trust and Long-Term
Credit Bank of Japan have recently announced a potential merger. The merger
could represent a watershed event marking the start of a turnaround for Japanese
banking, or it may be yet another bad solution to problems that have plagued
Japan since its economy began to deteriorate.
Despite uncertainty in Japan, some companies have successfully differentiated
themselves. Sony managed to post record fiscal year sales and profits. A profit
orientation mindset is also beginning to take root, as Matsushita Electric's
recently elicited return on asset measures attest. Valuations are becoming more
compelling and signs of change in Japan are beginning to appear, but companies
must ultimately demonstrate the ability to improve their returns for Japan's
overall stock market to recover.
MFS EMERGING GROWTH PORTFOLIO
The MFS Emerging Growth Portfolio ("Portfolio") seeks to provide long-term
growth of capital. For the six months ended June 30, 1998, the Portfolio
provided a total return of 21.42%. This compares very favorably to the 4.93%
return for the Russell 2000 Index and the 17.7% return for the S&P 500 for the
same period.
Low inflation, low interest rates and a robust U.S. economy created a positive
backdrop for emerging growth stocks in the first half of 1998. However, it was a
volatile period. Although seemingly far away, in the view of the Portfolio's
managers, the economic problems in Asia were probably the most important factors
affecting the U.S. financial markets during this reporting period. Concerns
relating to Asia drove premiums for liquidity to very high levels -- in other
words, investors were willing to pay much higher valuations for the liquidity
offered by bigger capitalization stocks. (Market capitalization is the value of
a company's outstanding shares of common stock, determined by the number of
shares outstanding multiplied by the share price.) Consequently, the
mid-capitalization company stocks and larger-capitalization company stocks in
the Portfolio tended to outperform the smaller stocks during the reporting
period. Also, concerns about Asia affected companies with significant exposure
to the region, such as technology stocks, many of which experienced a roller
coaster ride. Fortunately, the Portfolio's technology holdings were primarily in
computer software and networking, rather than the more volatile semiconductor
stocks that do a lot of business in Asia.
The Portfolio continued to benefit from the solid performance of its technology
holdings, where earnings were surprisingly strong despite issues relating to
Asia. Stocks that contributed to performance included Cisco, Microsoft, SAP, BMC
Software and Compuware -- all companies whose products were in strong demand by
companies seeking to increase productivity. Consolidation in the
telecommunications industry helped increase value in Portfolio holdings such as
WorldCom, MCI and Global Telesystems. Better-than-expected earnings and industry
consolidation also helped other companies such as Tyco International and
AirTouch. One stock which did not do as well as the Portfolio's managers would
have liked was Cendant, due to the merger of HFS and CUC International.
Moreover, the company encountered well-publicized difficulties because of
accounting problems at CUC. The Portfolio's managers think that the stock will
recover as those issues are resolved and the company should start to surprise
positively on the earnings front.
Looking ahead, the potential for interest rates to rise from currently very low
levels is something the managers are always on the look out for given the
continued strength of the U.S. economy and tight U.S. labor market. If rates
rise, interest-sensitive stocks such as financials and TV and radio broadcasters
could see their valuations come under pressure. So, to be on the cautious side,
the Portfolio's managers have trimmed back on some of their holdings in these
areas.
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The Portfolio's managers believe that we are at the beginning of a slowdown in
corporate profit growth for the economy and the S&P 500. We have already seen
the early manifestations of this in the first half of 1998, with earnings
disappointments for quite a few companies. The Portfolio's managers think this
bodes well for emerging growth stocks since many of them are expected to
generate earnings growth far superior to that of the broader market. As a
result, technology continues to be an area of emphasis since selected software
and networking companies are generating some of the strongest, most consistent
earnings growth that they have been able to identify.
Another area they believe offers great potential is the business and computer
services market. For example, the Portfolio's managers own information
technology and outsourcing firms that help other companies focus on their core
businesses. Telecommunications is another industry where they see many
opportunities given the increased competition and consolidation that is taking
place on a global basis. In their view, the companies that can grow the fastest,
and at the same time sustain and consistently deliver high growth, will be well
rewarded by the marketplace. The Portfolio's managers believe that their
investment strategy of searching out rapidly growing companies early in their
development, and growth stocks at reasonable prices should be a favorable one
for investors in 1998. (However, there can be no guarantees that their strategy
will be successful.)
FEDERATED HIGH YIELD PORTFOLIO
The Federated High Yield Portfolio ("Portfolio") seeks high current income by
investing primarily in a professionally managed, diversified portfolio of bonds.
The Portfolio posted a total return of 4.86% for the six months ended June 30,
1998. In comparison, the Lehman Brothers High Yield Bond Index returned 4.50%
for the six months versus 3.93% 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 treasury issues, agency
issues, corporate bond issues and mortgage-backed securities.)
Two opposing factors impacted the high yield bond market during the six months
ended June 30, 1998. On the positive side, the U.S. economy continued to
generate strong economic growth. On the negative side, Asian economies continue
to struggle. In the early part of the reporting period, the strong domestic
economy held the upper hand. However, late in the second quarter in 1998 Asian
economic problems and their impact on the domestic economy became a key investor
focal point. Economic statistics seemed to indicate that U.S. economic growth
was slowing with imports increasing, exports decreasing, inventories
accumulating and manufacturing activity slowing. This apparent slowing of the
domestic economy caused the spread between high yield bonds and U.S. Treasurys
to widen approximately 40 basis points and high quality bonds to outperform high
yield bonds in the second quarter. (A basis point is one-one hundredth of a
percent.) However, strong first quarter 1998 performance for high yield bonds
enabled them to outperform other high quality bonds for the period under review.
For example, the Lehman Brothers High Yield Bond Index returned 4.50% for the
six months versus 3.93% for the Lehman Brothers Aggregate Bond Index, a widely
used measure of high quality bond performance.
The Portfolio outperformed both the Lehman Brothers High Yield Bond Index and
the Lipper High Current Yield Fund Average (Lipper Analytical Services, Inc. is
a major fund tracking organization) during the period under review. Several
factors positively impacted the Portfolio's performance during the reporting
period. The Portfolio is overweighted in the broadcast radio and TV sectors
which generated outstanding returns led by companies such as Chancellor Media
and Sinclair Broadcasting. In the view of the Portfolio's managers, the
Portfolio's cable TV positions did well primarily because of consolidation
activity in the United Kingdom as well as AT&T's acquisition of
Telecommunication, Inc. in the U.S. which has reinforced the attractiveness of
the cable platform. The Portfolio also benefited from the strong performance of
several specific holdings including Nextel, Echostar, Six Flags, and Dialog
Corp. The energy sector was one of the worst performing sectors due to falling
oil prices.
The Portfolio remains overweighted in the telecommunication, cable TV and
broadcasting industries given the portfolio managers' belief that secular
changes occurring in these industries should make them superior performers
during the next six to twelve months. They also believe these sectors should
outperform in a slowing U.S. economy. The Portfolio's managers are maintaining a
bias toward higher quality high yield bonds although they are beginning to look
for attractive opportunities in lower quality high yield bonds on a selective
basis.
The performance of the high yield bond market over the balance of 1998 should be
a function of the U.S. economy and the overall strength of corporate profits.
The Portfolio's managers believe that the domestic economy is slowing and
corporate
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profits may disappoint optimistic expectations. Demand in Asia is weak while
supply from that region in industries such as semiconductors and steel is
beginning to impact domestic companies. However, they believe that the economy
will not sink into recession. Also the lull in the economy in the second half of
1998 may set the stage for a continuation of the current business cycle
expansion into 1999.
FEDERATED STOCK PORTFOLIO
The Federated Stock Portfolio ("Portfolio") seeks to provide growth of income
and capital by investing principally in a professionally managed and diversified
portfolio of the common stocks of high-quality companies. These companies
generally are leaders in their industries and are characterized by sound
management teams and the ability to finance future growth. For the six months
ended June 30, 1998, the Portfolio had a total return of 13.52% versus the
11.90% and 17.70% total returns for the Lipper growth and income funds average
index and the S&P 500, respectively.
During the first six months of 1998, the stock market reacted to events in Asia.
A financial crisis in this region last fall has triggered concerns of a global
economic slowdown. With economic uncertainty rising, domestic interest rates
fell and that provided support for the U.S. stock market. When the aftershocks
of the Asian crisis failed to quickly slow the American economy, many investors
rushed to buy U.S. stocks.
The U.S. market ended the first quarter of 1998 with a significant gain but
further progress became more halting as the Asian crisis began to affect
American exports in the spring. Late in the spring, stock investors increasingly
focused their attention on a handful of large market capitalization growth
companies. In fact, in the second quarter of 1998, the largest 50 companies in
the S&P 500 had an average total return of 8%, while the other 450, on average,
declined. This emphasis on large-cap growth stocks meant that value-oriented
strategies generally lagged the market for the first six months of 1998. Such
periods of underperformance by a value style happen from time to time despite
the time-tested benefits of emphasizing value in security selection. (Value
investing means investing in stocks that are selling for less than their true
intrinsic value, in the belief that the market will eventually recognize their
value.)
There are currently significant tailwinds pushing the stock market: ample
liquidity driven by favorable demographics, low inflation and interest rates,
increased productivity due to technology and enormous free cash flow generated
by corporate America. While these forces can justify current valuations when one
looks back, it is imperative that corporate earnings remain strong and inflation
remains subdued for this bull market in stocks to continue in the future. There
is nothing on the near-term horizon to suggest that this cannot be accomplished;
however one should recognize that the margin for error is quite small given the
stock market's historically high valuations.
The Portfolio's largest area of underperformance was caused by the Portfolio's
managers' exposure to tobacco. Philip Morris, RJR and UST Corp. were three of
the worst performing investments in the Portfolio during the past six months.
While the outcome of any government settlements as well as the impact of ongoing
litigation remains unclear, the portfolio managers believe that, with yields
from RJR Nabisco higher than U.S. Treasury bonds, and the lowest relative
valuations in the market, they are being adequately compensated for the current
uncertainty surrounding the tobacco industry. The Portfolio's managers view this
period of industry underperformance as a buying opportunity and they have
increased their exposure in this group.
During the reporting period, the Portfolio sold positions in PACCAR, Inc.,
Dayton-Hudson, Tele-Communications, Inc., General Motors Corp, Class H, and MCI
Communications Corp. after they had achieved significant price appreciation and
no longer appeared to be attractive based on the Portfolio's manager's valuation
disciplines.
These securities were replaced in the Portfolio by companies such as:
- - Bell Atlantic Corp.
- - Cooper Tire & Rubber Co.
- - Dillards, Inc.
- - ENSCO International Inc.
- - Hartford Financial Services Group, Inc.
7
<PG$PCN>
SEMI-ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
- - Kimberly-Clark Corp.
- - Parker-Hannifin Corp.
- - Union Camp Corp.
- - AT&T Corp.
- - Crown Cork & Seal Co., Inc.
- - Electronic Data Systems Corp.
- - FPL Group, Inc., Hasbro, Inc.
- - Northrop Corp.
- - Sun Microsystems, Inc.
These new positions were added to the Portfolio because they appear attractive
based on the Portfolio's managers' valuation disciplines, and they believe the
long-term fundamentals behind these companies are solid.
DISCIPLINED MID CAP STOCK PORTFOLIO
The Disciplined Mid Cap Stock Portfolio ("Portfolio") (formerly known as the Mid
Cap Disciplined Equity Fund) seeks growth of capital by investing primarily in a
broadly diversified portfolio of U.S. common stocks. For the six months ended
June 30, 1998, the Portfolio posted a total return of 9.00%, which compared
unfavorably to the 12.66% total return for the Lipper Analytical peer group
average.
The Portfolio is managed by the Travelers Investment Management Company
("TIMCO"). TIMCO manages the Portfolio 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 Portfolio's manager, attractive relative value. In order to
achieve consistent relative performance, the investment professionals at TIMCO
manage the Portfolio to mirror the overall risk, sector weightings and
growth/value style characteristics of the Standard & Poor's 400 Index.
During the first half of 1998, stock selection in the technology, financial
services, consumer discretionary and materials and processing sectors made the
strongest positive contribution to the Portfolio's overall relative performance.
In the technology sector, the Portfolio's managers' emphasis on a number of
rapidly growing software companies such as Keane Inc., BMC Software and Computer
Sciences was rewarded as those stocks rose sharply. In the financial services
sector, the Portfolio's biggest winner was Capital One Financial, a player in
the credit card and consumer banking businesses, whose earnings estimates have
climbed rapidly in the last six months. The Portfolio's managers' positions in
Bear Stearns, Hartford Life and Franklin Resources also performed well in this
sector.
In the consumer discretionary sector, the Portfolio's managers were helped by
overweighted positions in media companies such as New York Times and Meredith
Corporation and a number of different retailers such as Family Dollar, Costco
and Staples. The Portfolio also benefited from not holding Manpower Inc. and
U.S. Office Products, which fell on higher costs and declining revenues.
In the materials sector, the Portfolio's managers avoided a number of earnings
disappointments in companies such as Witco, IMC Global, Lubrizol and
Betzdearborn. They lost ground relative to the mid-capitalization index in the
transportation sector. Their positions in Overseas Shipholding and CNF
Transportation adversely affected performance and they also lagged the sector
performance as a result of their small underweight position in the airline
industry.
The Portfolio's managers believe that the current economic expansion has further
to go and that inflation will remain low. These factors argue in favor of a
continuation of the current bull market. Earnings growth, however, is clearly
slowing down and the recent market strength and current valuations are both
predicated on a healthy earnings rebound in the second half of the year and into
1999. Besides the historically high valuations for large-capitalization stocks,
the principal risk to the U.S. stock market remains on the earnings front. A
prolonged period of anemic earnings growth would trigger a correction in the
stock market through a contraction in the P/E multiple. The Portfolio's managers
remain cautious about the U.S. stock market
8
<PG$PCN>
SEMI-ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
over the short term. In this environment, they believe that it is particularly
important to identify companies with sustainable earnings growth at attractive
valuations across a wide variety of industries.
In their disciplined approach to stock selection, the Portfolio's managers
screen their research universe of over 800 mid-capitalization securities for
companies that offer improving fundamentals and relative earnings gain at
discounted stock valuations. In the technology sector, they focus on the higher
growth software industry with positions in Keane Inc., BMC Software and
Compuware. They maintain an underweight position in the weak performing
semi-conductor group by excluding stocks such as Xilinx and Analog Devices,
which have produced a string of negative earnings surprises. In the health care
sector, the Portfolio's managers continue to emphasize Biomet and Guidant,
leading manufacturers of medical devices, and medical services distribution
companies such as McKesson. In the consumer discretionary sector, their focus is
on diversified media companies like New York Times and retailers such as Family
Dollar, TJX and Neiman Marcus that demonstrate strong sales and earnings
momentum.
In closing, 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
July 10, 1998
9
<PG$PCN>
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON -- TRAVELERS QUALITY BOND PORTFOLIO AS OF 6/30/98
(UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
--------------------------------------------
<S> <C>
Six Months Ended 6/30/98 3.10%+
Year Ended 6/30/98 7.90%
8/30/96* through 6/30/98 7.61%
CUMULATIVE TOTAL RETURN
--------------------------------------------
8/30/96* through 6/30/98 14.39%
* 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 August
30, 1996, assuming reinvestment of dividends, through June 30,
1998. 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 Govt/Corp.
(Fiscal Year Covered) Portfolio Bond Index
<S> <C> <C>
8/30/96 10,000 10,000
12/96 10,356 10,489
6/97 10,602 10,776
12/31/97 11,095 11,512
6/30/98 11,439 11,992
</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 6/30/98
(UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
--------------------------------------------
<S> <C>
Six Months Ended 6/30/98 15.48%+
Year Ended 6/30/98 13.89%
8/1/96* through 6/30/98 17.02%
CUMULATIVE TOTAL RETURN
--------------------------------------------
8/1/96* through 6/30/98 35.07%
* 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 $10,000 made on August
1, 1996, assuming reinvestment of dividends, through June 30, 1998.
The Morgan Stanley Capital International ("MSCI") EAFE-GDP Weighted
Index is a composite portfolio consisting of equity total returns
for the countries of Europe, Australia, New Zealand and the Far
East, weighted based on each country's gross domestic product.
<TABLE>
<CAPTION>
Lazard
Measurement Period International
(Fiscal Year Covered) Stock Portfolio MSCI EAFE GDP
<S> <C> <C>
8/1/96 10,000 10,000
12/96 10,780 10,533
6/97 11,859 11,815
12/31/97 11,696 11,180
6/30/98 13,507 13,649
</TABLE>
- --------------------------------------------------------------------------------
Past performance is not predictive of future performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Average annual total returns are historical in nature and measure net investment
income and capital gain or loss from portfolio investments assuming
reinvestments of dividends. The returns do not reflect expenses associated with
the subaccount such as administrative fees, account charges and surrender
charges which, if reflected, would reduce the performance shown.
10
<PG$PCN>
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON -- MFS EMERGING GROWTH PORTFOLIO AS OF 6/30/98
(UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
<S> <C>
Six Months Ended 6/30/98 21.42%+
Year Ended 6/30/98 32.98%
8/30/96* through 6/30/98 27.43%
CUMULATIVE TOTAL RETURN
---------------------------------------------
8/30/96* through 6/30/98 55.93%
* 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 August
30, 1996, assuming reinvestment of dividends, through June 30,
1998. 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 10,000 10,000 10,000
12/96 10,600 11,441 10,931
6/97 11,726 13,798 12,046
12/31/97 12,843 15,258 13,376
6/30/98 15,593 17,961 14,035
</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 6/30/98
(UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
<S> <C>
Six Months Ended 6/30/98 4.86%+
Year Ended 6/30/98 13.18%
8/30/96* through 6/30/98 15.37%
CUMULATIVE TOTAL RETURN
---------------------------------------------
8/30/96* through 6/30/98 29.97%
* 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 August
30, 1996, assuming reinvestment of dividends, through June 30,
1998. 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 $100 million.
<TABLE>
<CAPTION>
Federated Lehman Lehman
Measurement Period High Yield High Yield Aggregate
(Fiscal Year Covered) Portfolio Bond Index Bond Index
<S> <C> <C> <C>
8/30/96 10,000 10,000 10,000
12/96 10,761 10,599 10,480
6/97 11,484 11,216 10,804
12/31/97 12,394 11,952 11,491
6/30/98 12,997 12,489 11,943
</TABLE>
- --------------------------------------------------------------------------------
Past performance is not predictive of future performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Average annual total returns are historical in nature and measure net investment
income and capital gain or loss from portfolio investments assuming
reinvestments of dividends. The returns do not reflect expenses associated with
the subaccount such as administrative fees, account charges and surrender
charges which, if reflected, would reduce the performance shown.
11
<PG$PCN>
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON -- FEDERATED STOCK PORTFOLIO AS OF 6/30/98 (UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
<S> <C>
Six Months Ended 6/30/98 13.52%+
Year Ended 6/30/98 26.47%
8/30/96* through 6/30/98 33.80%
CUMULATIVE TOTAL RETURN
---------------------------------------------
8/30/96* through 6/30/98 70.51%
* 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 August
30, 1996, assuming reinvestment of dividends, through June 30,
1998. 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>
Standard &
Measurement Period Federated Stock Poor's 500
(Fiscal Year Covered) Portfolio Index
<S> <C> <C>
8/30/96 10,000 10,000
12/96 11,261 11,441
6/97 13,482 13,798
12/31/97 15,032 15,258
6/30/98 17,051 17,961
</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 -- DISCIPLINED MID CAP STOCK PORTFOLIO AS OF 6/30/98
(UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
<S> <C>
Six Months Ended 6/30/98 9.00%+
Year Ended 6/30/98 28.94%
4/1/97* through 6/30/98 35.82%+
CUMULATIVE TOTAL RETURN
---------------------------------------------
4/1/97* through 6/30/98 46.47%+
* 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 $10,000 made on April
1, 1997, assuming reinvestment of dividends, through June 30, 1998.
The Standard & Poor's 400 Index is an unmanaged index composed of
400 widely held mid cap common stocks listed on the New York Stock
Exchange, American Stock Exchange and the over-the-counter market.
<TABLE>
<CAPTION>
Mid Cap Standard &
Measurement Period Disciplined Poor's 400
(Fiscal Year Covered) Equity Fund Index
<S> <C> <C>
4/1/97 10,000 10,000
6/97 11,360 11,151
12/31/97 13,438 13,425
</TABLE>
- --------------------------------------------------------------------------------
Past performance is not predictive of future performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Average annual total returns are historical in nature and measure net investment
income and capital gain or loss from portfolio investments assuming
reinvestments of dividends. The returns do not reflect expenses associated with
the subaccount such as administrative fees, account charges and surrender
charges which, if reflected, would reduce the performance shown.
12
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) JUNE 30, 1998
TRAVELERS QUALITY BOND PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
- ----------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
U.S. TREASURY OBLIGATIONS -- 60.1%
$4,000,000 AAA U.S. Treasury Note, 5.625% due 11/30/99..................... $ 4,006,440
400,000 AAA U.S. Treasury Note, 5.750% due 11/15/00..................... 401,984
4,000,000 AAA U.S. Treasury Note, 6.625% due 6/30/01...................... 4,117,160
3,200,000 AAA U.S. Treasury Note, 6.250% due 8/31/02...................... 3,283,168
- ----------------------------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS (Cost -- $11,811,965) 11,808,752
- ----------------------------------------------------------------------------------------------------
CORPORATE BONDS & NOTES -- 31.7%
- ----------------------------------------------------------------------------------------------------
APPAREL -- 3.8%
750,000 BBB- Tommy Hilfiger USA Inc., Company Guaranty, 6.500% due
6/1/03.................................................... 748,125
- ----------------------------------------------------------------------------------------------------
FOODS -- 2.6%
500,000 BBB Nabisco Inc., Note, 6.700% due 6/15/02...................... 508,125
- ----------------------------------------------------------------------------------------------------
HEALTH CARE -- 2.6%
250,000 BBB Columbia HCA Healthcare, Medium Term Note, 8.700% due
2/10/10................................................... 257,500
250,000 BBB Nationwide Health Properties Inc., Medium Term Note, 6.900%
due 10/1/37............................................... 259,062
- ----------------------------------------------------------------------------------------------------
516,562
- ----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 2.5%
500,000 AA- Telecom Corp. of New Zealand Ltd., 6.250% due 2/10/03 (a)... 500,160
- ----------------------------------------------------------------------------------------------------
TOBACCO -- 1.3%
250,000 A Philip Morris Cos., Inc., Sr. Note, 6.950% due 6/1/06....... 256,562
- ----------------------------------------------------------------------------------------------------
TRANSPORTATION -- 3.5%
650,000 BBB CSX Corp., Debenture, 7.250% due 5/1/04..................... 688,187
- ----------------------------------------------------------------------------------------------------
UTILITIES -- 15.4%
750,000 A Australian Gas Light Co., Note, 6.400% due 4/15/08 (a)...... 751,875
750,000 BB- Niagara Mohawk Power, Sr. Note, 7.625% due 10/1/05.......... 760,314
750,000 BBB+ Praxair Inc., Note, 6.150% due 4/15/03...................... 750,000
750,000 A+ United Utilities PLC, Note, 6.450% due 4/1/08............... 755,625
- ----------------------------------------------------------------------------------------------------
3,017,814
- ----------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS & NOTES (Cost -- $6,204,335) 6,235,535
- ----------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT AGENCIES -- 4.6%
- ----------------------------------------------------------------------------------------------------
CANADA -- 2.6%
500,000 A+ Province of Manitoba, 6.750% due 3/1/03..................... 516,760
- ----------------------------------------------------------------------------------------------------
PANAMA -- 2.0%
400,000 BB+ Republic of Panama, 7.875% due 2/13/02...................... 392,500
- ----------------------------------------------------------------------------------------------------
TOTAL FOREIGN GOVERNMENT AGENCIES (Cost -- $913,465) 909,260
- ----------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 3.6%
697,000 Chase, 5.700% due 7/1/98; Proceeds at maturity -- $697,108;
(Fully collateralized by U.S. Treasury Note, 6.000% due
7/31/02;
Market value -- $712,400) (Cost -- $697,000)................ 697,000
- ----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $19,626,765**) $19,650,547
- ----------------------------------------------------------------------------------------------------
</TABLE>
(a) Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers.
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 43 for definition of ratings.
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
LAZARD INTERNATIONAL STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- --------------------------------------------------------------------------------------
<C> <S> <C>
STOCK -- 92.6%
- --------------------------------------------------------------------------------------
AUSTRALIA -- 2.0%
38,906 Broken Hill Proprietary Co. Ltd. ........................... $ 325,456
41,800 Westpac Banking Corp. Ltd. ................................. 254,983
- --------------------------------------------------------------------------------------
580,439
- --------------------------------------------------------------------------------------
DENMARK -- 1.3%
4,280 Unidanmark A/S, Class A Shares.............................. 384,621
- --------------------------------------------------------------------------------------
FINLAND -- 0.9%
19,000 Merita PLC, Class A Shares.................................. 125,362
5,000 UPM-Kymmene Oyj............................................. 137,610
- --------------------------------------------------------------------------------------
262,972
- --------------------------------------------------------------------------------------
FRANCE -- 17.0%
3,060 Alcatel Alsthom............................................. 623,033
5,710 Axa......................................................... 642,209
6,700 Banque Nationale de Paris................................... 547,436
2,630 Compagnie de Saint Gobain................................... 487,633
4,600 Compagnie Generale des Establissements Michelin, Class B 265,530
Shares......................................................
6,080 Elf Aquitaine SA............................................ 854,780
10,850 Rhone-Poulenc SA............................................ 611,950
2,030 Suez Lyonnaise des Eaux..................................... 334,080
3,120 Vivendi..................................................... 666,212
- --------------------------------------------------------------------------------------
5,032,863
- --------------------------------------------------------------------------------------
GERMANY -- 10.9%
840 Allianz AG Registered Shares................................ 276,897
4,100 Daimler-Benz AG............................................. 402,049
5,300 Daimler-Benz AG Rights, Expire 6/98 (a)..................... 5,872
7,200 Dresdner Bank AG (c)........................................ 388,121
11,000 Hoechst AG.................................................. 549,085
3,800 Mannesmann AG............................................... 385,473
6,470 Metro AG.................................................... 392,501
7,270 Metro AG Rights, Expire 7/98 (a)............................ 316
1,075 Thyssen AG (c).............................................. 272,174
824 Viag AG..................................................... 556,941
- --------------------------------------------------------------------------------------
3,229,429
- --------------------------------------------------------------------------------------
HONG KONG -- 2.0%
15,473 HSBC Holdings PLC (c)....................................... 378,408
31,500 Swire Pacific Ltd., Class A Shares.......................... 118,908
108,000 Wharf Holdings Ltd. (c) .................................... 106,625
3,150 Wharf Holdings Warrants, Expire 12/31/99 (a)................ 0
- --------------------------------------------------------------------------------------
603,941
- --------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
LAZARD INTERNATIONAL STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- --------------------------------------------------------------------------------------
<C> <S> <C>
ITALY -- 5.1%
38,200 Credito Italiano S.p.A. .................................... $ 198,548
53,100 ENI S.p.A. ................................................. 345,924
42,170 Fiat S.p.A. ................................................ 185,139
28,800 Instituto Bancario San Paolo di Torino...................... 420,314
78,700 Telecom Italia S.p.A. di Risp NC (b)........................ 382,929
- --------------------------------------------------------------------------------------
1,532,854
- --------------------------------------------------------------------------------------
JAPAN -- 13.0%
12,000 Asahi Breweries Ltd. ....................................... 151,313
7,000 Honda Motor Corp. Ltd. ..................................... 249,162
1,000 Ito-Yokado Co. Ltd. ........................................ 47,051
50 Japan Tobacco, Inc. ........................................ 338,292
28,000 Matsushita Electric Industrial Co. Ltd. .................... 449,904
4,000 Nintendo Co. Ltd. .......................................... 370,357
57 Nippon Telegraph & Telephone Corp. ......................... 472,313
8,000 Omron Corp. ................................................ 122,203
5,500 Orix Corp. ................................................. 371,329
5,600 Promise Co., Ltd. .......................................... 230,399
26,000 Ricoh Co., Ltd. ............................................ 273,703
5,000 Sekisui Chemical Co. Ltd. .................................. 25,579
5,000 Sony Corp. ................................................. 430,522
74,000 Sumitomo Trust & Banking Co. (c) ........................... 330,583
- --------------------------------------------------------------------------------------
3,862,710
- --------------------------------------------------------------------------------------
MALAYSIA -- 0.4%
60,000 Genting Berhad.............................................. 108,499
- --------------------------------------------------------------------------------------
NETHERLANDS -- 3.6%
7,500 Heineken NV................................................. 294,587
6,200 Koninklijke KPN NV.......................................... 238,649
4,400 Royal Philips Electronics NV................................ 369,875
6,200 TNT Post Group NV........................................... 158,489
- --------------------------------------------------------------------------------------
1,061,600
- --------------------------------------------------------------------------------------
SINGAPORE -- 0.5%
47,000 United Overseas Bank Ltd. .................................. 146,049
- --------------------------------------------------------------------------------------
SPAIN -- 4.0%
22,800 Corporacion Bancaria de Espana SA........................... 512,326
14,618 Telefonica de Espana SA..................................... 676,997
- --------------------------------------------------------------------------------------
1,189,323
- --------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PG$PCN>
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SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
LAZARD INTERNATIONAL STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- --------------------------------------------------------------------------------------
<C> <S> <C>
SWEDEN -- 7.1%
29,700 ABB AB, Class A Shares...................................... $ 420,832
22,934 Astra AB, Class B Shares.................................... 457,247
20,700 Electrolux AB, Class B Shares............................... 355,603
19,200 Nordbanken Holding AB....................................... 140,841
9,500 Svenska Handelsbanken, Class A Shares....................... 440,757
9,700 Volvo AB, Class B Shares.................................... 288,875
- --------------------------------------------------------------------------------------
2,104,155
- --------------------------------------------------------------------------------------
SWITZERLAND -- 7.7%
2,390 Credit Suisse Group, Registered Shares...................... 531,793
160 Nestle SA, Registered Shares................................ 342,405
203 Novartis AG, Registered Shares.............................. 338,907
160 SGS Societe Generale de Surveillance Holding SA, Class B 271,202
Shares......................................................
176 Swatch Group AG, Bearer Shares.............................. 135,991
30 Swatch Group AG, Registered Shares.......................... 5,003
1,050 Zurich Versicherungs-Gesellschaft, Registered Shares........ 670,180
- --------------------------------------------------------------------------------------
2,295,481
- --------------------------------------------------------------------------------------
UNITED KINGDOM -- 17.1%
44,300 B.A.T. Industries PLC....................................... 442,379
88,900 British Aerospace PLC....................................... 682,317
39,200 British Petroleum Co. PLC................................... 570,661
20,198 Cadbury Schweppes PLC....................................... 312,739
37,874 Diageo PLC.................................................. 450,889
22,100 EMI Group PLC............................................... 193,772
19,400 Granada Group PLC........................................... 357,353
17,800 Imperial Chemical Industries PLC............................ 286,895
82,500 Lucasvarity PLC............................................. 330,019
35,500 Mirror Group PLC............................................ 133,863
30,400 National Power PLC.......................................... 286,074
25,900 National Westminster Bank PLC............................... 463,688
21,800 Prudential Corp. PLC........................................ 287,349
24,200 Unilever PLC................................................ 259,830
- --------------------------------------------------------------------------------------
5,057,828
- --------------------------------------------------------------------------------------
TOTAL STOCK (Cost -- $24,806,350)........................... 27,452,764
- --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- -----------------------------------------------------------------------------------------
<C> <S> <C>
REPURCHASE AGREEMENT -- 7.4%
$2,200,000 CIBC Wood Gundy Securities Inc., 5.500% due 7/1/98; Proceeds
at maturity -- $220,339;
(Fully collateralized by U.S. Treasury Note, 6.875% due
7/31/99;
Market value -- $2,244,683) (Cost -- $2,200,000)............ 2,200,000
- -----------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $27,006,350*)............ $29,652,764
- -----------------------------------------------------------------------------------------
</TABLE>
(a) Non-income producing security.
(b) Risp NC -- Risparmio Non-Convertible (non-convertible saving shares).
(c) A portion of this security is on loan.
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
MFS EMERGING GROWTH PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ---------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCK -- 90.6%
- ---------------------------------------------------------------------------------------
ADVERTISING -- 0.0%
100 Doubleclick Inc. ........................................... $ 4,969
- ---------------------------------------------------------------------------------------
AEROSPACE -- 0.7%
11,200 Gulfstream Aerospace Corp. ................................. 520,800
12,000 Newport News Shipbuilding................................... 321,000
- ---------------------------------------------------------------------------------------
841,800
- ---------------------------------------------------------------------------------------
BANKS & CREDIT COS. -- 0.0%
700 U.S. Trust Corp. ........................................... 53,375
- ---------------------------------------------------------------------------------------
BIOTECHNOLOGY -- 0.2%
3,300 Guidant Corp. .............................................. 235,331
100 Icon PLC ADR................................................ 2,525
- ---------------------------------------------------------------------------------------
237,856
- ---------------------------------------------------------------------------------------
BUSINESS MACHINES -- 0.3%
7,600 Compaq Computer Corp. ...................................... 215,650
4,250 Sun Microsystems, Inc. (a).................................. 184,609
- ---------------------------------------------------------------------------------------
400,259
- ---------------------------------------------------------------------------------------
BUSINESS SERVICES -- 10.7%
50,300 Accustaff Inc. (a).......................................... 1,571,875
11,300 Affiliated Computer Services, Class A Shares................ 435,050
7,500 Bisys Group Inc. ........................................... 307,500
242,434 Cendant Corp. .............................................. 5,060,810
5,500 Ceridian Corp. ............................................. 323,125
16,800 Computer Sciences Corp. .................................... 1,075,200
31,200 Danka Business Systems, Inc. ............................... 368,550
6,200 DST Systems Inc. (a)........................................ 347,200
26,700 First Data Corp. ........................................... 889,444
9,500 Ikon Office Solutions Inc. ................................. 138,344
21,850 Learning Tree International Inc. (a)........................ 439,731
3,600 Metamor Worldwide Inc. ..................................... 126,675
3,170 Navigant International Inc. ................................ 26,948
17,200 Policy Management System.................................... 675,100
17,100 Renaissance Worldwide Inc. ................................. 371,925
1,268 Sungard Data Systems, Inc. ................................. 48,659
19,750 Technology Solutions Co. (a)................................ 625,828
- ---------------------------------------------------------------------------------------
12,831,964
- ---------------------------------------------------------------------------------------
CELLULAR PHONES -- 0.9%
8,900 Airtouch Communications Inc. ............................... 520,094
12,200 Century Tel Enterprises, Inc. .............................. 559,675
- ---------------------------------------------------------------------------------------
1,079,769
- ---------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
MFS EMERGING GROWTH PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ---------------------------------------------------------------------------------------
<C> <S> <C>
COMMUNICATIONS SERVICES -- 3.8%
27,900 Global Telesystems Group (a)................................ $ 1,360,125
43,600 MCI Communications.......................................... 2,534,250
9,000 Sprint Corp. ............................................... 634,500
- ---------------------------------------------------------------------------------------
4,528,875
- ---------------------------------------------------------------------------------------
COMPUTER SOFTWARE -- 0.4%
4,100 Arm Holdings PLC ADR........................................ 251,125
1,000 Da Consulting Group Inc. (a)................................ 14,375
300 International Integration Inc. ............................. 5,175
6,600 Mobius Management Solutions Inc. ........................... 99,000
300 SAP Aktiengesellschaft ADR.................................. 67,500
- ---------------------------------------------------------------------------------------
437,175
- ---------------------------------------------------------------------------------------
COMPUTER SOFTWARE - PERSONAL COMPUTER -- 4.8%
3,825 Autodesk Inc. .............................................. 147,741
51,700 Microsoft Corp. (a)......................................... 5,602,987
- ---------------------------------------------------------------------------------------
5,750,728
- ---------------------------------------------------------------------------------------
COMPUTER SOFTWARE - SYSTEMS -- 19.0%
94,800 BMC Software Inc. (a)....................................... 4,923,675
98,410 Cadence Design System (a)................................... 3,075,312
99,102 Computer Associates International, Inc. .................... 5,506,355
5,400 Computer Learning Center.................................... 134,325
83,800 Compuware Corp. ............................................ 4,284,275
175,500 Oracle Systems, Corp. (a)................................... 4,310,719
3,800 Siebel Systems (a).......................................... 122,550
11,800 Synopsys Inc. (a)........................................... 539,850
- ---------------------------------------------------------------------------------------
22,897,061
- ---------------------------------------------------------------------------------------
CONSUMER GOODS & SERVICES -- 5.5%
8,400 Carson Inc. (a)............................................. 66,150
6,600 Rubbermaid Inc. ............................................ 219,038
100,036 Tyco International Ltd. .................................... 6,302,268
300 Whittman-Hart Inc. (a)...................................... 14,512
- ---------------------------------------------------------------------------------------
6,601,968
- ---------------------------------------------------------------------------------------
DEFENSE ELECTRONICS -- 0.3%
10,900 Loral Space & Communications (a)............................ 307,925
- ---------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT -- 0.2%
4,300 Cable Design Technologies (a)............................... 88,688
4,000 Elsag Bailey Process Auto (a)............................... 96,250
- ---------------------------------------------------------------------------------------
184,938
- ---------------------------------------------------------------------------------------
ELECTRONICS -- 0.6%
20,200 Altera Corp. (a)............................................ 597,162
800 Intel Corp. ................................................ 59,300
3,200 Xilinx Inc. (a)............................................. 108,800
- ---------------------------------------------------------------------------------------
765,262
- ---------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
MFS EMERGING GROWTH PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ---------------------------------------------------------------------------------------
<C> <S> <C>
ENTERTAINMENT -- 6.2%
21,600 CBS Corp. .................................................. $ 685,800
9,400 Clear Channel Communication (a)............................. 1,025,775
11,500 Cox Radio Inc. (a).......................................... 497,375
3,700 Gemstar International Group Ltd. ........................... 138,519
13,700 Harrah's Entertainment Inc. (a)............................. 318,525
3,500 Hearst Argyle TV Inc. ...................................... 140,000
4,500 Heftel Broadcasting (a)..................................... 201,375
14,700 Jacor Communications (a).................................... 867,300
2,400 Premier Parks Inc. ......................................... 159,900
15,300 Time Warner, Inc. .......................................... 1,307,194
10,000 Univision Communications Inc. (a)........................... 372,500
29,600 Viacom Inc. ................................................ 1,724,200
- ---------------------------------------------------------------------------------------
7,438,463
- ---------------------------------------------------------------------------------------
FINANCIAL INSTITUTIONS -- 1.9%
4,000 Associates First Capital Corp. ............................. 307,500
12,600 Consolidation Capital Co. .................................. 283,303
3,600 Donaldson, Lufkin & Jenrette Securities Corp. .............. 182,925
17,474 Franklin Resources Inc. .................................... 943,596
6,500 Morgan Stanley Dean Witter.................................. 593,937
- ---------------------------------------------------------------------------------------
2,311,261
- ---------------------------------------------------------------------------------------
INSURANCE -- 0.4%
2,300 Ace Ltd. ................................................... 89,700
5,800 Annuity & Life Re Holdings (a).............................. 128,325
3,300 Arm Financial Group, Inc. .................................. 73,013
1,200 Conseco Inc. ............................................... 56,100
1,300 Life Re Corp. .............................................. 106,600
- ---------------------------------------------------------------------------------------
453,738
- ---------------------------------------------------------------------------------------
MACHINERY -- 0.0%
3,150 SI Handling Systems Inc. ................................... 41,344
- ---------------------------------------------------------------------------------------
MEDICAL & HEALTH PRODUCTS -- 2.1%
7,100 Boston Scientific Corp. (a)................................. 508,538
3,400 King Pharmaceutical Inc. (a)................................ 47,600
6,800 McKesson Corp. ............................................. 552,500
31,600 U.S. Surgical Corp. ........................................ 1,441,750
- ---------------------------------------------------------------------------------------
2,550,388
- ---------------------------------------------------------------------------------------
MEDICAL & HEALTH SERVICES -- 7.7%
4,000 Cardinal Health Inc. ....................................... 375,000
4,900 Columbia HCA Healthcare Corp. .............................. 142,713
31,000 HBO & Co. .................................................. 1,092,750
1,050 Health Management Association (a)........................... 35,109
37,600 Healthsouth Corp. (a)....................................... 1,003,450
8,300 Integrated Health Service................................... 311,250
4,600 Medtronic Inc. ............................................. 293,250
10,700 Orthodontic Centers of America.............................. 224,031
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
MFS EMERGING GROWTH PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ---------------------------------------------------------------------------------------
<C> <S> <C>
MEDICAL & HEALTH SERVICES -- 7.7% (CONTINUED)
6,900 Pacificare Health System Inc. .............................. $ 609,788
2,300 PSS World Medical Inc. (a).................................. 33,637
6,700 Steris Corp. (a)............................................ 426,078
17,645 Total Renal Care Holdings (a)............................... 608,752
57,900 United Healthcare Co. ...................................... 3,676,650
6,600 Wellpoint Health Network (a)................................ 488,400
- ---------------------------------------------------------------------------------------
9,320,858
- ---------------------------------------------------------------------------------------
POLLUTION CONTROL -- 0.2%
5,800 USA Waste Service Inc. (a).................................. 286,375
- ---------------------------------------------------------------------------------------
PRINTING & PUBLISHING -- 0.0%
4,227 Workflow Management, Inc. (a)............................... 34,081
- ---------------------------------------------------------------------------------------
RESTAURANTS & LODGING -- 1.1%
8,100 Applebees International Inc. ............................... 181,237
19,100 Buffets Inc. ............................................... 299,631
20,857 Promus Hotel Corp. (a)...................................... 802,995
- ---------------------------------------------------------------------------------------
1,283,863
- ---------------------------------------------------------------------------------------
RETAIL -- 0.2%
400 Duane Reade Inc. (a)........................................ 12,000
4,300 Kohl's Corp. (a)............................................ 223,063
- ---------------------------------------------------------------------------------------
235,063
- ---------------------------------------------------------------------------------------
SPECIAL PRODUCTS & SERVICES -- 0.3%
413 Aztec Technology Partners................................... 3,154
1,000 Central Parking Corp. ...................................... 45,500
4,900 Coach USA Inc. (a).......................................... 223,562
3,522 School Specialty, Inc. (a).................................. 57,682
2,425 US Office Products Co. ..................................... 47,303
- ---------------------------------------------------------------------------------------
377,201
- ---------------------------------------------------------------------------------------
STORES -- 10.7%
3,050 Consolidated Stores Corp. (a)............................... 110,562
33,500 Corporate Express Inc. (a).................................. 425,031
24,800 CVS Corp. .................................................. 965,650
1,375 Dollar General Corp. ....................................... 54,398
6,800 General Nutrition Co. ...................................... 211,650
29,850 Home Depot Inc. ............................................ 2,479,416
6,500 Linens 'N Things Inc. ...................................... 198,656
26,000 Lowe's Cos., Inc. .......................................... 1,054,625
25,700 Micro Warehouse Inc. (a).................................... 398,350
73,100 Office Depot Inc. (a)....................................... 2,307,219
2,600 Proffitt's Inc. (a)......................................... 104,975
71,500 Republic Industries Inc. ................................... 1,787,500
51,400 Rite Aid Corp. ............................................. 1,930,713
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
MFS EMERGING GROWTH PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ---------------------------------------------------------------------------------------
<C> <S> <C>
STORES -- 10.7% (CONTINUED)
26,600 Staples Inc. (a)............................................ $ 769,738
400 Viking Office Products Inc. ................................ 12,550
- ---------------------------------------------------------------------------------------
12,811,033
- ---------------------------------------------------------------------------------------
SUPERMARKETS -- 1.8%
42,470 Fred Meyer Inc. ............................................ 1,804,975
8,400 Safeway Inc. ............................................... 341,775
- ---------------------------------------------------------------------------------------
2,146,750
- ---------------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 10.4%
1,700 Amdocs Ltd. ................................................ 25,712
1,500 Aspect Telecommunication (a)................................ 41,063
70,000 Cisco Systems Inc. (a)...................................... 6,444,375
40,300 Intermedia Communication (a)................................ 1,690,081
14,200 Lucent Technologies Inc. ................................... 1,181,262
8,000 Tellabs Inc. (a)............................................ 573,000
14,500 Tel-Save Holdings Inc. (a).................................. 213,875
48,090 Worldcom Inc. (a)........................................... 2,329,359
- ---------------------------------------------------------------------------------------
12,498,727
- ---------------------------------------------------------------------------------------
WIRELESS EQUIPMENT -- 0.2%
9,700 American Tower Corp. ....................................... 241,894
- ---------------------------------------------------------------------------------------
TOTAL COMMON STOCK (Cost -- $88,844,917).................... 108,954,963
- ---------------------------------------------------------------------------------------
FOREIGN STOCK -- 4.7%
- ---------------------------------------------------------------------------------------
GERMANY -- 3.7%
6,600 SAP AG, Preferred........................................... 4,486,537
- ---------------------------------------------------------------------------------------
GREAT BRITAIN -- 0.6%
250 Arm Holdings................................................ 4,943
40,100 Sema Group PLC.............................................. 476,712
96,800 Tylor Nelson................................................ 196,640
- ---------------------------------------------------------------------------------------
678,295
- ---------------------------------------------------------------------------------------
SWITZERLAND -- 0.4%
39,625 SAAB Aerospace.............................................. 417,372
7,500 Skandia Forsakings.......................................... 107,211
- ---------------------------------------------------------------------------------------
524,583
- ---------------------------------------------------------------------------------------
TOTAL FOREIGN STOCK (Cost -- $2,891,850).................... 5,689,415
- ---------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
MFS EMERGING GROWTH PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- ---------------------------------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENT -- 4.7%
$5,700,000 Federal Home Loan Discount Note, 5.400% due 7/1/98
(Cost -- $5,700,000)........................................ $ 5,700,000
- ---------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $97,436,767*)............ $120,344,378
- ---------------------------------------------------------------------------------------
</TABLE>
(a) Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
FEDERATED HIGH YIELD PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
- -------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
CORPORATE BONDS & NOTES -- 88.0%
- -------------------------------------------------------------------------------------------------
AEROSPACE & DEFENSE -- 0.2%
$ 50,000 B+ Tracor Inc., Sr. Sub. Debentures, 8.500% due 3/1/07......... $ 54,500
- -------------------------------------------------------------------------------------------------
AGRICULTURE -- 0.3%
75,000 B Purina Mills Inc., Sr. Sub. Note, 9.000% due 3/15/10+....... 77,250
- -------------------------------------------------------------------------------------------------
AUTOMOTIVE -- 1.4%
200,000 B Collins & Aikman Products Co., Sr. Sub. Note,
11.500% due 4/15/06........................................ 224,000
100,000 B Lear Corp., Sub. Note, 9.500% due 7/15/06................... 109,750
75,000 B3* Oshkosh Trucking Corp., Sr. Sub. Note, 8.750% due 3/1/08.... 75,938
- -------------------------------------------------------------------------------------------------
409,688
- -------------------------------------------------------------------------------------------------
BANKING -- 1.3%
350,000 B First Nationwide Holdings Inc., Sr. Sub. Note, 10.625% due
10/1/03..................................................... 397,250
- -------------------------------------------------------------------------------------------------
BEVERAGE & TOBACCO -- 0.4%
125,000 BB+ Dimon Inc., Sr. Note, 8.875% due 6/1/06..................... 128,281
- -------------------------------------------------------------------------------------------------
BROADCASTING - TV, CABLE & RADIO -- 8.1%
125,000 B- Acme Television, Sr. Discount Note, step bond to yield
11.006% due 9/30/04........................................ 102,189
150,000 NR Big City Radio Inc., Sr. Discount Note, step bond to yield
11.070% due 3/15/05........................................ 112,125
100,000 B- Capstar Broadcasting Partners, Sr. Sub. Note, 9.250% due
7/1/07..................................................... 104,750
Chancellor Media Corp., Sr. Sub. Note:
50,000 Ba3* 10.500% due 1/15/07........................................ 56,125
400,000 B 8.125% due 12/15/07........................................ 405,000
CSC Holdings Inc., Sr. Sub. Note:
225,000 BB- 9.250% due 11/1/05......................................... 241,313
100,000 BB- 9.875% due 2/15/13......................................... 111,000
100,000 CC+ Cumulus Media Inc., Sr. Sub. Note, 10.375% due 7/1/08....... 100,250
325,000 B Fox/Liberty Networks LLC Inc., Sr. Discount Note, step bond
to yield 9.580% due 8/15/07................................ 226,688
125,000 B1* Lamar Advertising Co., Sr. Sub. Note, 8.625% due 9/15/07.... 128,281
250,000 B Outdoor Systems Inc., Sr. Sub. Note, 8.875% due 6/15/07..... 260,000
Sinclair Broadcast Group Inc., Sr. Sub. Note:
275,000 B 8.750% due 12/5/02......................................... 281,188
100,000 B 10.000% due 9/30/05........................................ 106,500
100,000 B- Sullivan Broadcasting Inc., Sr. Sub. Note,
10.250% due 12/15/05....................................... 114,375
100,000 B UIH Australia Inc., Sr. Discount Note, step bond to yield
12.114% due 5/15/06........................................ 71,124
- -------------------------------------------------------------------------------------------------
2,420,908
- -------------------------------------------------------------------------------------------------
BUILDING/CONSTRUCTION -- 0.9%
50,000 B American Architectural Products, Sr. Sub. Note, 11.750% due
12/1/07..................................................... 52,125
100,000 B3* American Builders & Contractors, Sr. Sub. Note, 10.625% due
5/15/07..................................................... 103,625
100,000 BB Building Materials Corp., Sr. Note, 8.000% due 10/15/07..... 100,250
- -------------------------------------------------------------------------------------------------
256,000
- -------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
FEDERATED HIGH YIELD PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
- -------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
BUSINESS EQUIPMENT -- 1.5%
$150,000 B American Business Information, Sr. Sub. Note.,
9.500% due 6/15/08+........................................ $ 150,750
175,000 B- Fisher Scientific International Inc., Sr. Sub. Note,
9.000% due 2/1/06.......................................... 174,125
United Stationer Supply, Sr. Sub. Note:
33,000 B 12.750% due 5/1/05......................................... 37,455
100,000 B 8.375% due 4/15/08+........................................ 100,250
- -------------------------------------------------------------------------------------------------
462,580
- -------------------------------------------------------------------------------------------------
BUSINESS MACHINES -- 0.7%
175,000 B Dialog Corp., Sr. Sub. Note, 11.000% due 11/15/07........... 193,812
- -------------------------------------------------------------------------------------------------
BUSINESS SERVICES -- 0.7%
200,000 B- US Office Product Co., Sr. Sub. Note, 9.750% due 6/15/08+... 200,500
- -------------------------------------------------------------------------------------------------
CABLE/CELLULAR -- 6.2%
100,000 B Charter Communications Southeast LP Charter, Sr. Note,
11.250% due 3/15/06........................................ 110,375
125,000 B- Diamond Cable Communications PLC, Sr. Discount Note, step
bond to yield 9.900% due 2/15/07........................... 92,500
150,000 B- Diamond Holdings PLC, Guaranteed Sr. Note,
9.125% due 2/1/08.......................................... 156,375
125,000 NR Diva Systems Corp., Unit Sr. Discount Note, step bond to
yield 12.141% due 3/1/08+.................................. 64,375
100,000 B3* Echostar Satellite Broadcasting, Discount Note, step bond to
yield 13.017% due 3/15/04.................................. 92,000
375,000 B- International Cabletel Inc., Sr. Note, step bond to yield
11.550% due 2/1/06......................................... 306,095
375,000 B- NTL Inc., Sr. Deferred Coupon Note, step bond to yield
9.653% due 4/1/08+......................................... 244,687
275,000 B- Pegasus Communications Corp., Sr. Note, 9.625% due
10/15/05................................................... 283,937
200,000 BB+ Rogers Cable Systems Inc., Sr. Note, 10.000% due 3/15/05.... 222,000
275,000 BB- Rogers Cantel Inc., Sr. Sub. Note, 8.800% due 10/1/07....... 272,250
- -------------------------------------------------------------------------------------------------
1,844,594
- -------------------------------------------------------------------------------------------------
CHEMICALS -- 2.3%
Buckeye Cellulose Corp., Sr. Sub. Note:
75,000 BB- 8.500% due 12/15/05........................................ 76,875
100,000 BB- 9.250% due 9/15/08......................................... 105,250
150,000 BB- ISP Holdings Inc., Sr. Sub. Note, 9.000% due 10/15/03....... 156,000
Polymer Group Inc., Sr. Sub. Note:
125,000 B 9.000% due 7/1/07.......................................... 127,500
200,000 B 8.750% due 3/1/08+......................................... 200,500
50,000 B+ Sterling Chemicals Holdings Inc., Sr. Discount Note, step
bond to yield 12.485% due 8/15/08.......................... 29,125
- -------------------------------------------------------------------------------------------------
695,250
- -------------------------------------------------------------------------------------------------
CONGLOMERATES -- 0.3%
100,000 B- Eagle-Picher Industrial Inc., Sr. Sub. Note,
9.375% due 3/1/08+......................................... 101,875
- -------------------------------------------------------------------------------------------------
CONSUMER PRODUCTS -- 5.9%
100,000 BB- American Safety Razor, Sr. Note, 9.875% due 8/1/05.......... 107,875
175,000 B- Amscan Holdings Inc., Sr. Sub. Note, 9.875% due 12/15/07.... 182,000
250,000 B2* Boyds Collection LTD., Sr. Sub. Note, 9.000% due 5/15/08+... 250,625
125,000 B2* Chattem Inc., Sr. Sub. Note, 8.875% due 4/1/08+............. 124,688
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
FEDERATED HIGH YIELD PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
- -------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
CONSUMER PRODUCTS -- 5.9% (CONTINUED)
$ 50,000 B3* Diamond Brands Operating, Sr. Sub. Note,
10.125% due 4/15/08+....................................... $ 50,375
50,000 CCC+ Icon Fitness Corp., Sr. Discount Note, step bond to yield
14.000% due 11/15/06....................................... 24,500
100,000 CCC+ Icon Health & Fitness Inc., Sr. Discount Note, step bond to
yield 14.000% due 7/15/02.................................. 107,500
100,000 B+ NBTY Inc., Sr. Sub. Note, 8.625% due 9/15/07................ 102,750
150,000 B+ Playtex Family Products Corp., Sr. Sub. Note,
9.000% due 7/15/04......................................... 154,500
100,000 B+ Playtex Products Inc., Sr. Note, 8.875% due 7/15/04......... 103,000
300,000 B- Revlon Consumer Products Corp., Sr. Sub. Note,
8.625% due 2/1/08.......................................... 301,500
125,000 B- Sealy Mattress Co., Sr. Sub. Note, 9.875% due 12/15/07+..... 130,313
100,000 B Simmons Co., Sr. Sub. Note, 10.750% due 4/15/06............. 104,500
- -------------------------------------------------------------------------------------------------
1,744,126
- -------------------------------------------------------------------------------------------------
CONTAINERS - METAL & GLASS -- 0.5%
150,000 B- Tekni-plex Inc., Sr. Sub. Note, 9.250% due 3/1/08........... 149,625
- -------------------------------------------------------------------------------------------------
DISTRIBUTION -- 0.2%
100,000 NR Nebco Evans Holding Co., Sr. Discount Note, step bond to
yield 10.820% due 7/15/07.................................. 67,875
- -------------------------------------------------------------------------------------------------
DIVERSIFIED -- 0.4%
100,000 B- Neenah Corp., Sr. Sub. Note, 11.125% due 5/1/07............. 109,250
- -------------------------------------------------------------------------------------------------
ECOLOGICAL SERVICES & EQUIPMENT -- 1.5%
550,000 B+ Allied Waste Industry Inc., Sr. Discount Note, step bond to
yield 9.826% due 6/1/07.................................... 405,625
50,000 B+ Allied Waste North America Inc., Company Guaranty,
10.250% due 12/1/06........................................ 55,187
- -------------------------------------------------------------------------------------------------
460,812
- -------------------------------------------------------------------------------------------------
ELECTRIC UTILITIES -- 0.8%
200,000 BB+ El Paso Electric Co., 1st Mortgage Note,
9.400% due 5/1/11.......................................... 228,000
- -------------------------------------------------------------------------------------------------
ELECTRONICS -- 0.7%
150,000 B- PX Escrow Corp., Sr. Discount Note, step bond to yield
9.385% due 2/1/06+......................................... 108,375
100,000 B- Viasystems Inc., Sr. Sub. Note, 9.750% due 6/1/07........... 98,250
- -------------------------------------------------------------------------------------------------
206,625
- -------------------------------------------------------------------------------------------------
ENTERTAINMENT -- 3.3%
Premier Parks Inc.:
325,000 B Sr. Discount Note, step bond to yield 10.000% due 4/1/08.... 216,125
100,000 B- Sr. Note, step bond to yield 9.655% due 1/15/07............. 109,000
150,000 B- Six Flags Theme Parks Inc., Sr. Sub. Discount Note, step
bond to yield 11.012% due 6/15/05.......................... 169,313
475,000 BB- Viacom Inc., Sub. Debenture, 8.000% due 7/7/06.............. 490,438
- -------------------------------------------------------------------------------------------------
984,876
- -------------------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 0.7%
200,000 BB+ Contifinancial Corp., Sr. Note, 8.125% due 4/1/08........... 203,250
- -------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
25
<PG$PCN>
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SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
FEDERATED HIGH YIELD PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
- -------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
FOOD & DRUG RETAILERS -- 1.4%
$150,000 B Digiorgio Corp., Sr. Note, 10.000% due 6/15/07.............. $ 149,250
150,000 B- Jitney Jungle Stores Inc., Sr. Sub. Note,
10.375% due 9/15/07........................................ 160,500
100,000 B Stater Brothers Holdings Inc., Sr. Sub. Note,
9.000% due 7/1/04.......................................... 102,500
- -------------------------------------------------------------------------------------------------
412,250
- -------------------------------------------------------------------------------------------------
FOOD PRODUCTS -- 3.0%
125,000 B- Ameriserve Food Distribution Inc., Company Guaranty,
10.125% due 7/15/07........................................ 130,625
Aurora Foods Inc., Sr. Sub. Note:
100,000 B+ 9.875% due 2/15/07......................................... 105,500
100,000 B+ 8.750% due 7/1/08+......................................... 101,375
100,000 B Curtice-Burns Foods Inc., Sr. Sub. Note,
12.250% due 2/1/05......................................... 110,875
300,000 B- Eagle Family Foods Inc., Sr. Sub. Note,
8.750% due 1/15/08+........................................ 292,875
150,000 B2* International Home Foods Inc., Sr. Sub. Note,
10.375% due 11/1/06........................................ 166,313
- -------------------------------------------------------------------------------------------------
907,563
- -------------------------------------------------------------------------------------------------
FOREST PRODUCTS -- 0.4%
100,000 B Four M Corp., Sr. Note, 12.000% due 6/1/06.................. 107,250
- -------------------------------------------------------------------------------------------------
HEALTH CARE -- 3.1%
150,000 B- Alliance Imaging Inc., Sr. Sub. Note, 9.625% due 12/15/05... 153,375
100,000 B Dade International Inc., Sr. Sub. Note,
11.125% due 5/1/06......................................... 113,250
100,000 B- Everest Healthcare Services Corp., Sr. Sub. Note,
9.750% due 5/1/08+......................................... 102,250
50,000 B- Oxford Health Plans Inc., Sr. Note, 11.000% due 5/15/05+.... 51,375
Tenet Healthcare Corp.:
200,000 BB+ Sr. Note, 8.000% due 1/15/05+.............................. 208,000
300,000 BB- Sr. Sub. Note, 8.125% due 12/1/08+......................... 302,250
- -------------------------------------------------------------------------------------------------
930,500
- -------------------------------------------------------------------------------------------------
HOME FURNISHINGS -- 0.4%
125,000 B2* Werner Holding Co. Inc., Sr. Sub. Note,
10.000% due 11/15/07....................................... 130,938
- -------------------------------------------------------------------------------------------------
INDUSTRIAL GOODS & SERVICES -- 0.4%
125,000 B- Anchor Lamina Inc., Amer Inc., Sr. Sub. Note,
9.875% due 2/1/08.......................................... 123,750
- -------------------------------------------------------------------------------------------------
INDUSTRIALS -- 3.7%
150,000 B2* Amphenol Corp., Sr. Sub. Note, 9.875% due 5/15/07........... 160,125
150,000 B Euramax International PLC, Sr. Sub. Note,
11.250% due 10/1/06........................................ 162,750
100,000 B Grove Worldwide, Sr. Sub. Note, 9.250% due 5/1/08+.......... 100,000
100,000 B- International Utility Structures, Sr. Sub. Note,
10.750% due 2/1/08+........................................ 102,625
50,000 B Johnstown America Industries, Inc., Company Guaranteed,
11.750% due 8/15/05........................................ 55,688
100,000 B- JTM Industries Inc., Sr. Sub. Note, 10.000% due 4/15/08+.... 101,500
150,000 B2* MMI Products Inc., Sr. Sub. Note, 11.250% due 4/15/07....... 165,000
225,000 B Wesco Distribution Inc., Sr. Sub. Note,
9.125% due 6/1/08+......................................... 223,031
75,000 B Wesco International Inc., Sr. Discount Note, step bond to
yield 11.175% due 6/1/08+................................ 44,063
- -------------------------------------------------------------------------------------------------
1,114,782
- -------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
26
<PG$PCN>
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SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
FEDERATED HIGH YIELD PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
- -------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
LEISURE -- 1.4%
$208,000 B AMF Bowling Worldwide Inc., Sr. Sub. Discount Note, step
bond to yield 10.587% due 3/15/01.......................... $ 169,000
250,000 B Regal Cinemas Inc., Sr. Sub. Note, 9.500% due 6/1/08+....... 253,125
- -------------------------------------------------------------------------------------------------
422,125
- -------------------------------------------------------------------------------------------------
MACHINERY -- 1.5%
50,000 B+ Alvey Systems Inc., Sr. Sub. Note, 11.325% due 1/31/03...... 52,250
150,000 B+ Clark Material Handling Co., Sr. Note,
10.750% due 11/15/06....................................... 162,375
50,000 B Columbus McKinnon Corp., Sr. Sub. Note,
8.500% due 4/1/08+......................................... 49,375
100,000 B- National Equipment Services Inc., Sr. Sub. Note,
10.000% due 11/30/04+...................................... 100,500
61,000 B Tokheim Corp., Sr. Sub. Note, 11.500% due 8/1/06............ 69,388
- -------------------------------------------------------------------------------------------------
433,888
- -------------------------------------------------------------------------------------------------
MEDIA/CABLE -- 2.8%
100,000 B Chancellor Media Corp., Sr. Sub. Note, 9.375% due 10/1/04... 104,875
250,000 B+ Garden State Newspapers, Sr. Sub. Note,
8.750% due 10/1/09......................................... 255,625
150,000 BB+ Lenfest Communications, Sr. Note, 8.375% due 11/1/05........ 159,750
375,000 BB+ Telewest Communications, Sr. Discount Note, step bond to
yield 10.790% due 10/1/07.................................. 312,187
- -------------------------------------------------------------------------------------------------
832,437
- -------------------------------------------------------------------------------------------------
METALS & MINING -- 0.9%
100,000 B2* AEI Holding, Sr. Note, 10.000%, due 11/15/07................ 99,000
150,000 B Continental Global Group, Sr. Note, 11.000% due 4/1/07...... 157,875
- -------------------------------------------------------------------------------------------------
256,875
- -------------------------------------------------------------------------------------------------
MISCELLANEOUS -- 0.4%
100,000 B2* Van de Kamp Inc., Sr. Sub. Note, 12.000% due 9/15/05........ 111,875
- -------------------------------------------------------------------------------------------------
OIL & GAS -- 3.6%
200,000 B- Chiles Offshore LLC Financial Corp., Sr. Note,
10.000% due 5/1/08+........................................ 194,000
250,000 B Dailey International Inc., Sr. Note, 9.500% due 2/15/08..... 246,250
Forcenergy Inc., Sr. Sub. Note:
50,000 B 9.500% due 11/1/06......................................... 50,750
50,000 B 8.500% due 2/15/07......................................... 47,500
150,000 B Houston Exploration Co., Sr. Sub. Note, 8.625% due 1/1/08... 150,188
50,000 BB- Ocean Energy Inc., Sr. Sub. Note, 10.375% due 10/15/05...... 55,375
175,000 BB Pride International Inc., Sr. Note, 9.375% due 5/1/07....... 184,848
225,000 B Universal Compression Inc., Sr. Discount Note, step bond to
yield 9.822% due 2/15/08+.................................. 144,000
- -------------------------------------------------------------------------------------------------
1,072,911
- -------------------------------------------------------------------------------------------------
PUBLISHING & PRINTING -- 1.0%
Hollinger International Publishing Inc., Sr. Sub. Note:
50,000 BB- 9.250% due 2/1/06.......................................... 52,250
100,000 BB- 9.250% due 3/15/07......................................... 105,000
150,000 B+ Ziff Davis Inc., Sr. Sub. Note, 8.500% due 5/1/08........... 151,875
- -------------------------------------------------------------------------------------------------
309,125
- -------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
27
<PG$PCN>
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SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
FEDERATED HIGH YIELD PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
- -------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
SERVICES -- 0.7%
$100,000 B+ Coinmach Corp., Sr. Note, 11.750% due 11/15/05.............. $ 111,750
100,000 B+ Sitel Corp., Sr. Sub. Note, 9.250% due 3/15/06+............. 97,000
- -------------------------------------------------------------------------------------------------
208,750
- -------------------------------------------------------------------------------------------------
STEEL -- 0.9%
150,000 B GS Technologies Operating Co., Sr. Note,
12.250% due 10/1/05........................................ 166,875
100,000 Ba1* Ryerson Tull Inc., Note, 8.500% due 7/15/01................. 104,000
- -------------------------------------------------------------------------------------------------
270,875
- -------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 18.7%
200,000 CC+ American Cellular Corp., Sr. Note, 10.500% due 5/15/08+..... 199,500
375,000 BB- Call-Net Enterprises Inc., Sr. Discount Note, step bond to
yield 8.902% due 8/15/07................................... 281,250
100,000 BB+ Comcast Cellular Holdings, Sr. Note, 9.500% due 5/1//07..... 104,625
100,000 BB+ Comcast Corp., Sr. Sub. Debentures, 9.375% due 5/15/05...... 107,500
E.Spire Communications Inc.:
100,000 NR Sr. Discount Note, step bond to yield 10.789% due 4/1/06... 79,250
50,000 NR Sr. Sub. Note, step bond to yield 10.483% due 11/1/05...... 41,500
100,000 B Hermes Europe Railtel BV, Sr. Note, 11.500% due 8/15/07..... 113,125
50,000 B Highwaymaster Communications, Sr. Note,
13.750% due 9/15/05........................................ 37,500
275,000 NR Intelcom Group (USA) Inc., step bond to yield 10.034% due
5/1/06..................................................... 221,375
Intermedia Communications:
125,000 B 8.600% due 6/1/08+......................................... 126,562
150,000 B Sr. Discount Note, step bond to yield 9.841% due 7/15/07... 110,062
225,000 B Intermedia Communications of Florida, Sr. Discount Note,
step bond to yield 10.183% due 5/15/06...................... 185,062
100,000 Ba3* IXC Communications Inc., Sr. Sub. Note,
9.000% due 4/15/08+........................................ 100,000
500,000 B Level 3 Communications, Sr. Note, 9.125% due 5/1/08+........ 487,500
475,000 B+ McLeod USA Inc., Sr. Discount Note, step bond to yield
9.555% due 3/1/07.......................................... 353,875
Metronet Communications Corp.:
350,000 B Sr. Discount Note, step bond to yield 9.950% due 6/15/08+.. 216,125
50,000 B Sr. Note, 12.000% due 8/15/07+............................. 58,000
225,000 B- Millicom International Cellular SA, Sr. Sub. Discount Note,
step bond to yield 11.306% due 6/1/06...................... 172,125
Nextel Communications, Sr. Discount Note, step bond to
yield:
225,000 B2* 10.071% due 9/15/07+....................................... 152,437
300,000 B2* 10.274% due 2/15/08+....................................... 192,000
75,000 CC+ Nextel International Inc., Sr. Discount Note, step bond to
yield 12.125% due 4/15/08+................................. 43,687
100,000 B Nextlink Communications Inc., Sr. Note,
9.625% due 10/1/07......................................... 103,250
225,000 B Paging Network Inc., Sr. Sub. Note, 10.000% due 10/15/08.... 234,000
100,000 NR Pathnet Inc., Sr. Note, 10.500% due 4/15/08+................ 108,500
100,000 B- Psinet Inc., Sr. Note, 10.000% due 2/15/05.................. 102,500
350,000 BB+ Qwest Communications International Inc., Sr. Discount Note,
step bond to yield 8.702% due 10/15/07..................... 263,375
100,000 CC+ Sygnet Wireless Inc., Sr. Note, 11.500% due 10/1/06......... 111,375
150,000 B+ Telecomm Techniques Co., Sr. Sub. Note, 9.750% due
5/15/08+................................................... 150,937
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
28
<PG$PCN>
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SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
FEDERATED HIGH YIELD PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
- -------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
TELECOMMUNICATIONS -- 18.7% (CONTINUED)
$300,000 CC+ Telesystem International Wireless, Sr. Discount Note, step
bond to yield 13.250% due 6/30/07.......................... $ 201,750
Teligent Inc.:
75,000 CCC Sr. Discount Note, step bond to yield 11.710% due 3/1/08+.. 41,437
175,000 CCC Sr. Note, 11.500% due 12/1/07.............................. 178,062
225,000 CC+ Triton Communications Inc., Sr. Sub. Note, step bond to
yield 11.000% due 5/1/08+.................................. 127,687
275,000 B United International Holdings Inc., Sr. Discount Note,
step bond to yield 10.647% due 2/15/08..................... 169,812
150,000 NR US Exchange LLC, Sr. Note, 15.000% due 7/1/08+.............. 152,250
100,000 B+ Vanguard Cellular System Inc., 9.375% due 7/1/08............ 105,250
Viatel Inc.:
100,000 NR Sr. Note, 11.250% due 4/15/08+............................. 105,000
50,000 Caa1* Unit, Sr. Discount Note, step bond to yield 11.473% due
4/15/08+.................................................... 29,750
- -------------------------------------------------------------------------------------------------
5,567,995
- -------------------------------------------------------------------------------------------------
TEXTILES -- 1.7%
150,000 B- Collins & Aikman Group, Sr. Sub. Note,
10.000% due 1/15/07........................................ 156,750
50,000 B- Gear For Sports Inc., Sr. Sub. Note, 9.625% due 3/1/07...... 52,875
50,000 B- Glenoit Corp., Sr. Sub. Note, 11.000% due 4/15/07........... 53,625
Pillowtex Corp., Sr. Sub. Note:
150,000 B+ 10.000% due 11/15/06....................................... 161,250
75,000 B+ 9.000% due 12/15/07........................................ 77,250
- -------------------------------------------------------------------------------------------------
501,750
- -------------------------------------------------------------------------------------------------
TRANSPORTATION -- 3.1%
100,000 NR Allied Holdings Inc., Sr. Note, Callable 10/01/02,
8.625% due 10/1/07......................................... 102,500
125,000 B Chemical Leaman Corp., Sr. Note, 10.375% due 6/15/05........ 132,187
100,000 BB Gearbulk Holding Ltd., Sr. Note, 11.250% due 12/1/04........ 110,250
100,000 B+ Holt Group Inc., Sr. Note, 9.750% due 1/15/06+.............. 100,000
50,000 B1* Statia Terminals Terminals, 1st Mortgage Note,
11.750% due 11/15/03....................................... 52,625
Stena AB, Sr. Note:
200,000 BB 10.500% due 12/15/05....................................... 218,500
100,000 BB 8.750% due 6/15/07......................................... 102,000
100,000 B+ Stena Line AB, Sr. Note, 10.625% due 6/1/08................. 101,625
- -------------------------------------------------------------------------------------------------
919,687
- -------------------------------------------------------------------------------------------------
UTILITIES - ELECTRIC -- 0.6%
250,000 B Niagara Mohawk Power Corp., Sr. Discount Note, step bond to
yield 8.462% due 7/1/10.................................... 173,750
- -------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS & NOTES (Cost -- $25,891,186)......... 26,206,003
- -------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
29
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
FEDERATED HIGH YIELD PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ----------------------------------------------------------------------------------------
<C> <S> <C>
PREFERRED STOCK -- 4.4%
- ----------------------------------------------------------------------------------------
BROADCASTING - TV, CABLE & RADIO -- 0.7%
100 Cumulus Media Inc., Series A................................ $ 100,250
1,000 Sinclair Capital............................................ 109,250
- ----------------------------------------------------------------------------------------
209,500
- ----------------------------------------------------------------------------------------
CABLE/CELLULAR -- 0.2%
56 Pegasus Communications, Payment-in-kind, Exchanges
12.750%.................................................... 63,426
- ----------------------------------------------------------------------------------------
COMMUNICATIONS -- 0.2%
541 Echostar Communications Corp., Payment-in-kind, Exchanges
12.125%.................................................... 59,551
- ----------------------------------------------------------------------------------------
DISTRIBUTION -- 0.4%
1,027 Nebco Evans Holdings Inc., Payment-in-kind, Exchanges
11.250%.................................................... 106,246
- ----------------------------------------------------------------------------------------
MEDIA/CABLE -- 1.2%
1,000 Benedek Communications Corp., Payment-in-kind, Exchanges
11.500%+................................................... 101,000
564 Capstar Broadcasting Partners Inc., Payment-in-kind,
Exchanges 12.000%.......................................... 64,004
1,052 CBS Radio Corp., Payment-in-kind, Exchanges 11.375%......... 124,925
565 SFX Broadcasting Inc., Payment-in-kind, Exchanges 12.625%... 65,554
- ----------------------------------------------------------------------------------------
355,483
- ----------------------------------------------------------------------------------------
PUBLISHING & PRINTING -- 1.4%
4,350 Primedia Inc................................................ 430,650
- ----------------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 0.3%
770 Nextel Communications Inc., Series E........................ 80,657
- ----------------------------------------------------------------------------------------
TOTAL PREFERRED STOCK (Cost -- $1,262,019).................. 1,305,513
- ----------------------------------------------------------------------------------------
WARRANTS -- 0.0%
- ----------------------------------------------------------------------------------------
CABLE/CELLULAR -- 0.0%
50 Pegasus Communications Corp., Expire 1/1/07 (a)............. 1,625
100 UIH Australia Inc., Expire 5/15/06 (a)...................... 1,200
- ----------------------------------------------------------------------------------------
2,825
- ----------------------------------------------------------------------------------------
CHEMICALS -- 0.0%
100 Sterling Chemicals Holdings Inc., Expire 8/15/08 (a)........ 2,400
- ----------------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 0.0%
50 Highwaymaster Communications, Expire 9/15/05 (a)............ 100
50 Metronet Communications, Class B, Expire 8/15/07 (a)........ 200
- ----------------------------------------------------------------------------------------
300
- ----------------------------------------------------------------------------------------
TOTAL WARRANTS (Cost -- $6,903)............................. 5,525
- ----------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
30
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
FEDERATED HIGH YIELD PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- ----------------------------------------------------------------------------------------
<C> <S> <C>
REPURCHASE AGREEMENT -- 7.6%
$2,250,000 Citibank, 5.864% due 7/1/98; Proceeds at
maturity -- $2,250,367;
(Fully collateralized by U.S. Treasury Note, 5.500% due
5/31/03; Market value -- $2,298,588) (Cost -- $2,250,000)... $ 2,250,000
- ----------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $29,410,108**)........... $29,767,041
- ----------------------------------------------------------------------------------------
</TABLE>
(+) Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers.
(a) Non-income producing security.
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 43 for definition of ratings.
SEE NOTES TO FINANCIAL STATEMENTS.
31
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
FEDERATED STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -----------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCK -- 96.1%
- -----------------------------------------------------------------------------------
AIRLINES -- 0.9%
5,800 KLM Royal Dutch Airlines.................................... $ 237,437
- -----------------------------------------------------------------------------------
AUTOMOTIVE -- 0.9%
3,500 General Motors Corp. ....................................... 233,843
- -----------------------------------------------------------------------------------
BASIC INDUSTRY -- 4.5%
14,800 Archer-Daniels Midland Co. ................................. 286,750
2,700 Crown Cork & Seal Co., Inc. ................................ 128,250
2,700 Dow Chemical Corp. ......................................... 261,056
27,000 LTV Corp. .................................................. 258,188
5,500 Union Camp Corp. ........................................... 272,938
- -----------------------------------------------------------------------------------
1,207,182
- -----------------------------------------------------------------------------------
CONSUMER DURABLES -- 3.8%
10,600 Cooper Tire & Rubber Co. ................................... 218,625
3,700 Eastman Kodak Co. .......................................... 270,331
7,000 Hasbro Inc. ................................................ 275,188
8,100 Rubbermaid, Inc. ........................................... 268,818
- -----------------------------------------------------------------------------------
1,032,962
- -----------------------------------------------------------------------------------
CONSUMER NON-DURABLES -- 6.6%
4,000 Best Food................................................... 232,250
5,200 Kimberly-Clark Corp. ....................................... 238,550
7,100 Phillip Morris Cos., Inc. .................................. 279,563
3,700 RJR Nabisco Holdings Corp. ................................. 87,875
3,900 Sara Lee Corp. ............................................. 218,156
4,800 Unilever NV................................................. 378,900
12,500 UST, Inc. .................................................. 337,500
- -----------------------------------------------------------------------------------
1,772,794
- -----------------------------------------------------------------------------------
ENERGY -- 10.4%
2,000 Atlantic Richfield Co. ..................................... 156,250
3,600 Chevron Corp. .............................................. 299,025
4,200 Columbia Gas System Inc. ................................... 233,625
13,500 Ensco International Inc. ................................... 234,563
4,500 Exxon Corp. ................................................ 320,906
6,400 Occidental Petroleum Corp. ................................. 172,800
3,100 Royal Dutch Petroleum Co. .................................. 169,918
8,800 Sun Company, Inc. .......................................... 341,550
5,700 Texaco Inc. ................................................ 340,218
9,300 USX Marathon Group, Inc. ................................... 319,106
6,500 YPF Sociedad Anonima ADR.................................... 195,406
- -----------------------------------------------------------------------------------
2,783,367
- -----------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
32
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
FEDERATED STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -----------------------------------------------------------------------------------
<C> <S> <C>
FINANCIAL SERVICES -- 12.3%
4,500 Allmerica Financial Corp. .................................. $ 292,500
3,000 Allstate Corp. ............................................. 274,688
5,400 Bear Stearns Cos., Inc. .................................... 307,125
7,900 Boston Properties Inc. ..................................... 272,550
7,100 CIGNA Corp. ................................................ 489,900
1,000 General Re Corp. ........................................... 253,500
5,200 H&R Block, Inc. ............................................ 219,050
2,400 Hartford Financial Services, Inc. .......................... 274,500
3,900 Marsh & McLennan Cos., Inc. ................................ 235,706
3,600 MBIA Inc. .................................................. 269,550
4,400 Morgan Stanley Dean Witter.................................. 402,050
- -----------------------------------------------------------------------------------
3,291,119
- -----------------------------------------------------------------------------------
HEALTH CARE -- 11.0%
7,800 Abbott Labs, Inc. .......................................... 318,825
20,400 Beverly Enterprises, Inc. (a)............................... 281,775
4,500 Bristol-Myers Squibb Co. ................................... 517,218
2,100 Merck & Co., Inc. .......................................... 280,875
6,000 Perrigo Co. (a)............................................. 60,375
11,800 Pharmacia & Upjohn Inc. .................................... 544,275
3,800 Smithkline Beecham PLC Sponsored ADR........................ 229,900
10,400 U.S. Surgical Corp. ........................................ 474,500
3,900 United Healthcare Corp. .................................... 247,650
- -----------------------------------------------------------------------------------
2,955,393
- -----------------------------------------------------------------------------------
MANUFACTURING -- 8.6%
8,400 Ingersoll-Rand Co. ......................................... 370,125
12,100 ITT Industries Inc. ........................................ 452,238
6,000 Johnson Controls Inc. ...................................... 343,125
8,100 Lexmark International Group, Inc., Class A Shares (a)....... 494,100
3,600 Loews Corp. ................................................ 313,650
8,500 Parker-Hannifin Corp. ...................................... 324,063
- -----------------------------------------------------------------------------------
2,297,301
- -----------------------------------------------------------------------------------
RETAIL -- 4.3%
6,700 Dillard, Inc., Class A Shares............................... 277,631
15,900 KMart Corp. ................................................ 306,075
9,200 Wal-Mart Stores, Inc. ...................................... 558,900
- -----------------------------------------------------------------------------------
1,142,606
- -----------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
33
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
FEDERATED STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -----------------------------------------------------------------------------------
<C> <S> <C>
SERVICES -- 9.0%
2,500 ABB AB -- Sponsored ADR..................................... $ 345,313
22,000 News Corp Ltd. -- Sponsored ADR............................. 621,500
9,400 Readers Digest Association Inc., Class A Shares............. 254,975
2 Telecom-TCI Ventures, Class A Shares (a).................... 40
8,600 Tricon Global Restaurants, Inc. (a)......................... 272,513
5,600 Viacom Inc., Class A Shares (a)............................. 326,200
5,000 Viacom Inc., Class B Shares (a)............................. 292,500
8,400 Waste Management, Inc. ..................................... 294,000
- -----------------------------------------------------------------------------------
2,407,041
- -----------------------------------------------------------------------------------
TECHNOLOGY -- 10.9%
6,300 AMP, Inc. .................................................. 216,563
3,100 Electronic Data Systems Corp. .............................. 124,000
15,000 First Data Corp. ........................................... 499,688
2,600 International Business Machines Corp. ...................... 298,513
2,200 Northrop Grumman Corp. ..................................... 226,875
30,500 Novell Inc. (a)............................................. 388,875
4,600 Raytheon Co., Class A Shares................................ 265,075
7,400 Seagate Technology Inc. (a)................................. 176,213
10,600 Storage Technology Corp. (a)................................ 459,775
6,000 Sun Microsystems Inc. (a)................................... 260,625
- -----------------------------------------------------------------------------------
2,916,202
- -----------------------------------------------------------------------------------
TRANSPORTATION -- 2.2%
7,000 CNF Transportation, Inc. ................................... 297,500
9,100 Ryder System Inc. .......................................... 287,218
- -----------------------------------------------------------------------------------
584,718
- -----------------------------------------------------------------------------------
UTILITIES -- 10.7%
4,500 AT&T Corp. ................................................. 257,063
6,200 Bell Atlantic Corp. ........................................ 282,875
4,800 CMS Energy Corp. ........................................... 211,200
3,000 Coastal Corp. .............................................. 209,438
11,700 Entergy Corp. .............................................. 336,375
4,000 FPL Group, Inc. ............................................ 252,000
4,600 GTE Corp. .................................................. 255,875
8,200 Houston Industries Inc. .................................... 253,175
9,700 PG&E Corp. ................................................. 306,156
7,100 Public Services Enterprise Group, Inc. ..................... 244,506
5,600 U.S. West Inc. ............................................. 263,200
- -----------------------------------------------------------------------------------
2,871,863
- -----------------------------------------------------------------------------------
TOTAL COMMON STOCK (Cost -- $22,688,910).................... 25,733,828
- -----------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
34
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
FEDERATED STOCK PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- --------------------------------------------------------------------------------------
<C> <S> <C>
REPURCHASE AGREEMENT -- 3.9%
$1,053,000 Citibank, 5.823% due 7/1/98; Proceeds at
maturity -- $1,053,170;
(Fully collateralized by U.S. Treasury Note, 7.000% due
4/15/99; Market value -- $1,077,562) (Cost -- $1,053,000).. $ 1,053,000
- --------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $23,741,910**)........... $26,786,828
- --------------------------------------------------------------------------------------
</TABLE>
(a) Non-income producing security.
** Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
35
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
DISCIPLINED MID CAP STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
-----------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCK -- 89.7%
- ------------------------------------------------------------------------------------
AUTOMOTIVE & TRANSPORTATION -- 3.4%
1,269 Airborne Freight Corp. ..................................... $ 44,336
440 Alaska Air Group Inc. ...................................... 24,008
890 Arvin Industries Inc. ...................................... 32,318
358 Continental Airlines, Inc., Class B Shares+................. 21,793
1,236 GATX Corp. ................................................. 54,230
1,030 J.B. Hunt Transportation Services, Inc. .................... 36,694
780 Kansas City Southern Industries, Inc. ...................... 38,708
581 Lear Corp.+................................................. 29,813
580 Navistar International Corp.+............................... 16,748
240 Northwest Airlines Corp.+................................... 9,255
1,090 Trinity Industries, Inc. ................................... 45,235
- ------------------------------------------------------------------------------------
353,138
- ------------------------------------------------------------------------------------
CONSTRUCTION SERVICES -- 0.2%
1,182 Clayton Homes Inc. ......................................... 22,458
- ------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY -- 20.2%
1,320 AC Nielsen Corp.+........................................... 33,330
1,059 AccuStaff, Inc.+............................................ 33,094
481 Alberto Culver Co., Class A Shares.......................... 12,205
610 Autozone Inc.+.............................................. 19,482
1,199 Bed Bath & Beyond Inc.+..................................... 62,123
610 Borders Group, Inc.+........................................ 22,570
1,620 Brinker International Inc.+................................. 31,185
572 Cendant Corp.+.............................................. 11,941
50 Central Newspapers, Inc., Class A Shares.................... 3,488
1,482 Cintas Corp. ............................................... 75,582
1,650 Corrections Corp. of America+............................... 38,775
725 Costco Cos., Inc. .......................................... 45,720
1,210 Cracker Barrel Old Country Store, Inc. ..................... 38,418
928 CVS Corp. .................................................. 36,134
2,037 Dollar General Corp. ....................................... 80,589
3,468 Family Dollar Stores, Inc. ................................. 64,158
1,460 General Nutrition Cos., Inc., Class A Shares+............... 45,443
850 Hannaford Brothers Co. ..................................... 37,400
983 Harley Davidson Inc. ....................................... 38,091
1,550 Herman Miller, Inc. ........................................ 37,684
490 Hertz Corp., Class A Shares................................. 21,713
1,138 HON Industries, Inc. ....................................... 38,692
1,944 International Game Technology............................... 47,142
360 Interpublic Group of Cos., Inc. ............................ 21,848
360 Knight-Ridder, Inc. ........................................ 19,823
2,398 Kohl's Corp. (a)+........................................... 124,396
920 Kroger Co.+................................................. 39,445
2,686 Leggett & Platt, Inc. ...................................... 67,150
610 Liz Claiborne, Inc. ........................................ 31,873
360 Maytag Corp. ............................................... 17,775
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
36
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
DISCIPLINED MID CAP STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ------------------------------------------------------------------------------------
<C> <S> <C>
CONSUMER DISCRETIONARY -- 20.2% (CONTINUED)
490 Meredith Corp. ............................................. $ 22,999
360 National Service Industries, Inc. .......................... 18,315
850 Neiman Marcus Group, Inc. .................................. 36,922
490 New York Times Co., Class A Shares.......................... 38,833
1,662 Office Depot Inc.+.......................................... 52,456
1,193 Officemax Inc.+............................................. 19,685
836 Omnicom Group............................................... 41,696
1,680 Paychex Inc. ............................................... 68,355
514 Payless ShoeSource, Inc.+................................... 37,875
725 Reynolds & Reynolds Co., Class A Shares..................... 13,186
1,315 Robert Half International, Inc.+............................ 73,476
490 Ross Stores, Inc. .......................................... 21,070
3,583 Staples Inc.+............................................... 103,683
890 Starbucks Corp.+............................................ 47,559
1,940 Stewart Enterprises, Inc., Class A Shares................... 51,653
610 TCA Cable TV, Inc. ......................................... 36,600
1,940 TJX Cos. Inc. .............................................. 46,803
1,090 U.S. Foodservice+........................................... 38,218
440 Valassis Communications, Inc.+.............................. 16,968
360 VF Corp. ................................................... 18,540
1,620 Viking Office Products, Inc.+............................... 50,828
49 Washington Post Co., Class B Shares......................... 28,224
240 Whirlpool Corp. ............................................ 16,500
730 Wolverine World Wide, Inc. ................................. 15,831
- ------------------------------------------------------------------------------------
2,113,544
- ------------------------------------------------------------------------------------
CONSUMER STAPLES -- 3.3%
360 Brown-Forman Corp., Class B Shares.......................... 23,130
3,301 Coca-Cola Enterprises Inc. (a).............................. 129,564
814 Dean Foods Co. ............................................. 44,719
120 International Multifoods Corp. ............................. 3,300
1,527 Interstate Bakeries Corp. .................................. 50,677
970 J.M. Smucker Co., Class A Shares............................ 24,068
730 Suiza Foods Corp.+.......................................... 43,572
350 Tyson Foods Inc., Class A Shares............................ 7,591
343 Universal Corp.............................................. 12,820
180 Whitman Corp................................................ 4,129
- ------------------------------------------------------------------------------------
343,570
- ------------------------------------------------------------------------------------
ENERGY -- 1.9%
1,739 Ensco International Inc.+................................... 30,215
422 EVI Weatherford, Inc.+...................................... 15,667
1,551 Global Marine, Inc.+........................................ 28,984
692 Noble Drilling Corp.+....................................... 16,651
2,490 Parker Drilling Co.+........................................ 17,586
120 Pioneer Natural Resource Co. ............................... 2,865
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
37
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
DISCIPLINED MID CAP STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
-----------------------------------------------------------------------------------
<C> <S> <C>
ENERGY -- 1.9% (CONTINUED)
636 Tidewater, Inc. ............................................ $ 20,988
692 Transocean Offshore, Inc. .................................. 30,794
1,710 Varco International, Inc.+.................................. 33,879
- ------------------------------------------------------------------------------------
197,629
- ------------------------------------------------------------------------------------
FINANCIALS -- 13.1%
1,349 A.G. Edwards, Inc. ......................................... 57,585
2,218 AFLAC Inc. ................................................. 67,233
836 Ambac Financial Group, Inc. ................................ 48,906
730 AmSouth Bancorp............................................. 28,698
620 Associated Banc-Corp. ...................................... 23,328
1,248 Bear, Stearns & Co. Inc. ................................... 70,980
619 Capital One Financial Corp. ................................ 76,872
440 Countrywide Credit Industries, Inc. ........................ 22,330
624 Crestar Financial Corp. .................................... 34,047
1,126 Dime Bancorp, Inc. ......................................... 33,710
692 Enhance Financial Services Group, Inc. ..................... 23,355
379 Everest Reinsurance Holdings, Inc. ......................... 14,568
920 Finova Group, Inc. ......................................... 52,095
725 First Security Corp. ....................................... 15,520
1,004 First Tennessee National Corp. ............................. 31,689
490 First Virginia Banks, Inc. ................................. 25,051
1,404 Firstar Corp. .............................................. 53,352
456 Franklin Resources Inc. .................................... 24,624
374 Hartford Life, Inc., Class A Shares......................... 21,295
1,349 Hibernia Corp., Class A Shares.............................. 27,233
43 M & T Bank Corp. ........................................... 23,822
1,015 Marshall & Ilsley Corp. .................................... 51,828
1,193 Mercantile Bankshares Corp. ................................ 41,531
514 Mercury General Corp. ...................................... 33,057
2,197 Old Republic International Corp. ........................... 64,400
1,423 PaineWebber Group, Inc. .................................... 61,011
680 The PMI Group Inc. ......................................... 49,895
490 Provident Co., Inc. ........................................ 16,905
1,282 Regions Financial Corp. .................................... 52,642
1,634 SouthTrust Corp. ........................................... 71,079
670 T. Rowe Price Associates, Inc. ............................. 25,167
800 20th Century Industries..................................... 22,950
759 Union Planters Corp. ....................................... 44,639
168 Unionbancal Corp. .......................................... 16,212
725 Wilmington Trust Corp. ..................................... 44,134
- ------------------------------------------------------------------------------------
1,371,743
- ------------------------------------------------------------------------------------
HEALTH CARE -- 8.4%
514 Allegiance Corp. ........................................... 26,343
984 Bergen Brunswig Corp., Class A Shares....................... 45,633
329 Biogen, Inc.+............................................... 16,121
1,190 Biomet, Inc. ............................................... 39,344
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
38
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
DISCIPLINED MID CAP STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ------------------------------------------------------------------------------------
<C> <S> <C>
HEALTH CARE -- 8.4% (CONTINUED)
240 Cardinal Health Inc. ....................................... $ 22,500
206 Centocor Inc.+.............................................. 7,468
636 Chiron Corp.+............................................... 9,977
1,090 Concentra Managed Care, Inc.+............................... 28,340
1,320 First Health Group Corp.+................................... 37,620
110 Foundation Health Systems Inc., Class A Shares+............. 2,901
530 Guidant Corp. .............................................. 37,796
730 HBO & Co. .................................................. 25,733
1,009 Health Care & Retirement Corp.+............................. 39,792
2,315 Health Management Associates, Inc., Class A Shares.......... 77,408
730 Healthsouth Corp.+.......................................... 19,482
730 Humana, Inc.+............................................... 22,767
1,345 McKesson Corp.(a)........................................... 109,281
1,210 Mylan Laboratories.......................................... 36,376
2,650 Novacare Inc.+.............................................. 31,138
1,455 Omnicare, Inc. ............................................. 55,472
130 Oxford Health Plans, Inc.+.................................. 1,991
1,654 PharMerica, Inc.+........................................... 19,951
468 Stryker Corp. .............................................. 17,960
1,820 Total Renal Care Holdings, Inc.+............................ 62,790
1,820 Watson Pharmaceuticals, Inc. (a)+........................... 84,971
- ------------------------------------------------------------------------------------
879,155
- ------------------------------------------------------------------------------------
INTEGRATED OILS -- 1.2%
580 Ashland Inc. ............................................... 29,943
468 Murphy Oil Corp. ........................................... 23,722
1,601 Tosco Corp. ................................................ 47,029
625 Valero Energy Corp. ........................................ 20,781
- ------------------------------------------------------------------------------------
121,475
- ------------------------------------------------------------------------------------
MATERIALS & PROCESSING -- 4.6%
1,700 Albemarle Corp. ............................................ 37,506
624 Boise Cascade Corp. ........................................ 20,436
440 CarrAmerica Realty Corp. ................................... 12,485
440 Crescent Real Estate Equities Co. .......................... 14,795
1,940 Crompton & Knowles Corp. ................................... 48,864
970 Ecolab, Inc. ............................................... 30,070
1,210 Freeport-McMoRan Copper & Gold, Inc., Class B Shares........ 18,377
1,695 International Specialty Products, Inc.+..................... 31,569
490 Kimco Realty Corp. ......................................... 20,090
1,472 Lyondell Petrochemical Co. ................................. 44,804
360 Masco Corp. ................................................ 21,780
3,045 Solutia Inc. ............................................... 87,353
973 Sonoco Products Co. ........................................ 29,433
605 Vulcan Materials Co. ....................................... 64,546
- ------------------------------------------------------------------------------------
482,108
- ------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
39
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
DISCIPLINED MID CAP STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ------------------------------------------------------------------------------------
<C> <S> <C>
PRODUCER DURABLES -- 6.7%
347 Aeroquip-Vickers, Inc. ..................................... $ 20,256
970 American Power Conversion Corp.+............................ 29,100
1,033 Berg Electronics Corp.+..................................... 20,208
730 Carlisle Cos., Inc. ........................................ 31,436
850 Centex Corp. ............................................... 32,088
998 Cordant Technologies Inc. .................................. 46,033
290 Crane Co. .................................................. 14,083
1,172 Danaher Corp. .............................................. 42,998
658 Hubbell, Inc., Class B Shares............................... 27,389
610 Ingersoll-Rand Co. ......................................... 26,878
440 Litton Industries, Inc.+.................................... 25,960
730 Parker-Hannifin Corp. ...................................... 27,831
890 Pentair, Inc. .............................................. 37,825
829 Precision Castparts Corp. .................................. 44,248
1,076 Sunstrand Corp. ............................................ 61,601
120 Tecumseh Products Co., Class A Shares....................... 6,338
890 Teleflex Inc. .............................................. 33,820
490 Thomas & Betts Corp. ....................................... 24,133
2,099 U.S. Filter Corp.+.......................................... 58,903
1,754 U.S.A. Waste Services Inc.+................................. 86,604
- ------------------------------------------------------------------------------------
697,732
- ------------------------------------------------------------------------------------
TECHNOLOGY -- 16.0%
1,320 ADC Telecommunications, Inc.+............................... 48,221
490 Advanced Fibre Communications, Inc.+........................ 19,631
2,190 America Online, Inc. (a)+................................... 232,140
2,776 BMC Software Inc. (a)+...................................... 144,179
3,010 Cadence Design Systems, Inc. (a)+........................... 94,063
2,930 Comdisco, Inc. ............................................. 55,670
360 Computer Sciences Corp.+.................................... 23,040
2,202 Compuware Corp. (a)+........................................ 112,577
290 DST Systems, Inc.+.......................................... 16,240
870 Fiserv Inc.+................................................ 36,948
850 FORE Systems, Inc.+......................................... 22,525
850 General Instrument Corp.+................................... 23,109
800 General Semiconductor, Inc.+................................ 7,900
1,210 Keane, Inc.+................................................ 67,760
1,126 Lexmark International Group, Inc., Class A Shares........... 68,686
859 Linear Technology Corp. .................................... 51,808
1,762 Maxim Integrated Products, Inc.+............................ 55,833
1,609 Networks Associates Inc.+................................... 77,030
360 PeopleSoft, Inc.+........................................... 16,920
1,160 SCI Systems, Inc.+.......................................... 43,645
1,116 Solectron Corp.+............................................ 46,942
900 Sterling Commerce, Inc.+.................................... 43,650
1,460 Sterling Software, Inc.+.................................... 43,161
2,030 Storage Technology Corp.+................................... 88,051
1,851 SunGard Data Systems Inc.+.................................. 71,032
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
40
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
DISCIPLINED MID CAP STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
-----------------------------------------------------------------------------------
<C> <S> <C>
TECHNOLOGY -- 16.0% (CONTINUED)
1,210 Symantec Corp.+............................................. $ 31,611
1,110 Symbol Technologies, Inc. .................................. 41,903
1,090 Synopsys, Inc.+............................................. 49,868
490 Transaction Systems Architects, Inc., Class A Shares+....... 18,865
730 Vitesse Semiconductors Corp.+............................... 22,539
- ------------------------------------------------------------------------------------
1,675,547
- ------------------------------------------------------------------------------------
UTILITIES -- 10.7%
1,662 AES Corp.+.................................................. 87,359
644 Allegheny Energy, Inc. ..................................... 19,400
725 Baltimore Gas & Electric Co. ............................... 22,520
1,038 Black Hills Corp. .......................................... 23,874
1,282 CalEnergy Co. Inc.+......................................... 38,540
1,424 Century Telephone Enterprises, Inc. ........................ 65,326
1,320 Cinncinnati Bell Inc. ...................................... 37,785
569 Consolidated Natural Gas Co. ............................... 33,499
514 El Paso Natural Gas Co. .................................... 19,660
730 FirstEnergy Corp. .......................................... 22,447
545 Florida Progress Corp. ..................................... 22,413
1,338 Illinova Corp. ............................................. 40,140
581 IPALCO Enterprises, Inc. ................................... 25,818
1,538 LG&E Energy Corp. .......................................... 41,622
1,041 MarketSpan Corp.+........................................... 31,164
725 MCN Energy Group, Inc. ..................................... 18,034
379 Minnesota Power Inc. ....................................... 15,065
747 National Fuel Gas Co. ...................................... 32,541
1,405 New Century Energies, Inc. ................................. 63,839
580 New England Electric System................................. 25,085
960 Nextel Communications Inc.+................................. 23,880
2,344 NIPSCO Industries, Inc. .................................... 65,632
1,294 Northeast Utilities......................................... 21,917
1,595 Pinnacle West Capital Corp. ................................ 71,775
1,340 Public Service Co. of New Mexico............................ 30,401
1,918 SCANA Corp. ................................................ 57,180
1,356 TECO Energy, Inc. .......................................... 36,357
636 Telephone & Data Systems, Inc. ............................. 25,042
1,282 360 Communications Co.+..................................... 41,024
580 WinStar Communications, Inc.+............................... 24,903
1,138 Wisconsin Energy Corp. ..................................... 34,566
- ------------------------------------------------------------------------------------
1,118,808
- ------------------------------------------------------------------------------------
TOTAL COMMON STOCK (Cost -- $8,347,073)..................... 9,376,907
- ------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
41
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
DISCIPLINED MID CAP STOCK PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- ---------------------------------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENTS -- 10.3%
- ---------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 9.9%
$1,030,000 Morgan Stanley & Co. Inc., 5.760% due 7/1/98; Proceeds at
maturity -- 1,030,163;
(Fully collateralized by U.S. Treasury Notes, 7.125% due
9/30/99; Market value -- $1,051,642) (Cost -- $1,030,000)... $ 1,030,000
- ---------------------------------------------------------------------------------------
U.S. TREASURY OBLIGATION -- 0.4%
45,000 U.S. Treasury Bill, 5.010% due 7/1/98
(Cost -- $44,512)(b)........................................ 44,512
- ---------------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS (Cost -- $1,074,512)........... 1,074,512
- ---------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $9,421,585**)............ $10,451,419
- ---------------------------------------------------------------------------------------
</TABLE>
+ Non-income producing security.
(a) Security has been segregated by custodian for open futures contracts.
(b) Security serves as collateral for future contracts.
** Aggregate cost for Federal income tax purposes is substantially the same
SEE NOTES TO FINANCIAL STATEMENTS.
42
<PG$PCN>
- --------------------------------------------------------------------------------
BOND RATINGS (UNAUDITED)
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 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 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 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 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 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 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>
43
<PG$PCN>
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES (UNAUDITED) JUNE 30, 1998
<TABLE>
<CAPTION>
LAZARD MFS DISCIPLINED
TRAVELERS INTERNATIONAL EMERGING FEDERATED FEDERATED MID CAP
QUALITY BOND STOCK GROWTH HIGH YIELD STOCK STOCK
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments -- Cost..................... $19,626,765 $27,006,350 $ 97,436,767 $29,410,108 $23,741,910 $ 9,421,585
Foreign currency -- Cost................ -- 600,207 -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Investments, at value................... $19,650,547 $29,652,764 $120,344,378 $29,767,041 $26,786,828 $10,451,419
Foreign currency, at value.............. -- 603,417 -- -- -- --
Cash.................................... 251 146,028 -- 679 886 634
Receivable from affiliate............... 2,351 30,215 -- -- -- 10,528
Receivable for securities sold.......... -- 135,581 348,808 79,086 -- 314,002
Dividends and interest receivable....... 314,658 93,922 19,890 427,193 32,640 5,971
Receivable for open forward foreign
currency contracts (note 7)........... -- 265 -- -- -- --
Collateral for securities on loan
(note 9).............................. -- 1,102,694 -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS............................ 19,967,807 31,764,886 120,713,076 30,273,999 26,820,354 10,782,554
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Investment advisory fees payable........ 5,476 -- 70,827 15,829 13,730 --
Administration fees payable............. 1,131 -- 7,883 1,460 1,318 517
Payable to bank......................... -- -- 392,457 -- -- --
Payable for securities purchased........ -- 755,773 977,840 459,679 91,144 100,326
Payable for open forward foreign
currency contracts (note 7)........... -- 7 -- -- -- --
Payable to broker -- variation margin... -- -- -- -- -- 750
Payable for securities on loan
(note 9).............................. -- 1,102,694 -- -- -- --
Accrued expenses........................ 23,146 45,016 66,720 17,987 18,320 19,032
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES....................... 29,753 1,903,490 1,515,727 494,955 124,512 120,625
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS.......................... $19,938,054 $29,861,396 $119,197,349 $29,779,044 $26,695,842 $10,661,929
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Paid-in capital......................... $19,429,462 $26,368,280 $ 96,523,319 $28,337,402 $22,981,243 $ 9,465,989
Undistributed net investment income
(accumulated net investment loss)..... 442,359 80,456 (235,744) 927,180 109,088 26,191
Accumulated net realized gain on
investments........................... 42,451 757,343 2,846 157,529 560,593 114,934
Net unrealized appreciation of
investments, futures contracts and
foreign currencies.................... 23,782 2,655,317 22,906,928 356,933 3,044,918 1,054,815
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS.......................... $19,938,054 $29,861,396 $119,197,349 $29,779,044 $26,695,842 $10,661,929
- ---------------------------------------------------------------------------------------------------------------------------------
SHARES OUTSTANDING........................ 1,871,854 2,232,205 7,816,796 2,506,230 1,710,121 797,189
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE........................... $10.65 $13.38 $15.25 $11.88 $15.61 $13.37
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
44
<PG$PCN>
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
TRAVELERS LAZARD MFS DISCIPLINED
QUALITY INTERNATIONAL EMERGING FEDERATED FEDERATED MID CAP
BOND STOCK GROWTH HIGH YIELD STOCK STOCK
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest...................................... $499,787 $ 61,075 $ 147,724 $ 975,381 $ 27,545 $ 27,585
Dividends..................................... -- 366,825 65,335 55,275 174,649 37,081
Less: Foreign withholding tax................. -- (44,794) (1,361) -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME....................... 499,787 383,106 211,698 1,030,656 202,194 64,666
- ---------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)............. 24,731 89,147 353,244 70,800 61,963 28,350
Audit and legal............................... 10,000 8,660 18,000 8,000 8,000 7,100
Pricing service fees.......................... 9,000 3,902 4,000 1,000 -- --
Administration fees (Note 2).................. 4,589 6,483 28,259 6,535 5,948 2,430
Shareholder and system servicing fees......... 3,600 3,861 4,500 5,000 5,000 3,500
Custody....................................... 3,000 29,748 32,000 5,000 5,000 7,317
Shareholder communications.................... 1,200 2,398 5,000 4,000 4,000 1,000
Trustees' fees................................ -- 1,000 -- 1,000 1,000 --
Other......................................... 1,251 1,122 2,439 2,141 3,298 500
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES................................ 57,371 146,321 447,442 103,476 94,209 50,197
Less: Management fee waiver (Note 2).......... -- (11,499) -- -- -- (11,722)
- ---------------------------------------------------------------------------------------------------------------------------------
NET EXPENSES.................................. 57,371 134,822 447,442 103,476 94,209 38,475
- ---------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS).................... 442,416 248,284 (235,744) 927,180 107,985 26,191
- ---------------------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
FOREIGN CURRENCIES AND FUTURES CONTRACTS
(NOTES 3, 5 AND 7):
Net Realized Gain (Loss) From:
Securities transactions (excluding
short-term securities).................... 42,473 765,085 609,825 157,473 561,874 180,328
Foreign currency transactions.............. -- (89,008) -- -- -- --
Futures contracts.......................... -- -- -- -- -- (42,376)
- ---------------------------------------------------------------------------------------------------------------------------------
NET REALIZED GAIN............................. 42,473 676,077 609,825 157,473 561,874 137,952
- ---------------------------------------------------------------------------------------------------------------------------------
Changes in Net Unrealized Appreciation of
Investments, Foreign Currencies and Futures
Contracts:
Beginning of period........................ 62,830 613,193 5,784,835 518,084 1,360,255 553,589
End of year................................ 23,782 2,655,317 22,906,928 356,933 3,044,918 1,054,815
- ---------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET UNREALIZED
APPRECIATION............................... (39,048) 2,042,124 17,122,093 (161,151) 1,684,663 501,226
- ---------------------------------------------------------------------------------------------------------------------------------
NET GAIN (LOSS) ON INVESTMENTS, FOREIGN
CURRENCIES AND FUTURES CONTRACTS.............. 3,425 2,718,201 17,731,918 (3,678) 2,246,537 639,178
- ---------------------------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS.......... $445,841 $2,966,485 $17,496,174 $ 923,502 $2,354,522 $ 665,369
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
45
<PG$PCN>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED) FOR THE SIX MONTHS ENDED
JUNE 30, 1998
<TABLE>
<CAPTION>
LAZARD MFS DISCIPLINED
TRAVELERS INTERNATIONAL EMERGING FEDERATED FEDERATED MID CAP
QUALITY BOND STOCK GROWTH HIGH YIELD STOCK STOCK
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss)............ $ 442,416 $ 248,284 $ (235,744) $ 927,180 $ 107,985 $ 26,191
Net realized gain....................... 42,473 676,077 609,825 157,473 561,874 137,952
Increase (decrease) in net unrealized
appreciation......................... (39,048) 2,042,124 17,122,093 (161,151) 1,684,663 501,226
- ---------------------------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM
OPERATIONS........................... 445,841 2,966,485 17,496,174 923,502 2,354,522 665,369
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income................... (1,107) (25,350) -- -- (336) --
Net realized gain....................... (56,635) (29,664) -- (27,425) (148,514) (169,721)
- ---------------------------------------------------------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM
DISTRIBUTIONS TO SHAREHOLDERS........ (57,742) (55,014) -- (27,425) (148,850) (169,721)
- ---------------------------------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 10):
Net proceeds from sale of shares........ 10,414,442 30,147,251 38,746,486 15,219,939 13,209,792 3,887,882
Net asset value of shares issued for
reinvestment of dividends............ 57,742 55,014 -- 27,425 148,850 169,722
Cost of shares reacquired............... (390,379) (17,481,394) (7,392,364) (413,882) (968,461) (60,377)
- ---------------------------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM FUND SHARE
TRANSACTIONS......................... 10,081,805 12,720,871 31,354,122 14,833,482 12,390,181 3,997,227
- ---------------------------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS.................... 10,469,904 15,632,342 48,850,296 15,729,559 14,595,853 4,492,875
NET ASSETS:
Beginning of period..................... 9,468,150 14,229,054 70,347,053 14,049,485 12,099,989 6,169,054
- ---------------------------------------------------------------------------------------------------------------------------------
END OF PERIOD*.......................... $19,938,054 $ 29,861,396 $119,197,349 $29,779,044 $26,695,842 $10,661,929
- ---------------------------------------------------------------------------------------------------------------------------------
* Includes undistributed net investment
income (accumulated net investment
loss) of: $442,359 $80,456 $(235,744) $927,180 $109,088 $26,191
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
46
<PG$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 10):
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
NET ASSETS:
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) -- -- $1,439 --
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the period from April 1, 1997 (commencement of operations) to December
31, 1997.
SEE NOTES TO FINANCIAL STATEMENTS.
47
<PG$PCN>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
The Travelers Quality Bond, Lazard International Stock, MFS Emerging
Growth, Federated High Yield, Federated Stock and Disciplined Mid Cap Stock
Portfolios, formerly known as 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 thirteen other separate investment
portfolios: U.S. Government Securities, Social Awareness Stock, Utilities, Large
Cap, Equity Income, Convertible Bond, MFS Research, MFS Mid Cap Growth,
Disciplined Small Cap Stock, Strategic Stock, 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 semi-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 $27,016 was reclassified to paid-in
capital for MFS Emerging Growth Portfolio. Net investment income, net realized
gains and net assets for each Portfolio were not affected by these changes; and
(k) estimates and assumptions are required to be made regarding assets,
liabilities and changes in net assets resulting from operations when financial
statements are prepared. Changes in the economic environment, financial markets
and any other parameters used in determining these estimates could cause actual
results to differ.
In addition, the Lazard International Stock and MFS Emerging Growth
Portfolios may enter into forward exchange contracts in order to hedge against
foreign currency risk. These contracts are marked to market daily, by
recognizing the difference between the contract exchange rate and the current
market rate as an unrealized gain or loss. Realized gains or losses are
recognized when the contracts are settled.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS
Travelers Asset Management International Corporation ("TAMIC"), an indirect
wholly owned subsidiary of Travelers Group Inc., acts as investment adviser to
the Travelers Quality Bond ("TQB"), Lazard International Stock ("LIS"), MFS
Emerging Growth ("MEG"), Federated High Yield ("FHY"), Federated Stock ("FSP")
and Disciplined Mid Cap Stock
48
<PG$PCN>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Portfolios ("DMCS"). TQB, LIS, MEG, FHY, FSP and DMCS each pay TAMIC an
investment advisory fee 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 DMCS, 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.
- DMCS pays TIMCO 0.35% of DMCS'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"), 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 six months ended June 30, 1998, Travelers Insurance waived all or
part of its fees in the amounts of $11,722, and $11,499 for DMCS and LIS,
respectively.
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 six
months ended June 30, 1998 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO PURCHASES SALES
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Travelers Quality Bond Portfolio............................ $30,959,033 $20,907,973
Lazard International Stock Portfolio........................ 17,740,403 6,710,647
MFS Emerging Growth Portfolio............................... 52,827,337 21,928,047
Federated High Yield Portfolio.............................. 18,202,369 3,496,333
Federated Stock Portfolio................................... 14,751,088 2,838,964
Disciplined Mid Cap Stock Portfolio......................... 7,398,999 3,809,082
- ---------------------------------------------------------------------------------------
</TABLE>
At June 30, 1998, 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............................ $ 54,479 $ (30,697) $ 23,782
Lazard International Stock Portfolio........................ 3,707,880 (1,061,466) 2,646,414
MFS Emerging Growth Portfolio............................... 26,775,847 (3,868,236) 22,907,611
Federated High Yield Portfolio.............................. 782,725 (425,792) 356,933
Federated Stock Portfolio................................... 3,708,417 (663,499) 3,044,918
Disciplined Mid Cap Stock Portfolio......................... 1,243,353 (213,519) 1,029,834
- ----------------------------------------------------------------------------------------------------------
</TABLE>
49
<PG$PCN>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (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 DMCS 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 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 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 June 30, 1998, DMCS 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...................... 9/98 5 $886,519 $911,500 $24,981
- --------------------------------------------------------------------------------------------------------
</TABLE>
6. OPTIONS CONTRACTS
The LIS, MEG, FHY and DMCS 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 Portfolios 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 June 30, 1998, 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 six months ended June 30, 1998, the Portfolios did not write any
options.
50
<PG$PCN>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
7. FORWARD FOREIGN CURRENCY CONTRACTS
LIS and MFS may enter into forward foreign currency contracts.
At June 30, 1998, 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:
Japanese Yen...................................... 1,693,688 $12,205 7/1/98 $265
TO SELL:
Japanese Yen...................................... 660,591 4,760 7/1/98 (7)
- -------------------------------------------------------------------------------------------------------
Net Unrealized Gain on Forward Foreign Currency
Contracts....................................... $258
- -------------------------------------------------------------------------------------------------------
</TABLE>
8. FOREIGN SECURITIES
Investing in securities of foreign companies and foreign governments
involves special risks and considerations not typically associated with
investing in U.S. companies and the U.S. government. These risks include
revaluation of currencies and future adverse political and economic
developments. Moreover, securities of many foreign companies and foreign
governments and their markets may be less liquid and their prices more volatile
than those of securities of comparable U.S. companies and the U.S. government.
9. LENDING OF PORTFOLIO SECURITIES
The Portfolios have an agreement with their custodian whereby the custodian
may lend securities owned by a Portfolio to brokers, dealers and other financial
organizations. Fees earned by the Portfolios on securities lending are recorded
as interest income. Loans of securities by the Portfolios are collateralized by
cash, U.S. government securities or high quality money market instruments that
are maintained at all times in an amount at least equal to the current market
value of the loaned securities, plus a margin which may vary depending on the
type of securities loaned. The custodian establishes and maintains the
collateral in a segregated account. The Portfolios maintain exposure for the
risk of any losses in the investments of amounts received as collateral.
51
<PG$PCN>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
At June 30, 1998, LIS loaned common stocks having a value of approximately
$1,082,479 and holds the following collateral for loaned securities:
<TABLE>
<CAPTION>
SECURITY DESCRIPTION VALUE
- ------------------------------------------------------------------------
<S> <C>
TIME DEPOSITS:
Abbey National London, 6.625% due 7/1/98.................. $ 46,167
Banco Exterior de Espano Brussels, 6.750% due 7/1/98...... 46,167
Banque Bruxelles Lambert London, 6.500% due 7/1/98........ 46,167
Creditanstalt-Bankverein, 6.750% due 7/1/98............... 46,167
Generale Bank Milan, 6.750% due 7/1/98.................... 46,167
Nordeutsche Landesbank G.C., 6.750% due 7/1/98............ 46,167
Rabobank, London, 6.625% due 7/1/98....................... 46,167
SudwestDeutsche Stuttgart, 6.625% due 7/1/98.............. 46,167
WestDeutsche Landesbank Singapore, 6.500% due 7/1/98...... 46,167
COMMERCIAL PAPER:
Corporate Asset Funding Co., Inc., 6.251% due 7/1/98...... 55,390
General Electric Credit, 6.751% due 7/1/98................ 3,974
Koch Industries Inc., 6.301% due 7/1/98................... 55,390
Sheffield Receivable Corp., 6.501% due 7/1/98............. 36,926
Variable Funding Capital Corp., 6.451% due 7/1/98......... 55,390
Windmill Funding, 6.501% due 7/1/98....................... 55,390
REPURCHASE AGREEMENTS:
CS First Boston, 6.580% due 7/1/98........................ 18,466
Merrill Lynch Sec/MLPFS, 6.350% due 7/1/98................ 184,665
NationsBanc Montgomery Sec Inc., 6.550% due 7/1/98........ 221,600
- ------------------------------------------------------------------------
Total....................................................... $1,102,694
- ------------------------------------------------------------------------
</TABLE>
10. 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>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
TRAVELERS QUALITY BOND PORTFOLIO:
Shares sold............................................... 989,746 387,874
Shares issued on reinvestment............................. 5,422 25,688
Shares redeemed........................................... (36,948) (21,988)
- -------------------------------------------------------------------------------------------------
Net Increase.............................................. 958,220 391,574
- -------------------------------------------------------------------------------------------------
LAZARD INTERNATIONAL STOCK PORTFOLIO:
Shares sold............................................... 2,391,902 946,470
Shares issued on reinvestment............................. 4,165 11,082
Shares redeemed........................................... (1,393,900) (128,394)
- -------------------------------------------------------------------------------------------------
Net Increase.............................................. 1,002,167 829,158
- -------------------------------------------------------------------------------------------------
MFS EMERGING GROWTH PORTFOLIO:
Shares sold............................................... 2,739,362 4,341,790
Shares issued on reinvestment............................. -- 101,412
Shares redeemed........................................... (523,565) (67,367)
- -------------------------------------------------------------------------------------------------
Net Increase.............................................. 2,215,797 4,375,835
- -------------------------------------------------------------------------------------------------
</TABLE>
52
<PG$PCN>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
FEDERATED HIGH YIELD PORTFOLIO:
Shares sold............................................... 1,300,845 655,864
Shares issued on reinvestment............................. 2,312 69,193
Shares redeemed........................................... (35,376) (2,983)
- -------------------------------------------------------------------------------------------------
Net Increase.............................................. 1,267,781 722,074
- -------------------------------------------------------------------------------------------------
FEDERATED STOCK PORTFOLIO:
Shares sold............................................... 887,616 916,896
Shares issued on reinvestment............................. 9,609 55,752
Shares redeemed........................................... (61,991) (402,093)
- -------------------------------------------------------------------------------------------------
Net Increase.............................................. 835,234 570,555
- -------------------------------------------------------------------------------------------------
DISCIPLINED MID CAP STOCK PORTFOLIO(1):
Shares sold............................................... 294,193 461,398
Shares issued on reinvestment............................. 12,780 35,196
Shares redeemed........................................... (4,540) (1,838)
- -------------------------------------------------------------------------------------------------
Net Increase.............................................. 302,433 494,756
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) For the period from April 1, 1997 (commencement of operations) to December
31, 1997.
53
<PG$PCN>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
For a share of beneficial interest outstanding throughout each period:
<TABLE>
<CAPTION>
TRAVELERS QUALITY BOND PORTFOLIO 1998(1) 1997 1996(2)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $10.36 $10.10 $10.00
- -----------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income(3).................................. 0.24 0.43 0.19
Net realized and unrealized gain.......................... 0.08 0.29 0.16
- -----------------------------------------------------------------------------------------------
Total Income From Operations................................ 0.32 0.72 0.35
- -----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income..................................... 0.00* (0.43) (0.19)
Net realized gain......................................... (0.03) (0.03) (0.06)
- -----------------------------------------------------------------------------------------------
Total Distributions......................................... (0.03) (0.46) (0.25)
- -----------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.............................. $10.65 $10.36 $10.10
- -----------------------------------------------------------------------------------------------
TOTAL RETURN................................................ 3.10%++ 7.14% 3.56%++
- -----------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000'S)........................... $19,938 $9,468 $5,273
- -----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(3)(4)............................................ 0.75%+ 0.75% 0.75%+
Net investment income..................................... 5.76+ 5.80 5.62+
- -----------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE..................................... 21.41% 295% 35%
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) For the six months ended June 30, 1998 (unaudited).
(2) For the period from August 30, 1996 (commencement of operations) to December
31, 1996.
(3) 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 reimbursed 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>
(4) As a result of a voluntary expense limitation, the ratio of expenses to
average net assets will not exceed 0.75%.
* Amount represents less than $0.01.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
54
<PG$PCN>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of beneficial interest outstanding throughout each period:
<TABLE>
<CAPTION>
LAZARD INTERNATIONAL STOCK PORTFOLIO 1998(1) 1997 1996(2)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $11.57 $10.78 $10.00
- -------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income(3).................................. 0.13 0.05 0.02
Net realized and unrealized gain.......................... 1.70 0.87 0.76
- -------------------------------------------------------------------------------------------
Total Income From Operations................................ 1.83 0.92 0.78
- -------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income..................................... (0.01) (0.09) --
Net realized gain......................................... (0.01) (0.04) --
- -------------------------------------------------------------------------------------------
Total Distributions......................................... (0.02) (0.13) --
- -------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.............................. $13.38 $11.57 $10.78
- -------------------------------------------------------------------------------------------
TOTAL RETURN................................................ 15.48%++ 8.50% 7.80%++
- -------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000'S)........................... $29,861 $14,229 $4,322
- -------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(3)(4)............................................ 1.25%+ 1.25% 1.25%+
Net investment income..................................... 2.27+ 0.66 0.42+
- -------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE..................................... 34% 22% 9%
- -------------------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE ON EQUITY TRANSACTIONS........ $0.03 $0.04 $0.01
- -------------------------------------------------------------------------------------------
</TABLE>
(1) For the six months ended June 30, 1998 (unaudited).
(2) For the period from August 1, 1996 (commencement of operations) to December
31, 1996.
(3) Travelers Insurance has waived part or all of its fees for the six months
ended June 30, 1998, the year ended December 31, 1997 and the period ended
December 31, 1996. In addition, Travelers Insurance has reimbursed 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>
1998 $0.01 1.34%+
1997 0.03 1.76
1996 0.07 2.87+
</TABLE>
(4) As a result of a voluntary expense limitation, the ratio of expenses to
average net assets will not exceed 1.25%.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
55
<PG$PCN>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of beneficial interest outstanding throughout each period:
<TABLE>
<CAPTION>
MFS EMERGING GROWTH PORTFOLIO 1998(1) 1997 1996(2)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $12.56 $10.55 $10.00
- --------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income (loss)(3)........................... (0.03) (0.03) 0.03
Net realized and unrealized gain.......................... 2.72 2.26 0.57
- --------------------------------------------------------------------------------------------
Total Income From Operations................................ 2.69 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 PERIOD.............................. $15.25 $12.56 $10.55
- --------------------------------------------------------------------------------------------
TOTAL RETURN................................................ 21.42%++ 21.15% 6.00%++
- --------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000'S)........................... $119,197 $70,347 $12,924
- --------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(3)(4)............................................ 0.95%+ 0.95% 0.95%+
Net investment income (loss).............................. (0.50)+ (0.40) 0.55+
- --------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE..................................... 25% 94% 49%
- --------------------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE ON EQUITY TRANSACTIONS........ $0.06 $0.06 $0.03
- --------------------------------------------------------------------------------------------
</TABLE>
(1) For the six months ended June 30, 1998 (unaudited).
(2) For the period from August 30, 1996 (commencement of operations) to December
31, 1996.
(3) 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 reimbursed 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 $0.01 1.05%
1996 0.06 2.09+
</TABLE>
(4) As a result of a voluntary expense limitation, the ratio of expenses to
average net assets will not exceed 0.95%.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
56
<PG$PCN>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of beneficial interest outstanding throughout each period:
<TABLE>
<CAPTION>
FEDERATED HIGH YIELD PORTFOLIO 1998(1) 1997 1996(2)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $11.34 $10.42 $10.00
- -----------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income(3).................................. 0.37 0.60 0.31
Net realized and unrealized gain.......................... 0.18 1.01 0.46
- -----------------------------------------------------------------------------------------------
Total Income From Operations................................ 0.55 1.61 0.77
- -----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income..................................... -- (0.60) (0.31)
Net realized gain......................................... (0.01) (0.09) (0.04)
- -----------------------------------------------------------------------------------------------
Total Distributions......................................... (0.01) (0.69) (0.35)
- -----------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.............................. $11.88 $11.34 $10.42
- -----------------------------------------------------------------------------------------------
TOTAL RETURN................................................ 4.86%++ 15.45% 7.61%++
- -----------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000'S)........................... $29,779 $14,049 $5,381
- -----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(3)(4)............................................ 0.95%+ 0.95% 0.95%+
Net investment income..................................... 8.48+ 8.82 8.78+
- -----------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE..................................... 16% 43% 23%
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) For the six months ended June 30, 1998 (unaudited).
(2) For the period from August 30, 1996 (commencement of operations) to December
31, 1996.
(3) 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 reimbursed 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 $0.01 1.14%
1996 0.04 2.19+
</TABLE>
(4) As a result of a voluntary expense limitation, the ratio of expenses to
average net assets will not exceed 0.95%.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
57
<PG$PCN>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of beneficial interest outstanding throughout the period:
<TABLE>
<CAPTION>
FEDERATED STOCK PORTFOLIO 1998(1) 1997 1996(2)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $13.83 $11.10 $10.00
- -----------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income(3).................................. 0.06 0.10 0.06
Net realized and unrealized gain.......................... 1.81 3.60 1.20
- -----------------------------------------------------------------------------------------------
Total Income From Operations................................ 1.87 3.70 1.26
- -----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income..................................... (0.00)* (0.10) (0.06)
Net realized gain......................................... (0.09) (0.87) (0.09)
Capital................................................... -- -- (0.01)
- -----------------------------------------------------------------------------------------------
Total Distributions......................................... (0.09) (0.97) (0.16)
- -----------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.............................. $15.61 $13.83 $11.10
- -----------------------------------------------------------------------------------------------
TOTAL RETURN................................................ 13.52%++ 33.41% 12.61%++
- -----------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000'S)........................... $26,696 $12,100 $3,380
- -----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(3)(4)............................................ 0.95%+ 0.95% 0.95%+
Net investment income..................................... 1.08+ 1.11 1.55+
- -----------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE..................................... 14% 74% 11%
- -----------------------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE ON EQUITY TRANSACTIONS........ $0.05 $0.05 $0.05
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) For the six months ended June 30, 1998 (unaudited).
(2) For the period from August 30, 1996 (commencement of operations) to December
31, 1996.
(3) 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 reimbursed 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>
(4) As a result of a voluntary expense limitation, the ratio of expenses to
average net assets will not exceed 0.95%.
* Amount represents less than $0.01.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
58
<PG$PCN>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of beneficial interest outstanding throughout the period:
<TABLE>
<CAPTION>
DISCIPLINED MID CAP STOCK PORTFOLIO 1998(1) 1997(2)
- ----------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 12.47 $10.00
- ----------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income(3).................................. 0.03 0.06
Net realized and unrealized gain.......................... 1.09 3.37
- ----------------------------------------------------------------------------------
Total Income From Operations................................ 1.12 3.43
- ----------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income..................................... -- (0.06)
Net realized gain......................................... (0.22) (0.90)
- ----------------------------------------------------------------------------------
Total Distributions......................................... (0.22) (0.96)
- ----------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.............................. $ 13.37 $12.47
- ----------------------------------------------------------------------------------
TOTAL RETURN++.............................................. 9.00% 34.38%
- ----------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000'S)........................... $10,662 $6,169
- ----------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS+:
Expenses(3)(4)............................................ 0.95% 0.95%
Net investment income..................................... 0.64 0.85
- ----------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE..................................... 53% 74%
- ----------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE ON EQUITY TRANSACTIONS........ $0.05 $ 0.05
- ----------------------------------------------------------------------------------
</TABLE>
(1) For the six months ended June 30, 1998 (unaudited).
(2) For the period from April 1, 1997 (commencement of operations) to December
31, 1997.
(3) Travelers Insurance has waived all or a portion of its fees for the six
months ended June 30, 1998 and the period ended December 31, 1997. In
addition, Travelers Insurance has reimbursed the Portfolio for $3,564 of the
Portfolio's expenses for the period ended December 31, 1997. If such fees
were not waived or reimbursed, the per share decrease in net investment
income and the actual expense ratios would have been as follows:
<TABLE>
<CAPTION>
PER SHARE DECREASES EXPENSE RATIOS WITHOUT
IN NET INVESTMENT INCOME FEE WAIVERS AND REIMBURSEMENT
------------------------ ------------------------------
<S> <C> <C>
1998 0.02 1.23%+
1997 0.08 1.82+
</TABLE>
(4) As a result of voluntary expense limitation, the ratio of expenses to
average net assets will not exceed 0.95%.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
59
<PG$PCN>
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<PG$PCN>
(This page intentionally left blank)
<PG$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 (Semi-Annual) (8-98) Printed in U.S.A.
<PG$PCN>
THE TRAVELERS VARIABLE
PRODUCTS FUNDS
SEMI-ANNUAL REPORTS
June 30, 1998
THE TRAVELERS SERIES TRUST:
ZERO COUPON BOND FUND PORTFOLIO SERIES 1998
ZERO COUPON BOND FUND PORTFOLIO SERIES 2000
ZERO COUPON BOND FUND PORTFOLIO SERIES 2005
[TRAVELERSLIFE & ANNUITY LOGO]
The Travelers Insurance Company
The Travelers Life and Annuity Company
One Tower Square
Hartford, CT 06183
<PG$PCN>
TRAVELERS SERIES TRUST: ZERO COUPON BOND FUND PORTFOLIOS: SERIES 1998, 2000,
2005
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
We are pleased to provide the semi-annual reports for The Travelers Series
Trust: Zero-Coupon Bond Fund Portfolios: Series 1998, 2000 and 2005
("Portfolio(s)") for the period ended June 30, 1998. 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 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 U.S. economy continues to provide the domestic capital markets with the
almost ideal conditions of low interest rates, lower inflation and steady
economic growth. First quarter Gross Domestic Product ("GDP") growth was well
ahead of expectations and led to the prospect of a Federal Reserve Board ("Fed")
tightening midway through the first half of 1998. Reported inflation, however,
remains low and the Asian currency crisis has caused the Fed to lean towards a
more neutral stance.
Despite the strong first quarter, the U.S. economy has recently shown signs of
slowing down. While industrial production and retail sales have gone down, the
most compelling evidence of the slowdown comes from the bond market. For the
first time since 1990, the portion of the Treasury yield curve, showing the
spread between the two-year and ten-year Treasury yields is now slightly
inverted. (The yield curve shows the difference between short- and long-term
yields.) In the past, an inverted yield curve has been a sign of an economic
downturn.
Fed Chairman Alan Greenspan notes in his latest testimony on July 21, 1998, that
the Fed remains more concerned about inflation than an economic recession. We
see no indications of either an economic or earnings recession in the near
future and the risk in the stock market, in our view, is largely mitigated by
this outlook.
The U.S. stock market posted handsome returns in the first half of 1998. For the
six months ended June 30, 1998, the Dow Jones Industrial Average ("DJIA") rose
13.2% while the broader S&P 500 Index gained 17.7%. At this pace, we believe the
stock market could produce, yet again, another year of 30% or more appreciation,
a three-year run unprecedented in the history of the stock market. The bond
market produced healthy returns as yields on 30-year U.S. Treasury bonds fell to
their lowest level since the introduction of these securities in 1977.
We look ahead to a slower U.S. economy in the second half of 1998. The absence
of inflationary pressures should keep long-term bond yields below 6% while the
combination of lofty valuations and slower corporate earnings growth in 1998
could find stocks at the upper end of a trading range for the rest of the year.
FIXED INCOME MARKET COMMENTARY
Just when many investors were getting somewhat more comfortable with risk again,
the Asian financial crisis re-erupted in May and June. Unrest in Indonesia and
further weakness in the Japanese yen were some of the latest highlights in the
latest chapter of the Asian crisis. The region's turmoil sent Asia's stock
markets down again and caused major setbacks in most emerging country stock and
bond markets. In addition, heightened investor concerns about greater risk
triggered yet another crisis in Russia's fragile markets.
In reaction to the renewed troubles in Asia, the U.S. bond market rallied, as
many global investors sought refuge in U.S. Treasury securities during the
reporting period. Combined with U.S. and Japanese intervention to stabilize the
yen, the rally in U.S. Treasurys helped to support the U.S. stock and bond
markets by the end of the second quarter of 1998. Within the U.S. bond markets,
investment-grade bonds barely performed better than U.S. Treasurys. Many
longer-maturity bonds could not keep pace with the strong performance of the
30-Year U.S. Treasury bond. Mortgage-backed security spreads widened and
discount bonds performed better than premium bonds, as mortgage prepayments
remained high. Corporate bond spreads widened due to heavy issuance (i.e., more
supply) with the most widening occurring in bonds issued by corporations that
were more impacted by the Asian crisis.
Municipal bonds performed poorly as heavy issuance and investor "sticker shock"
kept tax-exempt bond yields from declining as much as U.S. Treasurys. High yield
bonds and emerging market bonds also lagged U.S. Treasurys during the second
quarter of 1998, although high yield bonds are still ahead of U.S. Treasurys for
the first six months of 1998.
1
<PG$PCN>
We continue to believe that interest rates in the U.S. will slowly move lower as
the crisis in Asia pushes U.S. GDP down to a 1% to 2% annual range in the second
half of 1998. Exports from the U.S. have declined sharply and the trade deficit
has widened rapidly. We expect even greater deterioration in the U.S. trade
deficit as Asian imports accelerate in the second half of the year. Inventory
growth in the U.S. was strong in the first half of 1998, and that condition
should slow projected U.S. economic growth in the second half of the year. In
addition, we expect that corporate profits will continue to be flat, which,
combined with high inventories and weak commodity prices, should help to weaken
capital spending during the next several quarters.
Within the U.S. bond market, we anticipate that the yield curve will be steeper
six to twelve months from now. However, we think that the yield curve will
likely stay flat until it becomes clearer that the inflationary risks from
currently tight U.S. labor markets have passed. As rates decline, bond spreads
are likely to widen. In addition, bond spreads should widen more because of a
continuation of the flight to quality as well as the fact that the supply of
bonds should remain high at these rate levels. The overall low inflationary
environment and the expected economic slowdown, along with the increased
volatility in the stock market, have created a favorable backdrop for fixed
income investments.
ZERO-COUPON BOND FUND PORTFOLIO PERFORMANCE
The three Zero-Coupon Bond Fund 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 bonds that have a "locked-in"
rate of return. Zero coupons, sometimes referred to as "strips," are long-term
U.S. Treasury bonds 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 (i.e., immunized) to have a duration equal to a
zero-coupon bond due on its maturity date. (Duration is a measure of a fund's
volatility relative to a given change in interest rates.) 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 PORTFOLIO SERIES 1998
The Zero-Coupon Bond Fund Portfolio Series 1998 had a total return of 2.82% for
the six months ended June 30, 1998 versus the Merrill Lynch Zero Coupon's
two-year return of 2.90% for the same period.
ZERO-COUPON BOND FUND PORTFOLIO SERIES 2000
The Zero-Coupon Bond Fund Portfolio Series 2000 had a total return of 3.42% for
the six months ended June 30, 1998 versus the Merrill Lynch Zero Coupon's
five-year total return of 3.29% for the same period.
ZERO-COUPON BOND FUND PORTFOLIO SERIES 2005
The Zero-Coupon Bond Fund Portfolio Series 2005 had a total return of 4.65% for
the six months ended June 30, 1998 versus the Merrill Lynch Zero Coupon's
ten-year total return of 4.87% 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 in the
future.
Sincerely,
/s/ HEATH B. MCLENDON
Heath B. McLendon
Chairman
July 22, 1998
2
<PG$PCN>
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON -- ZERO COUPON BOND FUND PORTFOLIO SERIES 1998
(UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
<S> <C>
Six Months Ended 6/30/98+ 2.82%
Year Ended 6/30/98 6.47%
10/11/95* through 6/30/98 5.70%
CUMULATIVE TOTAL RETURN
-----------------------------------------------
10/11/95* through 6/30/98 16.29%
*Commencement of operations
</TABLE>
This chart assumes an initial investment of $10,000 made on October
11, 1995, assuming reinvestment of dividends, through June 30,
1998. The Merrill Lynch Zero Coupon - 2 year is comprised of U.S.
government stripped securities which have a maturity not greater
than two years.
+ Total return is not annualized, as it may not be representative
of the total return for the year.
<TABLE>
<CAPTION>
Zero Coupon
Bond Fund Merrill Lynch
Measurement Period Portfolio Series Zero Coupon - 2
(Fiscal Year Covered) 1998 year
<S> <C> <C>
10/11/95 10000 10000
12/31/95 10211 10299
12/31/96 10655 10738
6/30/97 10922 11039
12/31/97 11309 11350
6/30/98 11629 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 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.
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON -- ZERO COUPON BOND FUND PORTFOLIO SERIES 2000
(UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
<S> <C>
Six Months Ended 6/30/98+ 3.42%
Year Ended 6/30/98 8.36%
10/11/95* through 6/30/98 6.10%
CUMULATIVE TOTAL RETURN
-----------------------------------------------
10/11/95* through 6/30/98 17.48%
*Commencement of operations
</TABLE>
This chart assumes an initial investment of $10,000 made on October
11, 1995, assuming reinvestment of dividends, through June 30,
1998. The Merrill Lynch Zero Coupon - 5 year is comprised of U.S.
government stripped securities which have a maturity not greater
than five years.
+ Total return is not annualized, as it may not be representative
of the total return for the year.
<TABLE>
<CAPTION>
Zero Coupon
Bond Fund Merrill Lynch
Measurement Period Portfolio Series Zero Coupon - 5
(Fiscal Year Covered) 2000 year
<S> <C> <C>
10/11/95 10000 10000
12/31/95 10252 10405
12/31/96 10596 10648
6/30/97 10841 10924
12/31/97 11359 11226
6/30/98 11748 11595
</TABLE>
- --------------------------------------------------------------------------------
Past performance is not predictive of future performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Average annual total returns are historical in nature and measure net investment
income and capital gains or losses from portfolio investments assuming
reinvestment of dividends. The returns do not reflect expenses associated with
the subaccount such as administrative fees, account charges and surrender
charges which, if reflected, would reduce the performance shown.
3
<PG$PCN>
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON -- ZERO COUPON BOND FUND PORTFOLIO SERIES 2005
(UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
<S> <C>
Six Months Ended 6/30/98+ 4.65%
Year Ended 6/30/98 14.41%
10/11/95* through 6/30/98 8.09%
CUMULATIVE TOTAL RETURN
-----------------------------------------------
10/11/95* through 6/30/98 23.58%
*Commencement of operations
</TABLE>
This chart assumes an initial investment of $10,000 made on October
11, 1995, assuming reinvestment of dividends, through June 30,
1998. The Merrill Lynch Zero Coupon - 10 year is comprised of U.S.
government stripped securities which have a maturity not greater
than ten years.
+ Total return is not annualized, as it may not be representative
of the total return for the year.
<TABLE>
<CAPTION>
Zero Coupon
Bond Fund Merrill Lynch
Measurement Period Portfolio Series Zero Coupon -
(Fiscal Year Covered) 2005 10 year
<S> <C> <C>
10/11/95 10000 10000
12/31/95 10480 10687
12/31/96 10580 10584
6/30/97 10802 10829
12/31/97 11810 11101
6/30/98 12358 11642
</TABLE>
- --------------------------------------------------------------------------------
Past performance is not predictive of future performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Average annual total returns are historical in nature and measure net investment
income and capital gains or losses from portfolio investments assuming
reinvestment of dividends. The returns do not reflect expenses associated with
the subaccount such as administrative fees, account charges and surrender
charges which, if reflected, would reduce the performance shown.
4
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) JUNE 30, 1998
ZERO COUPON BOND FUND PORTFOLIO SERIES 1998
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
- ---------------------------------------------------------------------------------------------
<C> <S> <C> <C>
U.S. TREASURY OBLIGATION -- 56.5%
$810,000 AAA U.S. Treasury Note, Stripped Principal Payment Only due
11/15/98
(Cost -- $792,826).......................................... $ 794,318
- ---------------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATION -- 2.0%
30,338 AAA Federal Home Loan Mortgage Corp., zero coupon bond to yield
6.995% due 12/15/99 (Cost -- $28,925)..................... 29,011
- ---------------------------------------------------------------------------------------------
CORPORATE BONDS AND NOTES -- 15.1%
- ---------------------------------------------------------------------------------------------
AUTOMOBILE -- 3.5%
48,000 A General Motors Acceptance Corp., Note, 7.500% due 5/26/00... 49,321
- ---------------------------------------------------------------------------------------------
BANKING -- 3.9%
60,000 AAA Deutsche Bank Financial, zero coupon medium term note to
yield 6.976% due 2/1/00................................... 54,825
- ---------------------------------------------------------------------------------------------
FINANCE -- 7.7%
60,000 A Avco Financial Services, Inc., zero coupon structure note to
yield 6.975% due 12/16/98................................. 58,449
50,000 NR Sears Overseas Financial NV, zero coupon bond to yield
6.282% due 7/12/98........................................ 49,951
- ---------------------------------------------------------------------------------------------
108,400
- ---------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES (Cost -- $212,098) 212,546
- ---------------------------------------------------------------------------------------------
FOREIGN BONDS AND NOTES -- 16.5%
- ---------------------------------------------------------------------------------------------
BANKING -- 8.2%
60,000 A+ Chemical New York NV Corp., zero coupon bond to yield 7.085%
due 2/16/99............................................... 58,103
60,000 NR International Bank of Reconstruction & Development, zero
coupon bond to yield 7.521% due 4/16/99................... 56,813
- ---------------------------------------------------------------------------------------------
114,916
- ---------------------------------------------------------------------------------------------
FOOD -- 4.2%
62,000 A PepsiCo, Inc., zero coupon note to yield 7.136% due
5/25/99................................................... 58,822
- ---------------------------------------------------------------------------------------------
INSURANCE -- 4.1%
60,000 AA New England Life, zero coupon bond to yield 7.460% due
2/1/99.................................................... 57,975
- ---------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS AND NOTES (Cost -- $231,067) 231,713
- ---------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 9.9%
139,000 Citibank, 5.317% due 7/1/98; Proceeds at
maturity -- $139,021;
(Fully collateralized by U.S. Treasury Note, 8.875% due
2/15/99;
Market value -- $142,256) (Cost -- $139,000)................ 139,000
- ---------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $1,403,916**) $1,406,588
- ---------------------------------------------------------------------------------------------
</TABLE>
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 8 for definition of ratings.
SEE NOTES TO FINANCIAL STATEMENTS.
5
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
ZERO COUPON BOND FUND PORTFOLIO SERIES 2000
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
- ---------------------------------------------------------------------------------------------
<C> <S> <C> <C>
U.S. TREASURY OBLIGATIONS -- 57.4%
$587,000 AAA U.S. Treasury Note, Stripped Principal Payment Only due
11/15/00.................................................. $ 516,814
167,000 AAA U.S. Treasury Note, Stripped Principal Payment Only due
5/15/01................................................... 143,101
300,000 AAA U.S. Treasury Note, Stripped Principal Payment Only due
8/15/01................................................... 253,479
74,000 AAA U.S. Treasury Note, Stripped Principal Payment Only due
11/15/02.................................................. 58,446
47,000 AAA U.S. Treasury Note, Stripped Principal Payment Only due
2/15/03................................................... 36,623
- ---------------------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS (Cost -- $989,208) 1,008,463
- ---------------------------------------------------------------------------------------------
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 -- $55,617)...................... 55,761
- ---------------------------------------------------------------------------------------------
CORPORATE BONDS AND NOTES -- 17.0%
- ---------------------------------------------------------------------------------------------
BANKING -- 3.1%
60,000 AAA Deutsche Bank Financial, zero coupon medium term note to
yield 6.652% due 2/1/00................................... 54,825
- ---------------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 3.2%
65,000 AAA Exxon Capital Ventures, Inc., zero coupon guaranteed note to
yield 6.713% due 2/15/01.................................. 55,981
- ---------------------------------------------------------------------------------------------
FOODS -- 3.1%
70,000 AA- Archer-Daniels Midland Co., zero coupon debenture
to yield 6.830% due 5/1/02................................ 55,738
- ---------------------------------------------------------------------------------------------
HOSPITAL SUPPLIES & SERVICES -- 3.1%
65,000 BBB Hospital Corp. of America, zero coupon bond to yield 7.311%
due 6/1/00................................................ 53,869
- ---------------------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 4.5%
70,000 BBB- Tele-Communications Inc., amortizing note, 9.650% due
10/1/03................................................... 78,138
- ---------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES (Cost -- $296,840) 298,551
- ---------------------------------------------------------------------------------------------
FOREIGN BONDS AND NOTES -- 22.5%
- ---------------------------------------------------------------------------------------------
BANKING -- 6.5%
60,000 A+ Chemical New York NV Corp., zero coupon bond to yield 7.316%
due 2/16/99............................................... 58,103
60,000 NR International Bank of Reconstruction & Development, zero
coupon bond to yield 7.316% due 4/16/99................... 56,813
- ---------------------------------------------------------------------------------------------
114,916
- ---------------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 6.1%
65,000 A+ American Express Co., zero coupon bond to yield 6.945% due
12/12/00.................................................. 56,306
50,000 A+ IBM International Finance NV, 6.250% due 10/10/00........... 50,394
- ---------------------------------------------------------------------------------------------
106,700
- ---------------------------------------------------------------------------------------------
FOODS -- 3.3%
62,000 A PepsiCo, Inc., zero coupon note to yield 6.932% due
5/25/99................................................... 58,822
- ---------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT -- 3.3%
64,000 AA+ Kingdom of Sweden, zero coupon note to yield 6.395% due
7/31/00................................................... 56,960
- ---------------------------------------------------------------------------------------------
INSURANCE -- 3.3%
60,000 AA New England Life, zero coupon bond to yield 7.228% due
2/1/99.................................................... 57,975
- ---------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS AND NOTES (Cost -- $393,800) 395,373
- ---------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $1,735,465**) $1,758,148
- ---------------------------------------------------------------------------------------------
</TABLE>
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 8 for definition of ratings.
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
ZERO COUPON BOND FUND PORTFOLIO SERIES 2005
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
- -----------------------------------------------------------------------------------------------
<C> <S> <C> <C>
U.S. TREASURY OBLIGATIONS -- 79.0%
$ 970,000 AAA U.S. Treasury Note, Stripped Principal Payment Only due
11/15/05.................................................... $ 648,804
1,600,000 AAA U.S. Treasury Note, Stripped Principal Payment Only due
2/15/06..................................................... 1,053,343
500,000 AAA U.S. Treasury Note, Stripped Principal Payment Only due
2/15/09..................................................... 276,935
- -----------------------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS (Cost -- $1,821,337) 1,979,082
- -----------------------------------------------------------------------------------------------
CORPORATE BONDS AND NOTES -- 4.5%
- -----------------------------------------------------------------------------------------------
FINANCE -- 2.3%
80,000 A+ Grand Metro Investment, zero coupon note to yield 7.137% due
1/6/04...................................................... 57,700
- -----------------------------------------------------------------------------------------------
FOODS -- 2.2%
70,000 AA- Archer-Daniels Midland Co., zero coupon bond to yield 6.932%
due 5/1/02.................................................. 55,738
- -----------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES (Cost -- $110,334) 113,438
- -----------------------------------------------------------------------------------------------
FOREIGN BONDS AND NOTES -- 9.1%
- -----------------------------------------------------------------------------------------------
BANKING -- 2.4%
75,000 A Chemical New York NV Corp., zero coupon bond to yield 7.646%
due 2/16/02................................................. 60,141
- -----------------------------------------------------------------------------------------------
FINANCE -- 2.3%
80,000 AAA Exxon Capital Corp., zero coupon note to yield 7.287% due
11/15/04.................................................... 56,150
- -----------------------------------------------------------------------------------------------
FOODS -- 2.2%
80,000 A+ General Mills Inc., zero coupon bond to yield 7.820% due
8/15/04..................................................... 55,800
- -----------------------------------------------------------------------------------------------
INSURANCE -- 2.2%
80,000 AAA American International Group, zero coupon bond to yield
7.570% due 8/15/04.......................................... 55,800
- -----------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS AND NOTES (Cost -- $219,983) 227,891
- -----------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 7.4%
186,000 Citibank, 5.464% due 7/1/98; Proceeds at
maturity -- $186,028;
(Fully collateralized by U.S. Treasury Note, 5.500% due
1/31/03;
Market value -- $194,038) (Cost -- $186,000)................ 186,000
- -----------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $2,337,654**) $2,506,411
- -----------------------------------------------------------------------------------------------
</TABLE>
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 8 for definition of ratings.
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PG$PCN>
- --------------------------------------------------------------------------------
BOND RATINGS (UNAUDITED)
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.
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.
Aaa -- Bonds 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 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 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 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
<PG$PCN>
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES (UNAUDITED) JUNE 30, 1998
<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 -- $1,403,916, $1,735,465 and
$2,337,654 respectively)............................... $1,406,588 $1,758,148 $2,506,411
Cash...................................................... 638 41,806 67
Interest receivable....................................... 916 3,939 29
Receivable from affiliate................................. 41,798 43,232 45,789
- -----------------------------------------------------------------------------------------------------
TOTAL ASSETS.............................................. 1,449,940 1,847,125 2,552,296
- -----------------------------------------------------------------------------------------------------
LIABILITIES:
Accrued expenses.......................................... 12,860 14,097 15,299
- -----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES......................................... 12,860 14,097 15,299
- -----------------------------------------------------------------------------------------------------
TOTAL NET ASSETS............................................ $1,437,080 $1,833,028 $2,536,997
- -----------------------------------------------------------------------------------------------------
NET ASSETS:
Paid-in capital........................................... $1,396,756 $1,764,105 $2,307,473
Undistributed net investment income....................... 39,273 51,927 68,462
Accumulated net realized loss on security transactions.... (1,621) (5,687) (7,695)
Net unrealized appreciation of investments................ 2,672 22,683 168,757
- -----------------------------------------------------------------------------------------------------
TOTAL NET ASSETS............................................ $1,437,080 $1,833,028 $2,536,997
- -----------------------------------------------------------------------------------------------------
SHARES OUTSTANDING.......................................... 139,325 175,827 230,406
- -----------------------------------------------------------------------------------------------------
NET ASSET VALUE, PER SHARE.................................. $10.31 $10.43 $11.01
- -----------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PG$PCN>
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, 1998
<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.................................................. $40,329 $53,251 $ 70,219
- -------------------------------------------------------------------------------------------------------
EXPENSES:
Audit and legal........................................... 6,000 6,000 6,000
Shareholder and system servicing fees..................... 3,105 3,550 3,555
Shareholder communications................................ 2,000 2,500 3,250
Investment advisory fees (Note 2)......................... 706 887 1,172
Custody................................................... 585 200 425
Administration fees (Note 2).............................. 424 534 706
Other..................................................... 500 1,000 1,000
- -------------------------------------------------------------------------------------------------------
TOTAL EXPENSES............................................ 13,320 14,671 16,108
Less: Expense reimbursement (Note 2)...................... (12,261) (13,341) (14,349)
- -------------------------------------------------------------------------------------------------------
NET EXPENSES.............................................. 1,059 1,330 1,759
- -------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME....................................... 39,270 51,921 68,460
- -------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE 3):
Net Realized Gain From Security Transactions (excluding
short-term securities):
Proceeds from sales.................................. -- 5,183 78,106
Cost of securities sold.............................. -- 5,160 75,294
- -------------------------------------------------------------------------------------------------------
NET REALIZED GAIN......................................... -- 23 2,812
- -------------------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of period.................................. 1,618 14,731 129,642
End of period........................................ 2,672 22,683 168,757
- -------------------------------------------------------------------------------------------------------
INCREASE IN NET UNREALIZED APPRECIATION................... 1,054 7,952 39,115
- -------------------------------------------------------------------------------------------------------
NET GAIN ON INVESTMENTS..................................... 1,054 7,975 41,927
- -------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS...................... $40,324 $59,896 $110,387
- -------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PG$PCN>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE
30, 1998
<TABLE>
<CAPTION>
ZERO ZERO ZERO
COUPON COUPON COUPON
BOND FUND BOND FUND BOND FUND
PORTFOLIO PORTFOLIO PORTFOLIO
SERIES 1998 SERIES 2000 SERIES 2005
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATIONS:
Net investment income..................................... $ 39,270 $ 51,921 $ 68,460
Net realized gain......................................... -- 23 2,812
Increase in net unrealized appreciation................... 1,054 7,952 39,115
- -----------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS.................... 40,324 59,896 110,387
- -----------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income..................................... (446) (949) (2,117)
- -----------------------------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM DISTRIBUTIONS TO
SHAREHOLDERS........................................... (446) (949) (2,117)
- -----------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 8):
Net proceeds from sales of shares......................... 10,998 49,737 238,915
Net asset value of shares issued for reinvestment of
dividends.............................................. 446 949 2,117
Cost of shares reacquired................................. (17,377) (33,193) (169,675)
- -----------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM FUND SHARE
TRANSACTIONS........................................... (5,933) 17,493 71,357
- -----------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS...................................... 33,945 76,440 179,627
NET ASSETS:
Beginning of period....................................... 1,403,135 1,756,588 2,357,370
- -----------------------------------------------------------------------------------------------------
END OF PERIOD*............................................ $1,437,080 $1,833,028 $2,536,997
- -----------------------------------------------------------------------------------------------------
* Includes undistributed net investment income of:.......... $39,273 $51,927 $68,462
- -----------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PG$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 1998 SERIES 2000 SERIES 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 $2,119
- -----------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PG$PCN>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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 sixteen 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, Disciplined Mid
Cap Stock Portfolio (formerly known as Mid Cap Disciplined Equity Fund),
Convertible Bond, MFS Research, MFS Mid Cap Growth, Disciplined Small Cap Stock
and Strategic Stock 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 semi-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"). 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 six months ended June 30, 1998, Travelers Insurance has agreed to
reimburse Series 1998, Series 2000, and Series 2005 for expenses in the amount
of $12,261, $13,341, and $14,349, respectively.
13
<PG$PCN>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. INVESTMENTS
During the six months ended June 30, 1998, 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................................................... -- -- --
Sales....................................................... -- $5,183 $78,106
- -----------------------------------------------------------------------------------------
</TABLE>
At June 30, 1998, 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............................... $3,022 $27,068 $168,757
Gross unrealized depreciation............................... (350) (4,385) --
- -------------------------------------------------------------------------------------------
Net unrealized appreciation................................. $2,672 $22,683 $168,757
- -------------------------------------------------------------------------------------------
</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 June 30, 1998, 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 (UNAUDITED) (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>
2000 2003 2004 2005
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Series 2000................................................. $5,200 -- -- --
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>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
SERIES 1998
Shares sold................................................. 1,088 5,116
Shares issued on reinvestment............................... 43 7,560
Shares redeemed............................................. (1,706) (3,138)
- ---------------------------------------------------------------------------------------------------
Net Increase (Decrease)..................................... (575) 9,538
- ---------------------------------------------------------------------------------------------------
SERIES 2000
Shares sold................................................. 4,840 10,557
Shares issued on reinvestment............................... 91 9,576
Shares redeemed............................................. (3,242) (3,082)
- ---------------------------------------------------------------------------------------------------
Net Increase................................................ 1,689 17,051
- ---------------------------------------------------------------------------------------------------
SERIES 2005
Shares sold................................................. 22,182 29,538
Shares issued on reinvestment............................... 192 11,994
Shares redeemed............................................. (15,794) (23,752)
- ---------------------------------------------------------------------------------------------------
Net Increase................................................ 6,580 17,780
- ---------------------------------------------------------------------------------------------------
</TABLE>
15
<PG$PCN>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
For a share of beneficial interest outstanding throughout each period:
<TABLE>
<CAPTION>
ZERO COUPON BOND FUND PORTFOLIO SERIES 1998 1998(1) 1997 1996 1995(2)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.................... $10.03 $9.99 $10.25 $10.00
- --------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income (3)............................. 0.28 0.57 0.53 0.12
Net realized and unrealized gain (loss)............... 0.00* 0.04 (0.13) 0.13
- --------------------------------------------------------------------------------------------------------------
Total Income From Operations............................ 0.28 0.61 0.40 0.25
- --------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income................................. 0.00* (0.56) (0.65) --
Net realized gains.................................... -- (0.01) (0.01) --
- --------------------------------------------------------------------------------------------------------------
Total Distributions..................................... 0.00 (0.57) (0.66) --
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.......................... $10.31 $10.03 $9.99 $10.25
- --------------------------------------------------------------------------------------------------------------
TOTAL RETURN............................................ 2.82%++ 6.13% 3.94% 2.50%++
- --------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000'S)....................... $1,437 $1,403 $1,303 $1,024
- --------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses (3)(4)....................................... 0.15%+ 0.15% 0.15% 0.15%+
Net investment income................................. 5.56+ 5.55 5.64 5.55+
- --------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE................................. 0% 17% 19% 20%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the six months ended June 30, 1998 (unaudited).
(2) For the period from October 11, 1995 (commencement of operations) to
December 31, 1995.
(3) For the six months ended June 30, 1998, the years ended December 31, 1997
and 1996, and the period ended December 31, 1995, Travelers Insurance
reimbursed the Portfolio for $12,261, $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>
1998 $0.09 1.89%+
1997 0.20 2.21
1996 0.24 2.82
1995 0.14 6.51+
</TABLE>
(4) The expense ratios for the six months ended June 30, 1998, years ended
December 31, 1997 and 1996, and the period ended December 31, 1995 reflect
an expense reimbursement by Travelers Insurance in connection with voluntary
expense limitations.
* Amount represents less than $0.01.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
16
<PG$PCN>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of beneficial interest outstanding throughout each period:
<TABLE>
<CAPTION>
ZERO COUPON BOND FUND PORTFOLIO SERIES 2000 1998(1) 1997 1996 1995(2)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD...................... $10.09 $9.96 $10.31 $10.00
- ---------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income (3)............................... 0.30 0.59 0.50 0.13
Net realized and unrealized gain (loss)................. 0.05 0.13 (0.22) 0.18
- ---------------------------------------------------------------------------------------------------------------
Total Income From Operations.............................. 0.35 0.72 0.28 0.31
- ---------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income................................... (0.01) (0.59) (0.63) --
- ---------------------------------------------------------------------------------------------------------------
Total Distributions....................................... (0.01) (0.59) (0.63) --
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD............................ $10.43 $10.09 $9.96 $10.31
- ---------------------------------------------------------------------------------------------------------------
TOTAL RETURN.............................................. 3.42%++ 7.20% 2.76% 3.10%++
- ---------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000'S)......................... $1,833 $1,757 $1,565 $1,029
- ---------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses (3)(4)......................................... 0.15%+ 0.15% 0.15% 0.15%+
Net investment income................................... 5.84+ 5.88 5.74 5.61+
- ---------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE................................... 0% 29% 33% 34%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the six months ended June 30, 1998 (unaudited).
(2) For the period from October 11, 1995 (commencement of operations) to
December 31, 1995.
(3) For the six months ended June 30, 1998, the years ended December 31, 1997
and 1996, and the period ended December 31, 1995, Travelers Insurance
reimbursed the Portfolio for $13,341, $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>
1998 $0.08 1.65%+
1997 0.16 1.80
1996 0.20 2.49
1995 0.14 6.51+
</TABLE>
(4) The expense ratios for the six months ended June 30, 1998, years ended
December 31, 1997 and 1996, and the period ended December 31, 1995 reflect
an expense reimbursement by Travelers Insurance in connection with voluntary
expense limitations.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
17
<PG$PCN>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of beneficial interest outstanding throughout each period:
<TABLE>
<CAPTION>
ZERO COUPON BOND FUND PORTFOLIO SERIES 2005 1998(1) 1997 1996 1995(2)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD................... $10.53 $9.97 $10.48 $10.00
- ------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income (3)............................ 0.30 0.60 0.48 0.13
Net realized and unrealized gain (loss).............. 0.19 0.56 (0.38) 0.35
- ------------------------------------------------------------------------------------------------------------
Total Income From Operations........................... 0.49 1.16 0.10 0.48
- ------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income................................ (0.01) (0.60) (0.61) --
- ------------------------------------------------------------------------------------------------------------
Total Distributions.................................... (0.01) (0.60) (0.61) --
- ------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD......................... $11.01 $10.53 $9.97 $10.48
- ------------------------------------------------------------------------------------------------------------
TOTAL RETURN........................................... 4.65%++ 11.63% 0.90% 4.80%++
- ------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000'S)...................... $2,537 $2,357 $2,054 $1,050
- ------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses (3)(4)...................................... 0.15%+ 0.15% 0.15% 0.15%+
Net investment income................................ 5.82+ 6.11 6.14 5.89+
- ------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE................................ 0% 9% 17% 23%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the six months ended June 30, 1998 (unaudited).
(2) For the period from October 11, 1995 (commencement of operations) to
December 31, 1995.
(3) For the six months ended June 30, 1998, the years ended December 31, 1997
and 1996, and the period ended December 31, 1995, Travelers Insurance
reimbursed the Portfolio for $14,349, $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>
1998 $0.06 1.37%+
1997 0.13 1.52
1996 0.15 2.17
1995 0.14 6.48+
</TABLE>
(4) The expense ratios for the six months ended June 30, 1998, the years ended
December 31, 1997 and 1996, and the period ended December 31, 1995 reflect
an expense reimbursement by Travelers Insurance in connection with voluntary
expense limitations.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
18
<PG$PCN>
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<PG$PCN>
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<PG$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 (Semi-Annual) (8-98) Printed in U.S.A.
<PG$PCN>
THE TRAVELERS VARIABLE
PRODUCTS FUNDS
SEMI-ANNUAL REPORTS
JUNE 30, 1998
[PHOTO]
THE TRAVELERS SERIES TRUST:
CONVERTIBLE BOND PORTFOLIO
STRATEGIC STOCK PORTFOLIO
DISCIPLINED SMALL CAP STOCK PORTFOLIO
MFS MID CAP GROWTH PORTFOLIO
MFS RESEARCH PORTFOLIO
[TRAVELERS LIFE & ANNUITY LOGO]
The Travelers Insurance Company
The Travelers Life and Annuity Company
One Tower Square
Hartford, CT 06183
<PG$PCN>
SEMI-ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
We are pleased to provide the semi-annual report for The Travelers Series
Trust -- Convertible Bond Portfolio, Strategic Stock Portfolio, Disciplined
Small Cap Stock Portfolio, MFS Mid Cap Growth Portfolio, and MFS Research
Portfolios ("Portfolio(s)") for the period ended June 30, 1998. A more detailed
summary of performance and current holdings for each Portfolio can be found in
the pages listed below.
<TABLE>
<CAPTION>
MARKET SCHEDULE OF
SUBACCOUNT COMMENTARY INVESTMENTS
---------- ---------- -----------
<S> <C> <C>
Convertible Bond Portfolio............................ 3 8
Strategic Stock Portfolio............................. 4 10
Disciplined Small Cap Stock Portfolio................. 4 12
MFS Mid Cap Growth Portfolio.......................... 5 19
MFS Research Portfolio................................ 6 23
</TABLE>
ECONOMIC REVIEW AND OUTLOOK
The U.S. economy continues to provide the domestic capital markets with the
almost ideal conditions of low interest rates, lower inflation and steady
economic growth. First quarter Gross Domestic Product ("GDP") growth was well
ahead of expectations and led to the prospect of a Federal Reserve Board ("Fed")
tightening midway through the first half of 1998. Reported inflation, however,
remains low and the Asian currency crisis has caused the Fed to lean toward a
more neutral stance.
Despite the strong first quarter, the U.S. economy has recently showed signs of
slowing down. While industrial production and retail sales have gone down, the
most compelling evidence of the slowdown comes from the bond market. For the
first time since 1990, the yield curve, defined by the spread between the
two-year and ten-year Treasury yields, is now slightly inverted. (The yield
curve shows the difference between short- and long-term yields.) In the past, an
inverted yield curve has been a harbinger of an economic downturn.
Fed Chairman Alan Greenspan notes in his latest testimony on July 21, 1998 that
the Fed remains more concerned about inflation rather than an economic
recession. We see no indications of either an economic or earnings recession in
the near future and the risk in the stock market, in our view, is largely
mitigated by this outlook.
The U.S. stock market posted handsome returns in the first half of 1998. On a
year-to-date basis, the Dow Jones Industrial Average ("DJIA") rose 13.2% while
the broader Standard & Poor's 500 Index ("S&P 500") gained 17.7%. At this pace,
the stock market would yet again produce another year of 30% or more
appreciation, a three-year run unprecedented in the history of the stock market.
The bond market produced healthy returns as yields on 30-year U.S. Treasury
bonds fell to their lowest level since the introduction of these securities in
1977.
We look ahead to a slower economy in the second half of 1998. The absence of
inflationary pressures should keep long-term bond yields below 6% while the
combination of lofty valuations and slower corporate earnings growth in 1998
could find stocks at the upper end of a trading range for the rest of the year.
EQUITY MARKET COMMENTARY
After three remarkable years of market appreciation averaging more than 30%
annually, the first quarter's total return S&P 500 of almost 15% was that much
more impressive. Since 1995, the stock market's climb has also been supported by
a dramatic increase in money flows by domestic and foreign investors, as well as
corporate buybacks and merger activity. Low domestic inflation and steady
revenue gains have also contributed to the expansion in the P/E multiple. (a P/E
ratio shows the relationship between a stock's price and the company's earnings
for the last four quarters.)
Stock market volatility increased significantly in the second quarter of 1998.
Investor focus shifted from the prospects of Fed monetary policy tightening to
the Asian crisis and eventually to hopes of reasonable corporate earnings growth
for the second quarter. Large-capitalization stocks posted a gain for the second
quarter of 1998 while small-capitalization stocks declined to fall farther
behind their large-cap stock counterparts.
1
<PG$PCN>
SEMI-ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
A seesaw pattern in stock prices persisted at the beginning of the second
quarter of 1998, as stock prices remained almost unchanged at the end of April
from a month earlier. Interest rate concerns took center stage towards the end
of April as the Fed publicly discussed a shift to a tightening bias. Long-term
interest rates shot up above 6% while the S&P 500 fell 4.3% from April 23, 1998
to April 27, 1998.
Despite a strong first quarter GDP report and low inflation, a slowdown in the
second half of 1998 became more apparent. Bond prices stabilized as a result of
such evidence in late April and early May and stock prices recovered to the
levels established at the end of the first quarter.
Renewed concerns over Asia and slowing earnings growth rocked the stock market
in May. The S&P 500 declined by almost 2% while the Russell 2000 Index fell
nearly 5%. (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.) Several companies provided early guidance about
lower second quarter earnings during the month of May. Investors, already
worried about record valuations in the stock market, showed no mercy in their
response to such disappointments as some stock prices tumbled down by as much as
50%.
Growth stocks performed better than value stocks in the second quarter of 1998
in the large-cap universe. In particular, the technology, health care and
consumer discretionary sectors performed quite well while the energy sector
underperformed significantly in the wake of falling oil prices.
The widely anticipated earnings pre-announcement season at the end of June, when
companies confess to upcoming earnings shortfalls, was not as severe as in prior
quarters. Many stock market investors appear to have drawn a positive inference
from this event and the current outlook for second quarter earnings seems
favorable. Corporate earnings growth, however, is clearly slowing down and the
recent market strength and current valuations are both predicated on a healthy
earnings rebound in the second half of the year and into 1999.
Besides the historically high valuations for large capitalization stocks, we
think the principal risk to the U.S. stock market remains on the earnings front.
If Asia remains in a protracted recession, which is a likely scenario at this
point, a slowdown in the global economy could take its toll on U.S. corporate
profits. A prolonged period of anemic earnings growth would trigger a correction
in the stock market through a contraction in the price-to-earnings multiple. We
remain cautious about the U.S. stock market in the short term but bullish over
the intermediate to long term.
In our view, three trends predominated in the international stock markets during
the latter stages of the reporting period:
- Large-capitalization stocks materially outperformed mid- and
small-capitalization stocks.
- The stock markets of relatively mature, developed economies
outperformed the more volatile and less liquid emerging markets.
- The strength of the U.S. dollar versus the currencies of the United
States' major trading partners largely negated returns earned in
local currencies.
The latter months of 1997 and early 1998 were marked by a sense of crisis in the
international markets. The Southeast Asian currency collapse radiated outward,
engulfing not only some of the strongest regional economies (such as Taiwan and
Singapore) but also ultimately crushing the Korean economy and its currency. In
Japan, the largest Asian stock market and economy and a major regional lender,
the crisis contributed to an already deteriorating local Japanese outlook.
We believe the Asian currency and economic collapse has far-reaching and as yet
not fully understood implications for global capital markets. So far, rescue
efforts have centered on creating stability and stemming further precipitous
declines in currencies and consumer and business confidence, such as the
feverish year-end efforts of the International Monetary Fund ("IMF") and global
banks to prevent a total collapse of the Korean financial system. In light of
this turmoil, the strength of the U.S. dollar and bond market, to some degree,
have reflected investor preferences for liquidity, stability and strength.
But the intermediate effects of these financial woes on Asia cannot be denied:
economic contraction and decline, massive bankruptcies and debt
restructurings/reschedulings, potential labor and civil unrest have resulted in
an investment climate of much greater risk. Whether or not government and
business policy-makers have the will and flexibility to make the correct
rehabilitative choices remains unanswerable and we believe another six to twelve
months of uncertainties in Asia appears very likely.
2
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SEMI-ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
FIXED INCOME MARKET COMMENTARY
Just when many investors were getting somewhat more comfortable with risk again,
the Asian financial crisis re-erupted in May and June. Unrest in Indonesia and
further weakness in the Japanese yen were some of the latest highlights in the
latest chapter of the Asian crisis. The region's turmoil sent Asia's stock
markets down again and caused major setbacks in most emerging country stock and
bond markets. In addition, heightened investor concerns about greater risk
triggered yet another crisis in Russia's fragile markets.
In reaction to the renewed troubles in Asia, the U.S. bond market rallied as
many global investors sought refuge in U.S. Treasury securities during the
reporting period. Combined with U.S. and Japanese intervention to stabilize the
yen, the rally in U.S. Treasurys helped to support the U.S. stock and bond
markets by the end of the second quarter of 1998. Within the U.S. bond markets,
investment-grade bonds barely performed better than U.S. Treasurys. Many
longer-maturity bonds could not keep pace with the strong performance of the
30-year U.S. Treasury bond. Mortgage-backed security spreads widened and
discount bonds performed better than premium bonds, as mortgage prepayments
remained high. Corporate bond spreads widened due to heavy issuance (i.e., more
supply) with the most widening occurring in bonds issued by corporations that
were more impacted by the Asian crisis.
Municipal bonds performed poorly as heavy issuance and investor "sticker shock"
kept tax-exempt bond yields from declining as much as U.S. Treasurys. High-yield
bonds and emerging market bonds also lagged U.S. Treasurys during the second
quarter of 1998, although high-yield bonds are still ahead of U.S. Treasurys for
the first six months of 1998.
We continue to believe that interest rates in the U.S. will slowly move lower as
the crisis in Asia pushes U.S. GDP down to a 1% to 2% annual range in the second
half of 1998. Exports from the U.S. have sharply declined and the trade deficit
has widened rapidly. We expect even greater deterioration in the U.S. trade
deficit as Asian imports accelerate in the second half of the year. Inventory
growth in the U.S. was strong in the first half of 1998, and that condition
should slow projected U.S. economic growth in the second half of the year. In
addition, we expect that corporate profits will continue to be flat, which
combined with high inventories and weak commodity prices, should help to weaken
capital spending during the next several quarters.
Within the U.S. bond market, we anticipate that the yield curve will be steeper
six to twelve months as of this writing. (The yield curve shows the difference
between short- and long-term yields.) We think that the yield curve will likely
stay flat until it becomes clearer that the inflationary risks from currently
tight U.S. labor markets have passed. As rates decline, bond spreads are likely
to widen. In addition, bond spreads should widen more because of a continuation
of the flight to quality as well as the fact that the supply of bonds should
remain high at these rate levels. The overall low inflationary environment and
the expected economic slowdown, along with the increased volatility in the stock
market, have created a favorable backdrop for fixed income investments.
CONVERTIBLE BOND PORTFOLIO
The Portfolio commenced operations on May 1, 1998. The investment objective of
the Portfolio is to seek current income and capital appreciation by investing in
convertible securities and in combinations of nonconvertible fixed-income
securities and warrants or call options that together resemble convertible
securities. (Convertible securities are bonds or preferred stocks that can be
converted into a preset number of shares of common stocks after a predetermined
date.) The Portfolio's Investment Adviser is the Travelers Asset Management
International Corporation ("TAMIC"), an indirect wholly owned subsidiary of
Travelers Group Inc.
June was a volatile period for the financial markets as uncertainty regarding
the crisis in Asia combined with concerns over Fed monetary policy led to some
wide swings in both the stock and bond market. However, by the end of the second
quarter of 1998, the S&P 500 was near its all-time high and the yield for the
30-year U.S. Treasury bond had fallen to roughly 5.62%. During the period under
review, the U.S. bond market showed strength as the U.S. economy exhibited signs
of moderating and investors gravitated to bonds for defensive reasons due to the
uncertainty surrounding Asia.
Since its inception, the Portfolio has posted a total return of 1.20%. In
addition, since the Portfolio began, the managers have maintained a heavy
emphasis on real estate investment trusts ("REITs") and technology securities.
Moreover, the Portfolio has also maintained a relatively high-credit quality
orientation since it began in May.
3
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SEMI-ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
STRATEGIC STOCK PORTFOLIO
Since its inception on May 1, 1998, the Portfolio posted a negative total return
of 3.10%. During the reporting period, large-cap stocks continued to dominate as
investors moved money into the perceived safer haven of well-diversified,
larger-company stocks. Growth stocks generally performed well in the first
quarter of 1998.
The U.S. stock market got off to a surprisingly strong start in the first
quarter. Investors were expecting the worst on the earnings front in early 1998
in the aftermath of the Asian crisis. The action in the U.S. stock market was
even more remarkable in light of the slight increase in interest rates at the
end of the first quarter of 1998. According to the research used by the
portfolio manager, about 46% of all companies exceeded earnings expectations
while 31% reported earnings below consensus.
The anxiously awaited fourth-quarter earnings, however, turned out to be better
than the worst-case scenario. As a result, investors heaved a big sigh of relief
and embarked on a furious buying spree. In a broad-based market rally, the S&P
500 gained 13.53% for the first quarter of 1998.
Stock market volatility increased significantly during the month of April. A
seesaw pattern in stock prices persisted through the month and the S&P 500 rose
slightly by 0.91% in April. Interest rates took center stage toward the end of
April as the Federal Reserve Board ("Fed") publicly discussed a shift to a
tightening bias. Long-term interest rates shot up above 6% while the S&P 500
fell 3.9% from April 22, 1998 to April 27, 1998. Inflation, however, continued
to remain low and, despite a strong first quarter Gross Domestic Product report,
economic data still suggests a slowdown in the second half of 1998. Bond prices
stabilized as a result of such evidence in late April and early May and stock
prices recovered to the levels established at the end of the first quarter of
1998.
Renewed concerns over Asia and slowing earnings growth rocked the stock market
in May. The S&P 500 declined by almost 2%. Several companies provided early
guidance about lower second quarter earnings. However, fund investors who had
exposure to large company stocks in the second quarter of 1998 did well, as the
S&P 500 again outpaced most other types of funds and had a return of roughly
3.17% in the second quarter of 1998 compared with the slight loss experienced by
most average U.S. stock funds. Despite the fact that the earnings of large
companies that dominate the S&P 500 have come under pressure lately, investors
appeared to prefer the "safety" of large-capitalization company stocks during
the reporting period that can still maintain their earnings in a slowing
economy.
The recent environment of low inflation, stable interest rates and steady
economic growth has been conducive to rising stock prices. Not surprisingly,
returns from the U.S. stock market during the reporting period were very
healthy. However, extended bull markets can cause some investors to lose sight
of some of the risks of investing in stocks.
DISCIPLINED SMALL CAP STOCK PORTFOLIO
Since its inception on May 1, 1998, the Portfolio posted a negative total return
of 4.60%. Small-capitalization stocks continued to lag their large-cap
counterparts during the reporting period and the Portfolio's performance was
negatively impacted.
In the quantitative stock selection model employed in the Portfolio, the
portfolio manager asks three questions about the small-cap companies he follows:
"Are earnings growing at a steady and consistent pace?" "Is the stock price
attractive relative to potential earnings growth?" And lastly, "Is the stock a
good value when compared with similar companies?" If the answer to all of these
questions is "yes," he then applies fundamental research based on his
understanding of each company's business prospects and management. If a stock
passes all these tests, then it's likely to be overweighted in the Portfolio
relative to the Russell 2500 Index.
In April 1998, stock market volatility increased significantly. A seesaw pattern
in stock prices persisted throughout the month, as stock prices remained
virtually unchanged at the end of April from a month earlier. Renewed concerns
over Asia and slower earnings growth rocked the stock market in May. Moreover,
several companies provided early guidance about lower second quarter earnings
during May and June. Investors, who were already concerned about the record
valuations in the stock market, showed no mercy in their response to such
disappointments as some stock prices went down by as much as 50%. The greater
incidence of negative earnings pre-announcements in the small-cap universe in
May made the month challenging for many small-cap stock managers.
4
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SEMI-ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
Small capitalization stocks continued to have a rough time in June. In
particular, cyclical market sectors with exposure to Asia performed poorly. The
Russell 2500 Index did advance, but only by about ten basis points compared to
the roughly 4% return for the S&P 500. (A basis point is one one-hundredth of a
percent. The S&P 500 is a capitalization-weighted measure of 500 widely held
common stocks.) Yet small-cap growth stocks did better than small-cap value
stocks during June, an interesting development. Within the small-cap stock
market universe, traditional growth sectors such as technology, health care, and
consumer discretionary performed the best in June against the backdrop of a
strong domestic economy. In addition, utility stocks also did well because
stable interest rates tend to help that sector. On the other hand, small-cap
energy stocks performed the worst in June, primarily due to falling oil prices,
a continuation of a trend that started at the beginning of 1998.
One of the key investment themes in the second quarter of 1998 was a flight to
quality and small-cap growth stocks with stable earnings growth performed the
best during the last month of the period under review. In general, both stock
price and earnings momentum were key factors that were successful in predicting
relative performance among the different types of small-cap stocks during this
time.
MFS MID CAP GROWTH PORTFOLIO
Since its inception date of March 23, 1998, the Portfolio has provided a
negative total return of 2.00%. The Portfolio was again the beneficiary of gains
by some of its largest holdings. Gemstar, which creates navigational software
for consumer electronics and Ascend, a data networking company, which added to
their first quarter gains, approaching 80% to 100% for the year to date. Another
top performer for the Portfolio was a newly established position, Computer
Learning, an educational services company that posted a return of over 100% for
the last quarter and Synopsis, an electronic design company, that posted a
return of 40% for the quarter. Together, these four Portfolio holdings resulted
in roughly a 4% gain for the Portfolio during the most recent quarter.
The Portfolio was also helped from buyouts of several companies: Viking Office
Products was purchased by Office Depot; Mariner Health was purchased by Paragon
Health and Giant Foods was purchased by a French-based company during the
period.
Smaller technology holdings and health care holdings underperformed during the
reporting period. Specifically in technology, performance was hurt by declines
in Edify, Natural Microsystems, Security Dynamics and Teradyne. In the health
care sector, performance was hurt by Cytyc, Concentra Managed Care and PSS World
Medical. The decline in energy prices has also impacted holdings in the oil
services area but the managers view this as an opportunistic time to add to
these positions.
During the reporting period, the managers made a number of changes to the
Portfolio. They reduced their weightings in a number of their larger technology
and leisure holdings, mostly based on extremely strong performance. They reduced
their holdings in Gamester, Ascend, Synopsis and Comverse Technology. The
managers have benefited from the above-mentioned buyouts and sold these
positions. The net result of these changes has been a reduction in their
technology and retail weightings during the reporting period. Moreover, the
managers have added to their weightings in energy because they believe that oil
prices will rise and that the valuation of the oil service stocks will also go
up much more during the next six to twelve months.
Their outlook for the stock market for the rest of the year is mixed. The recent
divergence in the performance of the S&P 500 (trading at 25.5 times earnings and
growing about 6%) and the mid-capitalization companies (trading at about its
forward growth rate) suggest to MFS tremendous opportunities in the mid-cap
arena. However, liquidity and capitalization are clearly important to the
investors today, so the closure of the "gap" cannot be taken for granted.
Asia remains a major concern, and its implications on a number of industries
have resulted in modifications of several major positions in the Portfolio.
Specifically the semiconductor equipment area faces serious challenges over the
next few quarters as the Asia economies deal with their exchange and interest
rates.
5
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SEMI-ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
MFS RESEARCH PORTFOLIO
Since its inception on March 23, 1998, the Portfolio had a total return of
2.30%. The Portfolio is overweighted in financial services, which MFS analysts
continue to see as an attractive sector, and transportation, where they have a
small position that is focused on the leaders within the industry.
During the second quarter of 1998 the sector weightings in the Portfolio have
not shifted a great deal, as their analysts have maintained their positions in
stocks that they believe can be long-term achievers. The only significant
changes have come in the consumer staples and energy sectors of the Portfolio,
which have gone in opposite directions. In regard to consumer staples, the
managers have decreased their position by over 4% as positions in Coca-Cola and
Philip Morris were sold. Their food and beverage analyst was concerned that
Coca-Cola's significant Asian exposure could have negative volume and currency
implications for the company, and that the demise of the proposed tobacco
settlement in Congress would create further legislative uncertainty and
difficulties for Philip Morris.
In the energy sector, the managers increased the Portfolio's weighting by over
3% during the past six months, as their analysts have noticed a compelling trend
in oil-sensitive stocks. As Asian economies fell in the latter part of 1997, a
supply and demand "disconnect" was created, as these Asian countries comprise a
key component of global demand. For this reason, oil prices plummeted, and the
oil-sensitive stocks in the economy began to underperform the market. However,
since that time, their analysts have picked up on various signals that this
"disconnect" should begin to self-correct, and that oil companies with internal
catalysts should benefit greatly from an improvement in oil prices. MFS energy
experts have invested in blue-chip oil companies such as Chevron, Texaco, and
British Petroleum, where the risk/reward trade-off has become very attractive
recently, and where all methods of valuation appear favorable relative to the
market.
During the past six months, the managers have increased their weighting in
health care that they regard as a good, steady growth sector of the economy.
Within this sector, the Portfolio is overweighted in medical services and
managed care companies such as United Healthcare, HBO & Co., and Tenet
Healthcare, as well as in pharmaceutical companies. In the managed care
industry, their analysts believe that after years of poor pricing the cycle has
finally turned, and should translate into substantial margin expansion for these
companies over the next two to three years. Their pharmaceutical analyst
continues to look for companies that are focused on new product development,
such as Bristol-Myers Squibb and American Home Products. Both companies continue
to generate new products and have quite strong growth rates. All of these health
care companies performed very well over the first six months of 1998 and
positively contributed to the Portfolio's performance.
The Portfolio also remains significantly overweighted in the technology sector.
The concentration in this sector has shifted toward those companies that
participate in the high end product market, where demand has remained strong,
and where we have found strong secular growth opportunities. The Portfolio has
trimmed positions in more commodity-type technology names that are more likely
to be impacted by the continuing turmoil in Southeast Asia. Microsoft continues
to be the top holding in the Portfolio, and has performed exceptionally well
over the first two quarters of 1998 as the company introduced new products and
posted strong earnings. Other substantial holdings such as Compuware, BMC
Software, and Cisco Systems also performed exceptionally for this time period.
The Portfolio remains overweighted in retailing, where companies such as Rite
Aid, Home Depot, and Safeway have enhanced its returns, and in the financial
services sector, where companies continue to benefit from corporate cost
cutting, consolidation, slow growth and low inflation. Conversely, the Portfolio
remains underweighted in utilities and communications relative to the S&P 500,
as MFS analysts believe that deregulation will decelerate the earnings of the
large players in this industry as competition increases, and are therefore
focusing on the smaller companies that are likely to be acquired in a
consolidation environment.
In addition, the Portfolio continues to be underweighted in autos and housing
and industrial goods & services and leisure. In regard to leisure, the major
story has been Cendant Corp, a company that performed miserably during the
second quarter of 1998 due to accounting fraud on behalf of one of the company's
recent acquisitions. The stock's precipitous decline had a negative impact on
the Portfolio and the entire investment community. A continued focus on
acquisitions and strong core businesses should return much of the value to
Cendant's stock price over the long term.
6
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SEMI-ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
The Portfolio's managers will continue to seek fundamentally strong companies to
add in the year ahead. The Portfolio continues to be based upon the research
analysts' best ideas within his or her industries. The stocks are selected after
careful, in-depth fundamental analysis of the earnings outlook of the companies.
These companies typically demonstrate dominant and/or growing market share,
quality new/existing products, superior management teams and strong financial
statements. Portfolio sector/industry weightings are a fallout of the "best
ideas" stock selection process.
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
July 26, 1998
7
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) JUNE 30, 1998
CONVERTIBLE BOND PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C>
PREFERRED STOCK -- 25.8%
- --------------------------------------------------------------------------------------------
AUTOMOBILE PARTS AND EQUIPMENT -- 6.9%
2,000 Budget Group Cap Trust, Exchange 6.250%..................... $ 115,250
2,000 Tower Automotive Cap Trust, Exchange 6.750%................. 96,500
- --------------------------------------------------------------------------------------------
211,750
- --------------------------------------------------------------------------------------------
ENERGY -- 3.0%
2,000 Calenergy Capital Trust, Exchange 6.500%.................... 91,750
- --------------------------------------------------------------------------------------------
MULTIMEDIA -- 0.3%
100 News Corp. Limited, Exchange 5.000% (a)..................... 8,638
- --------------------------------------------------------------------------------------------
PAPER, FOREST PRODUCTS AND PRINTING -- 3.1%
2,000 International Paper Capital Trust, Exchange 5.250%.......... 98,000
- --------------------------------------------------------------------------------------------
REAL ESTATE -- 12.5%
2,000 Equity Office PPTYS Trust, Exchange 5.250%.................. 90,250
4,000 Equity Residential Properties, Exchange 7.250%.............. 98,500
4,000 General Growth Properties, Exchange 7.250%.................. 101,000
4,000 Reckson Associates Realty, Exchange 7.625%.................. 95,000
- --------------------------------------------------------------------------------------------
384,750
- --------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCK (Cost -- $806,629).................... 794,888
- --------------------------------------------------------------------------------------------
FACE
AMOUNT RATINGS SECURITY VALUE
- --------------------------------------------------------------------------------------------
CONVERTIBLE BONDS AND NOTES -- 58.6%
- --------------------------------------------------------------------------------------------
ADVERTISING -- 7.0%
$100,000 A- Omnicom Group Inc., 2.250% due 1/6/13....................... 122,375
100,000 NR Interpublic Group Cos., Inc. 1.800% due 9/16/04............. 94,000
- --------------------------------------------------------------------------------------------
216,375
- --------------------------------------------------------------------------------------------
COMPUTER SOFTWARE -- 10.2%
100,000 NR Bea Systems, 4.000% due 6/15/05............................. 103,750
100,000 NR Comverse Technology Inc., 4.250% due 7/1/05................. 102,875
100,000 Aa2* GVC Corp. LTD, zero coupon due 5/21/02 (a).................. 106,500
- --------------------------------------------------------------------------------------------
313,125
- --------------------------------------------------------------------------------------------
ELECTRONICS -- 9.5%
100,000 B+ Micron Technology Inc., 7.000% due 7/1/04................... 93,250
100,000 A2* Potomac Electric Power Co., 5.000% due 9/1/02............... 97,125
119,000 Baa1* Sgs. Thomson Microelectronics, zero coupon due 6/10/08...... 102,191
- --------------------------------------------------------------------------------------------
292,566
- --------------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 3.5%
100,000 NR Financial Federal Corp., 4.250% due 5/1/05 (a).............. 106,250
- --------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
CONVERTIBLE BOND PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C>
HEALTHCARE -- 13.4%
$100,000 NR Genzyme Corp., 5.250% due 6/1/05 (a)........................ $ 97,750
100,000 BBB Rite Aid Corp., 5.250% due 9/15/02.......................... 122,875
100,000 BB- Tenet Healthcare Corp., 6.000% due 12/1/05.................. 91,750
100,000 A Thermo Instrument System, 4.500% due 10/15/03 (a)........... 100,000
- --------------------------------------------------------------------------------------------
412,375
- --------------------------------------------------------------------------------------------
HUMAN RESOURCES -- 3.4%
100,000 BB+ Interim Services Inc., 4.500% due 6/1/05.................... 105,625
- --------------------------------------------------------------------------------------------
MULTI-LINE INSURANCE -- 3.0%
100,000 A+ Loews Corp., 3.125% due 9/15/07............................. 91,250
- --------------------------------------------------------------------------------------------
OIL AND NATURAL GAS -- 2.4%
100,000 A Baker Hughes Inc., zero coupon due 5/5/08................... 72,875
- --------------------------------------------------------------------------------------------
REAL ESTATE -- 2.7%
100,000 NR Security Cap U.S. Realty, 2.000% due 5/22/03 (a)............ 84,313
- --------------------------------------------------------------------------------------------
RETAIL -- 3.5%
300,000 BBB Ingram Micro Inc., zero coupon due 6/9/18................... 108,375
- --------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE BONDS AND NOTES (Cost -- $1,781,043)...... 1,803,129
- --------------------------------------------------------------------------------------------
SUB-TOTAL INVESTMENTS (Cost -- $2,587,672).................. 2,598,017
- --------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 15.6%
480,000 Chase Securities Inc., 5.531% due 7/1/98; Proceeds at
maturity -- $480,074; (Fully collateralized by U.S. Treasury
Notes, 6.000% due 7/31/02; Market value -- $494,000)
(Cost -- $480,000).......................................... 480,000
- --------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $3,067,672*)............. $3,078,017
- --------------------------------------------------------------------------------------------
</TABLE>
(a) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers.
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
STRATEGIC STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK -- 96.3%
- ----------------------------------------------------------------------------------------
AUTOMOTIVE AND TRANSPORTATION -- 9.3%
2,556 General Motors Corp. ....................................... $ 170,773
5,199 Norfolk Southern Corp. ..................................... 154,995
- ----------------------------------------------------------------------------------------
325,768
- ----------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY -- 15.0%
2,397 Eastman Kodak Co. .......................................... 175,131
3,541 International Flavors & Fragrances Inc. .................... 153,812
353 The Limited, Inc. .......................................... 11,693
2,789 The May Department Stores Co. .............................. 182,680
- ----------------------------------------------------------------------------------------
523,316
- ----------------------------------------------------------------------------------------
CONSUMER STAPLES -- 15.1%
3,167 H.J. Heinz Co. ............................................. 177,748
4,058 PepsiCo, Inc. .............................................. 167,139
4,644 Philip Morris Cos. Inc. .................................... 182,857
- ----------------------------------------------------------------------------------------
527,744
- ----------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 4.4%
1,326 J.P. Morgan & Co. Inc. ..................................... 155,308
- ----------------------------------------------------------------------------------------
HEALTHCARE -- 5.3%
1,624 Bristol-Myers Squibb Co. ................................... 186,659
- ----------------------------------------------------------------------------------------
INTEGRATED OIL -- 14.6%
2,088 Chevron Corp. .............................................. 173,434
2,369 Exxon Corp. ................................................ 168,939
2,183 Mobil Corp. ................................................ 167,272
- ----------------------------------------------------------------------------------------
509,645
- ----------------------------------------------------------------------------------------
MATERIALS AND PROCESSING -- 9.2%
3,343 International Paper Co. .................................... 143,749
3,319 Union Carbide Corp. ........................................ 177,152
- ----------------------------------------------------------------------------------------
320,901
- ----------------------------------------------------------------------------------------
PRODUCER DURABLES -- 14.5%
213 Caterpillar Inc. ........................................... 11,262
3,639 Fluor Corp. ................................................ 185,589
136 Honeywell Inc. ............................................. 11,365
1,840 Minnesota Mining and Manufacturing Co. ..................... 151,225
3,108 Rockwell International Corp. ............................... 149,378
- ----------------------------------------------------------------------------------------
508,819
- ----------------------------------------------------------------------------------------
TECHNOLOGY -- 4.2%
3,329 Harris Corp. ............................................... 148,765
- ----------------------------------------------------------------------------------------
UTILITIES -- 4.7%
2,874 American Telephone & Telegraph Corp. ....................... 164,177
- ----------------------------------------------------------------------------------------
TOTAL COMMON STOCK (Cost -- $3,487,403)..................... 3,371,102
- ----------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
STRATEGIC STOCK PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
REPURCHASE AGREEMENT -- 3.7%
$128,000 Chase Manhattan Bank, 5.700% due 7/1/98; Proceeds at
maturity -- $128,020; (Fully collateralized by U.S. Treasury
Notes, 5.500% due 2/28/03; Market value -- $132,113)
(Cost -- $128,000).......................................... $ 128,000
- ----------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $3,615,403*)............. $3,499,102
- ----------------------------------------------------------------------------------------
</TABLE>
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
DISCIPLINED SMALL CAP STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -----------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCK -- 99.4%
- -----------------------------------------------------------------------------------
AUTOMOTIVE AND TRANSPORTATION -- 4.9%
457 Airborne Freight Corp. ..................................... $ 15,966
288 Arvin Industries, Inc. ..................................... 10,458
422 Avondale Industries, Inc. (a)............................... 11,645
358 C.H. Robinson Worldwide, Inc. .............................. 8,905
261 CNF Transportation Inc. .................................... 11,093
393 GATX Corp. ................................................. 17,243
327 J.B. Hunt Transport Services, Inc. ......................... 11,649
353 Mesaba Holdings, Inc. (a) .................................. 8,119
327 MotivePower Industries, Inc. (a) ........................... 8,012
379 Navistar International Corp. (a)............................ 10,944
471 Overseas Shipholding Group, Inc. ........................... 9,597
628 Swift Transportation Co., Inc. (a).......................... 12,442
471 USFreightways Corp. ........................................ 15,469
- -----------------------------------------------------------------------------------
151,542
- -----------------------------------------------------------------------------------
CONSUMER DISCRETIONARY -- 20.2%
209 Abercrombie & Fitch Co., Class A Shares (a)................. 9,196
490 ADVO, Inc. (a).............................................. 13,812
327 Apollo Group, Inc., Class A Shares (a)...................... 10,811
274 Bed Bath & Beyond, Inc. (a)................................. 14,197
550 Brinker International, Inc. (a)............................. 10,588
591 The Buckle, Inc. (a)........................................ 17,435
288 Coach USA, Inc. (a)......................................... 13,140
235 Consolidated Graphics, Inc. (a)............................. 13,865
379 Cort Business Services Corp. (a)............................ 11,939
366 Cox Radio, Inc., Class A Shares (a)......................... 15,830
483 Daisytek International Corp. (a)............................ 12,286
759 Darden Restaurants, Inc. ................................... 12,049
301 Data Processing Resources Corp. (a)......................... 9,350
248 Ethan Allen Interiors, Inc. ................................ 12,385
650 Fairfield Communities, Inc. (a)............................. 12,472
720 Family Dollar Stores, Inc. ................................. 13,320
693 Foodmaker, Inc. (a)......................................... 11,694
358 Footstar, Inc. (a).......................................... 17,184
575 Fossil, Inc. (a)............................................ 14,303
471 Fruit of The Loom, Inc., Class A Shares (a)................. 15,631
483 Furniture Brands International, Inc. (a).................... 13,554
536 Genesco Inc. (a)............................................ 8,744
445 Guitar Center, Inc. (a)..................................... 13,406
498 Herbalife International, Inc., Class A Shares............... 12,263
498 International Game Technology............................... 12,077
314 Jacor Communications Inc. (a)............................... 18,526
863 Mail-Well, Inc. (a)......................................... 18,716
432 The Men's Wearhouse, Inc. (a)............................... 14,256
261 Meredith Corp. ............................................. 12,251
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PG$PCN>
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SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
DISCIPLINED SMALL CAP STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -----------------------------------------------------------------------------------
<C> <S> <C>
CONSUMER DISCRETIONARY -- 20.2% (CONTINUED)
654 Merrill Corp. .............................................. $ 14,429
445 Mohawk Industries, Inc. (a)................................. 14,101
498 The North Face Inc. (a)..................................... 11,952
432 Ogden Corp. ................................................ 11,961
648 Outdoor Systems Inc. (a).................................... 18,130
358 Petersen Companies Inc., Class A Shares (a)................. 9,174
274 Pillowtex Corp. ............................................ 10,994
358 Rayovac Corp. (a)........................................... 8,122
798 Rio Hotel & Casino Inc. (a)................................. 15,062
490 Romac International, Inc. (a)............................... 14,884
261 Ross Stores, Inc. .......................................... 11,223
545 Safeskin Corp. (a).......................................... 22,413
235 St. John Knits Inc. ........................................ 9,077
261 StaffMark, Inc. (a)......................................... 9,559
784 Stride Rite Corp. .......................................... 11,809
186 US Office Products Co. ..................................... 3,632
235 USA Networks Inc. (a)....................................... 5,904
483 Viking Office Products, Inc. (a)............................ 15,154
510 VWR Scientific Products Corp. (a)........................... 12,559
601 Wolverine World Wide, Inc. ................................. 13,034
- -----------------------------------------------------------------------------------
628,453
- -----------------------------------------------------------------------------------
CONSUMER STAPLES -- 2.2%
248 Canandaigua Brands, Inc., Class A Shares (a)................ 12,199
209 Earthgrains Co. ............................................ 11,678
327 International Multifoods Corp. ............................. 8,993
314 Interstate Bakeries Corp. .................................. 10,421
327 Smithfield Foods, Inc. (a).................................. 9,974
254 Suiza Foods Corp. (a)....................................... 15,161
- -----------------------------------------------------------------------------------
68,426
- -----------------------------------------------------------------------------------
FINANCIAL SERVICES -- 13.8%
358 Amerus Life Holdings, Inc., Class A Shares.................. 11,590
326 Associated Banc-Corp........................................ 12,266
197 Astoria Financial Corp. .................................... 10,540
288 Bay View Capital Corp. ..................................... 9,144
575 Brenton Banks, Inc. ........................................ 11,752
118 CCB Financial Corp. ........................................ 12,538
239 CMAC Investment Corp. ...................................... 14,699
223 Centura Banks, Inc. ........................................ 13,938
223 Chartwell Re Corp. ......................................... 6,565
301 City National Corp. ........................................ 11,118
314 Eaton Vance Corp. .......................................... 14,542
548 Enhance Financial Services Group, Inc. ..................... 18,495
301 Everest Reinsurance Holdings, Inc. ......................... 11,570
130 Executive Risk, Inc. ....................................... 9,588
358 Fidelity National Financial, Inc. .......................... 14,253
197 Financial Security Assurance Holdings, Ltd. ................ 11,574
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
DISCIPLINED SMALL CAP STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -----------------------------------------------------------------------------------
<C> <S> <C>
FINANCIAL SERVICES -- 13.8% (CONTINUED)
366 First Republic Bank (a)..................................... $ 13,222
239 FirstFed Financial Corp. (a)................................ 12,428
301 FIRSTPLUS Financial Group, Inc. (a)......................... 10,836
314 GBC Bancorp................................................. 8,321
406 HCC Insurance Holdings, Inc. ............................... 8,932
149 International Bancshares Corp. ............................. 9,853
280 Legg Mason, Inc. ........................................... 16,118
235 Liberty Financial Companies, Inc. .......................... 8,108
144 Life Re Corp. .............................................. 11,808
353 Mercantile Bankshares Corp. ................................ 12,289
260 Mutual Risk Management, Ltd. ............................... 9,474
393 National Commerce Bancorporation............................ 16,457
628 Peoples Heritage Financial Group, Inc. ..................... 14,837
720 Republic Bancorp, Inc. ..................................... 13,590
327 Selective Insurance Group, Inc. ............................ 7,327
156 Trans Financial, Inc. ...................................... 8,951
498 United Bankshares, Inc. .................................... 16,994
288 Webster Financial Corp. .................................... 9,576
314 Westamerica Bancorporation.................................. 10,087
261 Zions Bancorporation........................................ 13,866
- -----------------------------------------------------------------------------------
427,246
- -----------------------------------------------------------------------------------
HEALTHCARE -- 9.5%
390 Allegiance Corp. ........................................... 19,988
550 Alpharma, Inc., Class A Shares.............................. 12,100
615 Arterial Vascular Engineering, Inc. (a)..................... 21,986
798 Beverly Enterprises, Inc. (a)............................... 11,022
314 Bindley Western Industries, Inc. ........................... 10,362
406 Cooper Cos., Inc. (a)....................................... 14,794
480 Datascope Corp. (a)......................................... 12,750
536 Genesis Health Ventures, Inc. (a)........................... 13,400
1,531 Gensia Sicor Inc. (a)....................................... 6,124
340 Health Care & Retirement Corp. (a).......................... 13,409
418 Lincare Holdings, Inc. (a).................................. 17,582
750 Mariner Health Group, Inc. (a).............................. 12,469
288 MiniMed, Inc. (a)........................................... 15,084
955 NovaCare, Inc. (a).......................................... 11,221
235 Renal Care Group, Inc. (a).................................. 10,355
470 Res-Care, Inc. (a).......................................... 8,666
358 Schein Pharmaceutical, Inc. (a)............................. 9,532
762 Theragenics Corp. (a)....................................... 19,860
571 Total Renal Care Holdings, Inc., Class A Shares (a)......... 19,700
340 Trigon Healthcare, Inc. (a)................................. 12,304
197 VISX, Inc. (a).............................................. 11,722
420 Wesley Jessen VisionCare, Inc. (a).......................... 9,713
- -----------------------------------------------------------------------------------
294,143
- -----------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
DISCIPLINED SMALL CAP STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -----------------------------------------------------------------------------------
<C> <S> <C>
INTEGRATED OIL -- 1.0%
288 Murphy Oil Corp. ........................................... $ 14,598
471 Valero Energy Corp. ........................................ 15,661
- -----------------------------------------------------------------------------------
30,259
- -----------------------------------------------------------------------------------
MATERIALS AND PROCESSING -- 15.1%
471 AK Steel Holding Corp. ..................................... 8,419
223 AptarGroup, Inc. ........................................... 13,868
314 Arden Realty, Inc. ......................................... 8,125
392 Avalon Bay Communities, Inc. ............................... 14,891
288 Cousins Properties, Inc. ................................... 8,604
524 Crompton & Knowles Corp. ................................... 13,198
353 Dexter Corp. ............................................... 11,230
863 Equity Inns, Inc. .......................................... 11,381
314 Felcor Suite Hotels, Inc. .................................. 9,852
379 First Industrial Realty Trust, Inc. ........................ 12,033
915 Gaylord Container Corp. (a)................................. 7,034
575 Glenborough Realty Trust, Inc. ............................. 15,166
156 H.B. Fuller Co. ............................................ 8,648
261 Health Care Properties Investors, Inc. ..................... 9,412
445 Hexcel Corp. (a)............................................ 10,068
34 Horizon Group Properties, Inc. (a).......................... 224
483 IMCO Recycling, Inc. ....................................... 8,936
601 International Specialty Products, Inc. (a).................. 11,194
239 LaSalle Partners, Inc. (a).................................. 10,636
550 Liberty Property Trust...................................... 14,059
144 Lone Star Industries, Inc. ................................. 11,097
393 Mack-Cali Realty Corp. ..................................... 13,509
379 Martin Marietta Materials, Inc. ............................ 17,055
274 Mid-America Apartment Communities, Inc. .................... 7,210
654 NL Industries, Inc. ........................................ 13,080
358 NVR, Inc. (a)............................................... 14,700
536 Nationwide Health Properties, Inc. (a)...................... 12,797
1 Navigant International, Inc. (a)............................ 4
235 OM Group, Inc. ............................................. 9,694
1 Pope & Talbot, Inc. ........................................ 12
680 Prime Retail, Inc. ......................................... 8,118
668 Reckson Associates Realty Corp. ............................ 15,782
42 Reckson Services Industries, Inc. (a)....................... 138
327 Regency Realty Corp. ....................................... 8,216
358 Reliance Steel & Aluminum Co. .............................. 13,828
1 School Specialty, Inc. (a).................................. 13
654 Security Capital Pacific Trust (a).......................... 14,715
358 Simpson Manufacturing Co., Inc. (a)......................... 13,828
144 Southdown, Inc. ............................................ 10,278
274 Spieker Properties, Inc. ................................... 10,618
510 Steel Dynamics, Inc. (a).................................... 7,076
772 Terra Industries, Inc. ..................................... 6,948
358 Tower Automotive, Inc. (a).................................. 15,349
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
DISCIPLINED SMALL CAP STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -----------------------------------------------------------------------------------
<C> <S> <C>
MATERIALS AND PROCESSING -- 15.1% (CONTINUED)
358 Trammell Crow Co. (a)....................................... $ 11,971
130 Tredegar Industries, Inc. .................................. 11,034
248 USG Corp. (a)............................................... 13,423
- -----------------------------------------------------------------------------------
467,471
- -----------------------------------------------------------------------------------
OTHER ENERGY -- 4.5%
314 Atwood Oceanics, Inc. (a)................................... 12,501
393 BJ Services Co. (a)......................................... 11,422
171 Cliffs Drilling Co. (a)..................................... 5,611
720 Cross Timbers Oil Co. ...................................... 13,725
209 Devon Energy Corp. ......................................... 7,302
1,073 EEX Corp. (a)............................................... 10,059
483 Forcenergy Inc. (a)......................................... 8,603
300 Helene Curtis Industries, Inc. (a).......................... 8,119
628 Marine Drilling Cos., Inc. (a).............................. 10,048
393 Newfield Exploration Co. (a)................................ 9,776
536 Pool Energy Services Co. (a)................................ 7,906
432 Seagull Energy Corp. (a).................................... 7,155
628 Swift Energy Co. (a)........................................ 10,009
327 Veritas DGC, Inc. (a)....................................... 16,330
- -----------------------------------------------------------------------------------
138,566
- -----------------------------------------------------------------------------------
PRODUCER DURABLES -- 5.9%
432 AGCO Corp. ................................................. 8,883
197 Aeroquip-Vickers, Inc. ..................................... 11,500
706 Berg Electronics Corp. (a).................................. 13,811
274 C&D Technologies, Inc. ..................................... 15,892
358 Comfort Systems USA, Inc. (a)............................... 8,368
327 Cordant Technologies, Inc. ................................. 15,083
288 The B.F. Goodrich Co. ...................................... 14,292
327 Graco, Inc. ................................................ 11,404
274 Jacobs Engineering Group, Inc. (a).......................... 8,802
379 Kaufman & Broad Home Corp. ................................. 12,033
197 Kennametal, Inc. ........................................... 8,225
288 Lennar Corp. ............................................... 8,496
156 Precision Castparts Corp. .................................. 8,327
327 Robbins & Myers, Inc. ...................................... 9,503
314 U.S. Home Corp. (a)......................................... 12,953
419 Watts Industries, Inc., Class A Shares...................... 8,747
274 ZERO Corp. ................................................. 7,775
- -----------------------------------------------------------------------------------
184,094
- -----------------------------------------------------------------------------------
TECHNOLOGY -- 15.4%
367 Advanced Fibre Communications, Inc. (a)..................... 14,703
274 Advent Software, Inc. (a)................................... 11,508
274 Apple Computer, Inc. (a).................................... 7,860
260 Applied Graphics Technologies, Inc. (a)..................... 11,895
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
DISCIPLINED SMALL CAP STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -----------------------------------------------------------------------------------
<C> <S> <C>
TECHNOLOGY -- 15.4% (CONTINUED)
130 Aspect Development, Inc. (a)................................ $ 9,831
340 Avid Technology, Inc. (a)................................... 11,390
746 Brightpoint Inc. (a)........................................ 10,817
524 Burr-Brown Corp. (a)........................................ 11,004
1,100 CHS Electronics, Inc. (a)................................... 19,663
524 CIBER Inc. (a).............................................. 19,912
156 Citrix Systems Inc. (a)..................................... 10,667
340 Cohu, Inc. ................................................. 8,266
432 Computer Horizons Corp. (a)................................. 16,011
390 Computer Task Group, Inc. .................................. 13,065
261 COMSAT Corp. ............................................... 7,390
248 Comverse Technology, Inc. (a)............................... 12,865
301 Envoy Corp. (a)............................................. 14,260
366 Information Management Resources, Inc. (a).................. 12,375
346 Keane, Inc. (a)............................................. 19,376
598 Legato Systems, Inc. (a).................................... 23,322
274 Lycos, Inc. (a)............................................. 20,653
130 Micrel, Inc. (a)............................................ 4,225
500 Network Appliance, Inc. (a)................................. 19,469
274 PMC-Sierra, Inc. (a)........................................ 12,844
340 Park Electrochemical Corp. ................................. 7,183
365 Policy Management Systems Corp. (a)......................... 14,326
446 Sanmina Corp. (a)........................................... 19,345
209 Sapient Corp. (a)........................................... 11,025
358 Software AG Systems, Inc. (a)............................... 10,472
342 Sterling Commerce, Inc. (a)................................. 16,587
340 Symbol Technologies, Inc. .................................. 12,835
601 Systems & Computer Technology Corp. (a)..................... 16,227
340 Tech Data Corp. (a)......................................... 14,578
144 Tekelec (a)................................................. 6,444
223 Visio Corp. (a)............................................. 10,648
523 Vitesse Semiconductor Corp. (a)............................. 16,148
- -----------------------------------------------------------------------------------
479,189
- -----------------------------------------------------------------------------------
UTILITIES -- 6.9%
242 BEC Energy.................................................. 10,023
524 Calenergy Co., Inc. (a)..................................... 15,753
735 Calpine Corp. (a)........................................... 14,838
366 CILCORP, Inc. .............................................. 17,568
360 Connecticut Energy Corp. ................................... 10,035
902 DPL, Inc. .................................................. 16,349
379 DQE, Inc. .................................................. 13,644
1,464 El Paso Electric Co. (a).................................... 13,451
510 MDU Resources Group, Inc. .................................. 18,201
314 New England Electric System................................. 13,581
1,073 Paging Network, Inc. (a).................................... 15,022
483 Sierra Pacific Resources.................................... 17,539
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PG$PCN>
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SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
DISCIPLINED SMALL CAP STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -----------------------------------------------------------------------------------
<C> <S> <C>
UTILITIES -- 6.9% (CONTINUED)
414 SkyTel Communications, Inc. (a)............................. $ 9,690
536 Washington Gas Light Co. ................................... 14,338
301 WinStar Communications (a).................................. 12,924
- -----------------------------------------------------------------------------------
212,956
- -----------------------------------------------------------------------------------
TOTAL COMMON STOCK (Cost -- $3,151,792)..................... 3,082,345
- -----------------------------------------------------------------------------------
WARRANTS -- 0.0%
263 Golden State Bancorp, Expire 1/1/01 (a) (Cost -- $1,544).... 1,397
- -----------------------------------------------------------------------------------
SUB-TOTAL INVESTMENTS (Cost -- $3,153,336).................. 3,083,742
- -----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
---------------------------------------------------------------------------------
<C> <S> <C>
U.S. TREASURY BILL -- 0.6%
$20,000 U.S. Treasury Bill due 9/17/98 (Cost -- $19,782)............ 19,788
- ----------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $3,173,118*)............. $3,103,530
- ----------------------------------------------------------------------------------
</TABLE>
(a) Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
MFS MID CAP GROWTH PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
--------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCK -- 100.0%
- ---------------------------------------------------------------------------------
BANKS AND CREDIT COMPANIES -- 2.6%
1,000 Compass Bancshares, Inc. ................................... $ 45,125
1,300 First Security Corp. ....................................... 27,828
400 Regions Financial Corp. .................................... 16,425
800 Washington Mutual, Inc. .................................... 34,750
- ---------------------------------------------------------------------------------
124,128
- ---------------------------------------------------------------------------------
BIOTECHNOLOGY -- 0.3%
600 IDEXX Laboratories, Inc. (a)................................ 14,925
- ---------------------------------------------------------------------------------
BUSINESS SERVICES -- 10.9%
1,600 Affiliated Computer Services, Inc., Class A Shares (a)...... 61,600
1,400 Computer Sciences Corp. (a)................................. 89,600
500 Cytoclonal Pharmaceutics Inc. (a)........................... 3,500
800 DST Systems, Inc. (a)....................................... 44,800
1,800 Fiserv, Inc. (a)............................................ 76,444
1,300 HCIA Inc. (a)............................................... 16,738
3,300 Learning Tree International, Inc. (a)....................... 66,413
2,400 Paymentech, Inc. (a)........................................ 49,350
100 Professional Detailing, Inc. (a)............................ 2,488
600 SPS Transaction Services Inc. (a)........................... 18,825
2,000 Technology Solutions Co. (a)................................ 63,375
600 The BISYS Group, Inc. (a)................................... 24,600
- ---------------------------------------------------------------------------------
517,733
- ---------------------------------------------------------------------------------
CHEMICALS -- 2.8%
1,600 Cambrex Corp. .............................................. 42,000
2,600 Sigma-Aldrich Corp. ........................................ 91,325
- ---------------------------------------------------------------------------------
133,325
- ---------------------------------------------------------------------------------
COMMUNICATIONS SERVICES -- 2.9%
1,000 Intermedia Communications Inc. (a).......................... 41,938
1,600 Natural MicroSystems Corp. (a).............................. 25,600
2,066 Qwest Communications International Inc. (a)................. 72,052
- ---------------------------------------------------------------------------------
139,590
- ---------------------------------------------------------------------------------
COMPUTER SERVICES -- 0.6%
800 Sportsline USA, Inc. (a).................................... 29,250
- ---------------------------------------------------------------------------------
COMPUTER SOFTWARE -- 13.7%
1,200 Autodesk, Inc. ............................................. 46,350
1,200 BMC Software, Inc. (a)...................................... 62,325
1,900 Cadence Design Systems, Inc. (a)............................ 59,375
4,800 Computer Learning Centers, Inc. (a)......................... 119,400
5,000 Discreet Logic Inc. (a)..................................... 58,125
12,800 Edify Corp. (a)............................................. 129,600
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
MFS MID CAP GROWTH PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ---------------------------------------------------------------------------------
<C> <S> <C>
COMPUTER SOFTWARE -- 13.7% (CONTINUED)
100 International Integration Inc. (a).......................... $ 1,725
800 Intuit Inc. (a)............................................. 49,000
1,200 MicroProse, Inc. (a)........................................ 5,325
2,500 Oracle Systems Corp. (a).................................... 61,406
700 Rational Software Corp. (a)................................. 10,675
1,600 Security Dynamics Technologies, Inc. (a).................... 29,600
300 Synopsys, Inc. (a).......................................... 13,725
- ---------------------------------------------------------------------------------
646,631
- ---------------------------------------------------------------------------------
CONGLOMERATES -- 0.7%
500 Tyco International Ltd. .................................... 31,500
- ---------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT -- 5.6%
8,000 Cable Design Technologies (a)............................... 165,000
2,300 Elsag Bailey Process Automation N.V. (a).................... 55,344
3,600 LoJack Corp. (a)............................................ 44,775
- ---------------------------------------------------------------------------------
265,119
- ---------------------------------------------------------------------------------
ELECTRONICS -- 4.7%
700 Analog Devices, Inc. (a).................................... 17,194
500 KLA-Tencor Corp. (a)........................................ 13,844
5,300 SIPEX Corp. (a)............................................. 113,950
2,900 Teradyne, Inc. (a).......................................... 77,575
- ---------------------------------------------------------------------------------
222,563
- ---------------------------------------------------------------------------------
ENTERTAINMENT -- 7.9%
600 Cox Communications, Inc., Class A Shares (a)................ 29,063
6,400 Gemstar International Group Ltd. (a)........................ 239,600
1,800 Heftel Broadcasting Corp., Class A Shares (a)............... 80,550
500 Jacor Communications, Inc. (a).............................. 29,500
- ---------------------------------------------------------------------------------
378,713
- ---------------------------------------------------------------------------------
FINANCIAL INSTITUTIONS -- 2.7%
200 Arm Financial Group, Inc., Class A Shares................... 4,425
600 Enhance Financial Services Group Inc. ...................... 20,250
1,000 The FINOVA Group Inc. ...................................... 56,625
800 Union Planters Corp. ....................................... 47,050
- ---------------------------------------------------------------------------------
128,350
- ---------------------------------------------------------------------------------
FOOD AND BEVERAGE PRODUCTS -- 1.1%
1,100 McCormick & Co., Inc. ...................................... 39,291
200 Tootsie Roll Industries, Inc. .............................. 15,350
- ---------------------------------------------------------------------------------
54,641
- ---------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
MFS MID CAP GROWTH PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ---------------------------------------------------------------------------------
<C> <S> <C>
INSURANCE -- 3.0%
1,400 Ace, Ltd. .................................................. $ 54,600
1,300 ESG Re Ltd. ................................................ 28,113
200 Life Re Corp. .............................................. 16,400
300 Mid Ocean Ltd. ............................................. 23,550
600 Mutual Risk Management Ltd. ................................ 21,863
- ---------------------------------------------------------------------------------
144,526
- ---------------------------------------------------------------------------------
MEDICAL AND HEALTH PRODUCTS -- 0.5%
100 King Pharmaceuticals, Inc. (a).............................. 1,400
500 Mentor Corp. ............................................... 12,125
1,980 UroMed Corp. (a)............................................ 11,014
- ---------------------------------------------------------------------------------
24,539
- ---------------------------------------------------------------------------------
MEDICAL AND HEALTH TECHNOLOGY AND SERVICES -- 13.7%
6,900 Beverly Enterprises, Inc. (a)............................... 95,306
400 Biomet, Inc. ............................................... 13,225
6,300 Concentra Managed Care, Inc. (a)............................ 163,800
9,900 Cytyc Corp. (a)............................................. 161,494
700 Datascope Corp. (a)......................................... 18,594
1,100 Healthcare Recoveries, Inc. (a)............................. 21,725
1,500 HEALTHSOUTH Corp. (a)....................................... 40,031
1,600 MedPartners, Inc. (a)....................................... 12,800
2,500 Mid Atlantic Medical Services, Inc. (a)..................... 28,750
2,600 PSS World Medical, Inc. (a)................................. 38,025
1,500 Total Renal Care Holdings, Inc. (a)......................... 51,750
800 Transition Systems, Inc. (a)................................ 8,500
- ---------------------------------------------------------------------------------
654,000
- ---------------------------------------------------------------------------------
OIL SERVICES -- 4.0%
500 BJ Services Co. (a)......................................... 14,531
900 Cooper Cameron Corp. (a).................................... 45,900
500 Diamond Offshore Drilling, Inc. ............................ 20,000
1,600 Global Industries Ltd. (a).................................. 27,000
2,000 Noble Drilling Corp. (a).................................... 48,125
700 The Houston Exploration Co. (a)............................. 16,056
400 Transocean Offshore Inc. ................................... 17,800
- ---------------------------------------------------------------------------------
189,412
- ---------------------------------------------------------------------------------
OIL & GAS -- 2.3%
700 Apache Corp. ............................................... 22,050
3,500 Newfield Exploration Co. (a)................................ 87,063
- ---------------------------------------------------------------------------------
109,113
- ---------------------------------------------------------------------------------
PRINTING AND PUBLISHING -- 1.9%
500 E.W. Scripps Co., Class A Shares............................ 27,406
1,600 Scholastic Corp. (a)........................................ 63,800
- ---------------------------------------------------------------------------------
91,206
- ---------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
MFS MID CAP GROWTH PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
--------------------------------------------------------------------------------
<C> <S> <C>
RAILROADS -- 1.1%
1,100 Kansas City Southern Industries, Inc. ...................... $ 54,588
- ---------------------------------------------------------------------------------
RESTAURANTS AND LODGING -- 0.6%
700 Promus Hotel Corp. (a)...................................... 26,950
- ---------------------------------------------------------------------------------
RETAIL -- 7.3%
3,300 BJ's Wholesale Club, Inc. (a)............................... 134,063
3,300 Rite Aid Corp. ............................................. 123,956
600 Viking Office Products, Inc. (a)............................ 18,825
1,700 Fred Meyer, Inc. (a)........................................ 72,250
- ---------------------------------------------------------------------------------
349,094
- ---------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 9.1%
6,200 Aerial Communications, Inc. (a)............................. 38,750
3,700 Ascend Communication, Inc. (a).............................. 183,380
2,900 Aspect Telecommunications Corp. (a)......................... 79,387
100 Com21, Inc. (a)............................................. 2,124
900 Comverse Technology, Inc. (a)............................... 46,687
1,000 Corsair Communications, Inc. (a)............................ 9,312
3,300 Lightbridge, Inc. (a)....................................... 28,050
1,000 MediaOne Group Inc. (a)..................................... 43,937
100 Scandinavian Broadcasting System SA (a)..................... 3,018
- ---------------------------------------------------------------------------------
434,645
- ---------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $4,918,182*)............. $4,764,541
- ---------------------------------------------------------------------------------
</TABLE>
(a) Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PG$PCN>
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SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
MFS RESEARCH PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -----------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCK -- 89.1%
- -----------------------------------------------------------------------------------
AEROSPACE -- 0.9%
560 Lockheed Martin Corp. ...................................... $ 59,290
- -----------------------------------------------------------------------------------
AIRLINES -- 0.5%
220 AMR Corp. (a)............................................... 18,315
220 US Airways Group, Inc. ..................................... 17,435
- -----------------------------------------------------------------------------------
35,750
- -----------------------------------------------------------------------------------
APPAREL AND TEXTILES -- 0.6%
560 Nordstrom, Inc. ............................................ 43,260
- -----------------------------------------------------------------------------------
AUTOMOTIVE -- 0.4%
100 Ford Motor Co. ............................................. 5,900
370 Lear Corp. (a).............................................. 18,986
- -----------------------------------------------------------------------------------
24,886
- -----------------------------------------------------------------------------------
BANKS AND CREDIT COMPANIES -- 5.1%
660 BankBoston Corp. ........................................... 36,713
1,110 The Chase Manhattan Corp. .................................. 83,805
950 Comerica Inc. .............................................. 62,937
780 Fleet Financial Group, Inc. ................................ 65,130
780 National City Corp. ........................................ 55,380
670 PNC Bank Corp. ............................................. 36,054
- -----------------------------------------------------------------------------------
340,019
- -----------------------------------------------------------------------------------
BUSINESS MACHINES -- 1.0%
1,560 Sun Microsystems, Inc. ..................................... 67,763
- -----------------------------------------------------------------------------------
BUSINESS SERVICES -- 0.6%
1,000 AccuStaff Inc. (a).......................................... 31,250
110 Eaton Corp. ................................................ 8,553
- -----------------------------------------------------------------------------------
39,803
- -----------------------------------------------------------------------------------
CHEMICALS -- 2.4%
1,340 Air Products And Chemicals, Inc. ........................... 53,600
440 Cambrex Corp. .............................................. 11,550
1,000 Cytec Industries Inc. (a)................................... 44,250
220 E.I. du Pont de Nemours and Co. ............................ 16,416
1,000 Sigma-Aldrich Corp. ........................................ 35,125
- -----------------------------------------------------------------------------------
160,941
- -----------------------------------------------------------------------------------
COMMUNICATIONS SERVICES -- 3.1%
630 Intermedia Communications Inc. (a).......................... 26,421
780 MCI Communications Corp. ................................... 45,338
670 Sprint Corp. ............................................... 47,235
1,780 WorldCom, Inc. ............................................. 86,219
- -----------------------------------------------------------------------------------
205,213
- -----------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
MFS RESEARCH PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -----------------------------------------------------------------------------------
<C> <S> <C>
COMPUTER SOFTWARE SYSTEMS -- 7.5%
560 Adobe Systems Inc. ......................................... $ 23,765
2,120 Alcatel Alsthom CGE, Sponsored ADR.......................... 86,256
1,780 BMC Software Inc. (a)....................................... 92,449
2,110 Cadence Design Systems, Inc. (a)............................ 65,938
1,000 Computer Associates International Inc. ..................... 55,563
1,460 Compuware Corp. (a)......................................... 74,643
780 EMC Corp. (a)............................................... 34,954
2,890 Oracle Corp. (a)............................................ 70,986
- -----------------------------------------------------------------------------------
504,554
- -----------------------------------------------------------------------------------
COMPUTER SOFTWARE -- 4.6%
800 Electronic Arts Inc. (a).................................... 43,200
2,450 Microsoft Corp. (a)......................................... 265,519
- -----------------------------------------------------------------------------------
308,719
- -----------------------------------------------------------------------------------
CONGLOMERATES -- 4.7%
2,890 Tyco International Ltd. .................................... 182,070
1,450 United Technologies Corp. .................................. 134,125
- -----------------------------------------------------------------------------------
316,195
- -----------------------------------------------------------------------------------
CONSUMER GOODS AND SERVICES -- 7.5%
820 Black & Decker Corp. ....................................... 50,020
560 The Clorox Co. ............................................. 53,410
1,100 Colgate-Palmolive Co. ...................................... 96,800
1,000 The Dial Corp. ............................................. 25,938
1,500 Gillette Co. ............................................... 85,031
1,780 Kimberly-Clark Corp. ....................................... 81,658
780 The Procter & Gamble Co. ................................... 71,028
780 Revlon, Inc., Class A Shares(a)............................. 40,072
- -----------------------------------------------------------------------------------
503,957
- -----------------------------------------------------------------------------------
CONTAINERS -- 0.7%
3,010 Stone Container Corp. ...................................... 47,031
- -----------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT -- 1.9%
780 American Standard Cos. Inc. (a)............................. 34,856
200 Cooper Industries, Inc. (a)................................. 10,988
910 General Electric Co. ....................................... 82,810
- -----------------------------------------------------------------------------------
128,654
- -----------------------------------------------------------------------------------
ELECTRONICS -- 0.8%
780 Analog Devices, Inc. (a).................................... 19,159
1,220 Teradyne, Inc. (a).......................................... 32,635
- -----------------------------------------------------------------------------------
51,794
- -----------------------------------------------------------------------------------
ENTERTAINMENT -- 1.2%
1,340 CBS Corp. .................................................. 42,545
670 Jacor Communications, Inc. (a).............................. 39,530
- -----------------------------------------------------------------------------------
82,075
- -----------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
MFS RESEARCH PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -----------------------------------------------------------------------------------
<C> <S> <C>
FINANCIAL INSTITUTIONS -- 4.0%
334 Associates First Captial Corp. ............................. $ 25,676
890 Fannie Mae.................................................. 54,066
1,010 First Union Corp. .......................................... 58,833
110 Green Tree Financial Corp. ................................. 4,709
220 Merrill Lynch & Co., Inc. .................................. 20,295
670 Morgan Stanley Dean Witter & Co. ........................... 61,221
340 The CIT Group, Inc. ........................................ 12,750
560 Union Planters Corp. ....................................... 32,935
- -----------------------------------------------------------------------------------
270,485
- -----------------------------------------------------------------------------------
FOOD AND BEVERAGE PRODUCTS -- 1.7%
1,670 Archer-Daniels-Midland Co. ................................. 32,356
1,000 CIA Cervejaria Brahma, Sponsored ADR........................ 12,500
780 Corn Products International, Inc. (a)....................... 26,422
1,110 McCormick & Co. Inc. ....................................... 39,648
100 Nabisco Holdings Corp., Class A Shares...................... 3,606
- -----------------------------------------------------------------------------------
114,532
- -----------------------------------------------------------------------------------
INSURANCE -- 8.2%
780 Ace, Ltd. .................................................. 30,420
560 The Allstate Corp. ......................................... 51,275
560 The Chubb Corp. ............................................ 45,010
1,110 CIGNA Corp. ................................................ 76,590
2,120 Conseco, Inc. (a)........................................... 99,110
110 EXEL Ltd. .................................................. 8,559
110 FPIC Insurance Group Inc. (a)............................... 3,699
560 Hartford Financial Services Group, Inc. .................... 64,050
330 Life Re Corp. .............................................. 27,060
890 Lincoln National Corp. ..................................... 81,324
330 Nationwide Financial Services, Inc. ........................ 16,830
1,000 ReliaStar Financial Corp. .................................. 48,000
- -----------------------------------------------------------------------------------
551,927
- -----------------------------------------------------------------------------------
MEDICAL AND HEALTH PRODUCTS -- 5.1%
2,000 American Home Products Corp. ............................... 103,500
670 Boston Scientific Corp. (a)................................. 47,989
1,670 Bristol-Myers Squibb Co. ................................... 191,946
- -----------------------------------------------------------------------------------
343,435
- -----------------------------------------------------------------------------------
MEDICAL AND HEALTH TECHNOLOGY AND SERVICES -- 5.9%
460 Cardinal Health, Inc. ...................................... 43,125
1,890 Columbia/HCA Healthcare Corp. .............................. 55,046
3,120 HBO & Co. .................................................. 109,980
2,340 HEALTHSOUTH Corp. (a)....................................... 62,449
2,000 United Healthcare Corp. .................................... 127,000
- -----------------------------------------------------------------------------------
397,600
- -----------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
25
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
MFS RESEARCH PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -----------------------------------------------------------------------------------
<C> <S> <C>
METALS AND MINERALS -- 0.4%
560 Minerals Technologies Inc. ................................. $ 28,490
- -----------------------------------------------------------------------------------
OIL SERVICES -- 1.4%
560 Cooper Cameron Corp. ....................................... 28,560
670 Diamond Offshore Drilling, Inc. (c)......................... 26,800
950 EVI Weatherford Inc. (a).................................... 35,269
- -----------------------------------------------------------------------------------
90,629
- -----------------------------------------------------------------------------------
OIL AND GAS -- 5.5%
1,110 British Petroleum Co. PLC, Sponsored ADR.................... 97,957
590 Chevron Corp. .............................................. 49,007
560 Mobil Oil Corp. ............................................ 42,910
1,670 Texaco Inc. ................................................ 99,678
2,340 USX-Marathon Group.......................................... 80,291
- -----------------------------------------------------------------------------------
369,843
- -----------------------------------------------------------------------------------
POLLUTION CONTROL -- 0.6%
1,000 Browning-Ferris Industries, Inc. ........................... 34,750
220 Waste Management, Inc. ..................................... 7,700
- -----------------------------------------------------------------------------------
42,450
- -----------------------------------------------------------------------------------
RAILROADS -- 0.5%
1,560 Wisconsin Central Transportation Corp. (a).................. 34,125
- -----------------------------------------------------------------------------------
RESTAURANTS AND LODGING -- 2.0%
2,560 Cendant Corp. (a)........................................... 53,440
780 CKE Restaurants, Inc. ...................................... 32,175
560 McDonald's Corp. ........................................... 38,640
220 Promus Hotel Corp. (a)...................................... 8,470
- -----------------------------------------------------------------------------------
132,725
- -----------------------------------------------------------------------------------
OFFICE PRODUCTS -- 0.3%
200 Xerox Corp. ................................................ 20,325
- -----------------------------------------------------------------------------------
RETAIL -- 5.7%
1,560 CVS Corp. .................................................. 60,743
670 Fred Meyer, Inc. (a)........................................ 28,475
780 The Home Depot, Inc. ....................................... 64,789
1,110 Office Depot, Inc. (a)...................................... 35,034
2,890 Rite Aid Corp. ............................................. 108,556
2,120 Safeway Inc. (a)............................................ 86,257
- -----------------------------------------------------------------------------------
383,854
- -----------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 2.2%
2,000 Aspect Telecommunications Corp. (a)......................... 54,750
1,000 Cisco Systems, Inc. (a)..................................... 92,063
- -----------------------------------------------------------------------------------
146,813
- -----------------------------------------------------------------------------------
TRANSPORTATION -- 0.6%
1,500 Newport News Shipbuilding Inc. ............................. 40,125
- -----------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
26
<PG$PCN>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
MFS RESEARCH PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -----------------------------------------------------------------------------------
<C> <S> <C>
UTILITIES -- 1.5%
1,000 CalEnergy Co., Inc. (a)..................................... $ 30,063
330 Columbia Energy Group....................................... 18,356
970 K N Energy, Inc. ........................................... 52,562
- -----------------------------------------------------------------------------------
100,981
- -----------------------------------------------------------------------------------
TOTAL COMMON STOCK (Cost -- $5,836,358)..................... 5,988,243
- -----------------------------------------------------------------------------------
FOREIGN STOCK -- 3.2%
- -----------------------------------------------------------------------------------
GERMANY -- 0.8%
560 Henkel KGAA................................................. 55,690
- -----------------------------------------------------------------------------------
HONG KONG -- 0.3%
4,000 Hutchison Whampoa........................................... 21,113
- -----------------------------------------------------------------------------------
NETHERLANDS -- 1.1%
1,110 ING Groep N.V. ............................................. 72,683
- -----------------------------------------------------------------------------------
SWITZERLAND -- 1.0%
4,450 Skandia Forsakings.......................................... 63,612
- -----------------------------------------------------------------------------------
TOTAL FOREIGN STOCK (Cost -- $202,789)...................... 213,098
- -----------------------------------------------------------------------------------
SUB-TOTAL INVESTMENTS (Cost -- $6,039,147).................. 6,201,341
- -----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- -----------------------------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENT -- 7.7%
$515,000 Federal Home Loan Mortgage Corp., 5.40% due 7/1/98
(Cost -- $515,000).......................................... 515,000
- -----------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $6,554,147*)............. $6,716,341
- -----------------------------------------------------------------------------------
</TABLE>
(a) Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
27
<PG$PCN>
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES (UNAUDITED) JUNE 30, 1998
<TABLE>
<CAPTION>
DISCIPLINED MFS
CONVERTIBLE STRATEGIC SMALL CAP MID CAP MFS
BOND STOCK STOCK GROWTH RESEARCH
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments -- Cost............................... $2,587,672 $3,487,403 $3,153,336 $4,918,182 $6,039,147
Short-term investments -- Cost.................... 480,000 128,000 19,782 -- 515,000
- ----------------------------------------------------------------------------------------------------------------------
Investments, at Value............................. $2,598,017 $3,371,102 $3,083,742 $4,764,541 $6,201,341
Short-term investments, at Value.................. 480,000 128,000 19,788 -- 515,000
Cash.............................................. 217 228 -- 453,837 1,384
Dividends and interest receivable................. 14,779 8,420 2,954 1,160 5,285
Receivable for securities sold.................... 53,700 -- 189,254 5,481 8,562
Receivable from affiliate......................... 6,743 -- -- 2,232 --
- ----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS...................................... 3,153,456 3,507,750 3,295,738 5,227,251 6,731,572
- ----------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased.................. -- 127,570 161,527 4,788 --
Payable to bank................................... -- -- 41,985 -- --
Investment advisory fees payable.................. -- 3,159 3,910 -- 1,403
Administration fees payable....................... -- 316 293 -- 315
Accrued expenses.................................. 10,700 1,264 684 10,800 9,185
- ----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES................................. 10,700 132,309 208,399 15,588 10,903
- ----------------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS.................................... $3,142,756 $3,375,441 $3,087,339 $5,211,663 $6,720,669
- ----------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Paid-in capital................................... $3,105,663 $3,476,126 $3,225,635 $5,306,365 $6,559,886
Accumulated net investment income (loss).......... 20,456 15,616 4,126 (6,469) 1,965
Accumulated net realized gain (loss) from
security transactions and futures contracts..... 6,292 -- (72,834) 65,408 (3,376)
Net unrealized appreciation (depreciation)
of investments.................................. 10,345 (116,301) (69,588) (153,641) 162,194
- ----------------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS.................................... $3,142,756 $3,375,441 $3,087,339 $5,211,663 $6,720,669
- ----------------------------------------------------------------------------------------------------------------------
SHARES OUTSTANDING.................................. 310,545 348,197 323,745 531,648 656,640
- ----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, PER SHARE.......................... $10.12 $9.69 $9.54 $9.80 $10.23
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
28
<PG$PCN>
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
DISCIPLINED MFS
CONVERTIBLE STRATEGIC SMALL CAP MID CAP MFS
BOND STOCK STOCK GROWTH RESEARCH
PORTFOLIO (a) PORTFOLIO (a) PORTFOLIO (a) PORTFOLIO (b) PORTFOLIO (b)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest........................................ $19,712 $ 2,880 $ 2,928 $ 5,778 $ 4,877
Dividends....................................... 4,750 17,475 6,085 3,355 13,872
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME......................... 24,462 20,355 9,013 9,133 18,749
- ---------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Audit and legal................................. 7,000 100 54 4,000 6,000
Investment advisory fees (Note 2)............... 3,006 3,159 3,910 10,981 11,811
Shareholder communications...................... 2,000 200 100 1,000 1,500
Shareholder and system servicing fees........... 750 300 170 1,200 900
Custody......................................... 500 85 45 6,267 2,400
Administration fees (Note 2).................... 300 316 293 823 --
Registration fees............................... -- 390 210 -- --
Trustees' fees.................................. -- 164 90 -- --
Other........................................... 500 25 15 1,071 291
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES.................................. 14,056 4,739 4,887 25,342 22,902
Less: Investment advisory and administration fee
waivers and expense reimbursement (Note
2)........................................ (10,050) -- -- (9,740) (6,118)
- ---------------------------------------------------------------------------------------------------------------------------------
NET EXPENSES.................................... 4,006 4,739 4,887 15,602 16,784
- ---------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS)...................... 20,456 15,616 4,126 (6,469) 1,965
- ---------------------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FUTURES CONTRACTS (NOTES 3 AND 5):
Realized Gain (Loss) From:
Security transactions (excluding short-term
securities)................................ 6,292 -- (71,540) 65,408 (3,376)
Futures contracts............................. -- -- (1,294) -- --
- ---------------------------------------------------------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS)........................ 6,292 -- (72,834) 65,408 (3,376)
- ---------------------------------------------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation
(Depreciation) of Investments:
Beginning of period........................... -- -- -- -- --
End of period................................. 10,345 (116,301) (69,588) (153,641) 162,194
- ---------------------------------------------------------------------------------------------------------------------------------
INCREASE IN NET UNREALIZED APPRECIATION
(DEPRECIATION)................................ 10,345 (116,301) (69,588) (153,641) 162,194
- ---------------------------------------------------------------------------------------------------------------------------------
NET GAIN (LOSS) ON INVESTMENTS AND FUTURES
CONTRACTS....................................... 16,637 (116,301) (142,422) (88,233) 158,818
- ---------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS...................................... $37,093 $ (100,685) $ (138,296) $ (94,702) $160,783
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) For the period from May 1, 1998 (commencement of operations) to June 30,
1998.
(b) For the period from March 23, 1998 (commencement of operations) to June 30,
1998.
SEE NOTES TO FINANCIAL STATEMENTS.
29
<PG$PCN>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE
30, 1998
<TABLE>
<CAPTION>
DISCIPLINED MFS
CONVERTIBLE STRATEGIC SMALL CAP MID CAP MFS
BOND STOCK STOCK GROWTH RESEARCH
PORTFOLIO (a) PORTFOLIO (a) PORTFOLIO (a) PORTFOLIO (b) PORTFOLIO (b)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss).................... $ 20,456 $ 15,616 $ 4,126 $ (6,469) $ 1,965
Net realized gain (loss)........................ 6,292 -- (72,834) 65,408 (3,376)
Increase in net unrealized appreciation
(depreciation)................................ 10,345 (116,301) (69,588) (153,641) 162,194
- ---------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS.................................... 37,093 (100,685) (138,296) (94,702) 160,783
- ---------------------------------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 14):
Net proceeds from sale of shares................ 3,109,595 3,486,160 3,239,690 5,316,491 6,570,850
Cost of shares reacquired....................... (3,932) (10,034) (14,055) (10,126) (10,964)
- ---------------------------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM FUND SHARE
TRANSACTIONS.................................. 3,105,663 3,476,126 3,225,635 5,306,365 6,559,886
- ---------------------------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS............................ 3,142,756 3,375,441 3,087,339 5,211,663 6,720,669
NET ASSETS:
Beginning of period............................. -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
END OF PERIOD*.................................. $3,142,756 $3,375,441 $3,087,339 $5,211,663 $6,720,669
- ---------------------------------------------------------------------------------------------------------------------------------
* Includes accumulated net investment income
(loss) of: $20,456 $15,616 $4,126 $(6,469) $1,965
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) For the period from May 1, 1998 (commencement of operations) to June 30,
1998.
(b) For the period from March 23, 1998 (commencement of operations) to June 30,
1998.
SEE NOTES TO FINANCIAL STATEMENTS.
30
<PG$PCN>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
The Convertible Bond, Strategic Stock, Disciplined Small Cap Stock, MFS Mid
Cap Growth and MFS Research Portfolios ("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 fourteen other separate investment portfolios: Travelers Quality
Bond, Lazard International Stock, MFS Emerging Growth, Federated High Yield,
Federated Stock, Disciplined Mid Cap Stock (formerly known as Mid Cap
Disciplined Equity Fund), 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 semi-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; and (j) estimates and assumptions are required to be made
regarding assets, liabilities and changes in net assets resulting from
operations when financial statements are prepared. Changes in the economic
environment, financial markets and any other parameters used in determining
these estimates could cause actual results to differ.
In addition, the MFS Mid Cap Growth and MFS Research 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 Convertible Bond ("CB"), Disciplined Small Cap Stock ("DSCS"), MFS Mid Cap
Growth ("MMCG"), MFS Research ("MRP"), and Strategic Stock ("SSP") Portfolios.
CB, DSCS, MMCG, MRP, and SSP each pay TAMIC an investment advisory fee
calculated at an annual rate of 0.60%, 0.80%, 0.80%, 0.80% and 0.60%. This fee
is calculated daily and paid monthly.
TAMIC has entered into sub-advisory agreements with Massachusetts Financial
Services ("MFS"), and Travelers Investment Management Co., Inc. ("TIMCO").
Pursuant to each sub-advisory agreement, MFS and TIMCO are responsible
31
<PG$PCN>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
for the day-to-day portfolio operations and investment decisions for MMCG, MRP,
DSCS and SSP, respectively. As a result, the following fees are paid and
calculated at an annual rate:
- TAMIC pays MFS 0.375% of MMCG and MRP's average daily net assets,
respectively.
- DSCS and SSP pay TIMCO 0.40% and 0.30% of their average daily net
assets, respectively.
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"), 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 period ended June 30, 1998, Travelers Insurance waived all or part
of its fees in the amounts of $3,306, $9,740, and $6,118 for CB, MMCG and MRP,
respectively, and agreed to reimburse CB for expenses in the amount of $6,744.
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 period
ended June 30, 1998 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO PURCHASES SALES
- -------------------------------------------------------------------------------------
<S> <C> <C>
Convertible Bond Portfolio.................................. $2,685,827 $ 105,928
Strategic Stock Portfolio................................... 3,487,403 --
Disciplined Small Cap Stock Portfolio....................... 4,188,021 963,145
MFS Mid Cap Growth Portfolio................................ 6,945,179 2,092,405
MFS Research Portfolio...................................... 6,754,363 715,216
- -------------------------------------------------------------------------------------
</TABLE>
At June 30, 1998, aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
<TABLE>
<CAPTION>
GROSS GROSS NET UNREALIZED
UNREALIZED UNREALIZED APPRECIATION
PORTFOLIO APPRECIATION DEPRECIATION (DEPRECIATION)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Convertible Bond Portfolio.................................. $ 64,111 $ (53,766) $ 10,345
Strategic Stock Portfolio................................... 75,150 (191,451) (116,301)
Disciplined Small Cap Stock Portfolio....................... 94,487 (164,075) (69,588)
MFS Mid Cap Growth Portfolio................................ 310,676 (464,317) (153,641)
MFS Research Portfolio...................................... 378,493 (216,299) 162,194
- ----------------------------------------------------------------------------------------------------------
</TABLE>
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. REVERSE REPURCHASE AGREEMENTS
The Portfolios may from time to time enter into reverse repurchase
agreements.
A reverse repurchase agreement involves a sale by the Portfolio of
securities that it holds with an agreement by the Portfolio to repurchase the
same securities at an agreed upon price and date. A reverse repurchase agreement
involves risk that the market value of the securities sold by the Portfolio may
decline below the repurchase price of the securities. The Portfolio will
establish a segregated account with its custodian, in which the Portfolio will
maintain cash, U.S. government
32
<PG$PCN>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
securities or other liquid high-grade debt obligations equal in value to its
obligations with respect to the reverse repurchase agreements.
At June 30, 1998, the Portfolios had no open reverse repurchase agreements.
6. FUTURES CONTRACTS
The 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 June 30, 1998, the Portfolios had no open futures contracts.
7. OPTIONS CONTRACTS
The 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 June 30, 1998, 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 period ended June 30, 1998, the Portfolios did not write any
options.
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.
33
<PG$PCN>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
9. SECURITIES TRADED ON A WHEN-ISSUED BASIS
The Portfolios may from time to time purchase securities on a when-issued
basis.
In a when-issued transaction, the Portfolio commits to purchasing
securities for which specific information is not yet known at the time of the
trade. Securities purchased on a TBA basis are not settled until they are
delivered to the Portfolio. Beginning on the date the Portfolio enters into the
when-issued transaction, the custodian maintains cash, U.S. government
securities or other liquid high grade debt obligations in a segregated account
equal in value to the purchase price of the when-issued security. These
transactions are subject to market fluctuations and their current value is
determined in the same manner as for other securities.
At June 30, 1998, there were no when-issued securities held by the
Portfolios.
10. MORTGAGE DOLLAR ROLL TRANSACTIONS
The Portfolios have the ability to participate in mortgage dollar rolls.
A mortgage dollar roll transaction involves a sale by the Portfolio of
securities that it holds with an agreement by the Portfolio to purchase similar
securities at an agreed upon price and date. The securities repurchased will
bear the same interest as those sold, but generally will be collateralized by
pools of mortgages with different prepayment histories than those securities
sold. Proceeds of the sale will be invested and the income from these
investments, together with any additional income from the Portfolio exceeding
the yield on the securities sold.
At June 30, 1998, there were no mortgage dollar roll transactions held by
the Portfolios.
11. SHORT SALES AGAINST THE BOX
The Portfolios have the ability to engage in short sales against the box.
A short sale against the box is a short sale of common stock such that,
when the short position is open, the Portfolio involved owns an equal amount of
the stock or preferred stock or debt securities (convertible or exchangeable)
without payment of further consideration, into an equal number of shares of
common stock sold short. The proceeds of the sale will be held by the broker
until the settlement date, when the Portfolio delivers the stock or the
convertible or exchangeable securities to close out its short position. Although
prior to delivery a Portfolio will have to pay an amount equal to any dividends
paid on the common stock sold short, the Portfolio will receive the dividends
from the stock or the preferred stock or the interest from the stock or
convertible or exchangeable debt securities plus a portion of the interest
earned from the proceeds of the short sale. The Portfolio will deposit in a
segregated account with the Portfolio's custodian, the common stock or
convertible preferred stock or debt securities in connection with short sales
against the box.
At June 30, 1998, there were no open short sales against the box.
12. LENDING OF SECURITIES
The Portfolios have the ability to lend its securities to brokers, dealers
and other financial organizations.
The Portfolio has an agreement with its custodian whereby the custodian may
lend securities owned by the Portfolio to brokers, dealers and other financial
organizations. Fees earned by the Portfolio on securities lending are recorded
in interest income. Loans of securities by the Portfolio are collateralized by
cash, U.S. government securities or high quality money market instruments that
are maintained at all times in an amount at least equal to the current market
value of the loaned securities, plus a margin which may vary depending on the
type of securities loaned. The custodian establishes and maintains the
collateral in a segregated account. The Portfolio maintains exposure for the
risk of any losses in the investment of amounts received as collateral.
At June 30, 1998, there were no loaned securities held by the Portfolios.
34
<PG$PCN>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
13. 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>
PERIOD ENDED
JUNE 30, 1998
- -----------------------------------------------------------------------------
<S> <C>
CONVERTIBLE BOND PORTFOLIO(a):
Shares sold................................................. 310,939
Shares redeemed............................................. (394)
- -----------------------------------------------------------------------------
Net Increase................................................ 310,545
- -----------------------------------------------------------------------------
STRATEGIC STOCK PORTFOLIO(a):
Shares sold................................................. 349,218
Shares redeemed............................................. (1,021)
- -----------------------------------------------------------------------------
Net Increase................................................ 348,197
- -----------------------------------------------------------------------------
DISCIPLINED SMALL CAP STOCK PORTFOLIO(a):
Shares sold................................................. 325,269
Shares redeemed............................................. (1,524)
- -----------------------------------------------------------------------------
Net Increase................................................ 323,745
- -----------------------------------------------------------------------------
MFS MID CAP GROWTH PORTFOLIO(b):
Shares sold................................................. 532,650
Shares redeemed............................................. (1,002)
- -----------------------------------------------------------------------------
Net Increase................................................ 531,648
- -----------------------------------------------------------------------------
MFS RESEARCH PORTFOLIO(b):
Shares sold................................................. 657,720
Shares redeemed............................................. (1,080)
- -----------------------------------------------------------------------------
Net Increase................................................ 656,640
- -----------------------------------------------------------------------------
</TABLE>
(a) Transactions are for the period from May 1, 1998 (commencement of
operations) to June 30, 1998.
(b) Transactions are for the period from March 23, 1998 (commencement of
operations) to June 30, 1998.
35
<PG$PCN>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
For a share of beneficial interest outstanding throughout each period:
<TABLE>
<CAPTION>
CONVERTIBLE BOND PORTFOLIO 1998(1)
- ---------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $10.00
- ---------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income(2).................................. 0.07
Net realized and unrealized gain.......................... 0.05
- ---------------------------------------------------------------------
Total Income From Operations................................ 0.12
- ---------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.............................. $10.12
- ---------------------------------------------------------------------
TOTAL RETURN++.............................................. 1.20%
- ---------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000'S)........................... $3,143
- ---------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS+:
Expenses(2)............................................... 0.80%
Net investment income..................................... 4.02
- ---------------------------------------------------------------------
PORTFOLIO TURNOVER RATE..................................... 5%
- ---------------------------------------------------------------------
</TABLE>
(1) For the period from May 1, 1998 (commencement of operations) to June 30,
1998 (unaudited).
(2) Travelers Insurance has waived all of its fees for the period ended June 30,
1998. In addition, Travelers Insurance has agreed to reimburse the Portfolio
for $6,744 of the Portfolio's expenses for the period ended June 30, 1998.
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>
1998 $0.03 1.97%+
</TABLE>
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
36
<PG$PCN>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of beneficial interest outstanding throughout each period:
<TABLE>
<CAPTION>
STRATEGIC STOCK PORTFOLIO 1998(1)
- ---------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $10.00
- ---------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income..................................... 0.04
Net realized and unrealized loss.......................... (0.35)
- ---------------------------------------------------------------------
Total Loss From Operations.................................. (0.31)
- ---------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.............................. $9.69
- ---------------------------------------------------------------------
TOTAL RETURN++.............................................. (3.10)%
- ---------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000'S)........................... $3,375
- ---------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS+:
Expenses.................................................. 0.88%
Net investment income..................................... 2.91
- ---------------------------------------------------------------------
PORTFOLIO TURNOVER RATE..................................... 0%
- ---------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE PAID ON EQUITY TRANSACTIONS... $0.05
- ---------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
DISCIPLINED SMALL CAP STOCK PORTFOLIO 1998(1)
- ---------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $10.00
- ---------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income..................................... 0.01
Net realized and unrealized loss.......................... (0.47)
- ---------------------------------------------------------------------
Total Loss From Operations.................................. (0.46)
- ---------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.............................. $9.54
- ---------------------------------------------------------------------
TOTAL RETURN++.............................................. (4.60)%
- ---------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000'S)........................... $3,087
- ---------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS+:
Expenses.................................................. 0.98%
Net investment income..................................... 0.83
- ---------------------------------------------------------------------
PORTFOLIO TURNOVER RATE..................................... 32%
- ---------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE PAID ON EQUITY TRANSACTIONS... $0.05
- ---------------------------------------------------------------------
</TABLE>
(1) For the period from May 1, 1998 (commencement of operations) to June 30,
1998 (unaudited).
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
37
<PG$PCN>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of beneficial interest outstanding throughout each period:
<TABLE>
<CAPTION>
MFS MID CAP GROWTH PORTFOLIO 1998(1)
- ---------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $10.00
- ---------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment loss(2).................................... (0.01)
Net realized and unrealized loss.......................... (0.19)
- ---------------------------------------------------------------------
Total Loss From Operations.................................. (0.20)
- ---------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.............................. $9.80
- ---------------------------------------------------------------------
TOTAL RETURN++.............................................. (2.00)%
- ---------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000'S)........................... $5,212
- ---------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS+:
Expenses(2)............................................... 1.14%
Net investment loss....................................... (0.47)
- ---------------------------------------------------------------------
PORTFOLIO TURNOVER RATE..................................... 81%
- ---------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE PAID ON EQUITY TRANSACTIONS... $ 0.06
- ---------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MFS RESEARCH PORTFOLIO 1998(1)
- ---------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $10.00
- ---------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income(2).................................. 0.00*
Net realized and unrealized gain.......................... 0.23
- ---------------------------------------------------------------------
Total Income From Operations................................ 0.23
- ---------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.............................. $10.23
- ---------------------------------------------------------------------
TOTAL RETURN++.............................................. 2.30%
- ---------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000'S)........................... $6,721
- ---------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS+:
Expenses(2)............................................... 1.13%
Net investment income..................................... 0.13
- ---------------------------------------------------------------------
PORTFOLIO TURNOVER RATE..................................... 24%
- ---------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE PAID ON EQUITY TRANSACTIONS... $0.05
- ---------------------------------------------------------------------
</TABLE>
(1) For the period from March 23, 1998 (commencement of operations) to June 30,
1998 (unaudited).
(2) Travelers Insurance has waived part of its fees for the period ended June
30, 1998. If such fees were not waived, 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
IN NET INVESTMENT INCOME WITHOUT FEE WAIVERS
------------------------ -------------------
<S> <C> <C>
MFS Mid Cap Growth Portfolio $0.02 1.96%+
MFS Research Portfolio 0.01 1.53+
</TABLE>
* Represents less than $0.01.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
38
<PG$PCN>
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<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.
This report is prepared for the general information of contract owners and is
not an offer of shares of The Travelers Series Trust: Travelers Convertible
Bond, Strategic Stock, Disciplined Small Cap Stock, MFS Mid Cap Growth and MFS
Research Portfolios. 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 (Semi-Annual) (8-98) Printed in U.S.A.
<PG$PCN>
THE TRAVELERS VARIABLE
PRODUCTS FUNDS
SEMI-ANNUAL REPORTS
June 30, 1998
MANAGED ASSETS TRUST
HIGH YIELD BOND TRUST
CAPITAL APPRECIATION FUND
MONEY MARKET PORTFOLIO
THE TRAVELERS SERIES TRUST:
U.S. Government Securities Portfolio
Social Awareness Stock Portfolio
Utilities Portfolio
[TRAVELERSLIFE LOGO]
The Travelers Insurance Company
The Travelers Life and Annuity Company
One Tower Square
Hartford, CT 06183
<pg$pcn>
SEMI-ANNUAL REPORT FOR THE TRAVELERS VARIABLE PRODUCTS FUNDS
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
We are pleased to provide the semi-annual report for The Travelers Series
Trust -- Managed Assets Trust, High Yield Bond Trust, Capital Appreciation Fund,
Money Market Portfolio (formerly known as Cash Income Trust) ("Fund") and the
Travelers Series Trust -- U.S. Government Securities, Social Awareness Stock and
Utilities Portfolios; ("Portfolio") for the period ended June 30, 1998.
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 date can be found in
this report. A more 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
SUBACCOUNT COMMENTARY INVESTMENTS
- ---------- ---------- -----------
<S> <C> <C>
Managed Assets Trust.................................. 3 9
High Yield Bond Trust................................. 4 18
Capital Appreciation Fund............................. 4 23
Money Market Portfolio................................ 6 26
U.S. Government Securities Portfolio.................. 37 42
Social Awareness Stock Portfolio...................... 37 43
Utilities Portfolio................................... 38 46
</TABLE>
ECONOMIC REVIEW AND OUTLOOK
The U.S. economy continues to provide the domestic capital markets with the
almost ideal conditions of low interest rates, lower inflation and steady
economic growth. First quarter Gross Domestic Product ("GDP") growth was well
ahead of expectations and led to the prospect of a Federal Reserve Board ("Fed")
tightening midway through the first half of 1998. Reported inflation, however,
remains low and the Asian currency crisis has caused the Fed to lean towards a
more neutral stance.
Despite the strong first quarter, the U.S. economy has recently showed signs of
slowing down. While industrial production and retail sales have gone down, the
most compelling evidence of the slowdown comes from the bond market. For the
first time since 1990, the yield curve, defined by the spread between the
two-year and ten-year Treasury yields, is now slightly inverted. (The yield
curve shows the difference between short- and long-term yields.) In the past, an
inverted yield curve has been a harbinger of an economic downturn.
Fed Chairman Alan Greenspan notes in his latest testimony that the Fed remains
more concerned about inflation rather than an economic recession. We see no
indications of either an economic or earnings recession in the near future and
the risk in the stock market, in our view, is largely mitigated by this outlook.
The U.S. stock market posted handsome returns in the first half of 1998. On a
year-to-date basis, the Dow Jones Industrial Average ("DJIA") rose 13.2% while
the broader Standard and Poor's 500 Index ("S&P 500") gained 17.7%. At this
pace, the stock market would yet again produce another year of 30% or more
appreciation, a three-year run unprecedented in the history of the stock market.
The bond market produced healthy returns as yields on 30-year U.S. Treasury
bonds fell to their lowest level since the introduction of these securities in
1977.
We look ahead to a slower economy in the second half of 1998. The absence of
inflationary pressures should keep long-term bond yields below 6% while the
combination of lofty valuations and slower corporate earnings growth in 1998
could find stocks at the upper end of a trading range for the rest of the year.
EQUITY MARKET COMMENTARY
After three remarkable years of market appreciation averaging more than 30%
annually, the first quarter's S&P 500 total return of almost 15% was that much
more impressive. Since 1995, the stock market's climb has also been supported by
a dramatic increase in money flows by domestic and foreign investors, as well as
corporate buybacks and merger activity. Low domestic inflation and steady
revenue gains have also contributed to the expansion in the P/E multiple. (a P/E
ratio shows the relationship between a stock's price and the company's earnings
for the last four quarters.)
1
<pg$pcn>
SEMI-ANNUAL REPORT FOR THE TRAVELERS VARIABLE PRODUCTS FUNDS
- --------------------------------------------------------------------------------
Stock market volatility increased significantly in the second quarter. Investor
focus shifted from the prospects of Fed tightening to the Asian crisis and
eventually to hopes of reasonable corporate earnings growth for the second
quarter. Large-capitalization stocks posted a gain for the second quarter of
1998 while small-capitalization stocks declined to fall farther behind their
large-cap stock counterparts.
A seesaw pattern in stock prices persisted at the beginning of the second
quarter of 1998, as stock prices remained almost unchanged at the end of April
from a month earlier. Interest rate concerns took center stage towards the end
of April as the Fed publicly discussed a shift to a tightening bias. Long-term
interest rates shot up above 6% while the S&P 500 fell 4.3% from April 23, 1998
to April 27, 1998.
Inflation, however, continued to remain low and, despite a strong first quarter
GDP report, a slowdown in the second half of 1998 became more apparent. Bond
prices stabilized as a result of such evidence in late April and early May and
stock prices recovered to the levels established at the end of the first
quarter.
Renewed concerns over Asia and slowing earnings growth rocked the stock market
in May. The S&P 500 declined by almost 2% while the Russell 2000 Index fell
nearly 5%. (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.) Several companies provided early guidance about
lower second quarter earnings during the month of May. Investors already worried
about record valuations in the stock market, showed no mercy in their response
to such disappointments as some stock prices tumbled down by as much as 50%.
Growth stocks performed better than value stocks in the second quarter of 1998
in the large-cap universe. In particular, the technology, health care and
consumer discretionary sectors performed quite well while the energy sector
underperformed significantly in the wake of falling oil prices.
The widely anticipated earnings pre-announcement season at the end of June, when
companies confess to upcoming earnings shortfalls, was not as severe as in prior
quarters. Many stock market investors appear to have drawn a positive inference
from this event and the current outlook for second quarter earnings seems
favorable.
Besides the historically high valuations for large-capitalization stocks, we
think the principal risk to the U.S. stock market remains on the earnings front.
If Asia remains in a protracted recession, which is a likely scenario at this
point, a slowdown in the global economy could take its toll on U.S. corporate
profits. A prolonged period of anemic earnings growth would trigger a correction
in the stock market through a contraction in the price-to-earnings multiple. We
remain cautious about the U.S. stock market in the short term but bullish over
the intermediate to long term.
FIXED INCOME MARKET COMMENTARY
Just when many investors were getting somewhat more comfortable with risk again,
the Asian financial crisis re-erupted in May and June. Unrest in Indonesia and
further weakness in the Japanese yen were some of the latest highlights in the
latest chapter of the Asian crisis. The region's turmoil sent Asia's stock
markets down again and caused major setbacks in most emerging country stock and
bond markets. In addition, heightened investor concerns about greater risk
triggered yet another crisis in Russia's fragile markets.
In reaction to the renewed troubles in Asia, the U.S. bond market rallied as
many global investors sought refuge in U.S. Treasury securities during the
reporting period. Combined with U.S. Secretary of Treasury Rubin's intervention
to stabilize the yen, the rally in U.S. Treasurys helped to support the U.S.
stock and bond markets by the end of the second quarter of 1998. Within the U.S.
bond markets, investment-grade bonds barely performed better than U.S.
Treasurys. Many longer-maturity bonds could not keep pace with the strong
performance of the 30-year U.S. Treasury bond. Mortgage-backed security spreads
widened and discount bonds performed better than premium bonds, as mortgage
prepayments remained high. Corporate bond spreads widened due to heavy issuance
(i.e., more supply) with the most widening occurring in bonds issued by
corporations that were more impacted by the Asian crisis.
Municipal bonds performed poorly as heavy issuance and investor "sticker shock"
kept tax-exempt bond yields from declining as much as U.S. Treasurys. High yield
bonds and emerging market bonds also lagged U.S. Treasurys during the second
quarter of 1998, although high-yield bonds are still ahead of U.S. Treasurys for
the first six months of 1998.
2
<pg$pcn>
SEMI-ANNUAL REPORT FOR THE TRAVELERS VARIABLE PRODUCTS FUNDS
- --------------------------------------------------------------------------------
We continue to believe that interest rates in the U.S. will slowly move lower as
the crisis in Asia pushes U.S. GDP down to a 1% to 2% annual range in the second
half of 1998. Exports from the U.S. have sharply declined and the trade deficit
has widened rapidly. We expect even greater deterioration in the U.S. trade
deficit as Asian imports accelerate in the second half of the year. Inventory
growth in the U.S. was strong in the first half of 1998, and that condition
should slow projected U.S. economic growth in the second half of the year. In
addition, we expect that corporate profits will continue to be flat, which
combined with high inventories and weak commodity prices, should help to weaken
capital spending during the next several quarters.
Within the U.S. bond market, we anticipate that the yield curve will be steeper
six to twelve months as of this writing. We think that the yield curve will
likely stay flat until it becomes clearer that the inflationary risks from
currently tight U.S. labor markets have passed. As rates decline, bond spreads
are likely to widen. In addition, bond spreads should widen more because of a
continuation of the flight to quality as well as the fact that the supply of
bonds should remain high at these rate levels. The overall low inflationary
environment and the expected economic slowdown, along with the increased
volatility in the stock market, have created a favorable backdrop for fixed
income investments.
MANAGED ASSETS TRUST
Managed Assets Trust ("Fund") seeks to provide a high total investment return
through a fully managed investment policy. For the six months ended June 30,
1998, the Trust had a total return of 12.76% versus 17.72% for the S&P 500 and
4.17% for the Lehman Government/Corporate Index benchmark.
During the first half of 1998, stock selection in the health care, consumer
discretionary, producer durables and autos and transportation sectors made the
strongest positive contribution to the Fund's overall relative performance. In
the health care sector, the Fund benefited from its positions in companies with
strong diversified sources of earnings such as Chancellor Media, New York Times
and Meredith Corp. as well as a number of different retailers such as Costco,
Albertsons and Jones Apparel.
In the producer durables sector, the managers' positions in Textron and United
Technologies helped performance in the first quarter. In the transportation
sector, their emphasis on the better performing airline and automobile
industries also made a positive contribution to performance. Their individual
stock picks here such as Delta Air Lines, AMR Corp. and Ford Motor Co. all
performed well. Their positions in Equitable Companies and Morgan Stanley Dean
Witter helped performance in the financial services sector towards the end of
the second quarter.
The managers lost ground relative to the benchmark primarily in the technology
sector. Their relative performance was penalized by not holding a number of
better performing stocks such as EMC Corp. and Digital Equipment. They were also
hurt by overweight positions in VLSI Technology and Oracle, which both reported
earnings disappointments.
The managers believe that the current economic expansion has further to go and
that inflation will remain low. These factors argue in favor of a continuation
of the current bull market. Earnings growth, however, is clearly slowing down
and the recent market strength and current valuations are both predicated on a
healthy earnings rebound in the second half of the year and into 1999. Besides
the historically high valuations for large capitalization stocks, the principal
risk to the U.S. stock market remains on the earnings front. A prolonged period
of anemic earnings growth would trigger a correction in the stock market through
a contraction in the P/E multiple. They remain cautious about the U.S. stock
market over the short term. In this environment, the managers believe that it is
particularly important to identify companies with sustainable earnings growth at
attractive valuations across a wide variety of industries.
In their disciplined approach to stock selection, the managers screen their
research universe of over 1,000 securities for companies that offer improving
fundamentals and relative earnings gains at discounted stock valuations. In the
technology sector, they focus on higher growth industries like networking and
software through their positions in Cisco and Intuit. They maintain an
underweight position in the weak performing semi-conductor group by excluding
stocks such as Motorola that have produced a string of negative earnings
surprises. In the health care sector, they continue to emphasize Guidant, a
leading manufacturer of medical devices that regulate heart activity through
chest implants. The managers' focus among the financial services sector remains
on the securities industry where they have positions in Merrill Lynch, Morgan
Stanley Dean Witter and The Equitable Companies.
3
<pg$pcn>
SEMI-ANNUAL REPORT FOR THE TRAVELERS VARIABLE PRODUCTS FUNDS
- --------------------------------------------------------------------------------
HIGH YIELD BOND TRUST
The High Yield Bond Trust ("Fund") seeks to generate income. The assets of the
Fund will be invested in bonds which, as a class, sell at discounts from par
value and are typically high-risk securities. For the six months ended June 30,
1998, the Fund had a total return of 5.15%. In comparison, the Lehman Aggregate
Bond Index posted a total return of 3.93% for the same period.
The high yield bond market generated relatively weak results in the second
quarter of 1998 and underperformed most other sectors of the bond market. Total
returns for the U.S. bond markets were in the 1% to 6% range, with the high
yield bond market at the lower end.
The 30-year U.S. Treasury bond generated the strongest results (i.e., more than
6%) of all the sectors, as many investors became more convinced that the Asian
crisis would contribute to an economic slowdown in the U.S. beginning in the
second quarter of 1998. The U.S. Treasury market has been sought out as a "safe
haven" by many investors concerned about increased economic uncertainty.
Moreover, an extremely heavy amount of new high yield bond issuances also caused
the high yield bond market to underperform versus other U.S. bond market
sectors. The higher-rated issues generated the strongest results among high
yield bonds given their greater sensitivity to interest rates. On the other
hand, the lowest-rated high yield bond issues generated the weakest returns and
that was not surprising given their greater sensitivity to general economic
conditions and stock market performance. While the stock market generated
positive results during the reporting period, there was considerably greater
volatility in the stock markets because of the higher uncertainty among many
investors.
Year-to-date, the total of newly issued high yield bonds was roughly $110
billion, which is more than twice last year's figure of $50 billion. Moreover,
year-to-date there has been approximately $15 billion of cash inflows into high
yield bond mutual funds, while above last year's total of $8 billion, an amount
that was clearly insufficient to counterbalance the effects of the extremely
heavy new issue calendar. However, continued strong demand for high yield bonds
from pension funds and insurance companies somewhat limited the underperformance
of the high yield bond market versus other bond sectors during the second
quarter of 1998.
The U.S. economy today remains generally supportive of high yield bonds and
inflation continues to be modest. In fact, recent retail sales growth in the
U.S. and housing sales and employment remains quite strong. The manager believes
that it is still an open question as to whether Asia's problems will have any
meaningful negative impact on future U.S. economic growth. While the Fed remains
concerned about the strength of the U.S. economy and the potential for higher
inflation in the future, there has been little evidence of inflationary
pressures so far.
As the high yield bond market continued to underperform during the second
quarter of 1998, the manager began to gradually take advantage of what he
believed to be attractively priced "B" rated issues. Given the continued
problems in Asia, the manager plans to remain underweighted in basic commodity
industries such as steel, forest products and petrochemicals, industries that
have been negatively affected by deflationary trends over the past six months.
(Deflation is when prices actually fall. Deflation should not be confused with
disinflation. Disinflation is the slowing down of the rate at which prices
increase.) The manager has recently started to lower the exposure to the energy
industry given the continued weakness in energy prices and the expectation that
as long as Asia remains mired in difficulties, energy prices should remain
depressed. The manager remains positive on the long-term trends in the energy
industry and does not plan to entirely eliminate the Fund's current energy
positions.
While the manager still expects U.S. economic growth to slow and corporate
profit margins may deteriorate for the rest of 1998, a meaningful U.S. economic
slowdown is not expected for the balance of the year. As a result, the manager
has become more opportunistically invested in select better-priced "B" and "BB"
rated new issues.
CAPITAL APPRECIATION FUND
The Capital Appreciation Fund ("Fund") seeks growth of capital through the use
of common stocks. Income is not an objective. The Fund invests principally in
common stocks of small to large companies that are expected to experience wide
fluctuations in price, both rising and falling. For the six months ending June
30, 1998, the Capital Appreciation Fund posted a total return of 29.99%. In
comparison, the Russell 2000 Index returned 4.93% for the same period.
4
<pg$pcn>
SEMI-ANNUAL REPORT FOR THE TRAVELERS VARIABLE PRODUCTS FUNDS
- --------------------------------------------------------------------------------
Markets generally moved ahead in the second quarter, masking the sharp
volatility that characterized the period. The S&P 500 rose 2.8%, while the DJIA
increased 1.8%. Despite a strong start, equity markets struggled mid-quarter
amid bad news from Asia and disappointing earnings reports in the semiconductor
industry. Better news helped the markets recover lost ground to end the quarter
on a high note. Meanwhile, the U.S. economic backdrop has been very positive.
Consumer spending remained resilient, housing starts held at near-record highs
and weakness in Asia kept the U.S. economy from boiling over. Inflation remained
in-check, and signs of slower economic growth in the second half of the year
drove the yield on the 30-year U.S. Treasury Bond down to 5.6% by the end of the
quarter.
During the period, the Fund outpaced its benchmark, the S&P 500, supported by
strong gains in the managers' large capitalization growth stocks, especially in
the technology and pharmaceutical industries. Among their technology stocks,
they benefited from their focus on market leaders like Cisco Systems, Microsoft,
and America Online (AOL). These companies enjoy a dominant market position, and
were able to weather the Asian crisis with no visible earnings impact. Cisco
Systems was a particularly strong performer. The company offset its Asian
exposure with strong gains elsewhere, and its equipment business is poised for
extraordinary growth against the backdrop of telecommunications deregulation and
the expansion of Internet traffic.
Meanwhile, Microsoft recovered from concerns over the Justice Department's
anti-trust suit, to rebound on an Appeals Court opinion in support of the
company. The managers remain impressed with Microsoft's potential -- their
product pipeline remains tremendous and advanced word on the Windows 98 launch
has been very positive. AOL was another strong performer. The market is
beginning to recognize AOL's successful transformation from service provider to
media channel, as its subscriber base recently surpassed the total number of MTV
viewers.
Pharmaceuticals have been among their strongest positions, supported by several
broad-based themes. First, demographic trends and the rising global utilization
of existing drugs have created a positive backdrop for the industry leaders.
Additionally, technological innovations have accelerated the R&D process, and
over the next few years the managers expect to see a dramatic increase in new
drug launches, to treat everything from cancers to obesity. Despite a
substantial run-up in its stock price, the managers remain very positive on
Pfizer's prospects for a variety of reasons. Not only does it offer a very
strong product pipeline of its own, but its marketing channel is so renowned
that companies like Monsanto and Warner-Lambert have sought Pfizer out to
partner on some of their most promising new drugs.
Among their financial stocks, they are also upbeat on BankAmerica. The bank's
strategic merger with NationsBank has provided the combined bank with a very
profitable geographic and demographic footprint across the Sunbelt. With their
geographic expansion complete, the combined bank is set to cut costs, exploit
synergies, boost operating margins, and unleash shareholder value. Their
cultures are complementary, and with BankAmerica's management at the helm, the
managers think the bank is well placed to emerge as a dominant franchise in the
new banking landscape.
Despite the Fund's strong performance, the managers did have a few
disappointments. AIG, the largest insurer in Asia, had its results restrained
due to the lingering currency storms. However, AIG is using this opportunity to
expand its distribution system and market reach in Asia, and they remain very
confident in the company's long-term potential. Additionally, the managers have
maintained some minor positions in a handful of rapidly growing midsize
companies. While they believe these companies could one day emerge as dominant
players within their respective industries, many of these holdings sport
relatively high price-to-earnings multiples due to their exceptional growth.
During the quarter, the managers saw stocks with higher valuations come under
pressure, as investors flocked toward the more predictable earnings of the large
capitalization names. Although this was a short-term setback, the managers held
on to these positions due to their impressive long-term prospects.
Looking forward, the managers do not expect the ride to get any smoother. Firms
with significant international exposure, especially in Asia, will most likely
continue to see their profit margins squeezed. The current risk is that the
Asian undertow could become strong enough to pull down U.S. and European
economic growth. They personally view this as a very small risk however, given
the resilience of consumer demand at home and the benefits of restructuring and
monetary convergence in Europe. Nonetheless, the managers will continue to
monitor the situation carefully. Most importantly, they have tried to invest in
companies that transcend the vagaries of the marketplace and can weather these
storms with minimal damage to their bottom lines.
5
<pg$pcn>
SEMI-ANNUAL REPORT FOR THE TRAVELERS VARIABLE PRODUCTS FUNDS
- --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
Money Market Portfolio ("Fund") seeks to provide 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 six-months ended June 30, 1998, the Fund generated an effective yield of
2.54% and as of June 30, 1998, had an average maturity of 22 days. The Fund
continues to invest primarily in U.S. Treasuries and government agency
securities. This investment strategy has provided the Fund with relative safety,
liquidity and relative stability. However, 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 $1.00 per share.
In closing, we would like to thank you for your investment in Managed Asset
Trust, High Yield Bond Trust, Capital Appreciation Fund and Money Market
Portfolio. We look forward to continuing to help you pursue your financial
goals.
Sincerely,
/s/ HEATH B. McLENDON
Heath B. McLendon
Chairman
July 10, 1998
6
<pg$pcn>
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON -- MANAGED ASSETS TRUST AS OF 6/30/98 (UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
----------------------------------------------
<S> <C>
Six Months Ended 6/30/98+ 12.76%
Year Ended 6/30/98 22.33%
Five Years Ended 6/30/98 14.92%
Ten Years Ended 6/30/98 14.18%
+ 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 June
30, 1988, assuming reinvestment of dividends, through June 30,
1998. 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>
Measurement Lehman Standard
Period Managed Government/Corporation Consumer & Poor's
(Fiscal Year Assets Bond Price 500
Covered) Trust Index Index Index
<S> <C> <C> <C> <C>
Jun-88 10000 10000 10000 10000
Dec-88 10919 10285 10212 10343
Dec-89 13880 11749 10687 13615
Dec-90 14223 12723 11339 13192
Dec-91 17310 14774 11686 17203
Dec-92 18199 15894 12025 18513
Dec-93 19897 17648 12355 20374
Dec-94 19451 17028 12686 20642
Dec-95 24726 20305 13008 25167
Dec-96 28133 20893 13439 30943
Dec-97 34128 22932 13667 41265
Jun-98 38482 23888 13811 48577
</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 6/30/98 (UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
<S> <C>
Six Months Ended 6/30/98+ 5.15%
Year Ended 6/30/98 13.35%
Five Years Ended 6/30/98 11.13%
Ten Years Ended 6/30/98 9.80%
+ 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 $10,000 made on June
30, 1988, assuming reinvestment of dividends, through June 30,
1998. The Lehman Aggregate Bond Index, an unmanaged index, is
composed of the Lehman Intermediate Government/Corporate Bond Index
and the Mortgage Backed Securities Index and includes treasury
issues, agency issues, corporate bond issues and mortgage-backed
securities. The Consumer Price Index is a measure of the average
change in prices over time in a fixed market basket of goods and
services. The First Boston High Yield Index Top Tier is a
broad-based market measure of high yield bonds, commonly known as
"junk bonds."
<TABLE>
<CAPTION>
First
Boston
Measurement High Lehman High
Period Yield Aggregate Consumer Yield
(Fiscal Year Bond Bond Price Index
Covered) Trust Index Index Top Tier
<S> <C> <C> <C> <C>
Jun-88 10000 10000 10000 10000
Dec-88 11456 10277 10212 11223
Dec-89 11617 11771 10687 12703
Dec-90 10557 12826 11339 12821
Dec-91 13313 14878 11686 15755
Dec-92 15064 15978 12025 17130
Dec-93 17174 17537 12355 19806
Dec-94 16958 17025 12686 19769
Dec-95 19581 20170 13008 23461
Dec-96 22723 20902 13439 25976
Dec-97 26487 22919 13667 29257
Jun-98 27851 23819 13811 30527
</TABLE>
- --------------------------------------------------------------------------------
Past performance is not predictive of future performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Average annual total returns are historical in nature and measure net investment
income and capital gain or loss from portfolio investments assuming reinvestment
of dividends. The returns do not reflect expenses associated with the subaccount
such as administrative fees, account charges and surrender charges which, if
reflected, would reduce the performance shown.
7
<pg$pcn>
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON -- CAPITAL APPRECIATION FUND AS OF 6/30/98 (UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
<S> <C>
Six Months Ended 6/30/98+ 29.99%
Year Ended 6/30/98 40.28%
Five Years Ended 6/30/98 23.32%
Ten Years Ended 6/30/98 19.47%
+ 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 $10,000 made on June
30, 1988, assuming reinvestment of dividends, through June 30,
1998. The Standard & Poor's 500 Index is an unmanaged index
composed of 500 widely held common stocks listed on the New York
Stock Exchange, American Stock Exchange and over-the-counter
market. The Russell 2000 Index is a capitalization weighted total
return index which is comprised of 2,000 of the smallest
capitaled U.S. domiciled companies with less than average growth
orientation whose common stock is traded in the United States of
the New York Stock Exchange, American Stock Exchange and NASDAQ.
The Consumer Price Index is a measure of the average change in
prices over time in a fixed market basket of goods and services.
<TABLE>
<CAPTION>
Measurement Standard
Period Capital & Poor's Russell Consumer
(Fiscal Year Appreciation 500 2000 Price
Covered) Fund Index Index Index
<S> <C> <C> <C> <C>
Jun-88 10000 10000 10000 10000
Dec-88 11006 10343 9846 10212
Dec-89 12735 13615 11448 10687
Dec-90 11940 13192 9217 11339
Dec-91 16139 17203 13462 11686
Dec-92 18980 18513 15940 12025
Dec-93 21844 20374 18949 12355
Dec-94 20803 20642 7863 12686
Dec-95 28369 25167 10101 13008
Dec-96 36370 30943 11767 13438
Dec-97 45879 41292 14398 13667
Jun-98 59636 48609 15108 13811
</TABLE>
- --------------------------------------------------------------------------------
Past performance is not predictive of future performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Average annual total returns are historical in nature and measure net investment
income and capital gains or losses from portfolio investments assuming
reinvestments of dividends. The returns do not reflect expenses associated with
the subaccount such as administrative fees, account charges and surrender
charges which, if reflected, would reduce the performance shown.
8
<pg$pcn>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) JUNE 30, 1998
MANAGED ASSETS TRUST
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -----------------------------------------------------------------------------------------------------
COMMON STOCK -- 66.4%
- -----------------------------------------------------------------------------------------------------
<C> <S> <C>
BASIC INDUSTRIES -- 0.4%
10,100 Mead Corp. ................................................. $ 320,675
10,100 Owens-Illinois, Inc. ....................................... 451,975
10,500 Willamette Industries, Inc. ................................ 336,000
- -----------------------------------------------------------------------------------------------------
1,108,650
- -----------------------------------------------------------------------------------------------------
BASIC MATERIALS - DEVELOPMENT -- 0.2%
11,286 Crane Co. .................................................. 548,076
- -----------------------------------------------------------------------------------------------------
CAPITAL GOODS -- 0.9%
9,900 Cordant Technologies Inc. .................................. 456,637
9,100 General Dynamics Corp. ..................................... 423,150
12,500 Ingersoll-Rand Co. ......................................... 550,781
12,200 Kaufman and Broad Home Corp. ............................... 387,350
14,000 Pulte Corp. ................................................ 418,250
- -----------------------------------------------------------------------------------------------------
2,236,168
- -----------------------------------------------------------------------------------------------------
COMPUTERS SERVICES -- 0.2%
9,900 Ceridian Corp. ............................................. 581,625
- -----------------------------------------------------------------------------------------------------
CONSUMER CYCLICALS -- 7.5%
12,700 AccuStaff, Inc.++........................................... 396,875
9,100 Borders Group, Inc.++....................................... 336,700
9,000 Colgate-Palmolive Co. ...................................... 792,000
13,200 Costco Cos., Inc. .......................................... 832,837
19,400 CVS Corp. .................................................. 755,387
9,800 Federated Department Stores, Inc. .......................... 527,362
9,800 Gannett Co. ................................................ 696,412
7,800 Gap, Inc. .................................................. 480,675
13,200 Gillette Co. ............................................... 748,275
17,400 Home Depot Inc. ............................................ 1,445,287
9,600 Jones Apparel Group, Inc. .................................. 351,000
9,548 Kimberly-Clark Corp. ....................................... 438,014
26,800 KMart Corp. ................................................ 515,900
4,400 Loews Corp. ................................................ 383,350
12,400 McDonald's Corp. ........................................... 855,600
8,800 New York Times Co., Class A Shares.......................... 697,400
23,800 Procter & Gamble Corp. ..................................... 2,167,288
7,600 Ross Stores, Inc. .......................................... 327,750
300 Stride Rite Corp. .......................................... 4,519
9,277 The Walt Disney Co. ........................................ 974,665
11,700 Thomas & Betts Corp. ....................................... 576,225
9,800 Time Warner, Inc. .......................................... 837,287
22,600 TJX Cos., Inc. ............................................. 545,225
9,700 Unilever NV................................................. 765,694
40,000 Wal-Mart Stores, Inc. ...................................... 2,430,000
- -----------------------------------------------------------------------------------------------------
18,881,727
- -----------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<pg$pcn>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
MANAGED ASSETS TRUST
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -----------------------------------------------------------------------------------------------------
<C> <S> <C>
CONSUMER PRODUCTS -- 0.2%
5,930 Eastman Kodak Co. .......................................... $ 433,261
- -----------------------------------------------------------------------------------------------------
CONSUMER STAPLES -- 4.4%
14,200 Adolph Coors Co., Class B Shares............................ 484,575
100 Anheuser-Busch Cos., Inc. .................................. 4,719
41,300 Coca-Cola Co. .............................................. 3,560,300
6,910 Dean Foods Co. ............................................. 379,618
15,700 H.J. Heinz & Co. ........................................... 881,162
13,200 Interstate Bakeries Corp. .................................. 438,075
7,300 Kellogg Co. ................................................ 274,206
16,000 MidAmerican Energy Holdings Co. ............................ 346,000
27,000 PepsiCo, Inc. .............................................. 1,112,063
36,200 Philip Morris Cos., Inc. ................................... 1,425,375
17,500 Sara Lee Corp. ............................................. 978,906
11,500 Suiza Foods Corp.++......................................... 686,406
370 Vlasic Foods International Inc.++........................... 7,446
6,000 Whirlpool Corp.++........................................... 412,500
- -----------------------------------------------------------------------------------------------------
10,991,351
- -----------------------------------------------------------------------------------------------------
ENERGY -- 0.3%
4,700 Halliburton Co. ............................................ 209,444
8,400 Schlumberger Ltd. .......................................... 573,825
- -----------------------------------------------------------------------------------------------------
783,269
- -----------------------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 10.7%
12,365 Allstate Corp. ............................................. 1,132,170
6,200 Ambac Financial Group, Inc. ................................ 362,700
8,600 American Express Co. ....................................... 980,400
15,025 American International Group, Inc. ......................... 2,193,650
7,917 Associates First Capital Corp. ............................. 608,619
5,527 Banc One Corp. ............................................. 308,476
16,100 BankAmerica Corp. .......................................... 1,391,644
14,600 BankBoston Corp. ........................................... 812,125
4,000 Bankers Trust New York Corp. ............................... 464,250
15,072 Chase Manhattan Corp. ...................................... 1,137,936
8,400 Citicorp.................................................... 1,253,700
7,950 Comerica, Inc. ............................................. 526,688
8,600 Countrywide Credit Industries., Inc. ....................... 436,450
12,900 Fannie Mae.................................................. 783,675
13,000 Freddie Mac ................................................ 611,813
5,600 First Union Corp. .......................................... 326,200
9,200 Fleet Financial Group, Inc. ................................ 768,200
5,300 Golden West Financial Corp. ................................ 563,456
5,100 Hartford Financial Services Group, Inc. .................... 583,313
3,200 J.P. Morgan & Co., Inc. .................................... 374,800
661 M & T Bank Corp. ........................................... 366,194
11,200 Merrill Lynch & Co., Inc. .................................. 1,033,200
9,200 MGIC Investment Corp. ...................................... 524,975
17,150 Morgan Stanley Dean Witter & Co. ........................... 1,567,081
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<pg$pcn>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
MANAGED ASSETS TRUST
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -----------------------------------------------------------------------------------------------------
<C> <S> <C>
FINANCIAL SERVICES -- 10.7% (CONTINUED)
21,175 NationsBank Corp. .......................................... $ 1,619,888
22,900 Norwest Corp. .............................................. 855,888
5,500 PNC Bank Corp. ............................................. 295,969
10,100 Republic New York Corp. .................................... 635,669
7,900 State Street Corp. ......................................... 549,050
13,600 Summit Bancorp.............................................. 646,000
13,900 SunAmerica, Inc. ........................................... 798,381
9,800 SunTrust Banks, Inc. ....................................... 796,863
18,400 Washington Mutual, Inc. .................................... 798,675
2,900 Wells Fargo & Co. .......................................... 1,070,100
- -----------------------------------------------------------------------------------------------------
27,178,198
- -----------------------------------------------------------------------------------------------------
HEALTHCARE -- 7.8%
28,800 Abbott Laboratories......................................... 1,177,200
30,500 American Home Products Corp. ............................... 1,578,375
20,400 Bristol-Myers Squibb Co. ................................... 2,344,725
21 Crescendo Pharmaceuticals Corp. ............................ 268
20,600 Eli Lilly & Co. ............................................ 1,360,888
10,300 Guidant Corp. .............................................. 734,519
23,000 HBO & Co. .................................................. 810,750
12,750 Health Management Associates, Inc., Class A Shares.......... 426,328
30,600 HEALTHSOUTH Corp.++......................................... 816,638
20,200 Johnson & Johnson........................................... 1,489,750
10,800 Lincare Holdings, Inc. ..................................... 454,275
17,500 Merck & Co., Inc. .......................................... 2,340,625
23,650 Pfizer Inc. ................................................ 2,570,459
17,900 Schering-Plough Corp. ...................................... 1,640,088
20,400 Warner-Lambert Co. ......................................... 1,415,250
12,000 Watson Pharmaceuticals, Inc.++.............................. 560,250
- -----------------------------------------------------------------------------------------------------
19,720,388
- -----------------------------------------------------------------------------------------------------
INSURANCE -- 0.8%
8,800 Equitable Cos., Inc. ....................................... 659,450
9,900 Everest Reinsurance Holdings, Inc. ......................... 380,531
9,450 Marsh & McLennan Cos., Inc. ................................ 571,134
3,650 Transatlantic Holdings, Inc. ............................... 282,191
- -----------------------------------------------------------------------------------------------------
1,893,306
- -----------------------------------------------------------------------------------------------------
MATERIALS AND PROCESSING -- 3.3%
5,743 Aeroquip-Vickers, Inc. ..................................... 335,248
11,100 Alumax, Inc. ............................................... 514,763
27,700 Bethlehem Steel Corp. ...................................... 344,519
15,800 Crompton & Knowles Corp. ................................... 397,963
19,400 Dayton-Hudson Corp. ........................................ 940,900
18,800 E.I. du Pont de Nemours & Co. .............................. 1,402,950
4,600 Georgia-Pacific (Timber Group).............................. 106,088
8,200 Georgia-Pacific Corp. ...................................... 483,288
11,000 Lyondell Petrochemical Co. ................................. 334,813
11,300 Masco Corp. ................................................ 683,650
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<pg$pcn>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
MANAGED ASSETS TRUST
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -----------------------------------------------------------------------------------------------------
<C> <S> <C>
MATERIALS AND PROCESSING -- 3.3% (CONTINUED)
5,600 Mercury General Corp. ...................................... $ 360,150
10,000 Monsanto Co. ............................................... 558,750
7,100 Raytheon Co. ............................................... 419,788
818 Raytheon Co., Class A Shares................................ 47,137
9,800 United Technologies Corp. .................................. 906,500
10,900 USX-US Steel Group, Inc. ................................... 359,700
3,400 Weyerhaeuser Co. ........................................... 157,038
- -----------------------------------------------------------------------------------------------------
8,353,245
- -----------------------------------------------------------------------------------------------------
MEDICAL EQUIPMENT -- 0.2%
8,700 Medtronic, Inc. ............................................ 554,625
- -----------------------------------------------------------------------------------------------------
NATURAL GAS -- 0.3%
23,200 Williams Cos., Inc. ........................................ 783,000
- -----------------------------------------------------------------------------------------------------
OIL -- 4.5%
29,100 Amoco Corp. ................................................ 1,211,288
5,800 Atlantic Richfield Co. ..................................... 453,125
8,892 BJ Services Co. ............................................ 258,424
9,900 Burlington Resources, Inc. ................................. 426,319
11,200 Chevron Corp. .............................................. 930,300
5,500 Enron Corp. ................................................ 297,344
45,900 Exxon Corp. ................................................ 3,273,244
18,600 Mobil Oil Corp. ............................................ 1,425,225
29,400 Royal Dutch Petroleum Co. ADR............................... 1,611,488
15,600 Texaco Inc. ................................................ 931,125
13,200 Unocal Corp. ............................................... 471,900
- -----------------------------------------------------------------------------------------------------
11,289,782
- -----------------------------------------------------------------------------------------------------
PRODUCER DURABLES -- 4.1%
9,700 Allied Signal Inc. ......................................... 430,437
16,970 Boeing Co. ................................................. 756,226
6,900 Caterpillar Inc. ........................................... 364,837
10,600 Deere & Co. ................................................ 560,475
4,200 Dow Chemical Corp. ......................................... 406,087
7,600 Emerson Electric Co. ....................................... 458,850
14,200 Entergy Corp. .............................................. 408,250
52,600 General Electric Co. ....................................... 4,786,600
9,200 Illinois Tool Works, Inc. .................................. 613,525
5,100 International Paper Co. .................................... 219,300
17,000 Office Depot Inc.++......................................... 536,562
11,500 Pitney Bowes, Inc. ......................................... 553,437
11,500 20th Century Industries..................................... 329,906
- -----------------------------------------------------------------------------------------------------
10,424,492
- -----------------------------------------------------------------------------------------------------
RETAIL -- 0.3%
4,700 J.C. Penney Co., Inc. ...................................... 339,869
11,200 Kroger Co. ................................................. 480,200
- -----------------------------------------------------------------------------------------------------
820,069
- -----------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<pg$pcn>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
MANAGED ASSETS TRUST
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -----------------------------------------------------------------------------------------------------
<C> <S> <C>
RETAIL-FOOD CHAINS -- 0.3%
16,173 Safeway Inc. ............................................... $ 658,039
- -----------------------------------------------------------------------------------------------------
RETAIL-SPECIALTY -- 0.3%
22,200 General Nutrition Cos., Inc., Class A Shares++.............. 692,362
- -----------------------------------------------------------------------------------------------------
TECHNOLOGY -- 10.3%
12,900 Berg Electronics Corp.++.................................... 252,356
24,550 Cisco Systems Inc. ......................................... 2,260,902
37,484 Compaq Computer Corp. ...................................... 1,063,608
6,062 Computer Associates International Inc. ..................... 336,820
6,900 Compuware Corp.++........................................... 352,547
12,300 Dell Computer Corp. ........................................ 1,141,209
21,400 Edison International........................................ 632,637
19,500 EMC Corp. .................................................. 873,844
13,800 Hewlett-Packard Co. ........................................ 826,275
29,800 Intel Corp. ................................................ 2,207,994
21,100 International Business Machines Corp. ...................... 2,422,544
6,900 Intuit Inc. ................................................ 422,841
29,538 Lucent Technologies Inc. ................................... 2,457,192
12,800 Meredith Corp. ............................................. 600,800
46,700 Microsoft Corp. ............................................ 5,062,572
16,800 Oracle Corp. ............................................... 412,125
4,800 PacifiCorp.................................................. 108,600
13,100 Sun Microsystems Inc. ...................................... 569,441
13,800 Symbol Technologies, Inc. .................................. 520,950
23,700 Sysco Corp. ................................................ 607,312
8,000 Tellabs, Inc. .............................................. 572,750
6,900 Texas Instruments, Inc. .................................... 402,356
19,600 Tyco International Ltd. .................................... 1,234,800
5,800 Xerox Corp. ................................................ 589,425
- -----------------------------------------------------------------------------------------------------
25,931,900
- -----------------------------------------------------------------------------------------------------
TEXTILES -- 0.2%
15,900 Fruit of The Loom, Inc., Class A Shares..................... 527,681
- -----------------------------------------------------------------------------------------------------
TRANSPORTATION -- 2.8%
10,040 AMR Corp.++................................................. 835,830
11,900 Chrysler Corp. ............................................. 670,862
10,400 Continental Airlines, Inc., Class B Shares++................ 633,100
9,000 CSX Corp. .................................................. 409,500
4,400 Delta Air Lines, Inc. ...................................... 568,700
30,300 Ford Motor Co. ............................................. 1,787,700
13,400 General Motors Corp. ....................................... 895,287
24,800 Navistar International Corp.++.............................. 716,100
3,700 Union Pacific Corp. ........................................ 163,262
6,200 US Airways Group, Inc. ..................................... 491,350
- -----------------------------------------------------------------------------------------------------
7,171,691
- -----------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<pg$pcn>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
MANAGED ASSETS TRUST
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -----------------------------------------------------------------------------------------------------
<C> <S> <C>
UTILITIES -- 6.4%
9,000 AirTouch Communications, Inc., Series A..................... $ 525,938
26,900 American Telephone & Telegraph Corp.++...................... 1,536,662
19,600 Ameritech Corp. ............................................ 879,550
27,148 Bell Atlantic Corp. ........................................ 1,238,627
17,700 Bellsouth Corp. ............................................ 1,188,112
8,900 Chancellor Media Corp. ..................................... 441,941
9,300 Clear Channel Communications Inc. .......................... 1,014,862
6,600 Columbia Energy Group....................................... 367,125
9,100 FPL Group, Inc. ............................................ 573,300
17,000 GTE Corp. .................................................. 945,625
4,600 Houston Industries Inc. .................................... 142,025
11,800 MCI Communications Corp. ................................... 685,506
10,400 MediaOne Group Inc. ........................................ 456,950
8,800 Northern Telecom Ltd. ...................................... 499,400
34,154 SBC Communications, Inc. ................................... 1,366,160
8,100 Sonat Inc. ................................................. 312,863
11,800 Southern Co. ............................................... 326,713
7,701 Sprint Corp. ............................................... 542,921
8,800 Tele-Communications, Inc., Class A Shares++................. 337,975
16,600 Texas Utilities Co. ........................................ 690,975
8,384 U. S. West, Inc. ........................................... 394,049
6,000 Viacom Inc., Class B Shares................................. 349,500
29,100 WorldCom, Inc. ............................................. 1,409,531
- -----------------------------------------------------------------------------------------------------
16,226,310
- -----------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK (Cost -- $108,422,723)................... 167,789,215
- -----------------------------------------------------------------------------------------------------
PREFERRED STOCK -- 1.9%
- -----------------------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 1.0%
6,000 Equity Office Properties.................................... 270,750
18,564 Equity Residential Properties, 7.250%....................... 457,139
4,000 Excel Realty Trust Inc., 2.125%............................. 118,000
2,000 Finova Finance, 5.500%...................................... 157,000
12,000 General Growth Properties 7.250%............................ 303,000
8,000 Merry Land & Investment, Series C, $12.50................... 209,500
8,000 National Australia Bank, 7.875%............................. 229,500
6,000 Newell Financial Trust, 5.250%.............................. 348,750
4,000 Reckson Associates Realty, 7.625%........................... 95,000
5,000 Tosco Financial Trust, 5.750%............................... 280,000
- -----------------------------------------------------------------------------------------------------
2,468,639
- -----------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<pg$pcn>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
MANAGED ASSETS TRUST
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
INDUSTRIALS -- 0.9%
4,000 Amcor Ltd., 7.250%.......................................... $ 194,250
10,000 Calenergy Capital II, 6.250%................................ 470,000
12,000 International Paper, 5.250%................................. 588,000
10,990 News Corp. Ltd., 5.000%..................................... 949,261
4,000 Rouse Co., Series B, $3.00.................................. 199,000
- -----------------------------------------------------------------------------------------------------
2,400,511
- -----------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCK (Cost -- $4,738,342).................. 4,869,150
- -----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
- -----------------------------------------------------------------------------------------------------
CONVERTIBLE CORPORATE BONDS -- 2.3%
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCIAL SERVICES -- 0.1%
$ 300,000 Security Capital US Real Estate Inc., 2.000% due 5/22/03+... 252,937
- -----------------------------------------------------------------------------------------------------
HEALTHCARE -- 0.2%
300,000 Genzyme Corp., 5.250% due 6/1/05+........................... 293,250
200,000 Rite Aid Corp., 5.250% due 9/15/02.......................... 245,750
- -----------------------------------------------------------------------------------------------------
539,000
- -----------------------------------------------------------------------------------------------------
INDUSTRIAL -- 1.4%
380,000 Alza Corp., zero coupon due 7/14/14......................... 223,250
262,000 Athena Neurosciences Inc., 4.750% due 11/15/04.............. 304,575
300,000 GVC Corp. Ltd., zero coupon due 5/21/02+.................... 319,500
300,000 Inco Ltd., 7.750% due 3/15/16............................... 288,750
300,000 Indian Petrochemicals, 2.500% due 3/11/02+.................. 294,000
1,000,000 Marriott International, zero coupon due 3/25/11............. 661,250
100,000 Omnicom Group, 4.250% due 1/3/07............................ 167,000
200,000 Omnicom Inc., 2.250% due 1/6/13............................. 244,750
500,000 Scholastic Corp., 5.000% due 8/15/05........................ 451,875
200,000 Taiwan Semiconductor, zero coupon due 7/3/02+............... 221,500
200,000 Telefonica Europa, 2.000% due 7/15/02....................... 302,000
- -----------------------------------------------------------------------------------------------------
3,478,450
- -----------------------------------------------------------------------------------------------------
MISCELLANEOUS -- 0.1%
200,000 Interpublic Group, 1.800% due 9/16/04....................... 188,000
- -----------------------------------------------------------------------------------------------------
TECHNOLOGY -- 0.3%
600,000 Ingram Micro, Inc., zero coupon due 6/9/18+................. 216,750
300,000 Interim Services Inc., 4.500% due 6/1/05.................... 316,875
238,000 STMicroelectronics N.V., zero coupon due 6/10/08............ 204,383
100,000 Thermo Instrument Systems, 4.000% due 1/15/05............... 99,500
- -----------------------------------------------------------------------------------------------------
837,508
- -----------------------------------------------------------------------------------------------------
UTILITIES -- ELECTRIC -- 0.2%
600,000 Potomac Electric Power Co., 5.000% due 9/1/02............... 582,750
- -----------------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE CORPORATE BONDS (Cost -- $5,390,131)...... 5,878,645
- -----------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<pg$pcn>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
MANAGED ASSETS TRUST
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- -----------------------------------------------------------------------------------------------------
CORPORATE BONDS -- 10.3%
- -----------------------------------------------------------------------------------------------------
<C> <S> <C>
FINANCIAL SERVICES -- 2.2%
$ 500,000 Great Western Financial, 6.375% due 7/1/00.................. $ 503,125
5,000,000 Nationwide Health, 6.900% due 10/1/37....................... 5,181,250
- -----------------------------------------------------------------------------------------------------
5,684,375
- -----------------------------------------------------------------------------------------------------
INDUSTRIAL -- 4.5%
2,000,000 Becton Dickinson, 8.800% due 3/1/01......................... 2,135,000
2,000,000 Cox Communications Inc., 6.875% due 6/15/05................. 2,085,000
2,000,000 Raytheon Co., 6.550% due 3/15/10............................ 2,010,000
5,000,000 Xerox Corp., 6.250% due 11/15/26............................ 5,118,750
- -----------------------------------------------------------------------------------------------------
11,348,750
- -----------------------------------------------------------------------------------------------------
TELEPHONE -- 2.0%
5,000,000 Bellsouth Capital Funding, 6.040% due 11/15/26.............. 5,075,000
- -----------------------------------------------------------------------------------------------------
TRANSPORTATION -- 1.6%
3,000,000 CSX, 6.950% due 5/1/27...................................... 3,090,000
836,618 Wilmington Trust, 9.250% due 1/2/07+........................ 847,544
- -----------------------------------------------------------------------------------------------------
3,937,544
- -----------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS (Cost -- $25,167,714)................. 26,045,669
- -----------------------------------------------------------------------------------------------------
FOREIGN BONDS -- 2.0%
- -----------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT BONDS -- 0.8%
2,000,000 Canada-Global Bond, 6.375% due 7/21/05...................... 2,068,750
- -----------------------------------------------------------------------------------------------------
INDUSTRIAL -- 1.2%
3,000,000 IBM International, 6.250% due 10/10/00...................... 3,023,667
- -----------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS (Cost -- $4,943,266).................... 5,092,417
- -----------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECTOR -- 15.0%
5,000,000 U.S. Physical Callable Corpus, zero coupon due 2/15/04...... 3,689,400
175,000 U.S. Treasury Bill, 5.010% due 9/17/98++.................... 173,100
11,200,000 U.S. Treasury Note, 5.750% due 4/30/03...................... 11,306,736
3,000,000 U.S. Treasury Note, 7.875% due 11/15/04++................... 3,369,750
2,000,000 U.S. Treasury Note, 6.500% due 8/15/05...................... 2,110,340
3,000,000 U.S. Treasury Note, 6.125% due 8/15/07...................... 3,121,920
4,000,000 U.S. Treasury Bond, 6.125% due 11/15/27..................... 4,288,520
244,793 FHLMC, 8.500% due 9/1/02.................................... 252,900
4,014,232 FHLMC, 8.000% due 9/1/04.................................... 4,144,694
45,522 FNMA, 8.500% due 3/1/05..................................... 47,470
79,761 FNMA, 8.500% due 3/1/05..................................... 83,176
3,387,433 FNMA Dwarf, 6.000% due 1/1/13............................... 3,353,559
991,295 FNMA, 6.500% due 12/1/27.................................... 987,578
155,474 GNMA, 9.000% due 12/15/16@.................................. 166,502
164,544 GNMA, 9.000% due 11/15/19@.................................. 176,215
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<pg$pcn>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
MANAGED ASSETS TRUST
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- -----------------------------------------------------------------------------------------------------
<C> <S> <C>
$ 278,021 GNMA, 9.500% due 1/15/20@................................... $ 300,435
102,855 GNMA, 9.500% due 3/15/20@................................... 111,147
191,005 GNMA, 7.500% due 5/15/23@................................... 196,376
- -----------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECTOR (Cost -- $37,224,915).......... 37,879,818
- -----------------------------------------------------------------------------------------------------
SUB-TOTAL INVESTMENTS (Cost -- $185,887,091)................ 247,554,914
- -----------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 2.1%
5,305,000 Citibank, 5.900% due 7/1/98; Proceeds at
maturity -- $5,305,869; (Fully collateralized by U.S.
Treasury Notes, 5.375% due 6/30/03; Market
value -- $5,412,800) (Cost -- $5,305,000)................... 5,305,000
- -----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $191,192,091*)........... $252,859,914
- -----------------------------------------------------------------------------------------------------
</TABLE>
++ Non-income producing security.
+ Security is exempt from registration under rule 144A of the Securities Act of
1933. This security may be sold in transactions that are exempt from
registration, normally to qualified institutional buyers.
++ Security is segregated by the Custodian for futures contract commitments
and/or for securities traded on a "to-be-announced" basis.
@ Date shown represents the last in range of maturity dates of mortgage
certificates owned.
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
17
<pg$pcn>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
HIGH YIELD BOND TRUST
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
- ---------------------------------------------------------------------------------------------------
CORPORATE BONDS AND NOTES -- 70.9%
- ---------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
AIRLINES -- 1.8%
$ 474,000 B- Atlas Air Inc., Sr. Notes, 10.750% due 8/1/05............... $ 502,440
- ---------------------------------------------------------------------------------------------------
BROADCASTING, CABLE AND TV -- 1.5%
400,000 B- Paxson Communications, Sr. Sub Notes, 11.625% due
10/01/02.................................................. 431,000
- ---------------------------------------------------------------------------------------------------
CASINOS -- 1.6%
400,000 BB Grand Casinos, 1st Mortgage Notes, 10.125% due 12/1/03...... 437,000
- ---------------------------------------------------------------------------------------------------
CHEMICALS -- 0.6%
155,000 B Polymer Group Inc., Company Guaranty, 9.000% due 7/1/07..... 158,100
- ---------------------------------------------------------------------------------------------------
CONSTRUCTION SERVICES -- 3.1%
350,000 B+ Beazer Homes USA, Company Guaranty, 8.875% due 4/1/08....... 341,250
350,000 BB+ Greystone Homes Inc., Sr. Notes, 10.750% due 3/1/04......... 377,125
150,000 B- Kevco Inc., Company Guaranty, 10.375% due 12/1/07........... 155,250
- ---------------------------------------------------------------------------------------------------
873,625
- ---------------------------------------------------------------------------------------------------
ELECTRONICS/COMPUTERS -- 0.7%
160,000 BB- Unisys Corp., Sr. Notes, 12.000% due 4/15/03................ 181,800
- ---------------------------------------------------------------------------------------------------
ENERGY -- 0.8%
240,000 B- Belden & Blake, Company Guaranty, 9.875% due 6/15/07........ 235,800
- ---------------------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 1.7%
150,000 B- B.F. Saul Real Estate Investment Trust, Sr. Notes, 9.750%
due 4/1/08................................................ 148,500
100,000 B- Diamond Holdings PLC, Company Guaranty, 9.125% due
2/1/08+................................................... 104,250
250,000 B Pacific & Atlantic Holdings, Notes, 11.500% due 5/30/08+.... 235,625
- ---------------------------------------------------------------------------------------------------
488,375
- ---------------------------------------------------------------------------------------------------
FOOD AND DRUG -- 5.4%
580,000 B AFC Enterprises Inc., Sr. Sub. Notes, 10.250% due 5/15/07... 617,700
260,000 B Archibald Candy Corp., Company Guaranty, 10.250% due
7/1/04.................................................... 276,900
240,000 B- Duane Reade Inc., Sr. Sub. Notes, 9.250% due 2/15/08........ 244,800
236,896 B FRD Acquisition, Senior Notes, 12.500% due 7/15/04.......... 260,602
100,000 B- Windy Hill Pet Food Co., Sr. Sub Notes, 9.750% due
5/15/07................................................... 106,000
- ---------------------------------------------------------------------------------------------------
1,506,002
- ---------------------------------------------------------------------------------------------------
HEALTHCARE -- 0.6%
160,000 B+ Physician Sales & Services, Company Guaranty, 8.500% due
10/1/07................................................... 164,800
- ---------------------------------------------------------------------------------------------------
INDUSTRIALS -- 10.2%
300,000 B- Advance Holding Corp., Debentures, step bond to yield
12.818% due 4/15/09+...................................... 178,500
290,000 B- Advance Stores Co., Sr. Sub Notes, 10.250% due 4/15/08+..... 301,238
310,000 B+ Avondale Mills Inc., Company Guaranty, 10.250% due 5/1/06... 333,250
400,000 B+ Diamond Triumph Auto, Sr. Notes, 9.250% due 4/1/08+......... 408,000
260,000 NR Elgar Holdings Inc., Sr. Notes, 9.875% due 2/1/08+.......... 241,150
250,000 B Grove Holdings LLC, Debentures, step bond to yield 11.838%
due 5/1/09................................................ 142,500
240,000 B- MTL Inc., Sr. Sub. Notes, 10.000% due 6/15/06+.............. 239,400
500,000 B- Numatics Inc., Sr Sub Notes, 9.625% due 4/1/08+............. 507,500
180,000 B+ TBS Shipping International Ltd., 1st Mortgage, 10.000% due
5/1/05+................................................... 164,700
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<pg$pcn>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
HIGH YIELD BOND TRUST
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
- ---------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
INDUSTRIALS -- 10.2% (CONTINUED)
$ 150,000 B- Transwestern Publishing, Sr. Sub. Notes, 9.625% due
11/15/07.................................................. $ 153,750
<C> <S> <C> <C>
180,000 B- Unicco Service, Company Guaranty, Series B, 9.875% due
10/15/07.................................................. 182,250
- ---------------------------------------------------------------------------------------------------
2,852,238
- ---------------------------------------------------------------------------------------------------
MANUFACTURING -- 3.0%
193,000 B+ French Fragrance Inc., Sr. Notes, 10.375% due 5/15/07....... 206,510
305,000 B- Reliant Building Product, Sr. Sub. Notes, 10.875% due
5/1/04.................................................... 307,288
250,000 B- Roller Bearing Co. Inc., Company Guaranty, 9.625% due
6/15/07................................................... 254,375
50,000 B- Sullivan Graphics Inc., Sr. Sub Notes, 12.750% due 8/1/05... 52,938
- ---------------------------------------------------------------------------------------------------
821,111
- ---------------------------------------------------------------------------------------------------
MEDIA/ENTERTAINMENT -- 7.5%
310,000 B Affinity Group, Sr. Sub. Notes, 11.500% due 10/15/03........ 327,438
500,000 B Jacor Communications Corp., Company Guaranty, 9.750% due
12/15/06.................................................. 546,250
90,000 B- Pegasus Communications Corp., Sr. Notes, 9.625% 10/15/05.... 92,925
400,000 B- Pegasus Media & Communication Inc., Notes, 12.500% due
7/1/05.................................................... 453,000
250,000 B- Plitt Theaters Inc., Sr. Sub. Notes, 10.875 6/15/04......... 273,438
150,000 B+ Telewest Communications PLC, Debentures, step bond to yield
10.515% due 10/1/07+...................................... 124,875
445,000 B United International Holdings Inc., Sr. Discount Notes, step
bond to yield 10.750% due 2/15/08......................... 274,788
- ---------------------------------------------------------------------------------------------------
2,092,714
- ---------------------------------------------------------------------------------------------------
MEDICAL PRODUCTS -- 1.6%
420,000 B- Mediq Inc., Sr. Sub Notes, 11.000% due 6/1/08+.............. 432,600
- ---------------------------------------------------------------------------------------------------
METALS/MINING -- 2.7%
153,000 B Continental Global Group Corp., Senior Notes, 11.000% due
4/1/07.................................................... 161,033
300,000 BB Great Central Mines Ltd, Sr. Notes, 8.875% due 4/1/08+...... 297,000
WHX Corp., Sr. Notes:
180,000 NR 10.500% due 4/15/05......................................... 183,600
110,000 B 10.500% due 4/15/05+........................................ 112,200
- ---------------------------------------------------------------------------------------------------
753,833
- ---------------------------------------------------------------------------------------------------
OIL DRILLING AND SERVICES -- 1.5%
400,000 NR Parker Drilling Co., Sr. Notes, 9.750% due 11/15/06......... 410,000
- ---------------------------------------------------------------------------------------------------
PAPER -- 1.5%
400,000 B Mail-Well Corp., Sr Sub Notes, 10.500% due 2/15/04.......... 429,500
- ---------------------------------------------------------------------------------------------------
RECREATIONAL ACTIVITIES -- 2.8%
357,000 B- Ballys Total Fitness, Sr. Sub Notes, 9.875% due 10/15/07.... 368,603
430,000 CCC+ SFX Entertainment Inc., Sr. Sub. Notes, 9.125% due
2/1/08+................................................... 423,550
- ---------------------------------------------------------------------------------------------------
792,153
- ---------------------------------------------------------------------------------------------------
RESTAURANTS -- 1.5%
400,000 B Friendly Ice Cream Corp., Company Guaranty, 10.500% due
12/1/07................................................... 423,000
- ---------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<pg$pcn>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
HIGH YIELD BOND TRUST
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
===================================================================================================
<S> <C> <C> <C>
RETAIL -- 5.4%
$ 520,000 NR Galey & Lord Inc., Company Guaranty, 9.125% due 3/1/08...... $ 504,400
500,000 BB KMart Corp., Notes, 7.900% due 12/14/00..................... 500,625
490,000 BB- Speciality Retailers Inc., Company Guaranty, 8.500% due
7/15/05................................................... 505,925
- ---------------------------------------------------------------------------------------------------
1,510,950
- ---------------------------------------------------------------------------------------------------
SCHOOLS -- 2.3%
640,000 B- La Petite Academy, Sr. Notes, 10.000% due 5/15/08+.......... 648,000
- ---------------------------------------------------------------------------------------------------
SERVICES -- 3.0%
260,000 CCC+ Florists Transworld Delivery Inc., Sr. Notes, 14.000% due
12/15/01.................................................. 285,350
230,000 B- Production Resource Group LLP, Sr. Sub. Notes, 11.500% due
1/15/08+.................................................. 223,100
185,000 B- Richmont Marketing Specialist, Sr. Sub Notes, 10.125% due
12/15/07+................................................. 188,931
120,000 B- Williams Scotsman Inc., Company Guaranty, 9.875% due
6/1/07.................................................... 125,400
- ---------------------------------------------------------------------------------------------------
822,781
- ---------------------------------------------------------------------------------------------------
TECHNOLOGY -- 1.7%
220,000 B- Fisher Scientific International Inc., Sr. Sub Notes, 9.000%
due 2/1/08................................................ 218,900
250,000 B- PSINET Inc., Sr. Notes, 10.000% due 2/15/05................. 256,250
- ---------------------------------------------------------------------------------------------------
475,150
- ---------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 4.6%
E.Spire Communication Inc.:
100,000 NR Senior Notes, 13.750% due 7/15/07........................... 114,750
125,000 NR Sr. Discount Notes, step bond to yield 11.632% due
11/1/05................................................... 103,750
400,000 B+ Jordan Telecomm Products, Sr. Discount Notes, step bond to
yield 10.629% due 8/1/07.................................. 332,000
535,000 B Level 3 Communications, Sr. Notes, 9.125% due 5/1/08........ 521,625
200,000 B- T/SF Communications Corp., Company Guaranty, 10.375% due
11/1/07................................................... 205,000
- ---------------------------------------------------------------------------------------------------
1,277,125
- ---------------------------------------------------------------------------------------------------
TEXTILES -- 1.5%
415,000 B+ Delta Mills Inc., Company Guaranty, 9.625% due 9/1/07+...... 409,293
- ---------------------------------------------------------------------------------------------------
TRANSPORTATION -- 0.8%
220,000 B Atlantic Express Transportation Corp., Company Guaranty,
10.750% due 2/1/04........................................ 234,850
- ---------------------------------------------------------------------------------------------------
UTILITIES -- 1.5%
417,000 B- International Utility, Sr. Sub Notes, 10.750% due 2/1/08+... 427,944
- ---------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES (Cost -- $19,319,416)....... 19,792,184
===================================================================================================
</TABLE>
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
===================================================================================================
STOCK -- 2.2%
===================================================================================================
<S> <C> <C> <C>
BROADCASTING, CABLE & TV -- 0.3%
740 Paxson Communications Corp., Preferred, Payment-in-kind,
Exchangeable 12.500% due 10/31/06......................... 78,070
- --------------------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 1.3%
4,500 Eagle-Picher Holdings, Preferred, 11.750% due 3/1/08+....... 262,125
850 SFX Broadcasting Inc., Preferred, Payment-in-kind, 12.625%
due 10/31/06.............................................. 98,706
- --------------------------------------------------------------------------------------------------
360,831
- --------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<pg$pcn>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
HIGH YIELD BOND TRUST
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES -- 0.6%
3,100 Niagra Mohawk Power......................................... $ 46,306
1,140 International Utility Structures @.......................... 124,545
- --------------------------------------------------------------------------------------------------
170,851
- --------------------------------------------------------------------------------------------------
TOTAL STOCK (Cost -- $587,662).............................. 609,752
- --------------------------------------------------------------------------------------------------
WARRANTS -- 0.2%
- --------------------------------------------------------------------------------------------------
MANUFACTURING -- 0.1%
1,600 Terex Corp., Appreciation Rights, Expire 5/15/02............ 35,200
- --------------------------------------------------------------------------------------------------
METAL PRODUCTS -- 0.1%
2,000 USN Corp., Expire 8/15/04................................... 24,000
- --------------------------------------------------------------------------------------------------
STEEL -- 0.0%
500 Gulf States Steel Inc., Expire 4/15/03...................... 25
- --------------------------------------------------------------------------------------------------
TOTAL WARRANTS (Cost -- $17)................................ 59,225
- --------------------------------------------------------------------------------------------------
SUB-TOTAL INVESTMENTS (Cost -- $19,907,095)................. 20,461,161
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENTS -- 26.7%
$6,448,000 Chase Securities, 5.700% due 7/1/98; Proceeds at
maturity -- $6,449,019 (Fully collateralized by U.S.
Treasury Notes, 5.500% due 2/28/03; Market
value -- $6,580,219)........................................ 6,448,000
1,000,000 Citibank, 5.900% due 7/1/98; Proceeds at
maturity -- $1,000,162 (Fully collateralized by U.S.
Treasury Notes, 5.375% due 2/15/01; Market
value -- $1,021,331)........................................ 1,000,000
- --------------------------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS (Cost -- $7,448,000)............ 7,448,000
- --------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $27,355,095**)........... $27,909,161
- --------------------------------------------------------------------------------------------------
</TABLE>
+ Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
@ Security issued with attached warrants.
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 22 for definition of bond ratings.
SUMMARY OF BONDS BY COMBINED RATINGS
<TABLE>
<CAPTION>
STANDARD & % OF TOTAL CORPORATE
MOODY'S AND/OR POOR'S BONDS & NOTES
- -------------------------------------------------
<S> <C> <C>
B B 77.0%
Ba BB 11.0
Caa CCC 4.0
NR NR 8.0
- -------------------------------------------------
100.0%
- -------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<pg$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 -- Bonds rated "AAA" has the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay
principal is extremely strong.
AA -- Bonds 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 -- Bonds 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 -- 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 for bonds in
higher rated categories.
BB, B -- Bonds rated "BB" and "B" are regarded, on balance, as
and CCC 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 -- Bonds 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 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 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 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 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 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 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 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 rated "Ca" represent obligations which are speculative
in a high degree. Such issues are often in default or have
other marked shortcomings.
C -- Bonds 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 (UNAUDITED) (CONTINUED) JUNE 30, 1998
CAPITAL APPRECIATION FUND
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ----------------------------------------------------------------------------------------
COMMON STOCK -- 89.1%
- ----------------------------------------------------------------------------------------
<C> <S> <C>
AIRCRAFT AND AEROSPACE -- 1.2%
99,700 Textron Inc. ............................................... $ 7,147,244
- ----------------------------------------------------------------------------------------
AIRLINES -- 0.1%
11,715 UAL Corp.++................................................. 913,770
- ----------------------------------------------------------------------------------------
BANKING -- 4.2%
83,000 BankAmerica Corp. .......................................... 7,174,313
57,800 Bank of New York............................................ 3,507,737
83,295 Citicorp.................................................... 12,431,779
42,825 Mercantile Bancorp, Inc. ................................... 2,157,309
- ----------------------------------------------------------------------------------------
25,271,138
- ----------------------------------------------------------------------------------------
BEVERAGE -- 6.2%
193,250 Coca-Cola Co. .............................................. 16,522,875
526,100 Coca-Cola Enterprises....................................... 20,649,425
- ----------------------------------------------------------------------------------------
37,172,300
- ----------------------------------------------------------------------------------------
CHEMICALS -- 4.8%
175,575 Cytec Industries Inc.++..................................... 7,769,194
368,745 Monsanto Co. ............................................... 20,603,627
29,210 Solutia Inc. ............................................... 837,962
- ----------------------------------------------------------------------------------------
29,210,783
- ----------------------------------------------------------------------------------------
COMPUTERS -- 6.2%
402,860 Dell Computer Corp.++....................................... 37,390,444
- ----------------------------------------------------------------------------------------
CONSUMER NON-DURABLES -- 4.7%
410,630 McDonald's Corp. ........................................... 28,333,470
- ----------------------------------------------------------------------------------------
COMMUNICATIONS -- 0.9%
150,000 Qwest Communications International, Inc.++.................. 5,231,250
- ----------------------------------------------------------------------------------------
DIVERSIFIED OPERATIONS -- 7.2%
100,000 CBS Corp. .................................................. 3,175,000
252,450 General Electric Co. ....................................... 22,972,950
204,685 Time Warner Inc. ........................................... 17,487,775
- ----------------------------------------------------------------------------------------
43,635,725
- ----------------------------------------------------------------------------------------
DRUGS AND HEALTHCARE -- 13.0%
296,950 Eli Lilly & Co. ............................................ 19,617,259
18,070 MedImmune Inc.++............................................ 1,127,116
253,225 Pfizer, Inc. ............................................... 27,522,392
430,125 Warner-Lambert Co. ......................................... 29,839,922
- ----------------------------------------------------------------------------------------
78,106,689
- ----------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<pg$pcn>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
CAPITAL APPRECIATION FUND
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ----------------------------------------------------------------------------------------
<C> <S> <C>
ELECTRONICS -- 2.6%
11,000 Sony Corp., Sponsored ADR................................... $ 946,688
251,950 Texas Instruments Inc. ..................................... 14,691,834
- ----------------------------------------------------------------------------------------
15,638,522
- ----------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 9.2%
226,425 Charles Schwab Corp. ....................................... 7,358,812
247,930 Fannie Mae.................................................. 15,061,748
179,325 Freddie Mac................................................. 8,439,483
120,905 Merrill Lynch & Co., Inc. .................................. 11,153,486
150,300 Morgan Stanley Dean Witter & Co. ........................... 13,733,662
- ----------------------------------------------------------------------------------------
55,747,191
- ----------------------------------------------------------------------------------------
MATERIALS AND PROCESSING -- 2.0%
277,400 Delta & Pine Land Co. ...................................... 12,344,300
- ----------------------------------------------------------------------------------------
RETAIL -- 3.1%
156,880 Costco Cos., Inc. .......................................... 9,893,245
209,250 Fred Meyer, Inc.++.......................................... 8,893,125
- ----------------------------------------------------------------------------------------
18,786,370
- ----------------------------------------------------------------------------------------
SOFTWARE -- 15.3%
236,300 America Online, Inc. ....................................... 25,047,800
275,190 Cisco Systems, Inc.++....................................... 25,334,679
67,380 Intuit Inc.++............................................... 4,127,025
158,650 J.D. Edwards & Co.++........................................ 6,812,034
284,700 Microsoft Corp.++........................................... 30,854,363
- ----------------------------------------------------------------------------------------
92,175,901
- ----------------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 8.4%
200,000 CIENA Corp.++............................................... 13,925,000
334,650 Lucent Technologies Inc. ................................... 27,838,697
200,000 MediaOne Group Inc.++....................................... 8,787,500
- ----------------------------------------------------------------------------------------
50,551,197
- ----------------------------------------------------------------------------------------
TOTAL COMMON STOCK (Cost -- $316,298,888)................... 537,656,294
- ----------------------------------------------------------------------------------------
FOREIGN STOCK -- 4.4%
848,713 Smithkline Beecham.......................................... 10,330,299
189,000 Sony Corp. ................................................. 16,273,733
- ----------------------------------------------------------------------------------------
TOTAL FOREIGN STOCK (Cost -- $29,169,365)................... 26,604,032
- ----------------------------------------------------------------------------------------
SUB-TOTAL INVESTMENTS (Cost -- $345,468,253)................ 564,260,326
- ----------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
24
<pg$pcn>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
CAPITAL APPRECIATION FUND
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- ----------------------------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENT -- 6.5%
$38,985,000 Citibank, 5.900% due 7/1/98; Proceeds at
maturity -- $38,991,389; (Fully collateralized by US.
Treasury Notes, 5.375% due 6/30/03; Market
value -- $39,765,175) (Cost -- $38,985,000)................. $ 38,985,000
- ----------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $384,453,253*)........... $603,245,326
- ----------------------------------------------------------------------------------------
</TABLE>
++ Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
25
<pg$pcn>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FACE ANNUALIZED
AMOUNT SECURITY YIELD VALUE
- --------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
COMMERCIAL PAPER -- 100.0%
$1,000,000 American Home Products matures 8/21/98...................... 5.56% $ 992,208
1,000,000 Asset Securitization Corp. matures 7/16/98.................. 5.55 997,704
1,000,000 Associates Corp. of America matures 7/13/98................. 5.55 998,156
1,000,000 Bell Atlantic Financial Services matures 7/24/98............ 5.56 996,466
1,000,000 Campbell Soup Co. matures 7/22/98........................... 5.60 996,745
1,000,000 Corporate Asset Funding matures 7/09/98..................... 5.55 998,771
1,000,000 Eaton Corp. matures 7/13/98................................. 5.60 998,140
1,000,000 E.I. duPont De Nemours matures 7/29/98...................... 5.54 995,737
900,000 Ford Motor Credit Corp. matures 7/15/98..................... 5.76 897,988
125,000 General Electric Capital Corp. matures 7/29/98.............. 5.56 124,467
1,000,000 Goldman, Sachs L.P. matures 8/04/98......................... 5.56 994,796
1,000,000 H.J. Heinz Co. matures 7/09/98.............................. 5.52 998,782
1,000,000 J.C. Penney matures 9/14/98................................. 5.58 988,543
400,000 Marsh & Mclennan Co. matures 7/9/98......................... 5.56 399,512
1,000,000 Merrill Lynch & Co., Inc. matures 7/22/98................... 5.61 996,745
1,000,000 Motorola Inc. matures 7/1/98................................ 5.52 1,000,000
1,000,000 National Rural Utilities matures 7/17/98.................... 5.56 997,556
1,000,000 Northern State Power Co. matures 7/27/98.................... 5.62 995,956
1,000,000 Potomac Electric Power Co. matures 7/27/98.................. 5.56 996,028
1,000,000 Private Expense Funding Corp. matures 7/7/98................ 5.56 999,083
1,000,000 Progress Capital Holdings matures 7/10/98................... 5.52 998,632
1,000,000 Provodian Master Trust matures 7/8/98....................... 5.61 998,913
900,000 Prudential Funding Co. matures 7/21/98...................... 5.55 897,245
1,000,000 Sherwin Williams Co. matures 7/2/98......................... 5.56 999,847
1,000,000 Southern New England Telecom matures 7/20/98................ 5.58 997,071
1,000,000 Teco Finance Inc. matures 8/18/98........................... 5.56 992,667
1,000,000 Toys 'R' Us Inc. matures 7/20/98............................ 5.51 997,108
1,000,000 TRW Inc. matures 7/27/98.................................... 5.57 995,999
1,000,000 Xerox matures 7/16/98....................................... 5.29 997,812
- --------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $27,238,677*)............ $27,238,677
- --------------------------------------------------------------------------------------------------------------
</TABLE>
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
26
<pg$pcn>
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES (UNAUDITED) JUNE 30, 1998
<TABLE>
<CAPTION>
MANAGED HIGH YIELD CAPITAL MONEY
ASSETS BOND APPRECIATION MARKET
TRUST TRUST FUND PORTFOLIO
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS:
Investments -- Cost.............................. $185,887,091 $19,907,095 $345,468,253 $27,238,677
Repurchase agreements -- Cost.................... 5,305,000 7,448,000 38,985,000 --
- ------------------------------------------------------------------------------------------------------------
Investments, at Value............................ $247,554,914 $20,461,161 $564,260,326 $27,238,677
Repurchase agreements, at Value.................. 5,305,000 7,448,000 38,985,000 --
Cash............................................. 200,290 902 678 21,716
Dividends and interest receivable................ 1,131,103 438,218 117,779 --
Receivable for securities sold................... 9,084,779 624,164 661,257 --
Receivable from broker -- variation margin....... 25,500 -- -- --
Receivable from affiliate........................ -- 17,000 -- --
- ------------------------------------------------------------------------------------------------------------
TOTAL ASSETS..................................... 263,301,586 28,989,445 604,025,040 27,260,393
- ------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased................. 9,063,708 -- -- --
Investment advisory fees payable................. 107,772 12,661 367,153 1,539
Administration fees payable...................... 12,972 1,519 -- 536
Dividends payable................................ -- -- -- 44,988
Accrued expenses................................. 73,606 16,797 -- 1,998
- ------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES................................ 9,258,058 30,977 367,153 49,061
- ------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS................................... $254,043,528 $28,958,468 $603,657,887 $27,211,332
- ------------------------------------------------------------------------------------------------------------
NET ASSETS:
Paid-in capital.................................. $178,883,201 $29,941,083 $377,831,141 $27,211,332
Undistributed net investment income.............. 2,795,001 1,194,348 427,193 --
Accumulated net realized gain (loss) from
security transactions and futures contracts... 10,806,092 (2,731,029) 6,607,480 --
Net unrealized appreciation of investments
and futures contracts......................... 61,559,234 554,066 218,792,073 --
- ------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS................................... $254,043,528 $28,958,468 $603,657,887 $27,211,332
- ------------------------------------------------------------------------------------------------------------
SHARES OUTSTANDING................................. 13,686,204 2,978,845 10,318,436 27,211,332
- ------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, PER SHARE......................... $18.56 $9.72 $58.50 $1.00
- ------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
27
<pg$pcn>
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
MANAGED HIGH YIELD CAPITAL MONEY
ASSETS BOND APPRECIATION MARKET
TRUST TRUST FUND PORTFOLIO
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest.............................................. $ 2,336,868 $1,282,523 $ 1,173,118 $635,698
Dividends............................................. 1,218,557 20,982 1,307,959 --
- -------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME............................... 3,555,425 1,303,505 2,481,077 635,698
- -------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 3)..................... 597,471 69,695 1,848,557 36,325
Administration fees (Note 3).......................... 71,697 8,364 147,885 6,978
Shareholder communications............................ 37,920 2,760 24,795 896
Audit and legal....................................... 26,359 10,208 9,546 11,165
Custody............................................... 14,195 6,680 9,521 2,824
Shareholder and system servicing fees................. 3,092 7,888 3,718 3,773
Trustees' fees........................................ 2,888 -- 3,222 3,013
Registration fees..................................... -- -- -- 1,059
Other................................................. 8,047 3,437 6,715 1,472
- -------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES........................................ 761,669 109,032 2,053,959 67,505
- -------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME................................... 2,793,756 1,194,473 427,118 568,193
- -------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FUTURES CONTRACTS (NOTES 4 AND 6):
Realized Gain (Loss) From:
Security transactions (excluding short-term
securities*)..................................... 11,738,622 765,691 8,192,316 (470)
Futures contracts.................................. (807,590) -- -- --
- -------------------------------------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS).............................. 10,931,032 765,691 8,192,316 (470)
- -------------------------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments
and Futures Contracts:
Beginning of period................................ 46,559,403 1,143,573 96,460,219 --
End of period...................................... 61,559,234 554,066 218,792,073 --
- -------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET UNREALIZED APPRECIATION.... 14,999,831 (589,507) 122,331,854 --
- -------------------------------------------------------------------------------------------------------------
NET GAIN (LOSS) ON INVESTMENTS AND FUTURES CONTRACTS.... 25,930,863 176,184 130,524,170 (470)
- -------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS.................. $28,724,619 $1,370,657 $130,951,288 $567,723
- -------------------------------------------------------------------------------------------------------------
</TABLE>
* Except for the Money Market Portfolio where the net realized losses are only
from the sale of short-term securities.
SEE NOTES TO FINANCIAL STATEMENTS.
28
<pg$pcn>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED) FOR THE SIX MONTHS ENDED
JUNE 30, 1998
<TABLE>
<CAPTION>
MANAGED HIGH YIELD CAPITAL MONEY
ASSETS BOND APPRECIATION MARKET
TRUST TRUST FUND PORTFOLIO
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income............................ $ 2,793,756 $ 1,194,473 $ 427,118 $ 568,193
Net realized gain (loss)......................... 10,931,032 765,691 8,192,316 (470)
Increase (decrease) in net unrealized
appreciation.................................. 14,999,831 (589,507) 122,331,854 --
- -------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS........... 28,724,619 1,370,657 130,951,288 567,723
- -------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM (NOTE 2):
Net investment income............................ (6,031,063) (1,906,452) (1,757,406) (567,723)
Net realized gains............................... (11,032,713) -- (15,276,145) --
- -------------------------------------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM
DISTRIBUTIONS TO SHAREHOLDERS................. (17,063,776) (1,906,452) (17,033,551) (567,723)
- -------------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 11):
Net proceeds from sale of shares................. 7,171,092 4,356,173 68,689,580 45,413,437
Net asset value of shares issued for reinvestment
of dividends.................................. 17,063,776 1,906,452 17,033,551 546,429
Cost of shares reacquired........................ (5,722,463) (2,040,540) (3,684,198) (32,242,335)
- -------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM FUND SHARE
TRANSACTIONS.................................. 18,512,405 4,222,085 82,038,933 13,717,531
- -------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS............................. 30,173,248 3,686,290 195,956,670 13,717,531
NET ASSETS:
Beginning of period.............................. 223,870,280 25,272,178 407,701,217 13,493,801
- -------------------------------------------------------------------------------------------------------------
END OF PERIOD*................................... $254,043,528 $28,958,468 $603,657,887 $ 27,211,332
- -------------------------------------------------------------------------------------------------------------
* Includes undistributed net investment income
of:.............................................. $2,795,001 $1,194,348 $427,193 --
- -------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
29
<pg$pcn>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) FOR THE YEAR ENDED
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MANAGED HIGH YIELD CAPITAL MONEY
ASSETS BOND APPRECIATION MARKET
TRUST TRUST FUND PORTFOLIO
- -------------------------------------------------------------------------------------------------------------
<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 $1,757,481 --
- -------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
30
<pg$pcn>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
The Managed Assets Trust, High Yield Bond Trust, Capital Appreciation Fund
and Money Market Portfolio (formerly known as 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
Money Market Portfolio 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 Money Market Portfolio ("MMP"). MAT, CAF
and MMP 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
$250,000,000 of its average daily net assets. This fee is calculated daily and
paid monthly.
TAMIC has a sub-advisory agreement with The Travelers Investment Management
Company, Inc. ("TIMCO"), an indirect wholly owned subsidiary of Travelers Group
Inc. Pursuant to the sub-advisory agreement, TIMCO is responsible for the
day-to-day portfolio operations and investment decisions for MAT. As a result,
TAMIC pays TIMCO, as sub-advisor, 0.25% of the average daily net assets of MAT.
31
<pg$pcn>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (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"), 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 $234,787 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 six months ended June 30, 1998, 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................................................... $84,503,638 $19,408,755 $157,188,420
- ------------------------------------------------------------------------------------------------------
Sales....................................................... 80,330,912 22,448,922 87,468,459
- ------------------------------------------------------------------------------------------------------
</TABLE>
At June 30, 1998, 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............................... $63,102,985 $717,624 $221,767,259
Gross unrealized depreciation............................... (1,435,162) (163,558) (2,975,186)
- --------------------------------------------------------------------------------------------------------
Net unrealized appreciation................................. $61,667,823 $554,066 $218,792,073
- --------------------------------------------------------------------------------------------------------
</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).
At June 30, 1998, MAT had sold 12 financial futures contracts on the
Standard & Poor's 500 Index expiring in September 1998. The basis value of such
contracts was $3,320,411. The market value of such contracts on June 30, 1998
was $3,429,000, resulting in an unrealized loss of $108,589.
32
<pg$pcn>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
7. OPTIONS CONTRACTS
Premiums paid when put or call options are purchased by the Funds,
represent investments, which are "marked-to-market" daily. When a purchased
option expires, the Funds realize a loss in the amount of the premium paid. When
the Funds enter into closing sales transactions, the Funds realize a gain or
loss depending on whether the proceeds from the closing sales transaction are
greater or less than the premium paid for the option. When the Funds exercise a
put option, it will realize a gain or loss from the sale of the underlying
security and the proceeds from such sale will be decreased by the premium
originally paid. When the Funds exercise a call option, the cost of the security
which the Funds purchase upon exercise will be increased by the premium
originally paid.
At June 30, 1998, 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 June 30, 1998, MAT held no TBA securities.
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 (UNAUDITED) (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>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997
- --------------------------------------------------------------------------------------------------
MANAGED ASSETS TRUST
<S> <C> <C>
Shares sold................................................. 381,050 430,658
Shares issued on reinvestment............................... 921,868 364,705
Shares redeemed............................................. (299,168) (707,124)
- --------------------------------------------------------------------------------------------------
Net Increase................................................ 1,003,750 88,239
- --------------------------------------------------------------------------------------------------
HIGH YIELD BOND TRUST
Shares sold................................................. 426,825 811,252
Shares issued on reinvestment............................... 196,339 1,591
Shares redeemed............................................. (199,218) (294,426)
- --------------------------------------------------------------------------------------------------
Net Increase................................................ 423,946 518,417
- --------------------------------------------------------------------------------------------------
CAPITAL APPRECIATION FUND
Shares sold................................................. 1,297,007 3,339,655
Shares issued on reinvestment............................... 292,021 59
Shares redeemed............................................. (71,670) (642,619)
- --------------------------------------------------------------------------------------------------
Net Increase................................................ 1,517,358 2,697,095
- --------------------------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
Shares sold................................................. 45,413,437 28,240,251
Shares issued on reinvestment............................... 546,429 286,879
Shares redeemed............................................. (32,242,335) (18,576,002)
- --------------------------------------------------------------------------------------------------
Net Increase................................................ 13,717,531 9,951,128
- --------------------------------------------------------------------------------------------------
</TABLE>
34
<pg$pcn>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
For a share of beneficial interest outstanding throughout each period:
<TABLE>
<CAPTION>
MANAGED ASSETS TRUST 1998(1) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD... $17.65 $14.98 $15.50 $12.85 $14.21 $14.02
- -----------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income................ 0.20 0.48 0.46 0.49 0.46 0.51
Net realized and unrealized gain
(loss)............................ 2.05 2.70 1.50 2.83 (0.73) 0.72
- -----------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations.... 2.25 3.18 1.96 3.32 (0.27) 1.23
- -----------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM (2):
Net investment income................ (0.47) (0.12) (0.89) (0.50) (0.67) (0.85)
Net realized gains................... (0.87) (0.39) (1.59) (0.17) (0.42) (0.19)
- -----------------------------------------------------------------------------------------------------------------
Total Distributions.................... (1.34) (0.51) (2.48) (0.67) (1.09) (1.04)
- -----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD......... $18.56 $17.65 $14.98 $15.50 $12.85 $14.21
- -----------------------------------------------------------------------------------------------------------------
TOTAL RETURN........................... 12.76%++ 21.31% 13.78% 27.12% (2.24)% 9.33%
- -----------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000'S)...... $254,044 $223,870 $188,610 $171,276 $140,887 $156,767
- -----------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses (3)......................... 0.64%+ 0.63% 0.58% 0.58% 0.61% 0.56%
Net investment income................ 2.34+ 2.91 3.51 3.49 3.59 3.65
- -----------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE................ 34% 90% 108% 110% 97% 86%
- -----------------------------------------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARES PAID ON
EQUITY TRANSACTIONS (4).............. $0.06 $0.05 $0.06 -- -- --
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
HIGH YIELD BOND TRUST 1998(1) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD... $9.89 $8.49 $9.00 $8.49 $9.25 $8.91
- -----------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income................ 0.33 0.76 0.91 0.80 0.66 0.68
Net realized and unrealized gain
(loss)............................ 0.18 0.65 0.41 0.41 (0.76) 0.47
- -----------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations.... 0.51 1.41 1.32 1.21 (0.10) 1.15
- -----------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM (2):
Net investment income................ (0.68) (0.01) (1.83) (0.70) (0.66) (0.81)
- -----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD......... $9.72 $9.89 $8.49 $9.00 $8.49 $9.25
- -----------------------------------------------------------------------------------------------------------------
TOTAL RETURN........................... 5.15%++ 16.56% 16.05% 15.47% (1.26)% 14.01%
- -----------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000'S)...... $28,958 $25,272 $17,291 $12,902 $11,716 $12,765
- -----------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses (5)......................... 0.78%+ 0.84% 0.97% 1.25% 1.25% 0.99%
Net investment income................ 8.56+ 9.04 11.01 9.37 7.71 7.69
- -----------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE................ 88% 137% 84% 222% 146% 19%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the six months ended June 30, 1998 (unaudited).
(2) Distributions from realized gains include both net realized short-term and
long-term capital gains. Prior to 1996 net realized short-term capital gains
were included in distributions from net investment income.
(3) The ratio of expenses to average net assets for 1993 reflects an expense
reimbursement by The Travelers in connection with voluntary expense
limitations. Without the expense reimbursement, the ratio of expenses to
average net assets would have been 0.60% for the year ended December 31,
1993.
(4) For the fiscal years beginning after 1995, the SEC instituted new guidelines
requiring the disclosure of average commissions per share on Funds which
held more than 10% of their assets in commissionable equity securities.
(5) The ratio of expenses to average net assets reflects an expense
reimbursement by The Travelers in connection with voluntary expense
limitations. Without the expense reimbursement, the ratios of expenses to
average net assets would have been 1.28%, 1.33% and 1.31%, for the years
ended December 31, 1995, 1994 and 1993, respectively.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
35
<pg$pcn>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of beneficial interest outstanding throughout each period:
<TABLE>
<CAPTION>
CAPITAL APPRECIATION FUND 1998(1) 1997 1996 1995 1994 1993(2)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD........................... $46.32 $36.72 $33.18 $24.50 $25.87 $22.72
- -------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income............ 0.02 0.19 0.23 0.24 0.19 0.19
Net realized and unrealized gain
(loss)........................ 13.87 9.41 8.49 8.61 (1.41) 3.21
- -------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From
Operations....................... 13.89 9.60 8.72 8.85 (1.22) 3.40
- -------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM (3):
Net investment income............ (0.18) -- (0.41) (0.17) (0.15) (0.25)
Net realized gains............... (1.53) (0.00)* (4.77) -- -- --
- -------------------------------------------------------------------------------------------------------------------
Total Distributions................ (1.71) (0.00)* (5.18) (0.17) (0.15) (0.25)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD..... $58.50 $46.32 $36.72 $33.18 $24.50 $25.87
- -------------------------------------------------------------------------------------------------------------------
TOTAL RETURN....................... 29.99%++ 26.14% 28.21% 36.37% (4.76)% 15.09%
- -------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD
(000'S).......................... $603,658 $407,701 $224,132 $122,155 $78,494 $62,414
- -------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses (4)..................... 0.83%+ 0.84% 0.83% 0.85% 0.89% 0.87%
Net investment income............ 0.17+ 0.54 0.69 0.84 0.79 0.81
- -------------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE............ 19% 89% 84% 124% 106% 155%
- -------------------------------------------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE PAID
ON EQUITY TRANSACTIONS (5)....... $0.06 $0.07 $0.06 -- -- --
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO 1998(1) 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD............................. $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
- -------------------------------------------------------------------------------------------------------------------
Net investment income (4).......... 0.0203 0.049 0.0412 0.0417 0.0278 0.0214
Distributions from net investment
income.......................... (0.0203) (0.049) (0.0412) (0.0417) (0.0278) (0.0214)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD....... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
- -------------------------------------------------------------------------------------------------------------------
TOTAL RETURN......................... 2.56%++ 5.03% 4.20% 4.17% 2.78% 2.14%
- -------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000'S).... $27,211 $13,494 $3,543 $1,417 $1,203 $647
- -------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses (6)(7).................... 0.58%+ 0.57% 0.78% 1.25% 1.25% 0.94%
Net investment income.............. 4.89+ 5.03 3.72 -- -- --
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the six months ended June 30, 1998 (unaudited).
(2) Effective May 1, 1993, Janus Capital Corporation became sub-adviser for
Capital Appreciation Fund.
(3) 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.
(4) 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.
(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.
(6) The Travelers reimbursed Money Market Portfolio 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.
(7) 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 $0.01 per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
36
<pg$pcn>
THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES PORTFOLIO
U.S. Government Securities Portfolio ("Portfolio") seeks to select investments
from the point of view of an investor concerned primarily with highest credit
quality, current income and total return. The assets of the Portfolio will be
invested in direct obligations of the United States, its agencies and
instrumentalities. For the six months ended June 30, 1998, the Portfolio had a
total return of 4.95%, which was above its Lipper Analytical Services, Inc. peer
group total return average of 3.27%. (Lipper is an independent fund-tracking
organization.) As of June 30, 1998, the composition of assets was roughly 79% in
mortgage-backed securities and approximately 21% in U.S. Government securities.
During the reporting period, two distinct themes dominated bond markets: ongoing
economic turmoil in Asia and steady U.S. economic growth with low inflation.
Both of these developments have provided quite favorable conditions for bonds
and helped send U.S. interest rates to historical lows.
As you can see from the chart below, interest rates have continued to decline
during the past six months:
<TABLE>
<CAPTION>
12/31/97 6/30/98
-------- -------
<S> <C> <C>
90-Day U.S. Treasury Bill................................... 5.34% 5.09%
2-Year U.S. Treasury Note................................... 5.64 5.47
5-Year U.S. Treasury Note................................... 5.70 5.46
10-Year U.S. Treasury Bond.................................. 5.74 5.45
30-Year U.S. Treasury Bond.................................. 5.92 5.62
</TABLE>
It has been more than a year since the first signs of trouble in Asian began to
surface and, so far, no clear resolution has emerged. The U.S. dollar has
strengthened considerably in response to weakening economies in the region, and
as the crisis drags on, fears of another round of currency devaluations has
heightened. Moreover, major Asian banks could soon find themselves enveloped in
a crisis of their own as they face mounting numbers of non-performing loans.
One result of the Asian crisis has been a flight of capital to U.S. financial
markets as many investors sought out a "safe haven" from the tumult surrounding
many global markets. The manager believes that foreign investors, whose holdings
of U.S. Treasury securities have nearly doubled in the last three years, have
been attracted to Treasurys because of a strong U.S. dollar as well as the
competitive yields that they currently offer.
In addition, a robust U.S. economy has dramatically increased tax receipts,
enabling government officials to project a federal budget surplus for the first
time in years and reducing the need for federal borrowing. Issuance of U.S.
Treasury securities in 1998 is expected to be substantially less than in 1997
and auctions of 3-year U.S. Treasury notes have been eliminated all together.
This decreased supply combined with a burgeoning demand has helped sustain a
U.S. Treasury market rally, driving the yield on the benchmark 30-year U.S.
Treasury bond to new historic lows.
For its part, the Federal Reserve Board ("Fed") has chosen to remain on the
sidelines. At its meetings in March 1998 and May 1998, the Federal Open Market
Committee ("FOMC"), the Fed's policy-making panel, elected to leave short-term
interest rates unchanged. However, the FOMC did indicate a bias toward
tightening monetary policy on fears that persistent strength in the U.S. economy
would soon lead to a pick-up in inflationary pressures. The FOMC also ended its
July 1998 meeting without action but has not yet released details of its
decision.
Looking ahead, the manager views the U.S. bond market as very attractive. With
currently low interest rates and mortgage prepayments at their highest since
1993, some would argue that interest rates should not decline further. There is
evidence that suggests interest rates could drop even more. Real interest rates
(the interest rate after subtracting the effects of inflation) are approaching
4% compared to a historical norm of 2.75%. The manager anticipates that by
year's end the 30-year U.S. Treasury bond could yield as low as 5% and
short-term rates could reach 4% within a year.
Moreover, there are a number of reasons to expect a slowdown in U.S. economic
growth, therefore diminishing the threat of higher inflation. The manager
believes that the U.S. has yet to feel the full impact of the Asian crisis and
the accompanying narrowing of corporate profit margins. In addition, we do not
believe that business investment and home building can sustain their recent
energetic pace. For all of the above reasons, the manager remains very positive
on the prospects for U.S. government agency securities.
SOCIAL AWARENESS STOCK PORTFOLIO
The Social Awareness Stock Portfolio ("Portfolio") seeks long-term capital
appreciation and retention of net investment income by selecting investments,
primarily common stocks, that meet the social criteria established for the
Portfolio. The
37
<pg$pcn>
THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
Portfolio's social criteria currently excludes companies that derive a
significant portion of their revenues from the production of tobacco, tobacco
products, alcohol, or military defense related services or gambling services.
For the six months ended June 30, 1998, the Portfolio returned 18.80% and did
better than the S&P 500, which posted a total return of 17.72% for the same
period.
The second quarter of 1998 provided very mixed results in the stock market,
depending on where you looked to identify performance. The S&P 500, a
traditional measure of the market, rose 2.9%, but the Index's performance was
significantly influenced by the larger companies that dominate the Index. When
viewed on a basis that gives equal weight to all companies, the same 500 stocks
showed a decline in price of 1.3%.
For the year-to-date, the equal weight S&P 500 underperformed the size-weighted
S&P 500 by 550 basis points (about 12.1% versus roughly 17.6%) and the small-
and mid-sized companies did even worse (about 6% to approximately 9%). (A basis
point is one-one hundredth of a percent.) Approximately 60% of industry groups
fell short of the S&P 500 Index's performance during the most recent three
months of the reporting period. As a general rule, the Portfolio's manager would
have wanted to own big, growth, long bonds, retailers, computers and healthcare.
Within that environment, their Portfolio performed quite well.
For the first half, the Portfolio exceeded all of these market measures,
providing an 18.80% return, despite maintaining about 10% cash reserves. In
examining these results, the managers estimate that some 60% can be attributable
to the economic sector emphasis that they adopted in the Portfolio, with the
remaining 40% associated with their specific stock selection within those
sectors. The portfolio managers were relatively active on a transactional basis
during the first half of the year, making in excess of 70 individual trades.
After eliminating partial actions, 13 new positions were established, 23
enlarged, 7 eliminated and 5 reduced. In total, the managers were a net buyer of
about $4 million in stock. Their new purchases were broadly diversified and
included energy, consumer, insurance, technology, transportation, REITs,
restaurants, agriculture, health care and education.
At quarter end, they held a total of 82 individual stocks, with an overweighting
in consumer cyclical and transportation. The managers continue to de-emphasize
the capital goods, communication service and energy sectors. The quality grade
of their stock portfolio averages around an S&P A-, with a market beta of 0.97.
(Beta is a measure of a security's volatility relative to the rest of the
market. The S&P 500 has a beta of one. A higher beta figure indicates a security
that is more volatile than the market and a security with a beta figure less
than one is less volatile than the market.) The average market capitalization of
their stocks was $31 billion. The managers expect that their strategy during the
second half of the year will emphasize internal portfolio adjustments, rather
than any major asset allocation shift. Nonetheless, if the market were to
provide some downside volatility without significant deterioration in the
underlying fundamental investment conditions, they believe that they possess the
flexibility to increase their equity allocation by another 10%.
UTILITIES PORTFOLIO
The Utilities Portfolio ("Portfolio") seeks to provide current income by
investing in equity and debt securities of companies in the utility industries.
For the six months ended June 30, 1998, the Portfolio had a total return of
8.10%. In comparison, the Lipper Analytical Services, Inc. peer group total
return average was 7.62%. (Lipper is an independent fund-tracking organization.)
During the first half of 1998, the utility industry continued to go up with
several of the major indices reaching all-time highs. The Portfolio's positive
performance was a result of a favorable interest rates, attractive relative
valuations of the electric utility group when compared to the overall stock
market and a continuation of improving regulatory reforms within the utility
industry. The transition to a more competitive electric industry continued to
evolve with several additional companies creating long-range plans to focus on
one sector (generation or distribution) of the industry instead of the
traditional fully integrated model. This creates additional opportunities for
investors as the managers expect a less homogeneous group and variance in
performance of individual companies. The utility sector should become less
focused on income and more on total investment return.
The managers remain positive on the utility sector as a balance to a diversified
investment portfolio. They expect overall economic growth to slow in the second
half of 1998 which should provide a positive environment for utilities bonds.
Moreover, any increase in stock market volatility could shift investment capital
to more defensive sectors such as utilities. Their portfolio focus emphasizes
quality companies with a strong financial position and special situations where
management has begun to implement a strategic plan for future growth.
38
<pg$pcn>
THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
The Portfolio's asset allocation is 89% stocks, 5% bonds and 6% cash. The common
stock sector consists of 55% electric utilities, 18% natural gas and 14%
telecommunications/media. New additions included MDU Resources, Montana Power,
Peco Energy, Public Service Enterprises and National Fuel Gas. The Portfolio's
managers have sold their holdings of Central and Southwest Corporation, Long
Island Lighting and French Telecom.
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
July 26, 1998
39
<pg$pcn>
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON -- U.S. GOVERNMENT SECURITIES PORTFOLIO AS OF 6/30/98
(UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
<S> <C>
Six Months Ended 6/30/98+ 4.95%
Year Ended 6/30/98 14.60%
Five Years Ended 6/30/98 7.51%
1/24/92* through 6/30/98 8.22%
CUMULATIVE TOTAL RETURN
----------------------------------------------
1/24/92* through 6/30/98 66.30%
+ Total return is not annualized, as it may
not be representative of the total return
for the year.
* Commencement of operations
</TABLE>
This chart assumes an initial investment of $10,000 made on January
24, 1992, assuming reinvestment of dividends, through June 30,
1998. 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
Measurement Period U.S. Government Consumer
(Fiscal Year Covered) Government Bond Index Price Index
<S> <C> <C> <C>
1/24/92 $ 10000 $ 10000 $ 10000
Dec-92 10790 10723 10275
Dec-93 11813 11866 10557
Dec-94 11147 11464 10840
Dec-95 13869 13567 11115
Dec-96 14077 13943 11484
Dec-97 15846 15280 11679
Jun-98 16630 15919 11801
</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 6/30/98
(UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
<S> <C>
Six Months Ended 6/30/98 18.80%
Year Ended 6/30/98 29.65%
Five Years Ended 6/30/98 19.77%
5/1/92* through 6/30/98 17.98%
CUMULATIVE TOTAL RETURN
----------------------------------------------
5/1/92* through 6/30/98 177.31%
+ Total return is not annualized, as it may
not be representative of the total return
for the year.
* Commencement of operations
</TABLE>
This chart assumes an initial investment of $10,000 made on May 1,
1992, assuming reinvestment of dividends, through June 30, 1998.
The Standard & Poor's 500 Index is an unmanaged index composed of
500 widely held common stocks listed on the New York Stock
Exchange, American Stock Exchange and the over-the-counter market.
The Consumer Price Index is a measure of the average change in
prices over time in a fixed market basket of goods and services.
<TABLE>
<CAPTION>
Social
Awareness Standard &
Measurement Period Stock Poor's 500 Consumer
(Fiscal Year Covered) Portfolio Index Price Index
<S> <C> <C> <C>
5/1/92 $ 10000 $ 10000 $ 10000
Dec-92 10950 10673 10157
Dec-93 11777 11745 10436
Dec-94 11461 11900 10716
Dec-95 15285 14509 10988
Dec-96 18340 17838 11353
Dec-97 23343 23789 11545
Jun-98 27731 28004 11666
</TABLE>
- --------------------------------------------------------------------------------
Past performance is not predictive of future performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Average annual total returns are historical in nature and measure net investment
income and capital gain or loss from portfolio investments assuming
reinvestments of dividends. The returns do not reflect expenses associated with
the subaccount such as administrative fees, account charges and surrender
charges which, if reflected, would reduce the performance shown.
40
<pg$pcn>
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON -- UTILITIES PORTFOLIO AS OF 6/30/98 (UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
<S> <C>
Six Months Ended 6/30/98+ 8.10%
Year Ended 6/30/98 30.01%
2/4/94* through 6/30/98 16.82%
CUMULATIVE TOTAL RETURN
----------------------------------------------
2/4/94* through 6/30/98 98.25%
+ Total return is not annualized, as it may
not be representative of the total return
for the year.
* Commencement of operations
</TABLE>
This chart assumes an initial investment of $10,000 made on
February 4, 1994, assuming reinvestment of dividends, through June
30, 1998. Standard & Poor's 500 Index is an unmanaged index
composed of 500 widely held common stocks listed on the New York
Stock Exchange, American Stock Exchange and over-the-counter
market. The Consumer Price Index is a measure of the average change
in prices over time in a fixed market basket of goods and services.
<TABLE>
<CAPTION>
Standard &
Measurement Period Utilities Poor's 500 Consumer
(Fiscal Year Covered) Portfolio Index Price Index
<S> <C> <C> <C>
2/4/94 $ 10000 $ 10000 $ 10000
Dec-94 10170 10072 10205
Dec-95 13149 13852 10464
Dec-96 14638 17031 10811
Dec-97 18340 22712 10995
Jun-98 19825 26737 11110
</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.
41
<pg$pcn>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) JUNE 30, 1998
U.S. GOVERNMENT SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- --------------------------------------------------------------------------------------
<CAPTION>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS -- 92.7%
<C> <S> <C>
U.S. Treasury Bonds:
$3,500,000 8.125% due 8/15/19.......................................... $ 5,158,600
4,500,000 7.500% due 11/15/24......................................... 5,583,375
4,000,000 6.125% due 11/15/27......................................... 3,752,455
2,888,725 FHLMC Certificates, 6.500% due 12/1/27@..................... 2,886,995
FNMA Certificates:
1,984,664 6.500% due 3/1/13@.......................................... 1,997,830
2,973,885 6.500% due 12/1/27.......................................... 2,980,588
5,021,444 7.000% due 5/1/28@.......................................... 5,108,869
GNMA Certificates:
2,512,159 9.000% due 9/15/09@......................................... 2,715,468
1,017,054 8.500% due 7/15/18@......................................... 1,089,194
2,016,637 6.000% due 4/20/28.......................................... 1,971,263
3,951,324 6.500% due 4/15/28.......................................... 3,945,121
4,000,000 Tennessee Valley Authority Debenture, 6.250% due 12/15/17... 4,140,000
- --------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(Cost -- $40,186,162)....................................... 41,329,758
- --------------------------------------------------------------------------------------
<CAPTION>
REPURCHASE AGREEMENT -- 7.3%
<C> <S> <C>
3,232,000 Citibank, 5.900% due 7/1/98; Proceeds at
maturity -- $3,232,527; (Fully collateralized by U.S.
Treasury Notes, 5.500% due 5/31/2003 Market
value -- $3,285,000) (Cost -- $3,232,000)................... 3,232,000
- --------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $43,418,162*)............ $44,561,758
- --------------------------------------------------------------------------------------
</TABLE>
@ Date shown represents last in range of maturity dates of mortgage certificates
owned.
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
42
<pg$pcn>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
SOCIAL AWARENESS STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -----------------------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCK -- 88.8%
- -----------------------------------------------------------------------------------------------------
BASIC MATERIALS -- 3.6%
4,000 Air Products & Chemicals, Inc. ............................. $ 160,000
3,500 Aluminum Co. of America..................................... 230,781
15,000 Engelhard Corp. ............................................ 303,750
8,000 Praxair, Inc. .............................................. 374,500
- -----------------------------------------------------------------------------------------------------
1,069,031
- -----------------------------------------------------------------------------------------------------
CAPITAL GOODS -- 4.3%
4,500 Belden, Inc. ............................................... 137,812
5,000 Deere & Co. ................................................ 264,375
4,600 Philips Electronics N.V..................................... 391,000
4,000 Pitney Bowes, Inc. ......................................... 192,500
11,000 US Filter Corp.++........................................... 308,688
- -----------------------------------------------------------------------------------------------------
1,294,375
- -----------------------------------------------------------------------------------------------------
COMMUNICATION -- 1.9%
6,300 MCI Communications Corp. ................................... 366,187
4,000 WorldCom, Inc.++............................................ 193,750
- -----------------------------------------------------------------------------------------------------
559,937
- -----------------------------------------------------------------------------------------------------
CONSUMER CYCLICALS -- 14.6%
5,000 Black & Decker Corp. ....................................... 305,000
9,375 Dollar General Corp. ....................................... 370,898
4,350 Home Depot, Inc. ........................................... 361,322
11,000 Kaufman and Broad Home Corp. ............................... 349,250
7,000 Liz Claiborne, Inc. ........................................ 365,750
15,000 Lowe's Cos., Inc. .......................................... 608,438
8,000 May Department Stores....................................... 524,000
13,800 Staples, Inc.++............................................. 399,338
12,000 Sylvan Learning Systems, Inc.++............................. 393,000
4,000 Toys "R" Us, Inc.++......................................... 94,250
3,800 Tribune Co. ................................................ 261,488
5,800 Wal-Mart Stores, Inc. ...................................... 352,350
- -----------------------------------------------------------------------------------------------------
4,385,084
- -----------------------------------------------------------------------------------------------------
CONSUMER STAPLES -- 11.2%
9,400 American Stores Co. ........................................ 227,362
18,000 Brinker International, Inc.++............................... 346,500
4,000 Gillette Co. ............................................... 226,750
8,700 Kroger Co.++................................................ 373,012
6,800 Newell Co. ................................................. 338,725
4,800 PepsiCo, Inc. .............................................. 197,700
9,200 Rite Aid Corp. ............................................. 345,575
19,200 Sysco Corp. ................................................ 492,000
480 Tricon Global Restaurants, Inc.++........................... 15,210
4,000 Unilever N. V............................................... 315,750
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
43
<pg$pcn>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
SOCIAL AWARENESS STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -----------------------------------------------------------------------------------------------------
CONSUMER STAPLES -- 11.2% (CONTINUED)
<C> <S> <C>
1,600 Walt Disney Co. ............................................ $ 168,100
14,000 Wendy's International, Inc. ................................ 329,000
- -----------------------------------------------------------------------------------------------------
3,375,684
- -----------------------------------------------------------------------------------------------------
ENERGY -- 2.7%
3,300 Anadarko Petroleum Corp. ................................... 221,719
4,300 British Petroleum Co. PLC................................... 379,475
2,500 Western Atlas Inc.++........................................ 212,188
- -----------------------------------------------------------------------------------------------------
813,382
- -----------------------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 18.9%
4,000 Allstate Corp. ............................................. 366,250
3,500 Amercian Express Co. ....................................... 399,000
1,875 American International Group Inc. .......................... 273,750
4,000 Associates First Capital Corp. ............................. 307,500
5,400 BankBoston Corp. ........................................... 300,375
7,600 Chase Manhattan Corp. ...................................... 573,800
1,800 Citicorp.................................................... 268,650
8,000 Freddie Mac................................................. 376,500
3,000 H. F. Ahmanson & Co. ....................................... 213,000
10,000 IndyMac Mortgage Holdings, Inc. ............................ 227,500
3,500 Lincoln National Corp. ..................................... 319,813
7,962 NationsBank Corp. .......................................... 609,093
9,000 Provident Cos., Inc. ....................................... 310,500
8,000 St. Paul Co., Inc. ......................................... 336,500
6,800 State Street Corp. ......................................... 472,600
3,000 Transamerica Corp. ......................................... 345,375
- -----------------------------------------------------------------------------------------------------
5,700,206
- -----------------------------------------------------------------------------------------------------
HEALTHCARE -- 10.3%
6,200 Amgen Inc. ................................................. 405,325
12,000 DENTSPLY International, Inc. ............................... 300,000
5,600 Johnson & Johnson........................................... 413,000
3,300 Merck & Co., Inc. .......................................... 441,375
10,000 Mylan Laboratories Inc. .................................... 300,625
2,400 Pfizer, Inc. ............................................... 260,850
4,400 Schering-Plough Corp. ...................................... 403,150
7,200 Stryker Corp. .............................................. 276,300
10,000 Tenet Healthcare Corp.++.................................... 312,500
- -----------------------------------------------------------------------------------------------------
3,113,125
- -----------------------------------------------------------------------------------------------------
TECHNOLOGY -- 14.6%
10,000 Anixter International Inc.++................................ 190,625
4,300 Automatic Data Processing, Inc. ............................ 313,363
625 Caliber Learning Network, Inc............................... 9,609
6,900 Cisco Systems Inc.++........................................ 635,231
12,500 Compaq Computer Corp. ...................................... 354,687
6,700 Computer Associates International........................... 372,269
14,000 EMC Corp.++................................................. 627,375
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
44
<pg$pcn>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
SOCIAL AWARENESS STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -----------------------------------------------------------------------------------------------------
TECHNOLOGY -- 14.6% (CONTINUED)
<C> <S> <C>
1,700 Intel Corp. ................................................ $ 126,012
4,400 International Business Machines Corp. ...................... 505,175
5,200 Lucent Technologies Corp. .................................. 432,575
2,200 Motorola Inc. .............................................. 115,637
4,000 Sun Microsystems Inc.++..................................... 173,750
5,400 Xerox Corp. ................................................ 548,775
- -----------------------------------------------------------------------------------------------------
4,405,083
- -----------------------------------------------------------------------------------------------------
TRANSPORTATION -- 3.3%
6,750 Mesaba Holdings, Inc.++..................................... 155,250
4,200 Norfolk Southern Corp. ..................................... 125,213
7,950 Southwest Airlines.......................................... 235,519
15,000 USFreightways Corp. ........................................ 492,656
- -----------------------------------------------------------------------------------------------------
1,008,638
- -----------------------------------------------------------------------------------------------------
UTILITIES -- 3.4%
10,000 Enron Corp. ................................................ 540,625
14,700 Williams Cos., Inc. ........................................ 496,125
- -----------------------------------------------------------------------------------------------------
1,036,750
- -----------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK (Cost -- $17,696,336).................... 26,761,295
- -----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
- -----------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 11.2%
<C> <S> <C>
$3,381,000 Citibank, 5.90% due 7/1/98; Proceeds at
maturity -- $3,381,552; (Fully collaterized by U.S. Treasury
Notes, 5.750% due 2/15/01; Market value -- $3,455,250)
(Cost -- $3,381,000)........................................ 3,381,000
- -----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $21,077,336*)............ $30,142,295
- -----------------------------------------------------------------------------------------------------
</TABLE>
++ Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
45
<pg$pcn>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
UTILITIES PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ------------------------------------------------------------------------------------------
COMMON STOCK -- 88.8%
- ------------------------------------------------------------------------------------------
ELECTRIC-UTILITY -- 55.2%
<C> <S> <C>
11,000 American Electric Power Co., Inc. .......................... $ 499,125
15,000 BEC Energy.................................................. 622,500
15,000 Cinergy Corp. .............................................. 525,000
20,225 Citizens Utilities Co., Class B Shares++.................... 194,666
15,000 CMS Energy Corp. ........................................... 660,000
15,000 DQE, Inc. .................................................. 540,000
15,000 Duke Energy Corp. .......................................... 888,750
20,000 Edison International........................................ 591,250
10,000 Endesa, Sponsored ADR....................................... 216,250
20,000 Florida Progress Corp. ..................................... 822,500
10,000 FPL Group, Inc. ............................................ 630,000
10,000 Houston Industries Inc. .................................... 308,750
9,500 Illinova Corp. ............................................. 285,000
12,000 LG&E Energy Corp. .......................................... 324,750
10,000 MDU Resources Group, Inc. .................................. 356,875
10,000 New Century Energies, Inc. ................................. 454,375
20,000 Niagara Mohawk Power Corp.++................................ 298,750
20,000 NIPSCO Industries, Inc. .................................... 560,000
20,000 Northern States Power Co.................................... 572,500
10,000 PacifiCorp.................................................. 226,250
25,000 PECO Energy Co.............................................. 729,688
6,600 Pinnacle West Capital Corp. ................................ 297,000
10,000 Public Services Enterprise Group Inc. ...................... 344,375
15,000 SCANA Corp. ................................................ 447,188
15,000 Sierra Pacific Resources.................................... 544,688
15,000 Southern Co. ............................................... 415,312
20,000 Texas Utilities Co.......................................... 832,500
15,000 Montana Power Co............................................ 521,250
12,000 UtiliCorp United, Inc. ..................................... 452,250
- ------------------------------------------------------------------------------------------
14,161,542
- ------------------------------------------------------------------------------------------
ELECTRONICS -- 1.8%
10,000 General Motors Corp., Class H (Hughes Electronics).......... 471,250
- ------------------------------------------------------------------------------------------
NATURAL GAS -- 17.9%
8,000 Coastal Corp. .............................................. 558,500
10,000 Consolidated Natural Gas Co................................. 588,750
24,000 Energen Corp. .............................................. 483,000
10,000 K N Energy, Inc. ........................................... 541,875
15,000 MCN Energy Group Inc. ...................................... 373,125
15,000 National Fuel Gas Co........................................ 653,437
22,557 Sempra Energy............................................... 625,956
10,000 Southwest Gas Corp. ........................................ 244,375
15,000 Williams Cos., Inc. ........................................ 506,250
- ------------------------------------------------------------------------------------------
4,575,268
- ------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
46
<pg$pcn>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1998
UTILITIES PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ------------------------------------------------------------------------------------------
TELEPHONE -- 13.9%
<C> <S> <C>
10,000 GTE Corp. .................................................. $ 556,250
8,000 NEXTLINK Communications Inc., Class A Shares++.............. 303,000
6,000 Qwest Communication Intl. Inc.++............................ 209,250
10,000 SBC Communications Inc. .................................... 400,000
9,000 Teleport Communications Group Inc., Class A Shares.......... 488,250
20,000 US West Media Group++....................................... 878,750
15,000 WorldCom, Inc. ............................................. 726,562
- ------------------------------------------------------------------------------------------
3,562,062
- ------------------------------------------------------------------------------------------
TOTAL COMMON STOCK (Cost -- $17,597,445).................... 22,770,122
- ------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- ------------------------------------------------------------------------------------------
CORPORATE BONDS -- 2.6%
- ------------------------------------------------------------------------------------------
ELECTRIC-UTILITY -- 1.6%
<C> <S> <C>
$200,000 Arizona Public Service Co., 7.25% due 8/1/23................ 200,750
200,000 Philadelphia Electric, 8.75% due 4/1/22..................... 211,500
- ------------------------------------------------------------------------------------------
412,250
- ------------------------------------------------------------------------------------------
TELEPHONE -- 1.0%
230,000 MCI Communication Corp., 7.75% due 3/23/25.................. 244,375
- ------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS (Cost -- $606,280).................... 656,625
- ------------------------------------------------------------------------------------------
U.S. TREASURY OBLIGATION -- 2.0%
500,000 U.S Treasury Notes, 7.70% due 11/30/99 (Cost -- $499,898)... 514,990
- ------------------------------------------------------------------------------------------
SUB-TOTAL INVESTMENTS (Cost -- $18,703,623)................. 23,941,737
- ------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 6.6%
1,690,000 Citibank, 5.09% due 7/1/98; Proceeds at
maturity -- $1,690,277; (Fully collateralized by U.S.
Treasury Notes, 5.375% due 6/30/03; Market
value -- $1,740,000) (Cost -- $1,690,000)................... 1,690,000
- ------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $20,393,623*)............ $ 25,631,737
- ------------------------------------------------------------------------------------------
</TABLE>
++ Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
47
<pg$pcn>
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES (UNAUDITED) JUNE 30, 1998
<TABLE>
<CAPTION>
U.S. GOVERNMENT SOCIAL AWARENESS
SECURITIES STOCK UTILITIES
PORTFOLIO PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Investments -- Cost.................................. $40,186,162 $17,696,336 $18,703,623
Repurchase agreement -- Cost......................... 3,232,000 3,381,000 1,690,000
- -------------------------------------------------------------------------------------------------------------
Investments, at Value................................ $41,329,758 $26,761,295 $23,941,737
Repurchase agreement, at Value....................... 3,232,000 3,381,000 1,690,000
Cash................................................. 25 168 854
Receivable from affiliate............................ -- 11,000 --
Dividends and interest receivable.................... 335,103 20,834 76,166
- -------------------------------------------------------------------------------------------------------------
TOTAL ASSETS......................................... 44,896,886 30,174,297 25,708,757
- -------------------------------------------------------------------------------------------------------------
LIABILITIES:
Investment advisory fees payable..................... 6,011 16,449 13,932
Administration fees payable.......................... 1,737 1,568 1,018
Accrued expenses..................................... 15,798 24,356 43,558
- -------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES.................................... 23,546 42,373 58,508
- -------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS....................................... $44,873,340 $30,131,924 $25,650,249
- -------------------------------------------------------------------------------------------------------------
NET ASSETS:
Paid-in capital...................................... $41,811,880 $20,557,850 $18,966,663
Undistributed net investment income.................. 1,117,808 97,583 352,869
Accumulated net realized gain from security
transactions...................................... 800,056 411,532 1,092,603
Net unrealized appreciation of investments........... 1,143,596 9,064,959 5,238,114
- -------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS....................................... $44,873,340 $30,131,924 $25,650,249
- -------------------------------------------------------------------------------------------------------------
SHARES OUTSTANDING..................................... 3,673,277 1,294,473 1,632,592
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, PER SHARE............................. $12.22 $23.28 $15.71
- -------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
48
<pg$pcn>
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
U.S. GOVERNMENT SOCIAL AWARENESS
SECURITIES STOCK UTILITIES
PORTFOLIO PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest................................................ $1,207,668 $ 85,505 $ 82,140
Dividends............................................... -- 125,690 378,990
- -------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME................................. 1,207,668 211,195 461,130
- -------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)....................... 63,756 84,143 76,738
Administration fees (Note 2)............................ 11,832 7,767 7,083
Audit and legal......................................... 7,000 11,282 10,745
Pricing fees............................................ 2,132 -- --
Custody................................................. 1,800 2,480 1,722
Shareholder communications.............................. 1,700 1,884 6,429
Shareholder and system servicing fees................... 1,693 3,674 3,798
Trustees' fees.......................................... -- 744 1,791
Other................................................... -- 1,638 --
- -------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES.......................................... 89,913 113,612 108,306
- -------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME..................................... 1,117,755 97,583 352,824
- -------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales.................................. 38,140,797 1,856,484 6,920,934
Cost of securities sold.............................. 36,803,474 1,433,938 5,828,446
- -------------------------------------------------------------------------------------------------------------
NET REALIZED GAIN....................................... 1,337,323 422,546 1,092,488
- -------------------------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of period.................................. 1,707,052 5,325,740 4,788,605
End of period........................................ 1,143,596 9,064,959 5,238,114
- -------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET UNREALIZED APPRECIATION...... (563,456) 3,739,219 449,509
- -------------------------------------------------------------------------------------------------------------
NET GAIN ON INVESTMENTS................................... 773,867 4,161,765 1,541,997
- -------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS.................... $1,891,622 $4,259,348 $1,894,821
- -------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
49
<pg$pcn>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS FOR THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
U.S. GOVERNMENT SOCIAL AWARENESS
SECURITIES STOCK UTILITIES
PORTFOLIO PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATIONS:
Net investment income............................ $ 1,117,755 $ 97,583 $ 352,824
Net realized gain................................ 1,337,323 422,546 1,092,488
Increase (decrease) in net unrealized
appreciation.................................. (563,456) 3,739,219 449,509
- -------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS........... 1,891,622 4,259,348 1,894,821
- -------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................ (23,805) (156,049) (643,885)
Net realized gains............................... -- (535,746) (609,017)
- -------------------------------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM DISTRIBUTIONS TO
SHAREHOLDERS.................................. (23,805) (691,795) (1,252,902)
- -------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 9):
Net proceeds from sale of shares................. 13,823,677 5,881,047 3,691,633
Net asset value of shares issued for reinvestment
of dividends.................................. 23,805 691,728 1,252,902
Cost of shares reacquired........................ (6,121,402) (1,021,616) (1,349,261)
- -------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM FUND SHARE
TRANSACTIONS.................................. 7,726,080 5,551,159 3,595,274
- -------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS............................. 9,593,897 9,118,712 4,237,193
NET ASSETS:
Beginning of period.............................. 35,279,443 21,013,212 21,413,056
- -------------------------------------------------------------------------------------------------------
END OF PERIOD*................................... $44,873,340 $30,131,924 $25,650,249
- -------------------------------------------------------------------------------------------------------
* Includes undistributed net investment income of:. $1,117,808 $97,583 $352,869
- -------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
50
<pg$pcn>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) 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 $643,930
- -------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
51
<pg$pcn>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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 16 other separate investment portfolios: Travelers Quality Bond,
Lazard International Stock, MFS Emerging Growth, Federated High Yield, Federated
Stock, Large Cap, Equity Income, Disciplined Mid Cap Stock (formerly known as
Mid Cap Disciplined Equity Fund), Convertible Bond, Strategic Stock, Disciplined
Small Cap Stock, MFS Mid Cap Growth, MFS Research, 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
semi-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"), 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 $200 million of the average daily net assets. Utilities
pays MMC investment management and advisory fees calculated at an annual rate of
0.65% of the average daily net assets. These fees are calculated daily and paid
monthly.
52
<pg$pcn>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (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 six months ended June 30, 1998, 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................................................... $46,524,404 $ 5,842,277 $ 9,776,656
- -----------------------------------------------------------------------------------------------------
Sales....................................................... 38,140,797 1,856,484 6,920,934
- -----------------------------------------------------------------------------------------------------
</TABLE>
At June 30, 1998, 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............................... $1,143,596 $9,381,508 $5,420,227
Gross unrealized depreciation............................... -- (316,549) (182,113)
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation................................. $1,143,596 $9,064,959 $5,238,114
- --------------------------------------------------------------------------------------------------
</TABLE>
4. REPURCHASE AGREEMENTS
The Portfolios purchase (and their custodian takes possession of) U.S.
Government securities from banks and securities dealers subject to agreements to
resell the securities to the sellers at a future date (generally, the next
business day) at an agreed-upon higher repurchase price. The Portfolios require
continual maintenance of the market value of the collateral in amounts at least
equal to 102% of the repurchase price.
5. FUTURES CONTRACTS
Initial margin deposits made upon entering into futures contracts are
recognized as assets. The initial margin is segregated by the custodian and is
noted in the schedule of investments. During the period the futures contract is
open, changes in the value of the contract are recognized as unrealized gains or
losses by "marking-to-market" on a daily basis to reflect the market value of
the contract at the end of each day's trading. Variation margin payments are
made or received and recognized as assets due from or liabilities due to broker,
depending upon whether unrealized gains or losses are incurred. When the
contract is closed, the Portfolios record a realized gain or loss equal to the
difference between the proceeds from (or cost of) the closing transactions and
the Portfolio's basis in the contract.
The Portfolios enter into such contracts to hedge portions of their
respective portfolios. The Portfolios bear the market risk that arises from
changes in the value of the financial instruments and securities indices
(futures contracts).
At June 30, 1998, the Portfolios had no open futures contracts.
53
<pg$pcn>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (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 June 30, 1998, 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 June 30, 1998, USGS held no TBA securities.
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>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT SECURITIES PORTFOLIO
Shares sold................................................. 1,158,700 978,971
Shares issued on reinvestment............................... 1,971 145,971
Shares redeemed............................................. (514,502) (491,712)
- --------------------------------------------------------------------------------------------------
Net Increase................................................ 646,169 633,230
- --------------------------------------------------------------------------------------------------
SOCIAL AWARENESS STOCK PORTFOLIO
Shares sold................................................. 262,115 479,843
Shares issued on reinvestment............................... 29,867 --
Shares redeemed............................................. (44,919) (132,790)
- --------------------------------------------------------------------------------------------------
Net Increase................................................ 247,063 347,053
- --------------------------------------------------------------------------------------------------
UTILITIES PORTFOLIO
Shares sold................................................. 236,599 341,896
Shares issued on reinvestment............................... 80,677 1,816
Shares redeemed............................................. (85,033) (433,506)
- --------------------------------------------------------------------------------------------------
Net Increase (Decrease)..................................... 232,243 (89,794)
- --------------------------------------------------------------------------------------------------
</TABLE>
54
<pg$pcn>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
For a share of beneficial interest outstanding throughout each period:
<TABLE>
<CAPTION>
U.S. GOVERNMENT SECURITIES PORTFOLIO 1998(1) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........ $11.65 $10.86 $12.43 $10.58 $11.63 $10.79
- ----------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income..................... 0.30 0.58 0.68 0.65 0.60 0.57
Net realized and unrealized gain (loss)... 0.28 0.79 (0.52) 1.80 (1.23) 0.44
- ----------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations......... 0.58 1.37 0.16 2.45 (0.63) 1.01
- ----------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM (2):
Net investment income..................... (0.01) (0.58) (1.55) (0.60) (0.39) (0.17)
Net realized gains........................ -- -- (0.18) -- (0.03) --
- ----------------------------------------------------------------------------------------------------------------------
Total Distributions......................... (0.01) (0.58) (1.73) (0.60) (0.42) (0.17)
- ----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.............. $12.22 $11.65 $10.86 $12.43 $10.58 $11.63
- ----------------------------------------------------------------------------------------------------------------------
TOTAL RETURN................................ 4.95%++ 12.62% 1.46% 24.42% (5.64)% 9.48%
- ----------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000'S)........... $44,873 $35,279 $26,009 $28,192 $24,522 $25,520
- ----------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses (3).............................. 0.44%+ 0.49% 0.62% 0.56% 0.71% 0.58%
Net investment income..................... 5.47+ 6.10 5.68 5.80 5.56 5.04
- ----------------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE..................... 99% 208% 501% 214% 16% 51%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SOCIAL AWARENESS STOCK PORTFOLIO 1998(1) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........ $20.06 $15.76 $14.32 $11.05 $11.64 $10.95
- ----------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income (4)................. 0.05 0.15 0.31 0.12 0.16 0.17
Net realized and unrealized gain (loss)... 3.71 4.15 2.42 3.47 (0.45) 0.65
- ----------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations......... 3.76 4.30 2.73 3.59 (0.29) 0.82
- ----------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM (2):
Net investment income..................... (0.12) -- (0.43) (0.14) (0.24) (0.13)
Net realized gains........................ (0.42) -- (0.86) (0.18) (0.06) --
- ----------------------------------------------------------------------------------------------------------------------
Total Distributions......................... (0.54) -- (1.29) (0.32) (0.30) (0.13)
- ----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.............. $23.28 $20.06 $15.76 $14.32 $11.05 $11.64
- ----------------------------------------------------------------------------------------------------------------------
TOTAL RETURN................................ 18.80%++ 27.28% 19.98% 33.37% (2.69)% 7.55%
- ----------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000'S)........... $30,132 $21,013 $11,040 $7,055 $3,879 $3,361
- ----------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses (4)(5)........................... 0.88%+ 0.98% 1.25% 1.25% 1.25% 1.05%
Net investment income..................... 0.75+ 0.97 0.43 0.99 1.43 1.50
- ----------------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE..................... 8% 19% 26% 73% 137% 60%
- ----------------------------------------------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE PAID
ON EQUITY TRANSACTIONS (6)................ $0.06 $0.06 $0.06 -- -- --
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the six months ended June 30, 1998 unaudited).
(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 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%.
(4) 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
$0.06 and the actual expense ratio would have been 1.69%.
(5) The ratios of expenses to average net assets for the years ended December
31, 1995, 1994 and 1993 reflect an expense reimbursement by The Travelers in
connection with voluntary expense limitations. Without the expense
reimbursements, the ratios of expenses to average net assets would have been
1.75%, 3.34% and 3.73%, respectively.
(6) For the fiscal years beginning after 1995, the SEC instituted new guidelines
requiring the disclosure of average commissions per share on Funds which
held more than 10% of their assets in commissionable equity securities.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
55
<pg$pcn>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of beneficial interest outstanding throughout each period:
<TABLE>
<CAPTION>
UTILITIES PORTFOLIO 1998(1) 1997 1996 1995 1994(2)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD................... $15.29 $12.22 $12.85 $10.17 $10.00
- --------------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income................................ 0.18 0.46 0.47 0.48 0.35
Net realized and unrealized gain (loss).............. 1.05 2.63 0.47 2.44 (0.18)
- --------------------------------------------------------------------------------------------------------------------
Total Income From Operations........................... 1.23 3.09 0.94 2.92 0.17
- --------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM (3):
Net investment income................................ (0.42) (0.01) (0.84) (0.24) --
Net realized gains................................... (0.39) (0.01) (0.73) -- --
- --------------------------------------------------------------------------------------------------------------------
Total Distributions.................................... (0.81) (0.02) (1.57) (0.24) --
- --------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD......................... $15.71 $15.29 $12.22 $12.85 $10.17
- --------------------------------------------------------------------------------------------------------------------
TOTAL RETURN........................................... 8.10%++ 25.29% 7.47% 29.29% 1.70%++
- --------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000'S)...................... $25,650 $21,413 $18,214 $15,340 $5,757
- --------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses (4)......................................... 0.92%+ 1.06% 1.07% 1.25% 1.25%+
Net investment income................................ 2.99+ 3.58 3.88 4.29 3.86+
- --------------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE................................ 31% 68% 39% 25% 32%
- --------------------------------------------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE PAID ON EQUITY
TRANSACTIONS (5)..................................... $0.06 $0.06 $0.06 -- --
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the six months ended June 30, 1998 (audited).
(2) For the period from February 4, 1994 (commencement of operations) to
December 31, 1994.
(3) 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.
(4) 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.
(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.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized
56
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Investment Advisers
-------------------
MANAGED ASSETS TRUST, HIGH YIELD BOND TRUST, CAPITAL APPRECIATION FUND, MONEY
MARKET PORTFOLIO 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, Money Market Portfolio, 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 (Semi-Annual)(8-98)
<pg$pcn>
