THE TRAVELERS VARIABLE
PRODUCTS FUNDS
ANNUAL REPORTS
DECEMBER 31, 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&Annuity
A Member of citigroup LOGO]
The Travelers Insurance Company
The Travelers Life and Annuity Company
One Tower Square
Hartford, CT 06183
<PAGE>
ANNUAL REPORT FOR THE TRAVELERS VARIABLE PRODUCTS FUNDS
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DEAR SHAREHOLDER:
We are pleased to provide the annual report for The Travelers Series Trust --
Managed Assets Trust, High Yield Bond Trust, Capital Appreciation Fund, Money
Market Portfolio ("Trust" or "Fund") and the Travelers Series Trust -- U.S.
Government Securities, Social Awareness Stock and Utilities Portfolios;
("Portfolio") for the year ended December 31, 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 17
Capital Appreciation Fund............................. 5 23
Money Market Portfolio................................ 5 25
U.S. Government Securities Portfolio.................. 38 43
Social Awareness Stock Portfolio...................... 39 44
Utilities Portfolio................................... 39 47
</TABLE>
ECONOMIC REVIEW AND OUTLOOK
The year 1998 saw a widely gyrating U.S. stock market with different sectors
performing differently. The large-cap oriented S&P 500 Stock-Index ("S&P 500")
returned 28.72% for the year. The S&P 400 MidCap Index had a gain of roughly 5%
while the Russell 2000 Index had a negative return of 2.6% for the year ended
December 31, 1998. Dividend-paying defensive stocks such as utilities performed
better than the average small- and mid-cap stock. While technology stocks were
adversely impacted by the global financial crisis in late 1997, they have since
rebounded, led by Internet-related names.
The economies of the developed world flourished in 1998 while most emerging
markets went down. Low interest rates, robust consumer spending and benign
inflation fueled economic growth in the U.S. and Europe and created favorable
conditions for corporate profitability. In contrast, Russia's economy collapsed,
Asia's economies remained mired in recession and Brazil's economy faltered at
year-end after $30 billion was spent to defend its currency during the reporting
period.
The year was also a record year for mergers and acquisitions, nearly double
1997's total. The merger of oil giants Exxon and Mobil announced in December
will result in the creation of the world's largest company in terms of revenue.
In the digital world, merger activity between Internet service providers, phone
companies, cable companies and telecommunications firms heated up, as
"convergence" became the new mantra.
We remain guardedly optimistic about the resilient U.S. economy in the first
half of 1999 because we expect interest rates to stay low and the productivity
revolution through technology to continue. However, the risks from foreign
markets cannot be discounted and future corporate earnings may come under
increasing pressure.
FIXED INCOME MARKET COMMENTARY
Problems that started with Asia's currency devaluations in the summer of 1997
hit the bond market hard in August and September of 1998. Bond values fell
dramatically and asset-backed bonds, mortgage-backed securities, emerging-market
debt and corporate bonds all were negatively affected. In 1998, the more risk a
bond investor assumed, the more he or she suffered.
For the year ended December 31, 1998, the Lehman Government/Corporate Index
returned 9.47%. During the year, the spreads between different kinds of bonds
and U.S. Treasuries widened at record speed as investors gravitated to their
safety amidst rising stock market volatility and higher investor anxiety about
the global economy. The Federal Reserve Board ("Fed") then changed its monetary
policy from one of vigilance against inflation to one of combating deflation
during the reporting period and cut rates three times. So far in 1999, spreads
have tightened, bond market liquidity has returned and the bond market has
stabilized.
Markets and policy makers expect real U.S. economic growth to finally slow to
the 1%-2% level in 1998 after 3 years of 3%-plus growth. The slowdown is
expected to be led by a sharp reduction in the growth rate of investment
spending and
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ANNUAL REPORT FOR THE TRAVELERS VARIABLE PRODUCTS FUNDS
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continued weakness in the export sector. The Conference Board survey of
corporate sentiment indicates that capital-spending plans has not yet rebounded
with the stock market and consumer sentiment. Year 2000 ("Y2K") spending is
temporarily boosting capital spending, yet industrial overcapacity and several
years of rapid spending in technology make slower investment spending highly
likely.
However, a drop in the rate of consumer spending growth is essential to any
meaningful forecast of 1%-2% real GDP growth. This has not happened yet despite
two years where consumer spending has been close to consumer income. The wealth
effect from three years of 20%-plus stock market gains is estimated to increase
spending 1.5% more than implied by income growth. Lower interest rates, lower
oil and other commodity prices and declining import prices have further boosted
consumer purchasing power.
The tight employment market has also been a major force behind high consumer
confidence and spending plans. December brought a further sharp drop in oil
prices and continued record high (which substantially exceeded expectations)
auto sales and housing starts. Unless they were all caused by unseasonably warm
weather, these factors cause us to push any forecast of a consumer slowdown
further out into the future which should delay any further Fed rate cuts.
There are storm clouds on the horizon that could lead the consumer to retreat.
Latin America has been pushed into recession by last summer's emerging market
meltdown and could be subject to further pressure if a Brazilian crisis erupts.
Latin America has a larger economic impact on the U.S. than Asia and Russia do.
A decline in the stock market could rattle the consumer, although the stock
market's continued resilience means that a sustained downturn is required before
spending would be significantly impacted. Japan is also a big question mark.
Economic activity is now declining there after several years of flat growth.
Despite three rate cuts in the second half of 1998, it would be hard to say the
Fed has an easy monetary policy. Short-term interest rates are still more than
3% above inflation and are high relative to nominal growth. Credit market
spreads are high and banks are tightening credit standards. These factors create
a downward bias for short-term rates over the long-term, but rates are likely to
remain stable until the consumer slows down.
With the Fed on hold, there will be some upward pressure on long-term rates. But
slow growth outside the U.S. and continued low inflation should prevent rates
from rising too much. The fact that so much of the U.S. Treasury curve trades
below the federal-funds rate is a big factor in the continued high spreads in
the investment grade corporate market. Because of this, spreads should move to
offset the change in U.S. Treasury yields -- narrowing when yields rise and
widening when yields fall.
EQUITY MARKET COMMENTARY
The deepening global financial crisis and its adverse impact on global economies
and leveraged hedge funds sent the U.S. stock market into a tailspin during the
third quarter of 1998. The S&P 500 fell by almost 10% in the third quarter while
the Russell 2000 Index of smaller companies fared even worse with a decline of
20%.
The third quarter began on a promising note as stock prices rose by almost 5% in
the first half of July. From the then all-time highs established on July 17,
1998, a series of bad news related to political and currency turmoil led the
stock market down through the end of August. The market decline over that period
was close to 20%, which qualifies under most scenarios as a bear market.
The bulk of the bad news in August came from the political and economic crisis
in Russia and the continuing spread of the currency contagion. The collapse of
the Russian ruble and the restructuring of Russian debt triggered trading and
lending losses at brokerage firms and banks. The crisis in the financial sector
took a turn for the worse later in the quarter as several hedge funds disclosed
losses related to the global financial turmoil. Several stocks in the financial
sector saw their market value cut in half during the third quarter.
Increased uncertainty over Clinton's presidency and the bigger question of the
damage to corporate profits added to the volatility in the stock market. The
increased prospects of a global and U.S. economic slowdown led to some easing of
monetary policy. Japan first decreased short-term interest rates by 20 basis
points and the Fed followed suit with a 0.25% rate cut in late September. The
U.S. stock market rallied in anticipation of the rate cut and stock prices rose
by almost 6% in September.
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ANNUAL REPORT FOR THE TRAVELERS VARIABLE PRODUCTS FUNDS
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In the large-capitalization stock universe, high-quality growth stocks performed
better than value stocks in the third quarter of 1998. The utilities sector
produced the only positive performance in the third quarter while the financial
services and energy sectors at the other end of the spectrum fell by over 20%.
Large-cap technology and health care stocks held up reasonably well, but
consumer stocks declined sharply against the likely backdrop of an economic
slowdown.
A proactive and aggressive stance by the Fed halted the stock market slide early
in the fourth quarter of 1998 and sent stock prices soaring in November and
December. The fourth quarter rally erased losses from the third quarter and most
market measures reached new all-time highs.
The negative sentiment in the stock market persisted through the first week of
October as the S&P 500 fell another 6%. Investor concerns focused on the impact
of the Russian crisis and global lending and trading losses on U.S. economic and
earnings growth.
Sentiment reversed in the second week of October after most market indexes had
declined over 20% from their all-time highs. The reversal in trend turned into a
significant stock market rally when the Fed cut short term rates by an
unexpected 25 basis points in the middle of October. The surprise Fed action
raised hopes that a proactive stimulative monetary policy by most central banks
would avert a global recession.
The stock market rally, triggered by the unexpected Fed rate cut in mid-October,
continued almost unabated through the months of November and December. The
market was also helped by economic reports in the fourth quarter which were well
ahead of expectations. Despite the strength in the economy, interest rates
remained low mainly as a result of low inflation.
In the large-cap universe, all sectors except energy (which declined by 3%),
registered strong gains in the fourth quarter. The market rally was led by the
technology and health care sectors which rose by over 30%. The financial
services, transportation and producer durables sectors also performed well.
The performance of the U.S. stock market in 1998 proves yet again that interest
rate changes and liquidity flows may have a more dominant influence on stock
prices than most other factors. In a year where earnings growth was close to
zero, most measures of the U.S. stock market have risen by over 20%. Declining
interest rates, which fell from 5.9% to 5.1% during 1998, have triggered a
significant expansion in the market price/earnings ("P/E") multiple. The upward
pressure on stock prices has been further amplified by strong money flows as
yields on alternative investments have dwindled.
A notable aspect of the stock market performance in 1998 was the divergence in
returns across different styles and segments of the market. While the S&P 500
rose by 28.72% in 1998, the Russell 2000 actually declined by 2.6%. The gain in
large-company growth stocks of 42.2% was well ahead of the 14.7% advance of
large-company value stocks and almost out of sight
With earnings growth slowing down, the market P/E multiple has now reached 23
times 1998 earnings. It appears that the biggest risk to the stock market still
remains on the earnings front. Earnings estimates for 1999 remain high and it is
quite likely that these earnings forecasts will be revised down. Despite the
overhang of possible downward earnings revisions, we believe that support from
low interest rates should limit an excessive downside.
MANAGED ASSETS TRUST
Managed Assets Trust ("Trust") seeks to provide a high total investment return
through a fully managed investment policy. For the year ended December 31, 1998,
the Trust had a total return of 21.44% versus 28.72% for the 60% of the S&P 500
and 9.47% for the 40% of the Lehman Government/Corporate Index benchmark.
Returns were hurt by being slightly overweighted in stocks, the underperformance
of the convertible bond market and the underperformance of its corporate bonds.
In their disciplined approach to stock selection, the portfolio managers screen
their research universe of over 1,000 securities for companies that offer
improving fundamentals and relative earnings gains at discounted stock
valuations.
During the third quarter of 1998, stock selection in the consumer discretionary,
financial services and producer durables sectors had an adverse impact on
relative portfolio performance. Media stocks such as New York Times, Meredith
Corp. and Clear Channel Communications and their holdings in the retail sector
such as Jones Apparel and General Nutrition sold off sharply on concerns of
future earnings weakness resulting from a possible recession. The prospect of a
slower economy also hurt producer durable stocks like United Technologies and
Deere Corp. where the managers had a modest overweight
3
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ANNUAL REPORT FOR THE TRAVELERS VARIABLE PRODUCTS FUNDS
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position. Trading and lending losses during the third quarter devastated the
financial services sector. The managers' overweight positions in BankBoston,
Equitable Companies, Morgan Stanley Dean Witter and Merrill Lynch also hurt the
Trust's performance.
Their stock selection in the technology and energy sectors contributed
positively to portfolio performance in the third quarter. Their positions in
higher growth technology stocks such as Cisco Systems, EMC Corp. and Symbol
Technologies performed well in the third quarter. Being underweight in several
poorly performing stocks such as Computer Associates, Parametric Technologies
and 3Com Corp. also helped the Trust. In the energy sector, the managers gained
from underweight positions in stocks such as Royal Dutch and Occidental
Petroleum.
During the fourth quarter of 1998, stock selection was favorable in most
sectors. The biggest contributions to relative portfolio performance came from
the technology, health care, consumer discretionary, producer durables and
utilities sectors. In the technology sector, a number of the managers overweight
position in stable growth companies with rising earnings estimates such as Cisco
Systems, Symbol Technologies, EMC Corp., Dell Computers and Lucent Technologies
performed well. The biggest gain in the Trust's portfolio, however, came from
America Online which rose by 70% in December alone on the heels of a frenzied
pursuit of Internet stocks and its inclusion into the S&P 500 index on the last
day of the year. Guidant Corp, a leading manufacturer of cardiological
equipment, and Amgen, the world's largest biotechnology company, were top stock
picks in the health care sector. Both stocks rose by almost 50% in the fourth
quarter of 1998 on strong revenue growth and positive earnings surprises.
A strong recovery in retail and media stocks from their lows in the third
quarter helped performance in the consumer discretionary sector. The Trust's
retail holdings in Dayton Hudson, Staples Inc. and CVS Corp. performed well and
media stocks such as The New York Times and Clear Channel Communications
recovered from near-recession levels as investors felt reassured about economic
prospects after the Fed action to cut interest rates.
The managers good performance in the producer durables sector was achieved from
a combination of picking the winners in the sector and avoiding the losers.
Their emphasis on Tyco International, a world leader in security systems, paid
off while the managers avoided some of the bigger losers within the sector such
as Minnesota Mining and Lockheed Martin.
In the utilities sector, the managers have been emphasizing long-distance and
cellular telephone companies such as Airtouch Communications, Sprint PCS and MCI
Worldcom at the expense of the regional telephone companies and the electric
utilities group. They were rewarded in these positions as investors paid a
premium for the higher growth prospects of these companies within a relatively
low growth sector. A small sample of their current holdings is presented here to
illustrate their investment approach. In the technology sector, they focus on
higher growth industries like networking and software through their positions in
Symbol Technologies, EMC Corp., Cisco and Oracle which are still trading at
reasonable valuations. Their emphasis on Amgen Corp. and Guidant Corp., leaders
in the biotechnology and medical devices industries respectively, illustrates
how they seek growth at a reasonable price.
HIGH YIELD BOND TRUST
The High Yield Bond Trust ("Trust") seeks generous income. The assets of the
Trust will be invested in bonds which, as a class, sell at discounts from par
value and are typically high-risk securities. For the year ended December 31,
1998, the High Yield Bond Trust had a total return of 6.56%. In comparison, the
Lehman Aggregate Bond Index posted a total return of 8.69% for the same period.
The high yield bond market generated relatively weak results during the third
quarter of 1998, underperforming all of the other domestic bond market sectors.
By the end of September, the Fed began taking aggressive actions to restore
investor confidence in the financial markets. The Fed concluded that the
financial markets were beginning to freeze up and overall liquidity in the bond
market was disappearing. Many companies were finding it increasingly more
difficult to borrow money through bond markets. Moreover, there was a more
pronounced reluctance on the part of many investors to invest in new bonds,
especially from companies that issue high yield bonds. Fears that an economic
recession was becoming more likely given the turmoil in emerging market
economies such as Korea, Russia and Indonesia were also key market factors.
Moreover, investors became concerned that a worldwide credit crunch in the
financial markets might throw the U.S. economy into a meaningful recession. By
acting decisively and lowering short-term interest rates three times, the Fed
was able to
4
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ANNUAL REPORT FOR THE TRAVELERS VARIABLE PRODUCTS FUNDS
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stabilize the domestic financial markets and restore investor confidence. In the
fourth quarter of 1998, as investors slowly became more comfortable with the
economic outlook and the Fed's resolve to keep the economy out of a recession,
the high yield bond market stabilized and outperformed other bond sectors. Yet
because of a lingering uncertainty over the economy, the high yield bond market
trades at undervalued levels. As more investors become convinced that the U.S.
economy is still fundamentally sound, the high yield bond market should continue
to stabilize and prices should improve.
The portfolio manager viewed the recent correction in the high yield bond market
as a buying opportunity and carefully redeployed excess cash reserves into the
market during this time. However, given the continued problems in Asia, he
remained underweighted in basic commodity industries such as steel, forest
products, energy and petrochemicals, industries that have been negatively
affected by worldwide deflationary trends in recent months. (Deflation is when
prices actually fall. Deflation should not be confused with disinflation, which
is the slowing down of the rate at which prices increase).
The portfolio manager believes that the Trust is appropriately positioned for
current economic conditions, a period characterized by slower growth and
somewhat weaker corporate profits. It should be noted that he still does not
anticipate a domestic economic recession for 1999. Moreover, the manager plans
to stick with the Trust's relatively sound credit quality orientation given the
higher volatility in the financial markets.
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 in both rising and declining markets. For the year ended
December 31, 1998, the Capital Appreciation Fund posted a total return of
61.63%. In comparison, the Russell 2000 Index returned a negative 2.55% for the
same period.
Looking back over the past twelve months, 1998 will surely go down as one of the
market's most volatile years this decade. Continued uncertainty in Asia,
instability in other emerging markets and a clear slowdown in global economic
growth set the stage for a tumultuous and, at times, unforgiving marketplace.
Remarkably, when all was said and done, the S&P 500 Index posted an historic
fourth straight year of 20%-plus returns. However, only a select handful of
companies performed exceptionally well, which masked a segmented market where
many stocks actually produced negative results.
Turning to the Fund, it well outperformed its benchmark, the S&P 500 Index.
Gains were driven by its holdings in the technology, cable, and life sciences
industries. In particular, America Online and Cisco Systems rose sharply to post
strong gains for the year. These companies continued to capitalize on their
leading market positions while also leveraging their foothold in the growing
Internet landscape.
Turning to the telecommunications industry, the portfolio managers benefited
from very strong performance by Nokia, a company that is rapidly becoming the
dominant global provider of telecommunications equipment. Additionally, Denver-
based telecommunications company Qwest Communications saw its stock price more
than double during fourth quarter. The company recently signed a lucrative joint
venture contract with Microsoft.
In the pharmaceutical sector, Eli Lilly moved higher, due in part to positive
news on the cancer-fighting properties of its osteoporosis drug Evista. While
the vast majority of the Fund posted strong results, its position in Dell
Computer did lag the rest of the technology sector. While Dell continues to
generate impressive results, its expensive price tag put off some investors.
Nonetheless, the managers remain very upbeat on the position.
Looking ahead, the managers remain positive on the longer-term prospects for
growth stocks, especially in a low interest rate environment. They continue to
focus on companies that can grow their earnings in any kind of economic
conditions.
MONEY MARKET PORTFOLIO
Money Market Portfolio (formerly known as Cash Income Trust) ("Portfolio") 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 Portfolio pursues this objective by investing in
securities maturing in one year or less.
5
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ANNUAL REPORT FOR THE TRAVELERS VARIABLE PRODUCTS FUNDS
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For the year ended December 31, 1998, the Portfolio generated an effective yield
of 5.08% and as of December 31, 1998, had an average maturity of 27 days. The
Portfolio continues to invest primarily in U.S. Treasuries and government agency
securities. This investment strategy has provided the Portfolio with safety,
liquidity and stability.
However, you should be aware that your investment in the Portfolio 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
January 13, 1999
6
<PAGE>
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PERFORMANCE COMPARISON -- MANAGED ASSETS TRUST AS OF 12/31/98 (UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
----------------------------------------------
<S> <C>
Year Ended 12/31/98 21.44%
Five Years Ended 12/31/98 15.81%
Ten Years Ended 12/31/98 14.27%
CUMULATIVE TOTAL RETURN
----------------------------------------------
4/8/83* through 12/31/98 416.87%
* Commencement of operations
</TABLE>
This chart assumes an initial investment of $10,000 made on
December 31, 1988, assuming reinvestment of dividends, through
December 31, 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>
Lehman Standard
Managed Government/Corporation Consumer & Poor's
Assets Bond Price 500
Trust Index Index Index
<S> <C> <C> <C> <C>
Dec-88 10000 10000 10000 10000
Dec-89 12712 11423 10465 13163
Dec-90 13026 12370 11103 12755
Dec-91 15854 14365 11443 16633
Dec-92 16668 15454 11775 17899
Dec-93 18224 17159 12099 19698
Dec-94 17815 16556 12423 19957
Dec-95 22646 19742 12738 24333
Dec-96 25766 20314 13160 29917
Dec-97 31257 22296 13383 39897
Dec-98 37960 24408 13598 51362
</TABLE>
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Past performance is not predictive of future performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Average annual total returns are historical in nature and measure net investment
income and capital gain or loss from portfolio investments assuming reinvestment
of dividends. The returns do not reflect expenses associated with the subaccount
such as administrative fees, account charges and surrender charges which, if
reflected, would reduce the performance shown.
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON -- HIGH YIELD BOND TRUST AS OF 12/31/98 (UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
----------------------------
<S> <C>
Year Ended 12/31/98 6.56%
Five Years Ended 12/31/98 10.44%
Ten Years Ended 12/31/98 9.44%
CUMULATIVE TOTAL RETURN
----------------------------------------------
3/19/82* through 12/31/98 407.17%
* Commencement of operations
</TABLE>
This chart assumes an initial investment of $10,000 made on
December 31, 1988, assuming reinvestment of dividends, through
December 31, 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
High Lehman High
Yield Aggregate Consumer Yield
Bond Bond Price Index
Trust Index Index Top Tier
<S> <C> <C> <C> <C>
Dec-88 10000 10000 10000 10000
Dec-89 10140 11454 10465 11319
Dec-90 9215 12480 11103 11424
Dec-91 11620 14477 11443 14038
Dec-92 13149 15548 11775 15264
Dec-93 14991 17064 12099 17648
Dec-94 14802 16566 12423 17614
Dec-95 17092 19626 12738 20905
Dec-96 19835 20339 13160 23146
Dec-97 23120 22301 13383 25923
Dec-98 24636 24239 13598 26144
</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
<PAGE>
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PERFORMANCE COMPARISON -- CAPITAL APPRECIATION FUND AS OF 12/31/98 (UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
----------------------------
<S> <C>
Year Ended 12/31/98 61.63%
Five Years Ended 12/31/98 27.67%
Ten Years Ended 12/31/98 21.01%
CUMULATIVE TOTAL RETURN
----------------------------------------------
3/19/82* through 12/31/98 1,637.61%
*Commencement of operations
</TABLE>
This chart assumes an initial investment of $10,000 made on
December 31, 1988, assuming reinvestment of dividends, through
December 31, 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>
CAPITAL APPRECIATION STANDARD & POOR'S
FUND 500 INDEX RUSSELL 2000 INDEX CONSUMER PRICE INDEX
-------------------- ----------------- ------------------ --------------------
<S> <C> <C> <C> <C>
12/88 10000 10000 10000 10000
12/89 11571 13163 11627 10465
12/90 10849 12755 9362 11103
12/91 14664 16633 13673 11443
12/92 17245 17899 16189 11775
12/93 19848 19698 19245 12099
12/94 18903 19957 7986 12423
12/95 25777 24333 10258 12738
12/96 33047 29917 11951 13160
12/97 41687 39923 14624 13383
12/98 67378 51396 14252 13524
</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
<PAGE>
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SCHEDULES OF INVESTMENTS DECEMBER 31, 1998
MANAGED ASSETS TRUST
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -----------------------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCK -- 71.3%
- -----------------------------------------------------------------------------------------------------
CONSUMER CYCLICALS -- 9.7%
6,904 Clorox Co. ................................................. $ 806,474
5,492 Colgate-Palmolive Co. ...................................... 510,070
14,700 Comcast Corp., Class A Shares............................... 863,166
9,500 Costco Cos., Inc. (a)....................................... 687,266
19,027 CVS Corp. .................................................. 1,046,485
5,816 Eastman Kodak Co. .......................................... 418,752
15,594 Fruit of the Loom Inc., Class A Shares (a).................. 215,392
9,611 Gannett Co. ................................................ 636,128
11,475 Gap Inc. ................................................... 645,469
12,946 Gillette Corp. ............................................. 625,454
34,130 Home Depot, Inc. ........................................... 2,088,329
4,610 J.C. Penney Co. ............................................ 216,094
26,284 K-Mart Corp. (a)............................................ 402,474
9,364 Kimberly-Clark Corp. ....................................... 510,338
10,984 Kroger Co. (a).............................................. 664,532
4,217 May Department Stores Co. .................................. 254,601
9,121 Maytag Corp. ............................................... 567,782
12,161 McDonald's Corp. ........................................... 931,837
16,477 MediaOne Group, Inc. (a).................................... 774,419
12,261 New York Times Co., Class A Shares.......................... 425,303
11,377 Nordstrom Inc. ............................................. 394,640
26,342 Procter & Gamble Co. ....................................... 2,405,354
12,300 Rite Aid Corp. ............................................. 609,619
15,862 Safeway Inc. (a)............................................ 966,591
16,084 Staples Inc. (a)............................................ 702,670
8,631 Tele-Communications, Inc. (a)............................... 477,672
19,222 Time Warner, Inc. .......................................... 1,192,965
7,258 Times Mirror Co., Class A Shares............................ 406,448
22,165 TJX Cos., Inc. ............................................. 642,785
12,513 Unilever NV................................................. 1,037,797
5,885 Viacom Inc. Non-Voting, Class B Shares (a).................. 435,490
39,230 Wal-Mart Corp. ............................................. 3,194,793
27,295 Walt Disney Co. ............................................ 818,850
- -----------------------------------------------------------------------------------------------------
26,576,039
- -----------------------------------------------------------------------------------------------------
CONSUMER STAPLES -- 4.6%
13,927 Adolph Coors Co., Class B Shares............................ 786,440
8,827 Anheuser-Busch Cos., Inc. .................................. 579,272
8,700 Campbell Soup Co. .......................................... 478,500
45,905 Coca-Cola Co. .............................................. 3,069,897
13,869 H.J. Heinz Co. ............................................. 785,332
12,946 Interstate Bakeries Corp. .................................. 342,260
7,160 Kellogg Co. ................................................ 244,335
4,315 Loews Corp. ................................................ 423,949
36,280 Pepsico Inc. ............................................... 1,485,213
56,215 Philip Morris Cos., Inc. ................................... 3,007,503
34,326 Sara Lee Corp. ............................................. 967,564
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
MANAGED ASSETS TRUST
<TABLE>
11,279 Suiza Foods Corp. (a). $ 574,524
<C> <S> <C>
363 Vlasic Foods International Inc. (a)......................... 8,644
- -----------------------------------------------------------------------------------------------------
12,753,433
- -----------------------------------------------------------------------------------------------------
ENERGY -- 0.2%
4,610 Halliburton Resources, Inc. ................................ 136,571
8,238 Schlumberger Ltd. .......................................... 379,978
- -----------------------------------------------------------------------------------------------------
516,549
- -----------------------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 10.6%
24,254 Allstate Corp. ............................................. 936,811
6,081 Ambac Financial Group, Inc. ................................ 366,000
12,783 American Express Co. ....................................... 1,307,062
24,751 American International Group, Inc. ......................... 2,391,565
15,530 Associates First Capital Corp. ............................. 658,084
12,421 Bank One Corp. ............................................. 634,247
38,676 BankAmerica Corp. .......................................... 2,325,395
14,319 BankBoston Corp. ........................................... 557,546
3,236 Capital One Financial Co. .................................. 372,140
20,568 Chase Manhattan Corp. ...................................... 1,399,910
7,797 Comerica, Inc. ............................................. 531,658
8,434 Countrywide Credit Industries, Inc. ........................ 423,281
24,152 Fannie Mae.................................................. 1,787,248
12,750 Federal Home Loan Mortgage Co. ............................. 821,578
7,700 Fifth Third Bancorp......................................... 549,347
5,492 First Union Corp. of North Carolina......................... 333,982
18,046 Fleet Financial Group, Inc. ................................ 806,431
5,198 Golden West Financial Corp. ................................ 476,592
10,004 Hartford Financial Services Group, Inc. .................... 548,970
20,200 Household International, Inc. .............................. 800,425
4,413 J.P. Morgan & Co. .......................................... 463,641
16,281 Lehman Brothers Holdings, Inc. ............................. 717,382
648 M&T Bank Corp. ............................................. 336,272
17,975 Merrill Lynch & Co., Inc. .................................. 1,199,831
20,841 Morgan Stanley, Dean Witter & Co. .......................... 1,479,711
11,500 National City Corp. ........................................ 833,750
5,394 PNC Bank Corp. ............................................. 291,950
9,906 Republic New York Corp. .................................... 451,342
7,748 State Street Corp. ......................................... 538,970
13,338 Summit Bancorp.............................................. 582,704
9,513 SunAmerica Inc. ............................................ 771,742
11,311 SunTrust Banks, Inc. ....................................... 865,292
4,400 TransAmerica Corp. ......................................... 508,200
11,146 Washington Mutual Inc. ..................................... 425,638
43,600 Wells Fargo & Co. .......................................... 1,741,275
- -----------------------------------------------------------------------------------------------------
29,235,972
- -----------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
MANAGED ASSETS TRUST
<TABLE>
<C> <S> <C>
HEALTH CARE -- 9.0%
28,246 Abbott Laboratories......................................... $ 1,384,054
29,913 American Home Products Corp. ............................... 1,684,476
9,410 Amgen Inc. (a).............................................. 983,345
11,000 Baxter International Inc. .................................. 707,438
17,948 Bristol-Myers Squibb Co. ................................... 2,401,667
21 Crescendo Pharmaceutical Corp. (a).......................... 288
20,204 Eli Lilly & Co. ............................................ 1,795,631
8,002 Guidant Corp. (a)........................................... 882,221
22,557 HBO & Co. .................................................. 647,104
30,011 Healthsouth Corp. (a)....................................... 463,295
27,211 Johnson & Johnson........................................... 2,282,323
14,233 Medtronic Inc. ............................................. 1,056,800
21,969 Merck & Co. ................................................ 3,244,547
24,299 Pfizer Inc. ................................................ 3,048,006
9,121 Pharmacia & Upjohn, Inc. ................................... 516,477
27,068 Schering-Plough Corp. ...................................... 1,495,507
20,007 Warner-Lambert Co. ......................................... 1,504,276
5,688 Watson Pharmaceuticals, Inc. (a)............................ 357,633
4,400 Wellpoint Heath Networks, Inc. (a).......................... 382,800
- -----------------------------------------------------------------------------------------------------
24,837,888
- -----------------------------------------------------------------------------------------------------
INSURANCE -- 0.4%
9,709 Everest Reinsurance Holdings, Inc. ......................... 378,044
9,268 Marsh & McLennan Cos., Inc. ................................ 541,599
3,580 Transatlantic Holdings, Inc. ............................... 270,514
- -----------------------------------------------------------------------------------------------------
1,190,157
- -----------------------------------------------------------------------------------------------------
MATERIALS & PROCESSING -- 2.8%
10,535 Aluminum Co. of America..................................... 785,516
27,167 Bethlehem Steel Corp. (a)................................... 227,524
15,496 Crompton & Knowles Corp. ................................... 320,574
19,027 Dayton-Hudson Corp. ........................................ 1,032,215
18,438 E.I. du Pont de Nemours & Co. .............................. 978,366
4,511 Georgia-Pacific Corp. (Timber Group)........................ 107,418
8,042 Georgia-Pacific Group....................................... 470,960
5,002 International Paper Co. .................................... 224,152
10,788 Lyondell Chemical Co. ...................................... 194,184
22,165 Masco Corp. ................................................ 637,244
5,492 Mercury General Corp. ...................................... 240,618
9,906 Mead Corp. ................................................. 290,370
9,808 Monsanto Co. ............................................... 465,880
11,300 Praxair Inc. ............................................... 398,325
802 Raytheon Co., Class A Shares................................ 41,453
6,963 Raytheon Co., Class B Shares................................ 370,780
9,513 Sealed Air Corp. (a)........................................ 485,758
3,335 Weyerhauser Co. ............................................ 169,460
10,298 Willamette Industries, Inc. ................................ 344,983
- -----------------------------------------------------------------------------------------------------
7,785,780
- -----------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
MANAGED ASSETS TRUST
<TABLE>
<C> <S> <C>
OIL -- 3.9%
17,556 Amoco Corp. ................................................ $ 1,059,944
10,690 Atlantic Richfield Co. ..................................... 697,523
9,709 Burlington Resources Inc. .................................. 347,704
10,984 Chevron Corp. .............................................. 910,986
5,394 Enron Corp. ................................................ 307,795
45,017 Exxon Corp. ................................................ 3,291,868
15,442 Mobil Corp. ................................................ 1,345,384
28,834 Royal Dutch Petroleum Co. ADR............................... 1,380,428
15,300 Texaco Inc. ................................................ 808,988
18,634 Unocal Corp. ............................................... 543,880
- -----------------------------------------------------------------------------------------------------
10,694,500
- -----------------------------------------------------------------------------------------------------
PRODUCER DURABLES -- 5.7%
16,643 Boeing Co. ................................................. 542,978
6,767 Caterpillar Inc. ........................................... 311,282
23,048 CBS Corp. .................................................. 754,822
9,709 Cordant Technologies Inc. .................................. 364,088
16,603 Crane Co. .................................................. 501,203
10,396 Deere & Co. ................................................ 344,368
4,119 Dow Chemical Co. ........................................... 374,572
17,359 EG&G Inc. .................................................. 482,797
7,454 Emerson Electric Co. ....................................... 466,341
13,927 Entergy Corp. .............................................. 433,478
8,925 General Dynamics Corp. ..................................... 523,228
65,834 General Electric Co. ....................................... 6,748,333
5,786 Honeywell Inc. ............................................. 435,758
12,259 Ingersoll-Rand Co. ......................................... 575,407
11,965 Kaufman & Broad Home Corp. ................................. 343,994
4,904 Pitney Bowes Inc. .......................................... 323,971
13,731 Pulte Corp. ................................................ 381,893
11,279 20th Century Industries..................................... 261,532
9,611 United Technologies Corp. .................................. 1,045,196
10,396 Waste Management Inc. ...................................... 484,714
- -----------------------------------------------------------------------------------------------------
15,699,955
- -----------------------------------------------------------------------------------------------------
TECHNOLOGY -- 14.0%
11,963 Applied Materials Inc. (a).................................. 511,044
7,109 Ceridian Corp. (a).......................................... 496,297
36,082 Cisco Systems Inc. (a)...................................... 3,349,988
31,882 Compaq Computer Corp. ...................................... 1,337,051
8,844 Computer Sciences Corp. .................................... 569,885
6,767 Compuware Corp. (a)......................................... 528,460
30,242 Dell Computer Corp. (a)..................................... 2,214,281
20,988 Edison International........................................ 585,041
14,279 EMC Corp. (a)............................................... 1,213,715
2,942 Gateway 2000 Inc. (a)....................................... 150,594
16,000 Hewlett Packard Co. ........................................ 1,093,000
38,063 Intel Corp. ................................................ 4,511,655
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
MANAGED ASSETS TRUST
<TABLE>
20,694 International Business Machines Corp. . $ 3,823,217
<C> <S> <C>
28,970 Lucent Technologies Inc. ................................... 3,186,700
12,554 Meredith Corp. ............................................. 475,483
51,367 Microsoft Corp. (a)......................................... 7,115,935
10,690 Motorola Inc. .............................................. 652,758
23,877 Oracle Corp. (a)............................................ 1,030,442
16,200 PP&L Resources, Inc. ....................................... 451,575
4,200 Sun Microsystems Inc. (a)................................... 359,363
6,534 Symbol Technologies, Inc. .................................. 417,768
23,244 Sysco Corp. ................................................ 637,757
3,629 Tellabs Inc. (a)............................................ 248,813
7,667 Texas Instruments Inc. ..................................... 656,008
15,398 3Com Corp. (a).............................................. 690,504
19,223 Tyco International Ltd. .................................... 1,450,136
5,688 Xerox Corp. ................................................ 671,184
- -----------------------------------------------------------------------------------------------------
38,428,654
- -----------------------------------------------------------------------------------------------------
TRANSPORTATION -- 1.7%
3,374 AMR Corp. (a)............................................... 200,331
8,827 CSX Corp. .................................................. 366,321
3,240 DaimlerChrysler AG (a)...................................... 311,243
29,717 Ford Motor Co. ............................................. 1,744,016
8,842 General Motors Corp. ....................................... 632,756
8,800 Lear Corp. (a).............................................. 338,800
17,323 Navistar International Corp. (a)............................ 493,706
9,200 TRW Inc. ................................................... 516,925
3,629 Union Pacific Corp. ........................................ 163,532
- -----------------------------------------------------------------------------------------------------
4,767,630
- -----------------------------------------------------------------------------------------------------
UTILITIES -- 8.7%
14,300 AES Corp. (a)............................................... 677,463
19,713 Airtouch Communications Inc. (a)............................ 1,421,800
11,769 Alltell Corp. .............................................. 703,933
6,034 America Online Inc. ........................................ 873,422
19,223 Ameritech Corp. ............................................ 1,218,258
33,982 AT&T Corp. ................................................. 2,557,146
30,414 Bell Atlantic Corp. ........................................ 1,727,895
34,718 Bellsouth Corp. ............................................ 1,731,560
22,263 Central & South West Corp. ................................. 610,841
15,142 Clear Channel Communications Inc. (a)....................... 825,239
6,473 Columbia Energy Group....................................... 373,816
8,925 FPL Group Inc. ............................................. 550,003
14,373 GTE Corp. .................................................. 969,279
4,511 Houston Industries, Inc. ................................... 144,916
44,435 MCI WorldCom, Inc. (a)...................................... 3,189,600
22,700 Nextel Communications, Inc. (a)............................. 536,997
33,497 SBC Communications, Inc. ................................... 1,796,277
7,944 Sonat Inc. ................................................. 214,985
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
MANAGED ASSETS TRUST
<TABLE>
11,573 Southern Co. . $ 336,320
<C> <S> <C>
8,453 Sprint Corp. ............................................... 711,109
31,276 Sprint Corp. PCS Group (a).................................. 723,258
16,281 Texas Utilities Co. ........................................ 760,119
8,223 U.S. West Communications Group.............................. 531,411
22,754 Williams Cos., Inc. ........................................ 709,640
- -----------------------------------------------------------------------------------------------------
23,895,287
- -----------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK (Cost -- $126,236,101)................... 196,381,844
- -----------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK -- 1.7%
- -----------------------------------------------------------------------------------------------------
FINANCIAL -- 0.9%
6,000 Equity Office Properties Trust, 5.250%...................... 251,250
8,000 Equity Residential Properties, 2.150%....................... 212,000
18,564 Equity Residential Properties, 7.250%....................... 399,126
2,000 Finova Finance, 5.500%...................................... 148,625
12,000 General Growth Properties, 7.250%........................... 309,000
8,000 National Australia Bank, 7.875%............................. 223,000
3,720 New Plan Excel Realty Insurance, 8.500%..................... 105,904
6,000 Newell Financial Trust, 5.250%.............................. 316,500
4,000 Reckson Associates Realty Services, 7.625%.................. 84,500
5,000 Tosco Financial Trust, 5.750%............................... 238,125
2,245 Union Pacific Capital Trust, 6.250%......................... 102,989
- -----------------------------------------------------------------------------------------------------
2,391,019
- -----------------------------------------------------------------------------------------------------
INDUSTRIAL -- 0.8%
4,000 Amcor Ltd, 7.250%........................................... 179,500
10,000 Calenergy Capital II, 6.250% (b)............................ 410,000
2,230 El Paso Energy Capital, 4.750%.............................. 106,761
12,000 International Paper Co., 5.250%............................. 589,500
10,990 News Corp. Ltd., 5.000%..................................... 964,373
- -----------------------------------------------------------------------------------------------------
2,250,134
- -----------------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCK (Cost -- $4,731,504)...... 4,641,153
- -----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT RATING+ SECURITY VALUE
<C> <S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS -- 10.8%
- ------------------------------------------------------------------------------------------------------------------
FINANCIAL -- 3.8%
$5,000,000 Baa2* Nationwide Health Properties, Inc., Notes, 6.900% due
10/1/37..................................................... 5,343,750
2,500,000 Baa1* Simon Debartolo, Company Guaranteed, 6.750% due 7/15/04..... 2,478,125
2,500,000 Baa2* Spieker Properties Inc., Notes, 8.000% due 7/19/05.......... 2,609,375
- ------------------------------------------------------------------------------------------------------------------
10,431,250
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
MANAGED ASSETS TRUST
<TABLE>
<C> <S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
INDUSTRIAL -- 3.6%
$2,000,000 A Cox Communications Inc., Notes, 6.875% due 6/15/05.......... $ 2,130,000
2,500,000 Baa* ProLogis Trust, Sr. Notes, 7.050% due 7/15/06............... 2,515,625
5,000,000 A Xerox Corp., Notes, 6.250% due 11/15/26..................... 5,287,500
- ------------------------------------------------------------------------------------------------------------------
9,933,125
- ------------------------------------------------------------------------------------------------------------------
TELEPHONE -- 1.9%
5,000,000 AAA Bellsouth Capital Funding, Debentures, 6.040% due
11/15/26.................................................... 5,175,000
- ------------------------------------------------------------------------------------------------------------------
TRANSPORTATION -- 1.5%
3,000,000 Baa2* CSX Corp., Debentures, 6.950% due 5/1/27.................... 3,198,750
836,617 NR Willmington Trust, 9.250% due 1/2/07........................ 838,659
- ------------------------------------------------------------------------------------------------------------------
4,037,409
- ------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS (Cost -- 27,520,460).................. 29,576,784
- ------------------------------------------------------------------------------------------------------------------
CONVERTIBLE CORPORATE BONDS -- 2.7%
- ------------------------------------------------------------------------------------------------------------------
FINANCIAL -- 0.4%
Bell Atlantic Corp., Bonds:
297,000 A+ 5.750% due 4/1/03........................................... 310,552
300,000 A1* 4.250% due 9/15/05.......................................... 311,625
400,000 BBB- Elan International Finance Ltd., Company Guaranteed, zero
coupon due 12/12/18......................................... 226,500
300,000 Baa* Security Capital U.S. Realty, Bonds, 2.000% due 5/22/03..... 237,000
- ------------------------------------------------------------------------------------------------------------------
1,085,677
- ------------------------------------------------------------------------------------------------------------------
INDUSTRIAL -- 2.1%
380,000 BBB- Alza Corp., Sub. Notes, zero coupon due 7/14/14............. 260,300
146,000 BBB- Athena Neurosciences Inc., Notes, 4.750% 11/15/04........... 172,828
321,000 A- Diamond Offshore Drilling Inc., Sub. Notes, 3.750% due
2/15/07..................................................... 289,301
300,000 NR Genzyme Corp., Sub. Notes, 5.250% due 6/1/05................ 396,375
300,000 Aa2* GVC Corp. Ltd., Bonds, zero coupon due 5/21/02 (b).......... 333,000
300,000 BBB- Inco Ltd., Debentures, 7.750% due 3/15/16................... 267,000
300,000 AA- Indian Petrochemicals Corp. Ltd., Bonds, 2.500% due 3/11/02
(b)......................................................... 302,250
600,000 BBB Ingram Micro Inc., Debenture, zero coupon due 6/9/18........ 208,500
300,000 BB+ Interim Services Inc., Sub. Notes, 4.500% due 6/1/05........ 264,375
200,000 NR Interpublic Group of Cos., Inc., Sub. Notes, 1.800% due
9/16/04..................................................... 222,250
570,000 A- Koninklijke Ahold, Sub. Notes, 3.000% 9/30/03............... 361,893
431,000 BBB- Lennar Corp., Debenture, zero coupon due 7/29/18............ 191,795
1,000,000 B2* Marriott International Inc., Debenture, zero coupon due
3/25/11..................................................... 651,250
200,000 A- Omnicon Group Inc., Sub. Debenture, 2.250% due 1/6/13....... 269,500
200,000 BBB- Rite Aid Corp., Sub. Notes, 5.250% due 9/15/02.............. 291,250
500,000 BBB Scholastic Corp., Sub. Notes, 5.000% due 8/15/05............ 483,750
238,000 BBB- STMicroelectronics NV, Sub. Notes, zero coupon due
6/10/08..................................................... 215,390
200,000 Aa1* Taiwan Semiconductor Manufacturing Co., Unsubordinated
Notes,
zero coupon due 7/3/02 (b).................................. 230,750
200,000 A+ Telefonica Europa, Company Guaranteed, 2.000% due 7/15/02... 297,000
100,000 A- Thermo Electron Corp., Sub. Debenture, 4.250% due 1/1/03.... 90,125
100,000 A- Thermo Instruments Inc., Company Guaranteed, 4.000% due
1/15/05..................................................... 82,000
- ------------------------------------------------------------------------------------------------------------------
5,880,882
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
MANAGED ASSETS TRUST
<TABLE>
<C> <S> <C>
- ------------------------------------------------------------------------------------------------------------------
UTILITY -- ELECTRIC -- 0.2%
$ 600,000 A- Potomac Electric Power, 5.000% due 9/1/02................... $ 582,000
- ------------------------------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE CORPORATE BONDS (Cost -- $6,933,124)...... 7,548,559
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
FACE
AMOUNT SECURITY VALUE
<C> <S> <C> <C>
U.S. GOVERNMENT SECTOR -- 12.7%
1,500,000 U.S. Treasury Notes, 6.125% due 8/15/07..................... 1,642,110
3,100,000 U.S. Treasury Bond, 7.125% due 2/15/23...................... 3,816,007
28,000,000 U.S. Treasury Strips, zero coupon due 5/15/11............... 14,754,880
3,156,072 FHLMC, 8.000% due 9/1/04.................................... 3,252,711
186,909 FHLMC, 8.500% due 9/1/02.................................... 192,866
2,197,296 FNMA, 5.500% due 8/1/28 (c)................................. 2,118,325
3,921,708 FNMA, 6.000% due 7/1/28 (c)................................. 3,875,124
980,153 FNMA, 6.500% due 12/1/27.................................... 987,191
108,614 FNMA, 8.500% due 3/1/05..................................... 113,129
3,249,886 FNMA Dwarf, 6.000% due 1/1/13............................... 3,261,034
189,535 GNMA, 7.500% due 5/15/23 (c)................................ 195,575
273,904 GNMA, 9.000% due 11/15/19 (c)............................... 292,478
292,315 GNMA, 9.500% due 3/15/20 (c)................................ 315,700
- ------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECTOR (Cost -- $35,429,097).......... 34,817,130
- ------------------------------------------------------------------------------------------------------------------
SHORT TERM U.S. GOVERNMENT INSTRUMENTS -- 0.2%
633,000 U.S. Treasury Bill, 4.330% due 3/18/99 (Cost -- $627,214)... 627,214
- ------------------------------------------------------------------------------------------------------------------
SUB-TOTAL INVESTMENTS (Cost -- $201,477,500)................ 273,592,684
- ------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 0.6%
1,741,000 Morgan Stanley, Dean Witter & Co., 4.620% due 1/4/99;
Proceeds at maturity -- $1,741,894; (Fully collateralized by
U.S. Treasury Bonds, 8.750% due 8/15/20; Market
value -- $1,776,076) (Cost -- $1,741,000)................... 1,741,000
- ------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $203,218,500**).......... $275,333,684
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Non-income producing security.
(b) 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.
(c) Date shown represents the last in range of maturity dates of mortgage
certificates owned.
+ All ratings are by Standard & Poor's Ratings Services, except that those
identified by an asterisk (*) are rated by Moody's Investors Service Inc.
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 22 for definitions of ratings.
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
HIGH YIELD BOND TRUST
<TABLE>
<CAPTION>
FACE
AMOUNT RATING+ SECURITY VALUE
- ---------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
CORPORATE BONDS AND NOTES -- 89.2%
- ---------------------------------------------------------------------------------------------------
CHEMICALS -- 0.6%
$ 155,000 B Polymer Group Inc., Company Guaranteed, Series B, 9.000% due
7/1/07.................................................... $ 153,450
- ---------------------------------------------------------------------------------------------------
CONSUMER NON-DURABLES -- 2.4%
350,000 B Grove Holdings LLC, step bond to yield 11.625% due 5/1/09... 147,000
485,000 B- Tropical Sportswear International Corp., Company Guaranteed,
11.000% due 6/15/08....................................... 511,674
- ---------------------------------------------------------------------------------------------------
658,674
- ---------------------------------------------------------------------------------------------------
ENERGY -- 5.1%
360,000 B Cross Timbers Oil Co., Sr. Sub. Notes, 9.250% due 4/1/07.... 332,100
310,000 B- International Utility Structures Inc., Sr. Sub. Notes,
10.750% due 2/1/08........................................ 291,400
365,000 B+ Parker Drilling Co., Company Guaranteed, 9.750% due
11/15/06.................................................. 326,675
180,000 BB- Pride Petroleum Inc., Sr. Notes, 9.375% due 5/1/07.......... 170,100
250,000 BB+ Tuscon Electric Power Co., Collateral Trust, 7.500% due
8/1/08.................................................... 260,625
- ---------------------------------------------------------------------------------------------------
1,380,900
- ---------------------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 0.6%
90,000 B- B.F. Saul Real Estate Investment Trust, Sr. Notes, 9.750%
due 4/1/08................................................ 82,800
120,000 B+ Pioneer Americas Acquisition, Company Guaranteed, 9.250% due
6/15/07................................................... 93,600
- ---------------------------------------------------------------------------------------------------
176,400
- ---------------------------------------------------------------------------------------------------
FOOD AND DRUG -- 4.2%
120,000 B Agrilink Foods, Sr. Sub. Notes, 11.875% due 11/1/08......... 122,400
510,000 B Archibald Candy Corp., Company Guaranteed, 10.250% due
7/1/04.................................................... 517,650
490,000 B- Duane Reade Inc., Company Guaranteed, 9.250% due 2/15/08.... 501,025
- ---------------------------------------------------------------------------------------------------
1,141,075
- ---------------------------------------------------------------------------------------------------
GAMING/LEISURE -- 9.5%
Bally Total Fitness Holdings Corp., Sr. Sub. Notes:
420,000 B+ 9.875% due 10/15/07......................................... 411,600
120,000 B+ 9.875% due 10/15/07 (a)..................................... 117,600
400,000 Ba3* Grand Casinos Inc., 1st Mortgage Notes, 10.125% due
12/1/03................................................... 436,000
350,000 BB+ Harrah's Operating Co. Inc., Company Guaranteed, 7.875% due
12/15/05.................................................. 351,750
150,000 B Hollywood Park Inc., Sr. Sub. Notes, 9.500% due 8/1/07...... 148,875
325,000 B+ Prime Hospitality Corp., Sr. Sub. Notes, 9.750% due
4/1/07.................................................... 328,250
Regal Cinemas Inc., Sr. Notes:
140,000 B 9.500% due 6/1/08........................................... 145,950
75,000 B 9.500% due 6/1/08 (a)....................................... 78,187
Station Casinos Inc., Sr. Sub. Notes:
360,000 B+ 10.125% due 3/15/06......................................... 377,100
200,000 B+ 8.875% due 12/1/08.......................................... 201,500
- ---------------------------------------------------------------------------------------------------
2,596,812
- ---------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
HIGH YIELD BOND TRUST
<TABLE>
<C> <S> <C> <C>
HEALTH CARE -- 3.0%
$ 250,000 B+ PSS World Medical Inc., Company Guaranteed, 8.500% due
10/1/07................................................... $ 261,563
350,000 B- Production Resource Group, Sr. Sub. Notes, 11.500% due
1/15/08................................................... 344,750
205,000 B+ Unilab Corp., Sr. Notes, 11.000% due 4/1/06................. 213,200
- --------------------------------------------------------------------------------------------------
819,513
- --------------------------------------------------------------------------------------------------
HOUSING -- 2.2%
250,000 B+ Beazer Homes USA Inc., Company Guaranteed, 8.875% due
4/1/08.................................................... 241,250
350,000 BB+ Greystone Homes Inc., Sr. Notes, 10.750% due 3/1/04......... 371,000
- --------------------------------------------------------------------------------------------------
612,250
- --------------------------------------------------------------------------------------------------
INFORMATION/TECHNOLOGY -- 4.5%
420,000 B- PSINet Inc., Sr. Notes, 10.000% due 2/15/05................. 415,980
160,000 BB- Unisys Corp., Sr. Notes, 12.000% due 4/15/03................ 179,600
225,000 B- Verio Inc., Sr. Notes, 11.250% due 12/1/08.................. 227,250
Viasystems Group, Sr. Sub. Notes:
120,000 B- 9.750% due 6/1/07........................................... 114,000
310,000 B- Series B 9.750% due 6/1/07.................................. 294,500
- --------------------------------------------------------------------------------------------------
1,231,330
- --------------------------------------------------------------------------------------------------
MANUFACTURING -- 9.3%
Advance Holding Corp.:
60,000 B- Step bond to yield 12.645% due 4/15/09...................... 35,400
300,000 NR Step bond to yield 12.818% due 4/15/09 (a).................. 177,000
240,000 B+ Diamond Triumph Autoglass, Sr. Notes, 9.250% due 4/1/08..... 238,200
400,000 B- Doane Pet Care Co., Sr. Sub. Notes, 9.750% due 5/15/07...... 410,000
400,000 B- Fisher Scientific International Inc., Sr. Sub. Notes, 9.000%
due 2/1/08................................................ 400,000
120,000 BB- Imax Corp., Sr. Notes, 7.875% due 12/1/05................... 121,200
300,000 B- Roller Bearing Co., Company Guaranteed, 9.625% due
6/15/07................................................... 288,000
180,000 B- Special Devices Inc., Sr. Sub. Notes, 11.375% due 12/15/08
(a)....................................................... 183,150
50,000 B- Sullivan Graphics Inc., Sr. Sub. Notes, 12.750% due
8/1/05.................................................... 51,000
250,000 B- Transdigm Inc., Sr. Sub. Notes, 10.375% due 12/1/08......... 250,625
410,000 B WHX Corp., Sr. Notes, 10.500% due 4/15/05................... 377,200
- --------------------------------------------------------------------------------------------------
2,531,775
- --------------------------------------------------------------------------------------------------
MEDIA/ENTERTAINMENT -- 15.1%
500,000 B Chancellor Media Corp., Sr. Sub. Notes, 9.000% due
10/1/08................................................... 531,250
100,000 B- Classic Cable Inc., Sr. Sub. Notes, 9.875% due 8/1/08....... 104,250
500,000 B Jacor Communication Co., Company Guaranteed, 9.750% due
12/15/06.................................................. 555,000
340,000 CCC+ Paxson Communication Corp., Sr. Sub. Notes, 11.625% due
10/1/02................................................... 345,100
Pegasus Media & Communication Corp.:
500,000 B- Notes 12.500% due 7/1/05.................................... 550,000
330,000 B- Sr. Notes, 9.625% due 10/15/05.............................. 330,000
595,000 B- SFX Entertainment Inc., Company Guaranteed, 9.125% due
2/1/08.................................................... 593,515
175,000 B Sinclair Broadcast Group Inc., Sr. Sub. Notes, 8.750% due
12/15/07.................................................. 176,750
645,000 B+ TeleWest Communications PLC, step bond to yield 10.809% due
10/1/07................................................... 538,575
200,000 B- Transwestern Publishing Co., Sr. Sub. Notes, 9.625% due
11/15/07.................................................. 208,750
340,000 B United International Holdings Inc., step bond to yield
10.767% due 2/15/08....................................... 183,600
- --------------------------------------------------------------------------------------------------
4,116,790
- --------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
HIGH YIELD BOND TRUST
<TABLE>
<C> <S> <C> <C>
METALS/MINERALS -- 7.4%
$ 500,000 B- Diamond Holdings PLC, Company Guaranteed, 9.125% due
2/1/08.................................................... $ 477,500
500,000 BB Great Central Mines Ltd., Sr. Notes, 8.875% due 4/1/08...... 497,500
450,000 B- La Petite Acadamy Inc., Company Guaranteed, 10.000% due
5/15/08................................................... 445,500
600,000 CCC+ Republic Engineer Steel, 1st Mortgage, 9.875% due
12/15/01.................................................. 616,500
- --------------------------------------------------------------------------------------------------
2,037,000
- --------------------------------------------------------------------------------------------------
PAPER -- 1.5%
400,000 B Mail-Well Corp., Sr. Sub. Notes, 10.500% due 2/15/04........ 421,000
- --------------------------------------------------------------------------------------------------
RETAIL -- 3.4%
410,000 B- Advance Stores Co. Inc., Sr. Sub. Notes, 10.250% due 4/15/08
(a)....................................................... 416,150
500,000 BB K-Mart Corp., Medium Term Notes, 7.900% due 12/14/00........ 508,750
- --------------------------------------------------------------------------------------------------
924,900
- --------------------------------------------------------------------------------------------------
SERVICES -- 6.9%
710,000 B AFC Enterprises, Sr. Sub. Notes, 10.250% due 5/15/07........ 741,950
250,000 B+ Equimar Shipholdings Ltd., Company Guaranteed, 9.875% due
7/1/07.................................................... 197,500
236,896 B FRD Acquisition, Sr. Notes, 12.500% due 7/15/04............. 241,634
450,000 B NE Restaurant Co. Inc., Sr. Notes, 10.750% due 7/15/08...... 456,750
240,000 B- Williams Scotsman Inc., Company Guaranteed, 9.875% due
6/1/07.................................................... 249,900
- --------------------------------------------------------------------------------------------------
1,887,734
- --------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 7.0%
295,000 CCC+ Centennial Cellular Corp., Sr. Sub. Notes, 10.750% due
12/15/08 (a).............................................. 297,213
250,000 B- Classic Communications, Inc., step bond to yield 13.055% due
8/1/09.................................................... 151,875
260,000 B+ Jordan Telecommunications Products, step bond to yield
10.629% due 8/1/07........................................ 200,200
NTL Inc.:
120,000 B- Sr. Notes, 11.500% due 10/1/08 (a).......................... 131,100
585,000 B- Step bond to yield 10.095% due 4/1/08....................... 356,850
400,000 BB+ Qwest Communication Corp., step bond to yield 7.608% due
2/1/08.................................................... 301,000
485,000 B- T/SF Communications Corp., Company Guaranteed, 10.375% due
11/1/07................................................... 483,181
- --------------------------------------------------------------------------------------------------
1,921,419
- --------------------------------------------------------------------------------------------------
TEXTILES -- 3.8%
550,000 B+ Avondale Mills Inc., Company Guaranteed, 10.250% due
5/1/06.................................................... 577,500
475,000 B+ Delta Mills Inc., Company Guaranteed, 9.625% due 9/1/07..... 467,875
- --------------------------------------------------------------------------------------------------
1,045,375
- --------------------------------------------------------------------------------------------------
TRANSPORTATION -- 2.7%
474,000 B- Atlas Air Inc., Sr. Notes, 10.750% due 8/1/05............... 500,070
240,000 B- MTL Inc., Sr. Sub. Notes, 10.000% due 6/15/06 (a)........... 232,800
- --------------------------------------------------------------------------------------------------
732,870
- --------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES (Cost -- $24,656,253)....... 24,389,267
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- --------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
STOCK -- 3.6%
- --------------------------------------------------------------------------------------------------
ENERGY -- 0.2%
3,100 Niagara Mohawk Power Corp. ................................. 49,987
- --------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
HIGH YIELD BOND TRUST
<TABLE>
<C> <S> <C> <C>
MEDIA/ENTERTAINMENT -- 0.2%
10 Paxson Communications Corp., Preferred, Payment-in-kind,
Exchangeable 12.500%...................................... $ 875
451 SFX Broadcasting Inc., Class A Shares, Preferred, 12.625%... 55,924
- --------------------------------------------------------------------------------------------------
56,799
- --------------------------------------------------------------------------------------------------
TECHNOLOGY -- 1.3%
4,500 Eagle-Picher Holdings, Preferred, 11.750%, Expire 3/1/08.... 220,500
71 Source Media Inc., Preferred, Payment-in-kind, Exchangeable
13.500%................................................... 1,385
9,000 Viasystems Group, Inc., Preferred, Series B................. 135,000
- --------------------------------------------------------------------------------------------------
356,885
- --------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 1.9%
300,000 Centaur Funding Corp., Preferred 9.080% (a)................. 309,060
2,100 Global Crossing Holding Ltd., Preferred 10.500% (a)......... 204,750
- --------------------------------------------------------------------------------------------------
513,810
- --------------------------------------------------------------------------------------------------
TOTAL STOCK (Cost -- $650,251).............................. 977,481
- --------------------------------------------------------------------------------------------------
WARRANTS (B) -- 0.1%
- --------------------------------------------------------------------------------------------------
MANUFACTURING -- 0.1%
1,600 Terex Corp., Expire 5/15/02................................. 32,000
- --------------------------------------------------------------------------------------------------
METAL PRODUCTS -- 0.0%
500 Gulf State Steel Alabama Inc., Expire 4/15/03............... 5
- --------------------------------------------------------------------------------------------------
TOTAL WARRANTS (Cost -- $44,163)............................ 32,005
- --------------------------------------------------------------------------------------------------
SUB-TOTAL INVESTMENTS (Cost -- $25,350,667)................. 25,398,753
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- --------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
REPURCHASE AGREEMENT -- 7.1%
$1,936,000 Morgan Stanley, Dean Witter & Co., 4.620% due 1/4/99,
Proceeds at Maturity -- $1,936,992 (Fully collaterized by
U.S. Treasury Notes, 13.875% due 5/15/11; Market
Value -- $1,979,923) (Cost -- $1,936,000)................... 1,936,000
- --------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $27,286,667**)........... $27,334,753
- --------------------------------------------------------------------------------------------------
</TABLE>
+ All ratings are by Standard & Poor's Ratings Services, except that those
identified by an asterisk (*) are rated by Moody's Investors Service Inc.
(a) 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.
(b) Non-income producing security.
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 22 for definition of bond ratings.
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
HIGH YIELD BOND TRUST
SUMMARY OF BONDS BY COMBINED RATINGS
<TABLE>
<CAPTION>
STANDARD & % OF TOTAL CORPORATE
MOODY'S AND/OR POOR'S BONDS & NOTES
<S> <C> <C> <C>
- -------------------------------------------------
Ba BB 13.1%
B B 81.0
Caa CCC 5.2
NR NR 0.7
- -------------------------------------------------
100.0%
- -------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
- --------------------------------------------------------------------------------
BOND RATINGS (UNAUDITED)
The definitions of the applicable rating symbols are set forth below:
Standard & Poor's Ratings Services ("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 Investors Service Inc. ("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
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
CAPITAL APPRECIATION FUND
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ----------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCK -- 88.3%
- ----------------------------------------------------------------------------------------
BANKING -- 0.4%
87,855 U.S. Bancorp................................................ $ 3,118,853
- ----------------------------------------------------------------------------------------
BEVERAGE -- 2.1%
206,960 Coca-Cola Co. .............................................. 13,840,450
135,965 Coca-Cola Enterprises Inc. ................................. 4,860,749
- ----------------------------------------------------------------------------------------
18,701,199
- ----------------------------------------------------------------------------------------
CHEMICAL -- 0.7%
134,205 Monsanto Co. ............................................... 6,374,738
- ----------------------------------------------------------------------------------------
COMPUTERS -- 12.4%
805,720 Dell Computer Corp. (a)..................................... 58,968,632
137,050 International Business Machines Corp. ...................... 25,319,988
428,380 VERITAS Software Corp. (a).................................. 25,676,026
- ----------------------------------------------------------------------------------------
109,964,646
- ----------------------------------------------------------------------------------------
COMMUNICATIONS -- 0.9%
160,645 Qwest Communications International, Inc. (a)................ 8,032,250
- ----------------------------------------------------------------------------------------
DIVERSIFIED OPERATIONS -- 8.9%
361,405 General Electric Co. ....................................... 36,885,898
676,170 Time Warner Inc. ........................................... 41,964,801
- ----------------------------------------------------------------------------------------
78,850,699
- ----------------------------------------------------------------------------------------
DRUGS AND HEALTH CARE -- 10.8%
318,020 Eli Lilly & Co. ............................................ 28,264,028
19,350 MedImmune, Inc. (a)......................................... 1,924,116
271,190 Pfizer, Inc. ............................................... 34,017,396
430,125 Warner-Lambert Co. ......................................... 32,340,023
- ----------------------------------------------------------------------------------------
96,545,563
- ----------------------------------------------------------------------------------------
ELECTRONICS -- 3.1%
323,376 Texas Instruments Inc. ..................................... 27,668,773
- ----------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 4.5%
363,735 Charles Schwab Corp. ....................................... 20,437,360
265,520 Fannie Mae.................................................. 19,648,480
- ----------------------------------------------------------------------------------------
40,085,840
- ----------------------------------------------------------------------------------------
MEDICAL INFORMATION SYSTEMS -- 3.6%
428,381 IMS Health Inc. ............................................ 32,315,916
- ----------------------------------------------------------------------------------------
RETAIL -- 7.7%
239,105 Costco Cos., Inc. (a)....................................... 17,260,392
309,250 Fred Meyer, Inc. (a)........................................ 18,632,312
216,395 Safeway Inc. (a)............................................ 13,186,570
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
CAPITAL APPRECIATION FUND
<TABLE>
219,850 Staples, Inc. (a). $ 9,604,697
157,830 Home Depot, Inc. ........................................... 9,657,223
- ----------------------------------------------------------------------------------------
68,341,194
- ----------------------------------------------------------------------------------------
SOFTWARE -- 21.7%
566,180 America Online, Inc. (a).................................... 90,588,800
508,245 Cisco Systems, Inc. (a)..................................... 47,171,489
104,290 Intuit Inc. (a)............................................. 7,561,025
204,090 J.D. Edwards & Co. (a)...................................... 5,791,054
304,900 Microsoft Corp. (a)......................................... 42,285,819
- ----------------------------------------------------------------------------------------
193,398,187
- ----------------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 11.5%
127,820 Global TeleSystems Group, Inc. (a).......................... 7,125,965
218,710 Lucent Technologies Inc. ................................... 24,058,100
366,195 MCI WorldCom, Inc. (a)...................................... 26,274,491
369,520 Nokia Corp. Sponsored ADR................................... 44,504,065
- ----------------------------------------------------------------------------------------
101,962,621
- ----------------------------------------------------------------------------------------
TOTAL COMMON STOCK (Cost -- $420,182,280)................... 785,360,479
- ----------------------------------------------------------------------------------------
FOREIGN STOCK -- 1.3%
DRUGS AND HEALTH CARE -- 1.3%
848,713 Smithkline Beecham PLC (Cost -- $11,889,340)................ 11,911,042
- ----------------------------------------------------------------------------------------
SUB-TOTAL INVESTMENTS (Cost -- $432,071,620)................ 797,271,521
- ----------------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
- ----------------------------------------------------------------------------------------
<C> <S> <C>
REPURCHASE AGREEMENT -- 10.4%
$92,708,000 Morgan Stanley, Dean Witter & Co., 4.620% due 1/4/99;
Proceeds at maturity -- $92,755,586; (Fully Collateralized
by U.S. Treasury Notes, 7.125% to 8.750% due 8/15/20 to
2/15/23; Market
Value -- $94,531,419)(Cost -- $92,708,000).................. 92,708,000
- ----------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $524,779,620**).......... $889,979,521
- ----------------------------------------------------------------------------------------
</TABLE>
(a) Non-income producing security.
** Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FACE ANNUALIZED
AMOUNT SECURITY YIELD VALUE
- --------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
COMMERCIAL PAPER -- 99.0%
$2,000,000 AC Acquisition Holdings matures 3/12/99..................... 5.10% $ 1,980,439
2,000,000 Asset Securitization Corp. matures 2/18/99.................. 5.35 1,985,947
2,200,000 Associates Corp. of North America matures 1/12/99........... 5.18 2,196,545
2,100,000 Bayer Corp. matures 2/25/99................................. 5.10 2,083,798
2,200,000 Becton Dickinson & Co. matures 1/19/99...................... 5.32 2,194,203
2,000,000 Campbell Soup Co. matures 1/8/99............................ 5.22 1,997,978
1,530,000 Coca-Cola Co. matures 2/4/99................................ 5.13 1,522,645
2,000,000 Eastman Kodak matures 1/27/99............................... 5.17 1,992,590
2,000,000 Eaton Corp. matures 1/6/99.................................. 6.03 1,998,328
1,650,000 E.I. Dupont de Nemours matures 1/14/99...................... 5.06 1,647,020
2,000,000 Ford Motor Credit Corp. matures 1/8/99...................... 5.44 1,997,896
1,125,000 General Electric Capital Corp. matures 1/13/99.............. 5.37 1,123,005
1,000,000 H.J. Heinz Co. matures 2/2/99............................... 5.21 995,404
1,900,000 Household Finance Corp. matures 1/11/99..................... 5.39 1,897,171
1,750,000 Johnson & Johnson matures 1/4/99............................ 5.00 1,749,271
2,150,000 Marsh & McLennan Co. Inc. matures 1/28/99................... 5.15 2,141,809
2,100,000 National Rural Utilities matures 1/15/99.................... 5.06 2,095,917
1,995,000 Paccar Financial Corp. matures 1/21/99...................... 5.23 1,989,237
2,100,000 Prudential Funding Co. matures 2/5/99....................... 5.27 2,089,383
2,000,000 Teco Finance Inc. matures 2/5/99............................ 5.16 1,990,044
1,850,000 TRW Inc. matures 1/28/99.................................... 5.23 1,842,813
2,250,000 Walt Disney Co. matures 3/2/99.............................. 5.16 2,230,950
- --------------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER (Cost -- $41,742,393) 41,742,393
- --------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 1.0%
430,000 CS First Boston Corp., 4.400% due 1/4/99; Proceeds at
Maturity -- $430,210; (Fully Collateralized by U.S. Treasury
Notes, 5.375% due 1/31/00; Market Value -- $438,780)
(Cost -- $430,000).......................................... 430,000
- --------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $42,172,393*)............ $42,172,393
- --------------------------------------------------------------------------------------------------------------
</TABLE>
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
25
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 1998
<TABLE>
<CAPTION>
MANAGED HIGH YIELD CAPITAL MONEY
ASSETS BOND APPRECIATION MARKET
TRUST TRUST FUND PORTFOLIO
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS:
Investments -- Cost.............................. $201,477,500 $25,350,667 $432,071,620 $41,742,393
Repurchase Agreements -- Cost.................... 1,741,000 1,936,000 92,708,000 430,000
- ------------------------------------------------------------------------------------------------------------
Investments, at value............................ $273,592,684 $25,398,753 $797,271,521 $41,742,393
Repurchase Agreements, at value.................. 1,741,000 1,936,000 92,708,000 430,000
Cash............................................. 520 -- 331 252
Dividends and interest receivable................ 984,220 586,988 174,941 56
Receivable for securities sold................... 165,698 252 -- --
Receivable for Fund shares sold.................. -- 232,889 1,340,964 --
- ------------------------------------------------------------------------------------------------------------
TOTAL ASSETS..................................... 276,484,122 28,154,882 891,495,757 42,172,701
- ------------------------------------------------------------------------------------------------------------
LIABILITIES:
Investment advisory fees payable................. 113,433 12,014 510,482 8,632
Administration fees payable...................... 13,651 1,442 40,362 2,136
Payable to bank.................................. -- 34,095 -- --
Payable for Fund shares purchased................ 62,457 -- -- --
Payable to broker -- variation margin............ 35,700 -- -- --
Dividends payable................................ -- -- -- 74,245
Accrued expenses................................. 77,207 18,890 83,990 18,359
- ------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES................................ 302,448 66,441 634,834 103,372
- ------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS................................... $276,181,674 $28,088,441 $890,860,923 $42,069,329
- ------------------------------------------------------------------------------------------------------------
NET ASSETS:
Paid-in capital.................................. $181,377,818 $27,358,407 $494,472,555 $42,069,329
Undistributed net investment income.............. 5,732,244 2,318,362 1,059,153 --
Accumulated net realized gain (loss) from
security transactions, foreign currencies and
futures contracts............................. 17,799,372 (1,636,414) 30,123,306 --
Net unrealized appreciation of investments,
futures contracts and foreign currencies...... 71,272,240 48,086 365,205,909 --
- ------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS................................... $276,181,674 $28,088,441 $890,860,923 $42,069,329
- ------------------------------------------------------------------------------------------------------------
SHARES OUTSTANDING................................. 13,812,401 2,850,740 12,246,916 42,069,329
- ------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, PER SHARE......................... $19.99 $9.85 $72.74 $1.00
- ------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
26
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
MANAGED HIGH YIELD CAPITAL MONEY
ASSETS BOND APPRECIATION MARKET
TRUST TRUST FUND PORTFOLIO
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest............................................ $ 4,703,240 $ 2,568,670 $ 3,117,890 $1,637,680
Dividends........................................... 2,454,616 46,514 2,898,344 --
Less: Foreign withholding tax....................... (4,526) -- (26,918) --
- -------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME............................. 7,153,330 2,615,184 5,989,316 1,637,680
- -------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 3)................... 1,232,882 141,393 4,360,310 96,335
Administration fees (Note 3)........................ 147,946 16,967 380,360 19,629
Audit and legal..................................... 41,953 35,597 46,643 29,000
Shareholder communications.......................... 21,348 10,984 76,697 6,746
Custody............................................. 18,000 7,912 40,154 9,269
Shareholder and system servicing fees............... 5,113 18,586 10,665 10,114
Trustees' fees...................................... 1,000 1,000 6,091 3,288
Other............................................... 3,196 378 5,748 3,288
- -------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES...................................... 1,471,438 232,817 4,926,668 177,669
- -------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME................................. 5,681,892 2,382,367 1,062,648 1,460,011
- -------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
FUTURES CONTRACTS AND FOREIGN CURRENCIES (NOTES 4 AND
6):
Realized Gain (Loss) From:
Security transactions (excluding short-term
securities*)................................... 19,805,812 443,848 31,708,067 (215)
Futures contracts................................ (1,800,903) -- -- --
Foreign currency transactions.................... -- -- (3,495) --
- -------------------------------------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS)............................ 18,004,909 443,848 31,704,572 (215)
- -------------------------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of
Investments, Futures Contracts and Foreign
Currencies:
Beginning of year................................ 46,559,403 1,143,573 96,460,219 --
End of year...................................... 71,272,240 48,086 365,205,909 --
- -------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET UNREALIZED
APPRECIATION........................................ 24,712,837 (1,095,487) 268,745,690 --
- -------------------------------------------------------------------------------------------------------------
NET GAIN (LOSS) ON INVESTMENTS, FUTURES CONTRACTS AND
FOREIGN CURRENCIES.................................. 42,717,746 (651,639) 300,450,262 (215)
- -------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS................ $48,399,638 $ 1,730,728 $301,512,910 $1,459,796
- -------------------------------------------------------------------------------------------------------------
</TABLE>
* Except for Money Market Portfolio where the net realized losses are only from
the sale of short-term securities.
SEE NOTES TO FINANCIAL STATEMENTS.
27
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEAR ENDED DECEMBER 31, 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............................ $ 5,681,892 $ 2,382,367 $ 1,062,648 $ 1,460,011
Net realized gain (loss)......................... 18,004,909 443,848 31,704,572 (215)
Increase (decrease) in net unrealized
appreciation.................................. 24,712,837 (1,095,487) 268,745,690 --
- -------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS........... 48,399,638 1,730,728 301,512,910 1,459,796
- -------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM (NOTE 2):
Net investment income............................ (6,031,526) (1,906,452) (1,757,481) (1,459,796)
Net realized gains............................... (11,032,250) -- (15,276,070) --
- -------------------------------------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM
DISTRIBUTIONS TO SHAREHOLDERS................. (17,063,776) (1,906,452) (17,033,551) (1,459,796)
- -------------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 11):
Net proceeds from sale of shares................. 17,716,235 7,689,311 206,554,463 103,475,184
Net asset value of shares issued for reinvestment
of dividends.................................. 17,063,776 1,906,452 17,033,551 1,409,254
Cost of shares reacquired........................ (13,804,479) (6,603,776) (24,907,667) (76,308,910)
- -------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM FUND SHARE
TRANSACTIONS.................................. 20,975,532 2,991,987 198,680,347 28,575,528
- -------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS............................. 52,311,394 2,816,263 483,159,706 28,575,528
NET ASSETS:
Beginning of year................................ 223,870,280 25,272,178 407,701,217 13,493,801
- -------------------------------------------------------------------------------------------------------------
END OF YEAR*..................................... $276,181,674 $28,088,441 $890,860,923 $ 42,069,329
- -------------------------------------------------------------------------------------------------------------
* Includes undistributed net investment income
of:.............................................. $5,732,244 $2,318,362 $1,059,153 --
- -------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
28
<PAGE>
- --------------------------------------------------------------------------------
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.
29
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Managed Assets Trust, High Yield Bond Trust, Capital Appreciation Fund
and Money Market Portfolio (formerly known as the 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 for which market quotations are not available
will be valued in good faith at fair value by or under the direction of the
Board of Trustees; (d) securities maturing within 60 days are valued at cost
plus accreted discount, or minus amortized premium, which approximates value;
(e) 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;
(f) 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; (g) gains or losses on
the sale of securities are calculated by using the specific identification
method; (h) dividends and distributions to shareholders are recorded on the
ex-dividend date; (i) 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; (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, 1998,
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 Managed Assets Trust, a portion of
undistributed net investment income amounting to $116 and a portion of
accumulated net realized gains amounting to $31,374 was reclassified to paid-in
capital. In addition, for the High Yield Bond Trust, a portion of accumulated
net realized loss amounting to $1,352,578 was reclassified to paid-in capital.
Net investment income, net realized gains and net assets were not affected by
this change; (k) 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 (l) 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 Citigroup, 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 Citigroup, 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.
30
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
TAMIC also has a sub-advisory agreement with Janus Capital Corporation
("Janus"). Pursuant to the sub-advisory agreement, Janus is responsible for the
day-to-day portfolio operations and investment decisions for CAF. As a result,
TAMIC pays Janus, as sub-advisor, 0.55% of the average daily net assets of CAF.
Travelers Insurance Company ("Travelers Insurance") acts as administrator
to the Funds. The Funds pay Travelers Insurance an administration fee calculated
at an annual rate of 0.06% of its average daily net assets. Travelers Insurance
has entered into a sub-administrative services agreement with Mutual Management
Corp. ("MMC"), 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 $13,143 were received from affiliated brokers.
One Trustee and all officers of the Funds are employees of Citigroup, Inc.,
or its subsidiaries.
4. INVESTMENTS
During the year ended December 31, 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................................................... $190,385,227 $35,792,135 $410,428,204
- -------------------------------------------------------------------------------------------------------
Sales....................................................... 179,263,147 33,175,676 277,800,626
</TABLE>
- --------------------------------------------------------------------------------
At December 31, 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............................... $76,641,813 $ 457,018 $367,626,910
Gross unrealized depreciation............................... (4,526,629) (408,932) (2,427,009)
- -----------------------------------------------------------------------------------------------------
Net unrealized appreciation................................. $72,115,184 $ 48,086 $365,199,901
- -----------------------------------------------------------------------------------------------------
</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 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 December 31, 1998, MAT had sold 42 financial futures contracts on the
Standard & Poor's 500 Index expiring in March 1999. The basis value of such
contracts was $13,920,694. The market value of such contracts on December 31,
1998 was $13,077,750, resulting in an unrealized loss of $842,944.
31
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. OPTIONS CONTRACTS
Premiums paid when put or call options are purchased by the Funds,
represent investments, which are "marked-to-market" daily. When a purchased
option expires, the Funds realize a loss in the amount of the premium paid. When
the Funds enter into closing sales transactions, the Funds realize a gain or
loss depending on whether the proceeds from the closing sales transaction are
greater or less than the premium paid for the option. When the Funds exercise a
put option, it will realize a gain or loss from the sale of the underlying
security and the proceeds from such sale will be decreased by the premium
originally paid. When the Funds exercise a call option, the cost of the security
which the Funds purchase upon exercise will be increased by the premium
originally paid.
At December 31, 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 December 31, 1998, MAT held no TBA securities.
9. CAPITAL LOSS CARRYFORWARD
At December 31, 1998, HYBT had, for Federal income tax purposes,
approximately $1,311,000 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>
1999 2000 2001 2002 2004
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
Carryforward Amounts.......................... $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.
32
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. SHARES OF BENEFICIAL INTEREST
The Declaration of Trust authorizes the issuance of an unlimited number of
shares of beneficial interest without par value. Transactions in shares of each
Fund were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------
MANAGED ASSETS TRUST
Shares sold................................................. 955,576 430,658
Shares issued on reinvestment............................... 921,867 364,705
Shares redeemed............................................. (747,496) (707,124)
- ---------------------------------------------------------------------------------------------------
Net Increase................................................ 1,129,947 88,239
- ---------------------------------------------------------------------------------------------------
HIGH YIELD BOND TRUST
Shares sold................................................. 772,815 811,252
Shares issued on reinvestment............................... 196,339 1,591
Shares redeemed............................................. (673,313) (294,426)
- ---------------------------------------------------------------------------------------------------
Net Increase................................................ 295,841 518,417
- ---------------------------------------------------------------------------------------------------
CAPITAL APPRECIATION FUND
Shares sold................................................. 3,602,035 3,339,655
Shares issued on reinvestment............................... 292,021 59
Shares redeemed............................................. (448,218) (642,619)
- ---------------------------------------------------------------------------------------------------
Net Increase................................................ 3,445,838 2,697,095
- ---------------------------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
Shares sold................................................. 103,475,184 28,240,251
Shares issued on reinvestment............................... 1,409,254 286,879
Shares redeemed............................................. (76,308,910) (18,576,002)
- ---------------------------------------------------------------------------------------------------
Net Increase................................................ 28,575,528 9,951,128
- ---------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
For a share of beneficial interest outstanding throughout each year ended
December 31:
<TABLE>
<CAPTION>
MANAGED ASSETS TRUST 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR............... $17.65 $14.98 $15.50 $12.85 $14.21
- ---------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income.......................... 0.41 0.48 0.46 0.49 0.46
Net realized and unrealized gain (loss)........ 3.27 2.70 1.50 2.83 (0.73)
- ---------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations.............. 3.68 3.18 1.96 3.32 (0.27)
- ---------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM (1):
Net investment income.......................... (0.47) (0.12) (0.89) (0.50) (0.67)
Net realized gains............................. (0.87) (0.39) (1.59) (0.17) (0.42)
- ---------------------------------------------------------------------------------------------------------------
Total Distributions.............................. (1.34) (0.51) (2.48) (0.67) (1.09)
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR..................... $19.99 $17.65 $14.98 $15.50 $12.85
- ---------------------------------------------------------------------------------------------------------------
TOTAL RETURN..................................... 21.44% 21.31% 13.78% 27.12% (2.24)%
- ---------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S).................. $276,182 $223,870 $188,610 $171,276 $140,887
- ---------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses....................................... 0.60% 0.63% 0.58% 0.58% 0.61%
Net investment income.......................... 2.30 2.91 3.51 3.49 3.59
- ---------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE.......................... 74% 90% 108% 110% 97%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
HIGH YIELD BOND TRUST 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR............... $9.89 $8.49 $9.00 $8.49 $9.25
- ---------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income.......................... 0.77 0.76 0.91 0.80 0.66
Net realized and unrealized gain (loss)........ (0.13) 0.65 0.41 0.41 (0.76)
- ---------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations.............. 0.64 1.41 1.32 1.21 (0.10)
- ---------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM (1):
Net investment income.......................... (0.68) (0.01) (1.83) (0.70) (0.66)
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR..................... $9.85 $9.89 $8.49 $9.00 $8.49
- ---------------------------------------------------------------------------------------------------------------
TOTAL RETURN..................................... 6.56% 16.56% 16.05% 15.47% (1.26)%
- ---------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S).................. $28,088 $25,272 $17,291 $12,902 $11,716
- ---------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses (2)................................... 0.82% 0.84% 0.97% 1.25% 1.25%
Net investment income.......................... 8.42 9.04 11.01 9.37 7.71
- ---------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE.......................... 147% 137% 84% 222% 146%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Distributions from realized gains include both net realized short-term and
long-term capital gains. Prior to 1996 net realized short-term capital gains
were included in distributions from net investment income.
(2) The ratio of expenses to average net assets 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% and 1.33% for the years ended
December 31, 1995 and 1994, respectively.
34
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of beneficial interest outstanding throughout each year ended
December 31:
<TABLE>
<CAPTION>
CAPITAL APPRECIATION FUND 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR............ $46.32 $36.72 $33.18 $24.50 $25.87
- ----------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income....................... 0.06 0.19 0.23 0.24 0.19
Net realized and unrealized gain (loss)..... 28.07 9.41 8.49 8.61 (1.41)
- ----------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations........... 28.13 9.60 8.72 8.85 (1.22)
- ----------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM (1):
Net investment income....................... (0.18) -- (0.41) (0.17) (0.15)
Net realized gains.......................... (1.53) (0.00)* (4.77) -- --
- ----------------------------------------------------------------------------------------------------------------
Total Distributions........................... (1.71) (0.00)* (5.18) (0.17) (0.15)
- ----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR.................. $72.74 $46.32 $36.72 $33.18 $24.50
- ----------------------------------------------------------------------------------------------------------------
TOTAL RETURN.................................. 61.63% 26.14% 28.21% 36.37% (4.76)%
- ----------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S)............... $890,861 $407,701 $224,132 $122,155 $78,494
- ----------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................... 0.85% 0.84% 0.83% 0.85% 0.89%
Net investment income....................... 0.18 0.54 0.69 0.84 0.79
- ----------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE....................... 53% 89% 84% 124% 106%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR.............. $1.00 $1.00 $1.00 $1.00 $1.00
- ----------------------------------------------------------------------------------------------------------------
Net investment income (2)..................... 0.049 0.049 0.0412 0.0417 0.0278
Distributions from net investment income...... (0.049) (0.049) (0.0412) (0.0417) (0.0278)
- ----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR.................... $1.00 $1.00 $1.00 $1.00 $1.00
- ----------------------------------------------------------------------------------------------------------------
TOTAL RETURN.................................... 5.08% 5.03% 4.20% 4.17% 2.78%
- ----------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S)................. $42,069 $13,494 $3,543 $1,417 $1,203
- ----------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses (2)(3)............................... 0.65% 0.57% 0.78% 1.25% 1.25%
Net investment income......................... 5.37 5.03 3.72 -- --
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Distributions from realized gains include both net realized short-term and
long-term capital gains. Prior to 1996 net realized short-term capital gains
were included in distributions from net investment income.
(2) The 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.
(3) The ratio of expenses to average net assets for 1995 and 1994 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% and 6.40% for the years ended
December 31, 1995 and 1994, respectively.
* Amount represents less than $0.01 per share.
35
<PAGE>
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
THE SHAREHOLDERS AND BOARDS OF TRUSTEES OF
MANAGED ASSETS TRUST, HIGH YIELD BOND TRUST, CAPITAL APPRECIATION FUND AND MONEY
MARKET PORTFOLIO:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of Managed Assets Trust, High Yield Bond Trust,
Capital Appreciation Fund and Money Market Portfolio as of December 31, 1998,
and the related statements of operations, statements of changes in net assets,
and financial highlights for the year then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The statements of changes in net
assets for the year ended December 31, 1996 and the financial highlights for
each of the years in the three year period then ended were audited by other
auditors whose report thereon, dated February 24, 1997, expressed an unqualified
opinion on those financial statements and financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1998, by correspondence with the custodian. As to securities
purchased or sold but not yet received or delivered, we performed other
appropriate auditing procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Managed Assets Trust, High Yield Bond Trust, Capital Appreciation Fund and Money
Market Portfolio as of December 31, 1998, their results of their operations,
changes in their net assets and their financial highlights for the year then
ended, in conformity with generally accepted accounting principles.
[KPMG Peat Marwick LLP
Signature]
New York, New York
February 8, 1999
36
<PAGE>
- --------------------------------------------------------------------------------
TAX INFORMATION (UNAUDITED)
For Federal tax purposes the Trust hereby designates for the fiscal year ended
December 31, 1998:
- Percentages of ordinary dividends paid as qualifying for the corporate
dividends received deduction:
<TABLE>
<S> <C>
Managed Assets Trust.............................. 45.24%
Capital Appreciation Fund......................... 100.00
</TABLE>
- Total long-term capital gain distributions paid:
<TABLE>
<S> <C>
Managed Assets Trust.............................. $ 8,710,595
Capital Appreciation Fund......................... 15,276,070
</TABLE>
A total of 12.71% of the ordinary dividends paid by the Managed Assets Trust
from net investment income are derived from Federal obligations and may be
exempt from taxation at the state level.
37
<PAGE>
ANNUAL REPORT FOR 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 year ended December 31, 1998, the Portfolio had a
total return of 10.20%, which was above its Lipper, Inc. peer group total return
average of 7.36%. (Lipper is an independent fund-tracking organization.)
The key events during 1998 were predominantly mergers and acquisitions, the
ongoing overseas economic crisis and the resiliency of the U.S. economy and
financial markets. The broad range in interest rates and the associated higher
market volatility reflected those conditions. As can be seen from the chart
below, interest rates went down during the reporting period:
YIELDS FROM U.S. TREASURY SECURITIES
<TABLE>
<CAPTION>
12/31/98 12/31/97
-------- --------
<S> <C> <C>
90-day Treasury Bill........................................ 4.45% 5.34%
2-Year Treasury Note........................................ 4.53 5.64
5-Year Treasury Note........................................ 4.54 5.71
10-Year Treasury Bond....................................... 4.65 5.74
30-Year Treasury Bond....................................... 5.09 5.92
</TABLE>
The historically low level of interest rates in October 1998 was precipitated by
the first Federal Reserve Board ("Fed") interest rate cut since 1996. While
further cuts ensued, concerns surrounding hedge fund losses took center stage,
prompting spreads between corporate bonds and mortgage-backed securities to
widen versus U.S. Treasuries. Compounding the problem was considerable corporate
financing as the managers headed toward the end of the year. Corporate debt
issuance for 1998 on a net basis was more than the prior two years combined.
The portfolio managers believe that the dominant issues in 1999 will be the
advent of the Euro, the prospects for economic recovery throughout Asia and
other less developed countries, the future sustainability of U.S. economic
growth and the ongoing resiliency of U.S. financial markets.
The Euro introduces a new variable to macroeconomic analysis that has not been
faced since the demise of the Soviet empire and the advent of true global
competition. Opportunities should abound in the financial markets as corporate
financing expands in creative new ways. However, the implications for the U.S.
dollar as the world's premier currency has now been brought into question by the
Euro's introduction.
The economic picture throughout Asia and Russia remains critically unclear.
Rising employment, the need to dump finished goods in the face of uncertain
currencies and fiscal policies that are slow to change and less than dramatic,
do not bode well for the financial markets of less developed countries.
According to the portfolio managers, the U.S. economy and the financial markets
should continue to soul search as to its prospects for continued good fortune.
The positives include such variables as low unemployment, strong productivity
and the dramatic increase in defined contribution plans (i.e., 401(k) plans) and
estate planning as key market influences. However, historically low savings (the
traditional standard) being redefined as the "wealth effect" as measured by
investment growth remains an ever-present shadow that can change with the ups
and downs of the financial markets.
Technical trends that have supported a decline in interest rates since 1981
remain fully intact. Minor disruptions keep markets range bound between 4.90%
and 5.40% during the first quarter of 1999. However, the portfolio managers
believe the more dominant longer-term force should be for rates to head toward
the 4.50% level. The managers have therefore positioned the Portfolio in the
coming year to benefit from these expected lower interest rates.
38
<PAGE>
ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
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 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 year ended December 31, 1998, the Portfolio returned 32.27%
and did better than the S&P 500, Index which posted a total return of 28.72%
over the same period.
Last year proved to be both an active and rewarding year for the Portfolio. The
portfolio managers entered 1998 with about $21.0 million in assets, and through
new contributions as well as appreciation they ended the fiscal year with $39.5
million (an increase of almost 88%). They were a net buyer of stock during each
month of the year, investing a net of $10.4 million, and in the process reduced
their starting cash reserves from 11% to 6%. In total, the managers initiated
some 152 individual stock transactions, established 21 new positions, eliminated
14, added to 107 existing holdings and reduced 10.
Throughout this period, the profile of the Portfolio did not change
significantly. The quality grade of the stock holdings remained the same
year-to-year, as did the price volatility characteristic as measured by the
"beta." The dividend yield realized actually rose slightly, while the market's
yield declined. The portfolio managers' sector emphasis, within the stock market
stayed essentially the same, with an above benchmark weighting in the consumer
cyclical, financial, transportation and utility areas. Only the technology
sector dropped out of its beginning over weight status. The biggest change came
in the list of their top ten stock holdings, where only three favorites at the
beginning of the year remained at year end.
As to the future, conventional wisdom says stocks are too expensive. Investors
have realized returns that have been too high for too long. Moreover, inflation
is now as good as it gets, interest rates are as low as the will go, price to
earnings multiples, therefore, are as high as they can be. Worse still, earnings
growth is rolling over, and may even be on the edge of a recession-style
decline. But, investors have repeatedly been fooled to the upside throughout
this bull cycle, and it may not be over yet. The portfolio managers have a sense
that the technology revolution is still not exhausted. Good companies so far
have found ways to use technology to run today's businesses better, but now they
will use it to design a better business model. As long as economic policy
actions do not rain on the ballpark, the game may not be over yet. In other
words, the current concerns (i.e., economy, earnings, deflation, etc.) could
prove to be short lived and not cause sustainable reversals. The portfolio
managers remain quite positive about the prospects for financial assets over the
long run.
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 year ended December 31, 1998, the Portfolio had a total return of
18.21%. In comparison, the Lipper Analytical Services, Inc. peer group total
return average was 16.79%. (Lipper is an independent fund-tracking
organization.)
An otherwise solid stock performance by the utility sector during 1998 was
overshadowed by another exceptional strong performance by the broad stock
market. For the year, the Portfolio, was 92% invested in stocks, 3% in bonds and
5% in cash reserves at year end. As of December 31, 1998, the portfolio manager
owned 44 stock positions and 3 bond issues. On the stock level, electric
utilities dominated with almost 61% of the Portfolio's assets, followed by
natural gas and telecommunications companies.
Last year was an exciting one within the utility stock universe because of the
extreme divergent investment results -- top performers up over 70%, and laggards
down more than 20%. The defining characteristic that separated the top
performers from their peers was the completion of their regulatory restructuring
plans thereby outlining management's long-term strategies. Once implemented,
these deregulated strategies resulted in improved earnings growth visibility and
reduced risk of regulatory uncertainties for each specific utility.
Thematically, 1998 was a year in which many companies seriously started
positioning themselves for the deregulated energy markets. Several large
utilities bought generating assets in other regions as part of a national
wholesale energy strategy while others exited the generation business in order
to focus on the regulated transmission and distribution business. International
39
<PAGE>
ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
acquisitions remained the focus of many companies at a time when other electric
companies were selling off international investments. In addition, the first
nuclear plant acquisition was made.
The portfolio managers anticipate that deregulation should accelerate in 1999
with the likely passage of restructuring legislation in key states such as New
Jersey, Texas and Michigan. Additionally, they anticipate a pick up in merger
and acquisition activity with small- and mid-sized utilities finding it
increasingly more difficult to compete in the complex deregulated market
hampered primarily by their size. As companies continue to restructure and
re-deploy capital investments they have assumed earnings growth for the sector
will remain in the three to five percent range and the average dividend pay out
(i.e. the portion of earnings distributed as dividends) will continue to decline
an average of twelve percentage points. For the successful companies, however,
the redeployment should set the stage for better total investment returns in the
future.
In closing, we thank you for your investment in The Travelers Series Trust. We
look forward to continuing to help you pursue your financial goals.
Sincerely,
/s/ HEATH B. MCLENDON
Heath B. McLendon
Chairman
January 13, 1999
40
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON -- U.S. GOVERNMENT SECURITIES PORTFOLIO AS OF 12/31/98
(UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
----------------------------
<S> <C>
Year Ended 12/31/98 10.20%
Five Years Ended 12/31/98 8.13%
1/24/92* through 12/31/98 8.36%
CUMULATIVE TOTAL RETURN
----------------------------------------------
1/24/92* through 12/31/98 74.63%
* Commencement of operations
</TABLE>
This chart assumes an initial investment of $10,000 made on January
24, 1992, assuming reinvestment of dividends, through December 31,
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 12/31/98
(UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
----------------------------
<S> <C>
Year Ended 12/31/98 32.27%
Five Years Ended 12/31/98 21.26%
5/1/92* through 12/31/98 18.41%
CUMULATIVE TOTAL RETURN
----------------------------------------------
5/1/92* through 12/31/98 208.75%
* Commencement of operations
</TABLE>
This chart assumes an initial investment of $10,000 made on May 1,
1992, assuming reinvestment of dividends, through December 31,
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.
41
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON -- UTILITIES PORTFOLIO AS OF 12/31/98 (UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
----------------------------
<S> <C>
Year Ended 12/31/98 18.21%
2/4/94* through 12/31/98 17.08%
CUMULATIVE TOTAL RETURN
----------------------------------------------
2/4/94* through 12/31/98 116.8%
* Commencement of operations
</TABLE>
This chart assumes an initial investment of $10,000 made on
February 4, 1994, assuming reinvestment of dividends, through
December 31, 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.
42
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS DECEMBER 31, 1998
U.S. GOVERNMENT SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- --------------------------------------------------------------------------------------
<C> <S> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS -- 90.0%
$7,500,000 U.S. Treasury Bonds, 5.250% due 11/15/28.................... $ 7,682,700
4,000,000 U.S. Treasury Notes, 7.500% due 11/15/16.................... 4,970,440
7,160,000 U.S. Treasury Notes, 8.125% due 8/15/21+.................... 9,701,156
4,916,462 FHLMC Certificates, Gold 6.000% due 11/1/28................. 4,861,152
3,906,540 FHLMC Certificates, Gold 6.500% due 12/1/13................. 3,967,560
3,029,999 FHLMC Certificates, 7.500% due 9/1/24 @..................... 3,114,263
1,472,951 FNMA Certificates, 6.000% due 10/1/13....................... 1,477,974
1,734,944 FNMA Certificates, 6.500% due 1/1/13 @...................... 1,760,969
2,940,460 FNMA Certificates, 6.500% due 12/1/27....................... 2,961,572
1,146,798 FNMA Certificates, 7.000% due 1/1/10........................ 1,172,602
4,609,956 FNMA Certificates, 7.000% due 5/1/28 @...................... 4,706,441
1,978,205 GNMA Certificates, 6.000% due 4/20/28....................... 1,954,091
2,020,000 GNMA Certificates, 6.500% due 12/15/28...................... 2,042,079
858,537 GNMA Certificates, 8.500% due 7/15/18 @..................... 911,123
2,184,395 GNMA Certificates, 9.000% due 9/15/09 @..................... 2,332,518
9,000,000 GNMA Certificates, RFCO Strip, zero coupon to yield 5.743%
due 10/15/13................................................ 3,915,000
2,000,000 Tennessee Valley Authority Debenture, 6.250% due 12/15/17... 2,120,000
- --------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(Cost -- $59,179,938)....................................... 59,651,640
- --------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 10.0%
6,681,000 CS First Boston, 4.400% due 1/4/99; Proceeds at
maturity -- $6,684,266; (Fully collateralized by U.S.
Treasury Notes, 5.375% due 1/31/00 Market
value -- $6,816,889) (Cost -- $6,681,000)................... 6,681,000
- --------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $65,860,938*)............ $66,332,640
- --------------------------------------------------------------------------------------
</TABLE>
+ Security is segregated by Custodian for open purchase commitments.
@ Date shown represents the last in range of maturity dates of mortgage
certificates owned.
* Aggregate cost for federal income tax purpose is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
43
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
SOCIAL AWARENESS STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -----------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCK -- 93.7%
- -----------------------------------------------------------------------------------------
BASIC MATERIALS -- 3.0%
4,000 Air Products & Chemicals, Inc. ............................. $ 160,000
6,000 Alcoa Inc................................................... 447,375
15,000 Engelhard Corp. ............................................ 292,500
8,000 Praxair, Inc. .............................................. 282,000
- -----------------------------------------------------------------------------------------
1,181,875
- -----------------------------------------------------------------------------------------
CAPITAL GOODS -- 3.4%
4,500 Belden, Inc. ............................................... 95,344
5,600 Philips Electronics N.V. ................................... 379,050
8,300 Pitney Bowes, Inc. ......................................... 548,319
14,500 U.S. Filter Corp. (a)....................................... 331,687
- -----------------------------------------------------------------------------------------
1,354,400
- -----------------------------------------------------------------------------------------
COMMUNICATION -- 2.1%
11,836 MCI Worldcom Inc. (a) ...................................... 849,233
- -----------------------------------------------------------------------------------------
CONSUMER CYCLICALS -- 15.9%
7,000 Black & Decker Corp. ....................................... 392,437
13,593 Dollar General Corp. ....................................... 321,135
12,700 Home Depot, Inc. ........................................... 777,081
50,000 Interface, Inc. ............................................ 464,062
11,000 Kaufman and Broad Home Corp. ............................... 316,250
7,000 Liz Claiborne, Inc. ........................................ 220,937
15,000 Lowe's Cos., Inc. .......................................... 767,813
8,000 May Department Stores....................................... 483,000
10,000 Ross Stores, Inc............................................ 393,750
13,800 Staples, Inc. (a)........................................... 602,887
12,000 Sylvan Learning Systems, Inc. (a)........................... 366,000
8,600 Tribune Co.................................................. 567,600
7,400 Wal-Mart Stores, Inc. ...................................... 602,638
- -----------------------------------------------------------------------------------------
6,275,590
- -----------------------------------------------------------------------------------------
CONSUMER STAPLES -- 12.3%
9,400 American Stores Co. ........................................ 347,213
18,000 Brinker International, Inc. (a)............................. 519,750
8,700 Kroger Co. (a).............................................. 526,350
14,800 Newell Co. ................................................. 610,500
4,800 PepsiCo, Inc. .............................................. 196,500
9,200 Rite Aid Corp. ............................................. 455,975
22,700 Sysco Corp. ................................................ 622,831
7,480 Tricon Global Restaurants, Inc. (a)......................... 374,935
8,000 Unilever N. V. ............................................. 663,500
4,800 Walt Disney Co. ............................................ 144,000
18,000 Wendy's International, Inc. ................................ 392,625
- -----------------------------------------------------------------------------------------
4,854,179
- -----------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
44
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
SOCIAL AWARENESS STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -----------------------------------------------------------------------------------------
<C> <S> <C>
ENERGY -- 3.1%
9,100 AES Corp. (a) .............................................. $ 431,112
6,600 Anadarko Petroleum Corp. ................................... 203,775
6,750 Baker Hughes Inc. .......................................... 119,391
5,370 British Petroleum Co. PLC................................... 481,286
- -----------------------------------------------------------------------------------------
1,235,564
- -----------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 19.0%
9,700 ACE, Ltd. .................................................. 334,044
9,200 Allstate Corp. ............................................. 355,350
4,000 American Express Co. ....................................... 409,000
6,112 American International Group Inc. .......................... 590,572
14,400 Associates First Capital Corp. ............................. 610,200
9,962 BankAmerica Corp. .......................................... 598,965
5,400 BankBoston Corp. ........................................... 210,263
13,300 Chase Manhattan Corp. ...................................... 905,231
10,000 CIT Group Inc. ............................................. 318,125
9,400 Freddie Mac................................................. 605,713
14,000 IndyMac Mortgage Holdings, Inc. ............................ 147,875
7,000 Lincoln National Corp. ..................................... 572,687
11,800 Provident Cos., Inc. ....................................... 489,700
13,300 St. Paul Co., Inc. ......................................... 462,175
6,800 State Street Corp. ......................................... 473,025
3,000 Transamerica Corp. ......................................... 346,500
2,540 Washington Mutual, Inc. .................................... 96,996
- -----------------------------------------------------------------------------------------
7,526,421
- -----------------------------------------------------------------------------------------
HEALTH CARE -- 11.2%
6,200 Amgen Inc. (a).............................................. 648,288
11,400 C. R. Bard, Inc. ........................................... 564,300
12,000 DENTSPLY International, Inc. ............................... 309,000
6,200 Johnson & Johnson........................................... 520,025
3,300 Merck & Co., Inc. .......................................... 487,369
10,000 Mylan Laboratories Inc. .................................... 315,000
2,400 Pfizer, Inc. ............................................... 301,050
11,200 Schering-Plough Corp. ...................................... 618,800
7,200 Stryker Corp. .............................................. 396,450
10,000 Tenet Healthcare Corp. (a).................................. 262,500
- -----------------------------------------------------------------------------------------
4,422,782
- -----------------------------------------------------------------------------------------
TECHNOLOGY -- 17.5%
19,500 Anixter International Inc. (a).............................. 396,094
5,000 Ascend Communications, Inc. (a)............................. 328,750
5,100 Automatic Data Processing, Inc. ............................ 408,956
12,125 Caliber Learning Network, Inc. (a).......................... 51,531
10,350 Cisco Systems Inc. (a)...................................... 960,609
12,500 Compaq Computer Corp. ...................................... 524,219
10,000 Electronic Data Systems Corp................................ 502,500
14,000 EMC Corp. (a)............................................... 1,190,000
1,700 Intel Corp. ................................................ 201,556
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
45
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
SOCIAL AWARENESS STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -----------------------------------------------------------------------------------------
<C> <S> <C>
TECHNOLOGY -- 17.5% (CONTINUED)
4,400 International Business Machines Corp. ...................... $ 812,900
5,200 Lucent Technologies Corp. .................................. 572,000
3,100 Sun Microsystems Inc. (a)................................... 265,438
5,900 Xerox Corp. ................................................ 696,200
- -----------------------------------------------------------------------------------------
6,910,753
- -----------------------------------------------------------------------------------------
TRANSPORTATION -- 3.5%
12,900 Norfolk Southern Corp. ..................................... 408,769
24,125 Southwest Airlines.......................................... 541,305
15,000 USFreightways Corp. ........................................ 436,875
- -----------------------------------------------------------------------------------------
1,386,949
- -----------------------------------------------------------------------------------------
UTILITIES -- 2.7%
11,000 Enron Corp. ................................................ 627,687
14,700 Williams Cos., Inc. ........................................ 458,456
- -----------------------------------------------------------------------------------------
1,086,143
- -----------------------------------------------------------------------------------------
TOTAL COMMON STOCK (Cost -- $24,610,693).................... 37,083,889
- -----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
<C> <S> <C>
REPURCHASE AGREEMENT -- 6.3%
$2,511,000 CS First Boston Corp., 4.400% due 1/4/99; Proceeds at
maturity -- $2,512,225; (Fully collaterized by U.S. Treasury
Notes, 5.375% due 1/31/00; Market Value -- $2,561,220)
(Cost -- $2,511,000)........................................ 2,511,000
- -----------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $27,121,693*)............ $39,594,889
- -----------------------------------------------------------------------------------------
</TABLE>
(a) Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
46
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
UTILITIES PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -------------------------------------------------------------------------------------------------------
<C> <C> <S> <C>
COMMON STOCK -- 91.8%
- -------------------------------------------------------------------------------------------------------
BROADCASTING & CABLE -- 2.9%
20,000 MediaOne Group, Inc.+....................................... $ 940,000
- -------------------------------------------------------------------------------------------------------
ELECTRIC-UTILITY -- 61.1%
11,000 American Electric Power Co., Inc. .......................... 517,687
20,000 BEC Energy.................................................. 823,750
15,000 Cinergy Corp. .............................................. 515,625
25,000 CMS Energy Corp. ........................................... 1,210,937
13,500 Dominion Resources Inc. .................................... 631,125
30,000 DQE, Inc. .................................................. 1,318,125
20,000 Edison International........................................ 557,500
25,000 El Paso Energy, Corp. ...................................... 870,312
10,000 Energy East Corp. .......................................... 565,000
10,000 FPL Group, Inc. ............................................ 616,250
25,000 FirstEnergy Corp. .......................................... 814,063
20,000 Florida Progress Corp. ..................................... 896,250
20,000 GPU, Inc. .................................................. 883,750
10,000 Houston Industries Inc. .................................... 321,250
15,000 Illinova Corp. ............................................. 375,000
15,000 Montana Power Co. .......................................... 848,438
20,000 NIPSCO Industries, Inc. .................................... 608,750
10,000 New Century Energies, Inc. ................................. 487,500
38,000 Niagara Mohawk Power Corp.+................................. 612,750
20,000 Northern States Power Co. .................................. 555,000
30,000 PECO Energy Co. ............................................ 1,248,750
25,000 Pinnacle West Capital Corp. ................................ 1,059,375
10,000 Public Service Enterprise Group, Inc. ...................... 400,000
15,000 SCANA Corp. ................................................ 483,750
15,000 Sierra Pacific Resources.................................... 570,000
20,000 Texas Utilities Co. ........................................ 933,750
30,000 Unicom Corp. ............................................... 1,156,875
- -------------------------------------------------------------------------------------------------------
19,881,562
- -------------------------------------------------------------------------------------------------------
NATURAL GAS -- 14.7%
16,000 Coastal Corp. .............................................. 559,000
10,000 Consolidated Natural Gas Co. ............................... 540,000
22,000 Energen Corp. .............................................. 429,000
10,000 K N Energy,Inc.............................................. 375,625
15,000 MCN Energy Group, Inc. ..................................... 285,938
15,000 MDU Resources Group, Inc. .................................. 394,687
15,000 National Fuel Gas Co. ...................................... 677,813
20,000 Sempra Energy............................................... 507,500
10,000 Southwest Gas Corp. ........................................ 268,750
24,000 Williams Cos., Inc. ........................................ 748,500
- -------------------------------------------------------------------------------------------------------
4,786,813
- -------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
47
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
UTILITIES PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -------------------------------------------------------------------------------------------------------
<C> <C> <S> <C>
TELEPHONE -- 13.1%
10,000 Bell Atlantic Corp. ........................................ $ 568,125
10,000 GTE Corp. .................................................. 674,375
20,000 MCI Worldcom, Inc.+......................................... 1,435,000
8,000 NEXTLINK Communications Inc.+............................... 227,000
6,000 Qwest Communications International Inc.+.................... 300,000
20,000 SBC Communications Inc. .................................... 1,072,500
- -------------------------------------------------------------------------------------------------------
4,277,000
- -------------------------------------------------------------------------------------------------------
29,885,375
TOTAL COMMON STOCK (Cost -- $23,250,344)....................
- -------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT RATING (A) SECURITY VALUE
<C> <C> <S> <C>
- -------------------------------------------------------------------------------------------------------
CORPORATE BONDS -- 1.4%
- -------------------------------------------------------------------------------------------------------
ELECTRIC-UTILITY -- 0.6%
$ 200,000 A- Arizona Public Service Co., 7.250% due 8/1/23............... 205,000
- -------------------------------------------------------------------------------------------------------
TELEPHONE -- 0.8%
230,000 A- MCI Communication Corp., 7.750% due 3/23/25................. 248,113
- -------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS (Cost -- $404,653).................... 453,113
- -------------------------------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS -- 1.6%
500,000 U.S. Treasury Notes, 7.750% due 11/30/99
(Cost -- $499,933).......................................... 513,750
- -------------------------------------------------------------------------------------------------------
SUB-TOTAL INVESTMENTS (Cost -- $24,154,930)................. 30,852,238
- -------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 5.2%
1,688,000 CS First Boston Corp., 4.400% due 1/4/99; Proceeds at
maturity -- $1,688,825; (Fully collateralized by U.S.
Treasury Note, 5.375% due 1/31/00; Market
value -- $1,722,508) (Cost -- $1,688,000)................... 1,688,000
- -------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $25,842,930**)........... $32,540,238
- -------------------------------------------------------------------------------------------------------
</TABLE>
+ Non-income producing security.
(a) All ratings are by Standard & Poor's Ratings Services, except that those
identified by an asterisk (*) are rated by Moody's Investors Service Inc.
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 49 for definitions of ratings.
SEE NOTES TO FINANCIAL STATEMENTS.
48
<PAGE>
- --------------------------------------------------------------------------------
BOND RATINGS (UNAUDITED)
The definitions of the applicable rating symbols are set forth below:
Standard & Poor's Ratings Services ("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 Investors Service Inc. ("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 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 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>
49
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 1998
<TABLE>
<CAPTION>
U.S. GOVERNMENT SOCIAL AWARENESS
SECURITIES STOCK UTILITIES
PORTFOLIO PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Investments -- Cost.................................. $59,179,938 $24,610,693 $24,154,930
Repurchase Agreements -- Cost........................ 6,681,000 2,511,000 1,688,000
- -------------------------------------------------------------------------------------------------------------
Investments, at value................................ 59,651,640 37,083,889 30,852,238
Repurchase Agreements, at value...................... 6,681,000 2,511,000 1,688,000
Cash................................................. 616 961 957
Dividends and interest receivable.................... 490,711 26,064 95,622
Receivable for securities sold....................... 1,100 -- 566,534
Receivable for Fund shares sold...................... -- 96,138 34,346
- -------------------------------------------------------------------------------------------------------------
TOTAL ASSETS......................................... 66,825,067 39,718,052 33,237,697
- -------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for Fund shares purchased.................... 336,265 -- --
Investment advisory fee payable...................... 12,069 34,383 17,391
Administration fees payable.......................... 2,738 1,923 1,337
Payable for securities purchased..................... -- 172,500 280,665
Accrued expenses..................................... 19,985 26,993 29,254
- -------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES.................................... 371,057 235,799 328,647
- -------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS....................................... $66,454,010 $39,482,253 $32,909,050
- -------------------------------------------------------------------------------------------------------------
NET ASSETS:
Paid-in capital...................................... $66,321,107 $25,882,430 $23,621,357
Undistributed net investment income.................. 5,474 185,510 791,288
Accumulated net realized gain (loss) from security
transactions...................................... (344,273) 941,117 1,799,097
Net unrealized appreciation of investments........... 471,702 12,473,196 6,697,308
- -------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS....................................... $66,454,010 $39,482,253 $32,909,050
- -------------------------------------------------------------------------------------------------------------
SHARES OUTSTANDING..................................... 5,632,090 1,523,475 1,915,301
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, PER SHARE............................. $11.80 $25.92 $17.18
- -------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
50
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
U.S. GOVERNMENT SOCIAL AWARENESS
SECURITIES STOCK UTILITIES
PORTFOLIO PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest................................................ $ 2,768,644 $ 148,059 $ 160,794
Dividends............................................... -- 284,074 841,414
Less: Foreign withholding tax........................... -- (2,485) --
- -------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME................................. 2,768,644 429,648 1,002,208
- -------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)....................... 156,432 189,593 168,378
Administration fees (Note 2)............................ 28,818 17,501 15,543
Audit and legal......................................... 9,588 20,192 13,270
Shareholder and system servicing fees................... 6,704 7,373 6,244
Custody................................................. 4,233 3,496 3,008
Shareholder communications.............................. 3,677 1,195 2,004
Trustees' fees.......................................... 2,806 1,435 --
Pricing service fees.................................... 2,000 -- --
Other................................................... 1,299 3,353 293
- -------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES.......................................... 215,557 244,138 208,740
- -------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME..................................... 2,553,087 185,510 793,468
- -------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE
3):
Realized Gain From Security Transactions (excluding
short-term securities):
Proceeds from sales.................................. 155,003,524 3,739,552 12,467,141
Cost of securities sold.............................. 151,988,200 2,787,421 10,670,224
- -------------------------------------------------------------------------------------------------------------
NET REALIZED GAIN....................................... 3,015,324 952,131 1,796,917
- -------------------------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year.................................... 1,707,052 5,325,740 4,788,605
End of year.......................................... 471,702 12,473,196 6,697,308
- -------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET UNREALIZED APPRECIATION...... (1,235,350) 7,147,456 1,908,703
- -------------------------------------------------------------------------------------------------------------
NET GAIN ON INVESTMENTS................................... 1,779,974 8,099,587 3,705,620
- -------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS.................... $4,333,061 $8,285,097 $4,499,088
- -------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
51
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
U.S. GOVERNMENT SOCIAL AWARENESS
SECURITIES STOCK UTILITIES
PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
OPERATIONS:
Net investment income............................ $ 2,553,087 $ 185,510 $ 793,468
Net realized gain................................ 3,015,324 952,131 1,796,917
Increase (decrease) in net unrealized
appreciation.................................. (1,235,350) 7,147,456 1,908,703
- -------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS........... 4,333,061 8,285,097 4,499,088
- -------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................ (2,585,952) (156,005) (643,885)
Net realized gains............................... (2,807,849) (535,723) (609,017)
- -------------------------------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM DISTRIBUTIONS TO
SHAREHOLDERS.................................. (5,393,801) (691,728) (1,252,902)
- -------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 8):
Net proceeds from sale of shares................. 37,655,108 12,345,818 10,648,592
Net asset value of shares issued for reinvestment
of dividends.................................. 5,393,801 691,728 1,252,902
Cost of shares reacquired........................ (10,813,602) (2,161,874) (3,651,686)
- -------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM FUND SHARE
TRANSACTIONS.................................. 32,235,307 10,875,672 8,249,808
- -------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS............................. 31,174,567 18,469,041 11,495,994
NET ASSETS:
Beginning of year................................ 35,279,443 21,013,212 21,413,056
- -------------------------------------------------------------------------------------------------------
END OF YEAR*..................................... $ 66,454,010 $39,482,253 $32,909,050
- -------------------------------------------------------------------------------------------------------
* Includes undistributed net investment income
of:........................................... $5,474 $185,510 $791,288
- -------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
52
<PAGE>
- --------------------------------------------------------------------------------
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.
53
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The U.S. Government Securities, Social Awareness Stock and Utilities
Portfolios (collectively, "Portfolio(s)") are separate investment portfolios of
The Travelers Series Trust ("Trust"). The Trust is a Massachusetts business
trust registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company and consists of these
portfolios and 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 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 for which market quotations are not
available will be valued in good faith at fair value by or under the direction
of the Board of Trustees; (d) securities maturing within 60 days are valued at
cost plus accreted discount, or minus amortized premium, which approximates
value; (e) 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; (f) 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; (g) gains or losses on the sale of securities
are calculated by using the specific identification method; (h) dividends and
distributions to shareholders are recorded on the ex-dividend date; (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, 1998,
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 Social Awareness
Stock Portfolio, a portion of undistributed net investment income amounting to
$44 and a portion of accumulated net realized gains amounting to $23 was
reclassified to paid-in capital. In addition, for the Utilities Portfolio, a
portion of undistributed net investment income amounting to $45 and a portion of
accumulated net realized gains amounting to $115 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 (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. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS
Travelers Asset Management International Corporation ("TAMIC"), an indirect
wholly owned subsidiary of Citigroup, 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 Citigroup,
Inc., acts as investment manager and advisor to the Social Awareness Stock
("SAS") and Utilities ("Utilities") Portfolios. SAS pays MMC an investment
management and advisory fee calculated at an annual rate of: 0.65% on the first
$50 million, 0.55% on the next $50 million, 0.45% on the next $100 million and
0.40% on amounts over $200 million of the average daily net assets. Utilities
pays MMC investment management and advisory fees calculated at an annual rate of
0.65% of the average daily net assets. These fees are calculated daily and paid
monthly.
54
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Travelers Insurance Company ("Travelers Insurance") acts as administrator
to the Portfolios. The Portfolios pay Travelers Insurance an administration fee
calculated at an annual rate of 0.06% of the average daily net assets. Travelers
Insurance has entered into a sub-administrative services agreement with MMC.
Travelers Insurance pays MMC, as sub-administrator, a fee calculated at an
annual rate of 0.06% of the average daily net assets of each Portfolio. This fee
is calculated daily and paid monthly.
One Trustee and all officers of the Trust are employees of Citigroup, Inc.,
or its subsidiaries.
3. INVESTMENTS
During the year ended December 31, 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................................................... $182,265,242 $14,110,116 $20,069,550
- ------------------------------------------------------------------------------------------------------
Sales....................................................... 155,003,524 3,739,552 12,467,141
</TABLE>
- --------------------------------------------------------------------------------
At December 31, 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............................... $ 628,555 $13,361,023 $7,033,982
Gross unrealized depreciation............................... (156,853) (887,827) (336,674)
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation................................. $ 471,702 $12,473,196 $6,697,308
- --------------------------------------------------------------------------------------------------
</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 the repurchase price.
5. FUTURES CONTRACTS
Initial margin deposits made upon entering into futures contracts are
recognized as assets. The initial margin is segregated by the custodian and is
noted in the schedule of investments. During the period the futures contract is
open, changes in the value of the contract are recognized as unrealized gains or
losses by "marking-to-market" on a daily basis to reflect the market value of
the contract at the end of each day's trading. Variation margin payments are
made or received and recognized as assets due from or liabilities due to broker,
depending upon whether unrealized gains or losses are incurred. When the
contract is closed, the Portfolios record a realized gain or loss equal to the
difference between the proceeds from (or cost of) the closing transactions and
the Portfolio's basis in the contract.
The Portfolios enter into such contracts to hedge portions of their
respective portfolios. The Portfolios bear the market risk that arises from
changes in the value of the financial instruments and securities indices
(futures contracts).
At December 31, 1998, the Portfolios had no open futures contracts.
55
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. OPTIONS CONTRACTS
Premiums paid when put or call options are purchased by the Portfolios,
represent investments, which are "marked-to-market" daily. When a purchased
option expires, the Portfolios will realize a loss in the amount of the premium
paid. When the Portfolios enter into closing sales transactions, the Portfolios
will realize a gain or loss depending on whether the proceeds from the closing
sales transactions are greater or less than the premium paid for the option.
When the Portfolios exercise a put option, they will realize a gain or loss from
the sale of the underlying security and the proceeds from such sale will be
decreased by the premium originally paid. When the Portfolios exercise a call
option, the cost of the security which the Portfolios purchase upon exercise
will be increased by the premium originally paid.
At December 31, 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 December 31, 1998, USGS held no TBA securities.
8. SHARES OF BENEFICIAL INTEREST
The Declaration of Trust authorizes the issuance of an unlimited number of
shares of beneficial interest without par value. Transactions in shares of each
Portfolio were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT SECURITIES PORTFOLIO
Shares sold................................................. 3,036,112 978,971
Shares issued on reinvestment............................... 457,035 145,971
Shares redeemed............................................. (888,165) (491,712)
- -------------------------------------------------------------------------------
Net Increase................................................ 2,604,982 633,230
- -------------------------------------------------------------------------------
SOCIAL AWARENESS STOCK PORTFOLIO
Shares sold................................................. 542,975 479,843
Shares issued on reinvestment............................... 29,867 --
Shares redeemed............................................. (96,777) (132,790)
- -------------------------------------------------------------------------------
Net Increase................................................ 476,065 347,053
- -------------------------------------------------------------------------------
UTILITIES PORTFOLIO
Shares sold................................................. 663,583 341,896
Shares issued on reinvestment............................... 80,676 1,816
Shares redeemed............................................. (229,307) (433,506)
- -------------------------------------------------------------------------------
Net Increase (Decrease)..................................... 514,952 (89,794)
- -------------------------------------------------------------------------------
</TABLE>
56
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
For a share of beneficial interest outstanding throughout each year ended
December 31:
<TABLE>
<CAPTION>
U.S. GOVERNMENT SECURITIES PORTFOLIO 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR.................... $11.65 $10.86 $12.43 $10.58 $11.63
- -------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income............................... 0.49 0.58 0.68 0.65 0.60
Net realized and unrealized gain (loss)............. 0.70 0.79 (0.52) 1.80 (1.23)
- -------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations................... 1.19 1.37 0.16 2.45 (0.63)
- -------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM (1):
Net investment income............................... (0.50) (0.58) (1.55) (0.60) (0.39)
Net realized gains.................................. (0.54) -- (0.18) -- (0.03)
- -------------------------------------------------------------------------------------------------------------------
Total Distributions................................... (1.04) (0.58) (1.73) (0.60) (0.42)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR.......................... $11.80 $11.65 $10.86 $12.43 $10.58
- -------------------------------------------------------------------------------------------------------------------
TOTAL RETURN.......................................... 10.20% 12.62% 1.46% 24.42% (5.64)%
- -------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S)....................... $66,454 $35,279 $26,009 $28,192 $24,522
- -------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................ 0.45% 0.49% 0.62% 0.56% 0.71%
Net investment income............................... 5.31 6.10 5.68 5.80 5.56
- -------------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE............................... 349% 208% 501% 214% 16%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SOCIAL AWARENESS STOCK PORTFOLIO 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR.................... $20.06 $15.76 $14.32 $11.05 $11.64
- -------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income (2)........................... 0.10 0.15 0.31 0.12 0.16
Net realized and unrealized gain (loss)............. 6.30 4.15 2.42 3.47 (0.45)
- -------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations................... 6.40 4.30 2.73 3.59 (0.29)
- -------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM (1):
Net investment income............................... (0.12) -- (0.43) (0.14) (0.24)
Net realized gains.................................. (0.42) -- (0.86) (0.18) (0.06)
- -------------------------------------------------------------------------------------------------------------------
Total Distributions................................... (0.54) -- (1.29) (0.32) (0.30)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR.......................... $25.92 $20.06 $15.76 $14.32 $11.05
- -------------------------------------------------------------------------------------------------------------------
TOTAL RETURN.......................................... 32.27% 27.28% 19.98% 33.37% (2.69)%
- -------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S)....................... $39,482 $21,013 $11,040 $7,055 $3,879
- -------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses (2)(3)..................................... 0.84% 0.98% 1.25% 1.25% 1.25%
Net investment income............................... 0.63 0.97 0.43 0.99 1.43
- -------------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE............................... 14% 19% 26% 73% 137%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Distributions from realized gains include both net realized short-term and
long-term capital gains. Prior to 1996 net realized short-term capital gains
were included in distributions from net investment income.
(2) For the year ended December 31, 1996, The Travelers reimbursed the Social
Awareness Stock 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%.
(3) The ratios of expenses to average net assets for the years ended December
31, 1995 and 1994 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% and 3.34%, respectively.
57
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of beneficial interest outstanding throughout each year ended
December 31:
<TABLE>
<CAPTION>
UTILITIES PORTFOLIO 1998 1997 1996 1995 1994(1)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR..................... $15.29 $12.22 $12.85 $10.17 $10.00
- --------------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income................................ 0.37 0.46 0.47 0.48 0.35
Net realized and unrealized gain (loss).............. 2.33 2.63 0.47 2.44 (0.18)
- --------------------------------------------------------------------------------------------------------------------
Total Income From Operations........................... 2.70 3.09 0.94 2.92 0.17
- --------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM (2):
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 YEAR........................... $17.18 $15.29 $12.22 $12.85 $10.17
- --------------------------------------------------------------------------------------------------------------------
TOTAL RETURN........................................... 18.21% 25.29% 7.47% 29.29% 1.70%++
- --------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S)........................ $32,909 $21,413 $18,214 $15,340 $5,757
- --------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses (3)......................................... 0.80% 1.06% 1.07% 1.25% 1.25%+
Net investment income................................ 3.06 3.58 3.88 4.29 3.86+
- --------------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE................................ 51% 68% 39% 25% 32%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the period from February 4, 1994 (commencement of operations) to
December 31, 1994.
(2) Distributions from realized gains include both net realized short-term and
long-term capital gains. Prior to 1996 net realized short-term capital gains
were included in distributions from net investment income.
(3) The ratios of expenses to average net assets for the year ended December 31,
1995 and the period ended December 31, 1994 reflect expense reimbursements
by The Travelers in connection with voluntary expense limitations. Without
the expense reimbursements, the ratios of expenses to average net assets
would have been 1.27% and 3.49% (annualized), respectively.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized
58
<PAGE>
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
THE TRAVELERS SERIES TRUST:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of the U.S. Government Securities Portfolio,
Social Awareness Stock Portfolio and Utilities Portfolio of The Travelers Series
Trust as of December 31, 1998, and the related statements of operations,
statements of changes in net assets, and the financial highlights for the year
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial highlights for each of the years in the three-year period
then ended were audited by other auditors whose report thereon, dated February
24, 1997, expressed an unqualified opinion on those financial statements and
financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997, by correspondence with the custodian. As to securities
purchased but not yet received, we performed other appropriate auditing
procedures. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial positions of the
U.S. Government Securities Portfolio, Social Awareness Stock Portfolio and
Utilities Portfolio of The Travelers Series Trust as of December 31, 1998, the
results of their operations, changes in their net assets and their financial
highlights for the year then ended, in conformity with generally accepted
accounting principles.
[KPMG Peat Marwick LLP
Signature]
New York, New York
February 8, 1999
59
<PAGE>
- --------------------------------------------------------------------------------
TAX INFORMATION (UNAUDITED)
For Federal tax purposes the Trust hereby designates for the fiscal year ended
December 31, 1998:
- Percentages of ordinary dividends paid as qualifying for the corporate
dividends received deduction:
<TABLE>
<S> <C>
Social Awareness Stock Portfolio.................. 91.05%
Utilities Portfolio............................... 70.08
</TABLE>
- Total long-term capital gain distributions paid:
<TABLE>
<S> <C>
U.S. Government Securities Portfolio.............. $753,756
Social Awareness Stock Portfolio.................. 535,746
Utilities Portfolio............................... 466,835
</TABLE>
The following percentages of ordinary dividends paid from net investment income
are derived from Federal obligations and may be exempt from taxation at the
state level.
<TABLE>
<S> <C>
Utilities Portfolio.................................... 3.17%
U.S. Government Securities Portfolio................... 23.83
</TABLE>
60
<PAGE>
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 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 or
Travelers Life & Annuity Company and the Prospectuses for the underlying funds,
which collectively contain all pertinent information, including the applicable
sales commissions.
Printed in U.S.A. VG-181 (Annual)(2-99)
THE TRAVELERS VARIABLE
PRODUCTS FUNDS
ANNUAL REPORTS
DECEMBER 31, 1998
The Travelers Series Trust:
Zero Coupon Bond Fund Portfolio Series 2000
Zero Coupon Bond Fund Portfolio Series 2005
[TravelersLife&Annuity
A Member of citigroup 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 2000 AND 2005
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
We are pleased to provide the annual report for The Travelers Series Trust: Zero
Coupon Bond Fund Portfolios: Series 2000 and 2005 ("Portfolio(s)") for the year
ended December 31, 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
1998 saw a widely gyrating U.S. stock market with different sectors performing
differently. The large-cap oriented S&P 500 Stock Index returned about 28.6% for
the year. The S&P 400 Midcap Index had a gain of 19.1% while the Russell 2000
Index had a negative return of 2.6% for the year ended December 31, 1998.
Dividend-paying defensive stocks such as utilities performed better than the
average small- and mid-cap stocks. While technology stocks were adversely
impacted by the global financial crisis in late 1997, they have since rebounded,
led by Internet related names.
The economies of the developed world flourished in 1998 while most emerging
markets went down. Low interest rates, robust consumer spending and benign
inflation fueled economic growth in the U.S. and Europe and created favorable
conditions for corporate profitability. In contrast, Russia's economy collapsed,
Asia's economies remained mired in recession and Brazil's economy faltered at
year end after $30 billion was spent to defend its currency during the year.
1998 was also a record year for mergers and acquisitions, nearly double 1997's
total. The merger of oil giants Exxon and Mobil announced in December will
result in the creation of the world's largest company in terms of revenue. In
the digital world, merger activity between Internet service providers, phone
companies, cable companies and telecommunications firms heated up as
"convergence" became the new mantra.
We remain guardedly optimistic about the resilient U.S. economy in the first
half of 1999 because we expect interest rates to stay low and the productivity
revolution through technology to continue. However, the risks from foreign
markets cannot be discounted and future corporate earnings may come under
increasing pressure.
FIXED INCOME MARKET COMMENTARY
Problems that started with Asia's currency devaluations in the summer of 1997
hit the bond market hard in August and September of 1998. Bond values fell
dramatically and asset-backed bonds, mortgage-backed securities, emerging market
debt and corporate bonds all were negatively affected. In 1998, the more risk a
bond investor assumed, the more he or she suffered.
For the year ended December 31, 1998, the Lehman Government/Corporate Index
returned 9.47%. During the reporting period, the spreads between different kinds
of bonds and U.S. Treasurys widened at record speed as investors gravitated to
their safety amidst rising stock market volatility and higher investor anxiety
about the global economy. The Federal Reserve Board ("Fed") then changed its
monetary policy from one of vigilance against inflation to one of combating
deflation during the reporting period and cut rates three times. So far in 1999,
spreads have tightened, bond market liquidity has returned and the bond market
has stabilized.
Markets and policy makers expect real U.S. economic growth to finally slow to
the 1.00%-2.00% level in 1998 after 3 years of 3.00% plus growth. The slowdown
is expected to be led by a sharp reduction in the growth rate of investment
spending and continued weakness in the export sector. The Conference Board
survey of corporate sentiment indicates that capital-spending plans has not yet
rebounded with the stock market and consumer sentiment. Y2K spending is
temporarily boosting capital spending, yet industrial overcapacity and several
years of rapid spending in technology make slower investment spending highly
likely.
However, a drop in the rate of consumer spending growth is essential to any
meaningful forecast of 1.00%-2.00% real Gross Domestic Product ("GDP") growth.
This has not happened yet despite two years where consumer spending has been
close to consumer income. The wealth effect from three years of 20% plus stock
market gains is estimated to increase spending 1.5% more than implied by income
growth. Lower interest rates, lower oil and other commodity prices, and
declining import prices have further boosted consumer purchasing power.
The tight employment market has also been a major force behind high consumer
confidence and spending plans. December brought a further sharp drop in oil
prices and continued record high (which substantially exceeded expectations)
auto sales
1
<pg$pcn>
and housing starts. Unless they were all caused by unseasonably warm weather,
these factors cause us to push any forecast of a consumer slowdown further out
into the future which will delay any further Fed rate cuts.
There are storm clouds on the horizon that could lead the consumer to retreat.
Latin America has been pushed into recession by last summer's emerging market
meltdown and could be subject to further pressure if a Brazilian crisis erupts.
Latin America has a larger economic impact on the U.S. than Asia and Russia do.
A decline in the stock market could rattle the consumer, although the stock
market's continued resilience means that a sustained downturn is required before
spending would be significantly impacted. Japan is also a big question mark.
Economic activity is now declining there after several years of flat growth.
Despite the three rate cuts in the second half of 1998, it would be hard to say
the Fed has an easy monetary policy. Short-term interest rates are still more
than 3% above inflation and are high relative to nominal growth. Credit market
spreads are high and banks are tightening credit standards. These factors create
a downward bias for short-term rates over the long-term, but rates are likely to
remain stable until the consumer slows down.
With the Fed on hold, there will be some upward pressure on long-term rates. But
slow growth outside the U.S. and continued low inflation should prevent rates
from rising too much. The fact that so much of the U.S. Treasury yield curve
trades below the Federal-funds rate is a big factor in the continued high
spreads in the investment grade corporate market. Because of this, spreads
should move to offset the change in U.S. Treasury yields -- narrowing when
yields rise and widening when yields fall.
PORTFOLIO PERFORMANCE
The two Zero Coupon Bond Fund Portfolios commenced operation 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 two Portfolios have target maturity
dates of 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 a return based on the difference between the
purchase price and the value at maturity, or par value. The yield for a zero
coupon is the difference in price over the time until the bond matures.
Each Portfolio is managed (immunized) to have a duration equal to a zero-coupon
bond due on its maturity date. To boost its yield potential, the managers have
added zero-coupon corporate bonds. Because these are hard to find, they 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 Fund's durations.
ZERO COUPON BOND FUND PORTFOLIO SERIES 2000
The Zero Coupon Bond Fund Portfolio Series 2000 had a total return of 7.58% for
the year ended December 31, 1998 versus the Merrill Lynch Zero Coupon's return
of 7.89% for the same period.
ZERO COUPON BOND FUND PORTFOLIO SERIES 2005
The Zero Coupon Bond Fund Portfolio Series 2005 had a total return of 12.26% for
the year ended December 31, 1998 versus the Merrill Lynch Zero Coupon's total
return of 13.85% 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
January 26, 1999
2
<pg$pcn>
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON -- ZERO COUPON BOND FUND PORTFOLIO SERIES 2000
(UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
<S> <C>
Year Ended 12/31/98 7.58%
10/11/95* through 12/31/98 6.41%
CUMULATIVE TOTAL RETURN
-----------------------------------------------
10/11/95* through 12/31/98 22.20%
*Commencement of operations
</TABLE>
This chart assumes an initial investment of $10,000 made on October
11, 1995, assuming reinvestment of dividends, through December 31,
1998. The Merrill Lynch Zero Coupon 5 Year Index is comprised of
U.S. government stripped securities which have a maturity not
greater than five years.
[Performance graph - Series 2000]
<TABLE>
<CAPTION>
Intermediate Lehman Broth-
Measurement Period High Grade ers Aggregate
(Fiscal Year Covered) Portfolio Bond Index
<S> <C> <C>
10/16/91 10000.00 10000.00
12/91 10240.00 10507.00
12/92 10781.00 11285.00
12/93 11643.00 12386.00
12/94 11287.00 12024.00
12/95 13292.00 14246.00
6/30/96 12929.00 14073.00
</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 2005
(UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
<S> <C>
Year Ended 12/31/98 12.26%
10/11/95* through 12/31/98 9.14%
CUMULATIVE TOTAL RETURN
-----------------------------------------------
10/11/95* through 12/31/98 32.58%
*Commencement of operations
</TABLE>
This chart assumes an initial investment of $10,000 made on October
11, 1995, assuming reinvestment of dividends, through December 31,
1998. The Merrill Lynch Zero Coupon 10 Year Index is comprised of
U.S. government stripped securities which have a maturity not
greater than ten years.
[Performance graph - Series 2005]
- --------------------------------------------------------------------------------
Past performance is not predictive of future performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Average annual total returns are historical in nature and measure net investment
income and capital gains or losses from portfolio investments assuming
reinvestment of dividends. The returns do not reflect expenses associated with
the subaccount such as administrative fees, account charges and surrender
charges which, if reflected, would reduce the performance shown.
3
<pg$pcn>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS DECEMBER 31, 1998
ZERO COUPON BOND FUND PORTFOLIO SERIES 2000
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(A) SECURITY VALUE
- -----------------------------------------------------------------------------------------------
<C> <S> <C> <C>
U.S. TREASURY OBLIGATIONS -- 54.6%
$587,000 AAA U.S. Treasury Notes, Stripped Principal Payment only, due
11/15/00.................................................. $ 538,948
167,000 AAA U.S. Treasury Notes, Stripped Principal Payment only, due
5/15/01................................................... 149,852
300,000 AAA U.S. Treasury Notes, Stripped Principal Payment only, due
8/15/01................................................... 266,100
74,000 AAA U.S. Treasury Notes, Stripped Principal Payment only, due
11/15/02.................................................. 62,315
47,000 AAA U.S. Treasury Notes, Stripped Principal Payment only, due
2/15/03................................................... 38,838
- -----------------------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS (Cost -- $1,019,451) 1,056,053
- -----------------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 3.0%
62,000 AAA Federal Home Loan Mortgage Corp., zero coupon bond to yield
7.992% due 9/15/18 (Cost -- $57,624)...................... 58,047
- -----------------------------------------------------------------------------------------------
CORPORATE BONDS AND NOTES -- 13.0%
- -----------------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 3.0%
65,000 AAA Exxon Capital Ventures, Inc., zero coupon guaranteed note to
yield 7.299% due 2/15/01.................................. 58,581
- -----------------------------------------------------------------------------------------------
FOODS -- 3.1%
70,000 AA- Archer-Daniels Midland Co., zero coupon bond to yield 7.276%
due 5/1/02................................................ 58,975
- -----------------------------------------------------------------------------------------------
HOSPITAL SUPPLIES & SERVICES -- 2.8%
65,000 BBB Hospital Corp. of America, zero coupon bond to yield 7.326%
due 6/1/00................................................ 53,706
- -----------------------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 4.1%
70,000 BBB- Tele-Communications Inc., amortizing note, 9.650% due
10/1/03................................................... 79,888
- -----------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES (Cost -- $247,924) 251,150
- -----------------------------------------------------------------------------------------------
FOREIGN BONDS & NOTES -- 21.1%
- -----------------------------------------------------------------------------------------------
BANKING -- 6.1%
60,000 A+ Chemical New York NV Corp., zero coupon bond to yield 7.804%
due 2/16/99............................................... 59,696
60,000 NR International Bank of Reconstruction & Development, zero
coupon bond to yield 7.815% due 4/16/99................... 59,168
- -----------------------------------------------------------------------------------------------
118,864
- -----------------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 5.7%
65,000 A+ American Express Co., zero coupon bond to yield 7.389% due
12/12/00.................................................. 58,338
50,000 A+ IBM International Finance NV, Bond, 6.250% due 10/10/00..... 51,137
- -----------------------------------------------------------------------------------------------
109,475
- -----------------------------------------------------------------------------------------------
FOODS -- 3.1%
62,000 A PepsiCo, Inc., zero coupon note to yield 7.363% due
5/25/99................................................... 60,760
- -----------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT -- 3.1%
64,000 AA+ Kingdom of Sweden, zero coupon note to yield 6.772% due
7/31/00................................................... 59,040
- -----------------------------------------------------------------------------------------------
INSURANCE -- 3.1%
60,000 AA New England Life, zero coupon bond to yield 7.699% due
2/1/99.................................................... 59,700
- -----------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS AND NOTES (Cost -- $404,712) 407,839
- -----------------------------------------------------------------------------------------------
SUB-TOTAL INVESTMENTS (Cost -- $1,729,711) 1,773,089
- -----------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
4
<pg$pcn>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
ZERO COUPON BOND FUND PORTFOLIO SERIES 2000
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C>
REPURCHASE AGREEMENT -- 8.3%
$160,000 CS First Boston Corp., 4.273% due 1/4/99; Proceeds at
maturity -- $160,076; (Fully collateralized by U.S.
Treasury Note, 5.375% due 1/31/00; Market
value -- $163,770) (Cost -- $160,000).................... $ 160,000
- --------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $1,889,711**) $1,933,089
- --------------------------------------------------------------------------------------------
</TABLE>
(a) All ratings are by Standard & Poor's Ratings Service, except those
identified by an asterisk (*) are rated by Moody's Investors Service, Inc.
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 7 for definition of ratings.
SEE NOTES TO FINANCIAL STATEMENTS.
5
<pg$pcn>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
ZERO COUPON BOND FUND PORTFOLIO SERIES 2005
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(A) SECURITY VALUE
- -------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
U.S. TREASURY OBLIGATIONS -- 75.9%
$ 970,000 AAA U.S. Treasury Note, Stripped Principal Payment Only due
11/15/05.................................................... $ 702,862
1,600,000 AAA U.S. Treasury Note, Stripped Principal Payment Only due
2/15/06..................................................... 1,140,944
910,000 AAA U.S. Treasury Note, Stripped Principal Payment Only due
2/15/09..................................................... 550,049
- -------------------------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS (Cost -- $2,129,265) 2,393,855
- -------------------------------------------------------------------------------------------------
CORPORATE BONDS AND NOTES -- 3.8%
- -------------------------------------------------------------------------------------------------
FINANCE -- 1.9%
80,000 A+ Grand Metro Investment, zero coupon note to yield 7.732% due
1/6/04...................................................... 61,000
- -------------------------------------------------------------------------------------------------
FOODS -- 1.9%
70,000 AA- Archer-Daniels Midland Co., zero coupon bond to yield 7.276%
due 5/1/02.................................................. 58,975
- -------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES (Cost -- $113,921) 119,975
- -------------------------------------------------------------------------------------------------
FOREIGN BONDS AND NOTES -- 7.7%
- -------------------------------------------------------------------------------------------------
BANKING -- 2.0%
75,000 A Chemical New York NV, zero coupon bond to yield 8.171% due
2/16/02..................................................... 62,559
- -------------------------------------------------------------------------------------------------
FINANCE -- 1.9%
80,000 AAA Exxon Capital Corp., zero coupon note to yield 7.765% due
11/15/04.................................................... 61,020
- -------------------------------------------------------------------------------------------------
FOODS -- 1.9%
80,000 A+ General Mills Inc., zero coupon bond to yield 8.080% due
8/15/04..................................................... 60,000
- -------------------------------------------------------------------------------------------------
INSURANCE -- 1.9%
80,000 AAA American International Group, zero coupon bond to yield
7.818% due 8/15/04.......................................... 60,000
- -------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS AND NOTES (Cost -- $227,287) 243,579
- -------------------------------------------------------------------------------------------------
SUB-TOTAL INVESTMENTS (Cost -- $2,470,473) 2,757,409
- -------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 12.6%
398,000 CS First Boston Corp., 4.349% due 1/4/99; Proceeds at
maturity -- $398,192; (Fully collateralized by U.S.
Treasury Notes, 5.375% due 1/31/00; Market
value -- $406,850) (Cost -- $398,000).................... 398,000
- -------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $2,868,473**) $3,155,409
- -------------------------------------------------------------------------------------------------
</TABLE>
(a) All ratings are by Standard & Poor's Ratings Service, except those
identified by an asterisk (*) are rated by Moody's Investors Service, Inc.
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 7 for definition of ratings.
SEE NOTES TO FINANCIAL STATEMENTS.
6
<pg$pcn>
- --------------------------------------------------------------------------------
BOND RATINGS (UNAUDITED)
The definitions of the applicable rating symbols are set forth below:
Standard & Poor's Ratings Service ("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 to a debt obligation. 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 issues
only in 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 Investors Service, Inc. ("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 these bonds.
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 that
suggest a susceptibility to impairment some time in the
future.
Baa -- Bonds rated "Baa" are considered to be medium grade
obligations, i.e., 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. 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>
7
<pg$pcn>
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 1998
<TABLE>
<CAPTION>
ZERO COUPON ZERO COUPON
BOND FUND BOND FUND
PORTFOLIO PORTFOLIO
SERIES 2000 SERIES 2005
- ---------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Investments, at value (Cost -- $1,729,711 and $2,470,473,
respectively).......................................... $1,773,089 $2,757,409
Repurchase agreement (Cost -- $160,000 and $398,000,
respectively).......................................... 160,000 398,000
Cash...................................................... 210 815
Interest receivable....................................... 5,562 48
Receivable from affiliate................................. 35,469 37,752
- ---------------------------------------------------------------------------------------
TOTAL ASSETS.............................................. 1,974,330 3,194,024
- ---------------------------------------------------------------------------------------
LIABILITIES:
Payable for Fund shares purchased......................... 295 486
Accrued expenses.......................................... 21,382 23,131
- ---------------------------------------------------------------------------------------
TOTAL LIABILITIES......................................... 21,677 23,617
- ---------------------------------------------------------------------------------------
TOTAL NET ASSETS............................................ $1,952,653 $3,170,407
- ---------------------------------------------------------------------------------------
NET ASSETS:
Paid-in capital........................................... $1,914,154 $2,891,166
Accumulated net realized loss on security transactions.... (4,879) (7,695)
Net unrealized appreciation of investments................ 43,378 286,936
- ---------------------------------------------------------------------------------------
TOTAL NET ASSETS............................................ $1,952,653 $3,170,407
- ---------------------------------------------------------------------------------------
SHARES OUTSTANDING.......................................... 190,240 281,491
- ---------------------------------------------------------------------------------------
NET ASSET VALUE, PER SHARE.................................. $10.26 $11.26
- ---------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<pg$pcn>
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
ZERO COUPON ZERO COUPON
BOND FUND BOND FUND
PORTFOLIO PORTFOLIO
SERIES 2000 SERIES 2005
- ------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME:
Interest.................................................. $108,314 $150,843
- ------------------------------------------------------------------------------------------
EXPENSES:
Audit and legal........................................... 16,965 16,965
Shareholder and system servicing fees..................... 7,329 7,329
Shareholder communications................................ 6,000 6,500
Trustees' fees............................................ 3,000 3,000
Investment advisory fees (Note 2)......................... 1,833 2,601
Administration fees (Note 2).............................. 1,103 1,566
Custody................................................... 220 1,171
Other..................................................... 2,005 2,833
- ------------------------------------------------------------------------------------------
TOTAL EXPENSES............................................ 38,455 41,965
Less: Expense reimbursement (Note 2)...................... (35,705) (38,063)
- ------------------------------------------------------------------------------------------
NET EXPENSES.............................................. 2,750 3,902
- ------------------------------------------------------------------------------------------
NET INVESTMENT INCOME....................................... 105,564 146,941
- ------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE 3):
Realized Gain From Security Transactions (excluding
short-term securities):
Proceeds from sales.................................... 61,091 78,106
Cost of securities sold................................ 60,260 75,294
- ------------------------------------------------------------------------------------------
NET REALIZED GAIN......................................... 831 2,812
- ------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year...................................... 14,731 129,642
End of year............................................ 43,378 286,936
- ------------------------------------------------------------------------------------------
INCREASE IN NET UNREALIZED APPRECIATION................... 28,647 157,294
- ------------------------------------------------------------------------------------------
NET GAIN ON INVESTMENTS..................................... 29,478 160,106
- ------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS...................... $135,042 $307,047
- ------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<pg$pcn>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
ZERO ZERO
COUPON COUPON
BOND FUND BOND FUND
PORTFOLIO PORTFOLIO
SERIES 2000 SERIES 2005
- ---------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income..................................... $ 105,564 $ 146,941
Net realized gain......................................... 831 2,812
Increase in net unrealized appreciation................... 28,647 157,294
- ---------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS.................... 135,042 307,047
- ---------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income..................................... (106,950) (150,107)
- ---------------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM DISTRIBUTIONS TO
SHAREHOLDERS........................................... (106,950) (150,107)
- ---------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 8):
Net proceeds from sales of shares......................... 154,905 713,026
Net asset value of shares issued for reinvestment of
dividends.............................................. 106,950 150,107
Cost of shares reacquired................................. (93,882) (207,036)
- ---------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS....... 167,973 656,097
- ---------------------------------------------------------------------------------------
INCREASE IN NET ASSETS...................................... 196,065 813,037
NET ASSETS:
Beginning of year......................................... 1,756,588 2,357,370
- ---------------------------------------------------------------------------------------
END OF YEAR............................................... $1,952,653 $3,170,407
- ---------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<pg$pcn>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) FOR THE YEAR ENDED DECEMBER
31, 1997
<TABLE>
<CAPTION>
ZERO ZERO
COUPON COUPON
BOND FUND BOND FUND
PORTFOLIO PORTFOLIO
SERIES 2000 SERIES 2005
- ---------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income..................................... $ 96,984 $ 126,611
Net realized loss......................................... (2,672) (3,033)
Increase in net unrealized appreciation................... 20,928 110,215
- ---------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS.................... 115,240 233,793
- ---------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income..................................... (96,426) (125,818)
- ---------------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM DISTRIBUTIONS TO SHAREHOLDERS (96,426) (125,818)
- ---------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 8):
Net proceeds from sales of shares......................... 108,077 308,853
Net asset value of shares issued for reinvestment of
dividends.............................................. 96,426 125,818
Cost of shares reacquired................................. (31,473) (239,518)
- ---------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS....... 173,030 195,153
- ---------------------------------------------------------------------------------------
INCREASE IN NET ASSETS...................................... 191,844 303,128
NET ASSETS:
Beginning of year......................................... 1,564,744 2,054,242
- ---------------------------------------------------------------------------------------
END OF YEAR*.............................................. $1,756,588 $2,357,370
- ---------------------------------------------------------------------------------------
* Includes undistributed net investment income of:.......... $955 $2,119
- ---------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<pg$pcn>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The 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 eighteen
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 (formerly known as Mid Cap Disciplined Equity
Fund), Convertible Bond, MFS Research, MFS Mid Cap Growth, Disciplined Small Cap
Stock, Strategic Stock, NWQ Large Cap and Jurika & Voyles Core Equity
Portfolios. Shares of the Trust are offered only to insurance company separate
accounts that fund certain variable annuity and variable life insurance
contracts. The financial statements and financial highlights for the other
portfolios are presented in separate annual reports.
The significant accounting policies consistently followed by the Portfolios
are: (a) security transactions are accounted for on trade date; (b) securities
traded on national securities markets are valued at the closing prices on such
markets; securities for which no sales prices were reported and U.S. government
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, 1998, 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 $431 and $1,047, were
reclassified to paid-in capital for Series 2000 and Series 2005, 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 Citigroup 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 year ended December 31, 1998, Travelers Insurance has agreed to
reimburse Series 2000 and Series 2005 for expenses in the amount of $35,705 and
$38,063, respectively.
12
<pg$pcn>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS
During the year ended December 31, 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
2000 2005
- ---------------------------------------------------------------------------------
<S> <C> <C>
Purchases................................................... -- $244,015
Sales....................................................... $61,091 78,106
- ---------------------------------------------------------------------------------
</TABLE>
At December 31, 1998, the aggregate unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
<TABLE>
<CAPTION>
SERIES SERIES
2000 2005
- ---------------------------------------------------------------------------------
<S> <C> <C>
Gross unrealized appreciation............................... $49,601 $286,936
Gross unrealized depreciation............................... (6,223) --
- ---------------------------------------------------------------------------------
Net unrealized appreciation................................. $43,378 $286,936
- ---------------------------------------------------------------------------------
</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 the repurchase price.
5. FUTURES CONTRACTS
Initial margin deposits made upon entering into futures contracts are
recognized as assets. Securities equal to the initial margin amount are
segregated by the custodian in the name of the broker. Additional securities are
also segregated up to the current market value of the futures contracts. During
the period the futures contract is open, changes in the value of the contract
are recognized as unrealized gains or losses by "marking-to-market" on a daily
basis to reflect the market value of the contract at the end of each day's
trading. Variation margin payments are received or made and recognized as assets
due from or liabilities due to broker, depending upon whether unrealized gains
or losses are incurred. When the contract is closed, the Portfolio records a
realized gain or loss equal to the difference between the proceeds from (or cost
of) the closing transactions and the Portfolio's basis in the contract.
The Portfolios enter into such contracts to hedge a portion of their
portfolios. The Portfolios bear the market risk that arises from changes in the
value of the financial instruments and securities indices (futures contracts).
At December 31, 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.
13
<pg$pcn>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. CAPITAL LOSS CARRYFORWARD
At December 31, 1998, Series 2000 and Series 2005 had, for Federal income
tax purposes, approximately $4,000 and $6,000, 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>
2004 2005
- ------------------------------------------------------------------------------
<S> <C> <C>
Series 2000................................................. -- $4,000
Series 2005................................................. $1,000 5,000
- ------------------------------------------------------------------------------
</TABLE>
8. SHARES OF BENEFICIAL INTEREST
The Declaration of Trust authorizes the issuance of an unlimited number of
shares of beneficial interest without par value. Transactions in shares of each
Portfolio were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
SERIES 2000
Shares sold................................................. 14,571 10,557
Shares issued on reinvestment............................... 10,423 9,576
Shares redeemed............................................. (8,892) (3,082)
- ----------------------------------------------------------------------------------------------------
Net Increase................................................ 16,102 17,051
- ----------------------------------------------------------------------------------------------------
SERIES 2005
Shares sold................................................. 63,382 29,538
Shares issued on reinvestment............................... 13,336 11,994
Shares redeemed............................................. (19,053) (23,752)
- ----------------------------------------------------------------------------------------------------
Net Increase................................................ 57,665 17,780
- ----------------------------------------------------------------------------------------------------
</TABLE>
14
<pg$pcn>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
For a share of beneficial interest outstanding throughout each year ended
December 31, except where noted:
<TABLE>
<CAPTION>
ZERO COUPON BOND FUND PORTFOLIO SERIES 2000 1998 1997 1996 1995(1)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR........................ $10.09 $9.96 $10.31 $10.00
- --------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income (2)............................... 0.59 0.59 0.50 0.13
Net realized and unrealized gain (loss)................. 0.17 0.13 (0.22) 0.18
- --------------------------------------------------------------------------------
Total Income From Operations.............................. 0.76 0.72 0.28 0.31
- --------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income................................... (0.59) (0.59) (0.63) --
- --------------------------------------------------------------------------------
Total Distributions....................................... (0.59) (0.59) (0.63) --
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR.............................. $10.26 $10.09 $9.96 $10.31
- --------------------------------------------------------------------------------
TOTAL RETURN.............................................. 7.58% 7.20% 2.76% 3.10%++
- --------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S)........................... $1,953 $1,757 $1,565 $1,029
- --------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses (2)(3)......................................... 0.15% 0.15% 0.15% 0.15%+
Net investment income................................... 5.74 5.88 5.74 5.61+
- --------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE................................... 0% 29% 33% 34%
- --------------------------------------------------------------------------------
</TABLE>
(1) For the period from October 11, 1995 (commencement of operations) to
December 31, 1995.
(2) For the years ended December 31, 1998, 1997 and 1996, and the period ended
December 31, 1995, Travelers Insurance reimbursed the Portfolio for $35,705,
$27,177, $31,032 and $14,257 in expenses, respectively. If such expenses
were not reimbursed, the per share decrease of net investment income and
actual expense ratios would have been as follows:
<TABLE>
<CAPTION>
EXPENSE RATIOS
PER SHARE DECREASES WITHOUT EXPENSE
TO NET INVESTMENT INCOME REIMBURSEMENT
------------------------ ---------------
<S> <C> <C>
1998 $0.19 2.09%
1997 0.16 1.80
1996 0.20 2.49
1995 0.14 6.51+
</TABLE>
(3) As a result of a voluntary expense limitation, the ratio of expenses to
average net assets will not exceed 0.15%.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
15
<pg$pcn>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of beneficial interest outstanding throughout each year ended
December 31, except where noted:
<TABLE>
<CAPTION>
ZERO COUPON BOND FUND PORTFOLIO SERIES 2005 1998 1997 1996 1995(1)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR..................... $10.53 $9.97 $10.48 $10.00
- -----------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income (2)............................ 0.55 0.60 0.48 0.13
Net realized and unrealized gain (loss).............. 0.74 0.56 (0.38) 0.35
- -----------------------------------------------------------------------------
Total Income From Operations........................... 1.29 1.16 0.10 0.48
- -----------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income................................ (0.56) (0.60) (0.61) --
- -----------------------------------------------------------------------------
Total Distributions.................................... (0.56) (0.60) (0.61) --
- -----------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR........................... $11.26 $10.53 $9.97 $10.48
- -----------------------------------------------------------------------------
TOTAL RETURN........................................... 12.26% 11.63% 0.90% 4.80%++
- -----------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S)........................ $3,170 $2,357 $2,054 $1,050
- -----------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses (2)(3)...................................... 0.15% 0.15% 0.15% 0.15%+
Net investment income................................ 5.63 6.11 6.14 5.89+
- -----------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE................................ 3% 9% 17% 23%
- -----------------------------------------------------------------------------
</TABLE>
(1) For the period from October 11, 1995 (commencement of operations) to
December 31, 1995.
(2) For the years ended December 31, 1998, 1997 and 1996, and the period ended
December 31, 1995, Travelers Insurance reimbursed the Portfolio for $38,063,
$28,361, $30,922 and $14,256 in expenses, respectively. If such expenses
were not reimbursed, the per share decrease of net investment income and
actual expense ratios would have been as follows:
<TABLE>
<CAPTION>
EXPENSE RATIOS
PER SHARE DECREASES WITHOUT EXPENSE
TO NET INVESTMENT INCOME REIMBURSEMENT
------------------------ -------------------
<S> <C> <C>
1998 $0.14 1.61%
1997 0.13 1.52
1996 0.15 2.17
1995 0.14 6.48+
</TABLE>
(3) As a result of a voluntary expense limitation, the ratio of expenses to
average net assets will not exceed 0.15%.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
TAX INFORMATION (UNAUDITED)
The following percentages of ordinary income dividends paid by the Trust are
derived from Federal obligations and may be exempt from taxation at the state
level:
<TABLE>
<S> <C>
- - Zero Coupon Bond Fund Portfolio Series 2000............... 54.85%
- - Zero Coupon Bond Fund Portfolio Series 2005............... 81.29%
</TABLE>
16
<pg$pcn>
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
THE TRAVELERS SERIES TRUST:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of the Zero Coupon Bond Fund Portfolio Series 2000
and the Zero Coupon Bond Fund Portfolio Series 2005 of the Travelers Series
Trust as of December 31, 1998, the related statements of operations for the year
then ended, the statements of changes in net assets and the financial highlights
for each of the years in the two-year period then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits. The financial
highlights for the year ended December 31, 1996 and the period from October 11,
1995 (commencement of operations) to December 31, 1995 were audited by other
auditors whose report thereon, dated February 24, 1997, expressed an unqualified
opinion on those financial statements and those financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis evidence, supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1998, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Zero Coupon Bond Fund Portfolio Series 2000 and Zero Coupon Bond Fund Portfolio
Series 2005 of the Travelers Series Trust as of December 31, 1998, the results
of their operations for the year then ended, and the changes in their net assets
and financial highlights for each of the years in the two-year period then
ended, in conformity with generally accepted accounting principles.
LOGO
New York, New York
February 8, 1999
17
<pg$pcn>
Investment Adviser
TRAVELERS ASSET MANAGEMENT INTERNATIONAL CORPORATION
Hartford, Connecticut
Independent Auditors
KPMG LLP
New York, New York
Custodian
PNC BANK, N.A.
This report is prepared for the general information of contract owners and is
not an offer of shares of Zero Coupon Bond Fund Portfolio Series 2000 and Zero
Coupon Bond Fund Portfolio Series 2005. It should not be used in connection with
any offer except in conjunction with the Prospectuses for the Variable Universal
Life Insurance products offered by The Travelers Insurance Company and The
Travelers Life and Annuity Company and the Prospectuses for the underlying
funds, which collectively contain all pertinent information, including the
applicable sales commissions.
VG-ZERO (Annual) (2-99) Printed in U.S.A.
THE TRAVELERS VARIABLE
PRODUCTS FUNDS
ANNUAL REPORTS
DECEMBER 31, 1998
The Travelers Series Trust:
NWQ Large Cap Portfolio
Jurika & Voyles Core Equity Portfolio
[TravelersLife&Annuity
A Member of citigroup LOGO]
The Travelers Insurance Company
The Travelers Life and Annuity Company
One Tower Square
Hartford, CT 06183
<pg$pcn>
ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
We are pleased to provide the annual report for The Travelers Series Trust - NWQ
Large Cap Portfolio and the Jurika & Voyles Core Equity Portfolio ("Portfolios")
for the year ended December 31, 1998. A more detailed summary of performance and
current holdings for each Portfolio can be found in the sections that follow.
ECONOMIC REVIEW AND OUTLOOK
The year 1998 saw a widely gyrating U.S. stock market with different sectors
performing differently. The large-cap oriented S&P 500 Stock Index ("S&P 500")
returned about 28.6% for the year. The S&P 400 Midcap Index had a gain of
roughly 19% while the Russell 2000 Index had a negative return of 2.6% for the
year ended December 31, 1998. Dividend paying defensive stocks such as utilities
performed better than the average small- and mid-cap stock. While technology
stocks were adversely impacted by the global financial crisis in late 1997, they
have since rebounded, led by Internet-related names.
The economies of the developed world flourished in 1998 while most emerging
markets went down. Low interest rates, robust consumer spending and benign
inflation fueled economic growth in the U.S. and Europe and created favorable
conditions for corporate profitability. In contrast, Russia's economy collapsed,
Asia's economies remained mired in recession and Brazil's economy faltered at
year-end after $30 billion was spent to defend its currency during the reporting
period.
1998 was also a record year for mergers and acquisitions, nearly double 1997's
total. The merger of oil giants Exxon and Mobil announced in December will
result in the creation of the world's largest company in terms of revenue. In
the digital world, merger activity between Internet service providers, phone
companies, cable companies and telecommunications firms heated up, as
"convergence" became the new mantra.
We remain guardedly optimistic about the resilient U.S. economy in the first
half of 1999 because we expect interest rates to stay low and the productivity
revolution through technology to continue. However, the risks from foreign
markets cannot be discounted and future corporate earnings may come under
increasing pressure.
NWQ LARGE CAP PORTFOLIO
Since its inception date on July 20, 1998 through December 31, 1998, the NWQ
Large Cap Portfolio ("Portfolio") had a total return of a negative 4.94%. During
the same time period, the S&P 500, an unmanaged index of common stock, posted a
total return of 4.54%.
The Dow Jones Industrial Average and S&P 500 indexes registered their fourth
consecutive year of double-digit gains in 1998, a record streak. Even though the
large capitalization averages produced record setting results, there were also
record disparities in performance. Growth stocks outpaced value stocks by 28%
and large stocks outpaced small stocks by 30%. This reflected the extremely
difficult economic and financial conditions impacting much of the world in 1998.
Investment flows last year sought out "safe" investments perceived as immune
from the world's near-term problems, creating a huge valuation disparity (or
risk premium) between large capitalization growth stocks and everything else.
As noted above, the Portfolio has declined 4.94% since its inception on July 20,
1998. While the Portfolio did recover significantly in the fourth quarter of
1998, it was not enough to completely offset the third quarter's negative
return. Stock market volatility, which peaked in October, resulted in much
indiscriminate selling by the market, especially in the finance sector. The
Portfolio's finance sector, which represents its largest sector weighting, was
negatively impacted as the market reacted to news about Russia's debt default
and the problems of a major hedge fund. As market volatility subsided in
reaction to pro-growth Federal Reserve policy actions, the Portfolio's turnabout
resulted in a positive return of 11.3% in the fourth quarter of 1998. The
managers remain very positive toward the finance industry. Positions were taken
in Allstate, Banc One, BankAmerica, Bank of New York, Bear Stearns, First Union
and Hartford Financial Services.
Exposure in the consumer discretionary, health and technology sectors was
increased during the reporting period. Purchases included Aetna, American
Greetings, Columbia/HCA Healthcare, Hewlett-Packard, Loews, MediaOne Group and
Waste Management. Within the energy sector, the managers are taking steps to
consolidate their holdings in the highest quality energy companies, as they
believe the industry represents one of the best risk/reward tradeoffs in the
market today. Sales in this sector included Conoco and Transocean Offshore.
1
<pg$pcn>
ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
Looking ahead it is clear to the managers that the Asian crisis, the subsequent
collapse of Russia and the spreading weakness in Latin America should
significantly alter the economic landscape for some time. They expect that
overall world economic growth rates for the next few years will be significantly
lower as the world economy is plagued with global excess capacity. While the
growth rate of the U.S. economy will most likely decline from its recent pace,
the U.S. is likely to grow at a faster rate relative to most countries. Foreign
economies, especially in developing markets, will eventually recover, but the
process may be slow and uneven. With this in mind, the managers are focusing on
identifying and investing in underpriced companies (i.e., compelling valuations)
with strong domestic franchises that can continue to grow earnings and deliver
results in a slower growth world. Companies in consolidating industries that can
unlock value and improve profitability through restructuring and cost reductions
are of particular interest.
The managers fully recognize that 1998 was a difficult year. However, be assured
that the managers have no intention of chasing what they believe is the market's
current mania for overvalued growth stocks. The divergence in valuations between
growth and value is the widest it has been in 25 years. While they of course,
cannot be certain exactly when value investing will come back into favor, they
can be certain that this divergence is not sustainable. Adherence to their value
discipline has proved profitable over time, and they have every confidence that
their value approach should prove rewarding again.
JURIKA & VOYLES CORE EQUITY PORTFOLIO
Since the inception date of July 20, 1998 through December 31, 1998, the Jurika
& Voyles Core Equity Portfolio ("Portfolio") provided a total return of 3.08%,
which compares to a 10.41% return for S&P 500 during the same time period.
For stocks, 1998 was a unique year. The 28.6% return by the S&P 500 represented
the record fourth year in a row where the S&P 500's return exceeded 20%.
Dividing the S&P 500 into quintiles (i.e., 5 groups of 100 stocks) by
capitalization, the managers found that the size effect was the most dramatic in
memory. The largest 100 stocks with capitalizations of greater than $23.3
billion had an average return of 38.0%. The bottom 100 stocks in the S&P 500
with capitalizations of less than $2.9 billion had an average return of a
negative 5.2%.
The P/E effect was also dramatic. Based on forward P/E ratio, the top quintile
with P/E's of over 44 times had an average return of 54.8%. The bottom quintile
with P/E's of under 18.1 times had an average return of 16.9%. The combination
of size and valuation created an extraordinary effect. The largest growth stocks
outperformed the smallest value stocks by more than 60%. This phenomenon was in
effect for the entire year, yet a little less dramatic in the second half.
The Portfolio began operation on July 20, 1998. This marked the beginning of a
major correction in the global capital markets which saw the S&P 500 fall almost
20% from peak to trough. Given their orientation to the mid cap/value sectors of
the market (due to their lower P/E emphasis), the managers are pleased with the
performance. During the same period, the Russell Mid-Cap Index returned a
negative 1.17% while the S&P 500, which was driven by the large, above average
P/E stocks, returned 3.66%.
During 1998, the managers tried to position the Portfolio fairly defensively,
balancing risk and return by investing in smaller-and medium-sized companies
that they believed would be able to meet their earnings forecasts and sold at
reasonable valuations relative to those expectations.
Some of the companies that the managers have held and which continue to fit this
description include Federal Express, Cigna and American Stores. In addition,
given the deflation in commodities and manufacturing, they have held stakes in
some companies that are selling at extremely depressed valuations. Two of these
companies are Santa Fe International, an oil rig drilling company and Case
Corp., a manufacturer of agricultural and heavy-duty construction equipment. As
the economic environment for these companies improves, they have the ability to
deliver substantial increases in reported earnings. This should drive the prices
of their stocks significantly higher.
Technology has remained a key component for the Portfolio, a sector where the
managers have been able to find companies that possess both the growth and value
attributes they seek. A number of the portfolio's largest holdings, including
3Com, Texas Instruments, Sun Microsytems and Synopsys, benefited from investors'
renewed interest in technology stocks, as well as positive fundamental changes
in the companies' core businesses. Earnings for these companies improved,
prompting a significant rally in the stocks in the fourth quarter of l998;
investor enthusiasm drove up the share prices of these stocks by between
approximately 50% and 80%, respectively.
2
<pg$pcn>
ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
The managers' believe that investor expectations are too optimistic. Their view
is that the general confidence in the Fed and the IMF to extend the current
environment of non-inflationary growth will be challenged in 1999. Earnings
estimates for 1999 and longer-term estimates of earnings growth rates are too
high. As in 1998, they expect estimates to fall during 1999.
They also believe that the period of dominance by large growth stocks may be
over. Valuation differentials between large and small stocks are at extreme
levels and the valuations of the "nifty 25" (the 25 largest, highest P/E stocks)
is a valuation extreme comparable to the nifty fifty in the early 1970s.
The Portfolio is structured to benefit from these views. The securities the
managers own are undervalued -- they have low earnings expectations incorporated
into their current prices. The managers have confidence that buying undervalued
companies provides some downside protection. Their research team performs
detailed analysis of the business models for each of the companies they own.
The Portfolio continues to emphasize the mid cap universe. The weighted average
market capitalization of the Portfolio is $16 billion vs. $87 billion for the
S&P 500. The managers believe that the extreme valuation differential will
result in significant outperformance by the mid cap sector of the market.
They also believe that the U.S. technology industry offers exciting prospects
and will continue to drive both capital investment and efficiency across all
industries, domestically and worldwide. Thus, the Portfolio has a significant
overweight in technology relative to the S&P 500. The companies they own have
strong market shares, profitable business models and are attractively valued.
The Jurika & Voyles Core Equity Portfolio also has a significant exposure to
companies the managers believe will be protective in a difficult market
environment. Around 5% of the Portfolio is in REITs and they own other defensive
stocks that have income or book value protection (Ultramar, Everest Reinsurance,
Case). This component should benefit performance in a difficult environment.
In closing, we thank you for your investment in The Travelers Series Trust. We
look forward to continuing to help you pursue your financial goals.
Sincerely,
/s/ HEATH B. MCLENDON
Heath B. McLendon
Chairman
January 28, 1999
3
<pg$pcn>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS DECEMBER 31, 1998
NWQ LARGE CAP PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ----------------------------------------------------------------------------------------
<C> <S> <C>
STOCK -- 80.2%
- ----------------------------------------------------------------------------------------
AEROSPACE -- 1.4%
1,400 Lockheed Martin Corp. ...................................... $ 118,650
- ----------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY -- 12.0%
4,500 American Greetings Corp., Class A Shares.................... 184,781
2,800 Federated Department Stores, Inc. .......................... 121,975
3,700 Fortune Brands, Inc. ....................................... 117,013
5,500 MediaOne Group, Inc. (a).................................... 258,500
3,000 Time Warner, Inc. .......................................... 186,188
3,000 Waste Management, Inc. ..................................... 139,875
- ----------------------------------------------------------------------------------------
1,008,332
- ----------------------------------------------------------------------------------------
CONSUMER STAPLES -- 8.6%
3,000 Loews Corp. ................................................ 294,750
5,200 Phillip Morris Cos., Inc. .................................. 278,200
1,800 Unilever NV................................................. 149,287
- ----------------------------------------------------------------------------------------
722,237
- ----------------------------------------------------------------------------------------
ENERGY -- 6.8%
4,500 Coastal Corp. .............................................. 157,219
7,200 Halliburton Co. ............................................ 213,300
1,200 Transocean Offshore Inc. ................................... 32,175
8,800 Weatherford International, Inc. ............................ 170,500
- ----------------------------------------------------------------------------------------
573,194
- ----------------------------------------------------------------------------------------
FINANCE -- 24.3%
4,000 BankAmerica Corp. .......................................... 240,500
6,600 Bank of New York Co., Inc. ................................. 265,650
5,000 Bank One, Corp. ............................................ 255,312
3,500 Bear Stearns Cos. Inc. ..................................... 130,813
2,000 Chase Manhattan Corp. ...................................... 136,125
4,000 First Union Corp. .......................................... 243,250
3,600 Hartford Financial Services Group, Inc. .................... 197,550
2,000 National City Corp. ........................................ 145,000
6,000 The Allstate Corp. ......................................... 231,750
5,000 Wells Fargo & Co. .......................................... 199,688
- ----------------------------------------------------------------------------------------
2,045,638
- ----------------------------------------------------------------------------------------
HEALTHCARE -- 5.2%
3,400 Aetna Inc. ................................................. 267,325
6,800 Columbia/HCA Healthcare Corp. .............................. 168,300
- ----------------------------------------------------------------------------------------
435,625
- ----------------------------------------------------------------------------------------
MATERIALS AND PROCESSING -- 4.1%
3,300 Air Products and Chemicals, Inc. ........................... 132,000
2,000 E. I. du Pont de Nemours and Co. ........................... 106,125
3,000 Praxair, Inc. .............................................. 105,750
- ----------------------------------------------------------------------------------------
343,875
- ----------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
4
<pg$pcn>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
NWQ LARGE CAP PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ----------------------------------------------------------------------------------------
<C> <S> <C>
PRODUCER DURABLES -- 8.0%
9,000 Case Corp. ................................................. $ 196,312
2,000 Deere & Co. ................................................ 66,250
2,400 Emerson Electric Co. ....................................... 150,150
2,200 Ingersoll-Rand Co. ......................................... 103,263
3,100 Sundstrand Corp. ........................................... 160,812
- ----------------------------------------------------------------------------------------
676,787
- ----------------------------------------------------------------------------------------
TECHNOLOGY -- 5.5%
2,400 Hewlett-Packard Co. ........................................ 163,950
1,700 Texas Instruments Inc. ..................................... 145,456
1,300 Xerox Corp. ................................................ 153,400
- ----------------------------------------------------------------------------------------
462,806
- ----------------------------------------------------------------------------------------
TRANSPORTATION -- 4.3%
4,500 Burlington Northern Santa Fe Corp. ......................... 151,875
4,000 Delta Air Lines, Inc. ...................................... 208,000
- ----------------------------------------------------------------------------------------
359,875
- ----------------------------------------------------------------------------------------
TOTAL STOCK (Cost -- $6,861,769)............................ 6,747,019
- ----------------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
- ----------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 19.8%
$1,675,000 Chase Securities, Inc., 4.500% due 1/4/99; Proceeds at
maturity -- $1,675,868;
(Fully collateralized by U.S. Treasury Note, 8.750% due
5/15/17;
Market value -- $1,711,050) (Cost -- $1,675,000)............ 1,675,000
- ----------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $8,536,769*)............. $8,422,019
- ----------------------------------------------------------------------------------------
</TABLE>
(a) Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
5
<pg$pcn>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
JURIKA & VOYLES CORE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C>
STOCK -- 87.3%
- -------------------------------------------------------------------------------------
BASIC INDUSTRIES -- 1.2%
2,100 OM Group, Inc. ............................................. $ 76,650
- -------------------------------------------------------------------------------------
COMMUNICATIONS -- 5.8%
3,750 ECI Telecommunications Ltd. ................................ 133,594
5,100 3Com Corp. (a).............................................. 228,544
- -------------------------------------------------------------------------------------
362,138
- -------------------------------------------------------------------------------------
CONSUMER CYCLICALS -- 8.4%
6,100 American Stores Co. ........................................ 225,319
2,900 Circuit City Stores-Circuit City Group...................... 144,819
1,100 Hannaford Brothers Co. ..................................... 58,300
4,200 Mattel, Inc. ............................................... 95,812
- -------------------------------------------------------------------------------------
524,250
- -------------------------------------------------------------------------------------
CONSUMER SERVICES -- 2.4%
600 McGraw-Hill Cos., Inc. ..................................... 61,125
2,000 SABRE Group Holdings, Inc. (a).............................. 89,000
- -------------------------------------------------------------------------------------
150,125
- -------------------------------------------------------------------------------------
CONSUMER STAPLES -- 1.5%
2,200 Newell Co. ................................................. 90,750
- -------------------------------------------------------------------------------------
ENERGY -- 10.0%
3,150 Enron Corp. ................................................ 179,747
2,400 KN Energy, Inc. ............................................ 87,300
4,400 Santa Fe International Corp. ............................... 64,350
2,100 Texaco Inc. ................................................ 111,037
1,800 Ultramar Diamond Shamrock Corp. ............................ 43,650
2,050 Vastar Resources, Inc. ..................................... 88,534
2,700 Weatherford International, Inc. (a)......................... 52,312
- -------------------------------------------------------------------------------------
626,930
- -------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 6.2%
3,250 CIT Group, Inc., Class A Shares............................. 103,391
2,500 First Union Corp. .......................................... 152,031
3,400 Washington Mutual, Inc. .................................... 129,837
- -------------------------------------------------------------------------------------
385,259
- -------------------------------------------------------------------------------------
HEALTHCARE PRODUCTS -- 4.4%
2,700 Baxter International Inc. .................................. 173,644
1,500 Elan Corp Plc, Sponsored ADR (a)............................ 104,344
- -------------------------------------------------------------------------------------
277,988
- -------------------------------------------------------------------------------------
HEALTHCARE SERVICES -- 2.1%
5,000 Tenet Healthcare Corp. (a).................................. 131,250
- -------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
6
<pg$pcn>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
JURIKA & VOYLES CORE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C>
INDUSTRIAL PRODUCTS -- 11.0%
4,600 Case Corp. ................................................. $ 100,338
1,800 Deere & Co. ................................................ 59,625
1,900 Lockheed Martin Corp. ...................................... 161,025
3,600 Parker-Hannifin Corp. ...................................... 117,900
2,100 Xerox Corp. ................................................ 247,800
- -------------------------------------------------------------------------------------
686,688
- -------------------------------------------------------------------------------------
INSURANCE -- 6.1%
1,800 Amerin Corp. (a)............................................ 42,525
1,800 CIGNA Corp. ................................................ 139,162
1,300 Everest Reinsurance Holdings, Inc. ......................... 50,619
1,400 Provident Cos., Inc. ....................................... 58,100
2,000 ReliaStar Financial Corp. .................................. 92,250
- -------------------------------------------------------------------------------------
382,656
- -------------------------------------------------------------------------------------
REITS -- 4.5%
1,600 Avalonbay Communities, Inc. ................................ 54,800
1,600 Equity Residential Properties Trust......................... 64,700
2,500 ProLogis Trust.............................................. 51,875
2,100 Public Storage, Inc. ....................................... 56,831
1,500 Spieker Properties, Inc. ................................... 51,938
- -------------------------------------------------------------------------------------
280,144
- -------------------------------------------------------------------------------------
TECHNOLOGY/HARDWARE -- 0.9%
650 Sun Microsystems, Inc. (a).................................. 55,656
- -------------------------------------------------------------------------------------
TECHNOLOGY/SEMICONDUCTORS -- 1.3%
1,000 Texas Instruments Inc. ..................................... 85,563
- -------------------------------------------------------------------------------------
TECHNOLOGY/SOFTWARE -- 11.8%
3,600 Electronic Arts Inc. (a).................................... 202,050
2,900 Electronic Data Systems Corp. .............................. 145,725
6,550 First Data Corp. ........................................... 207,553
3,400 Synopsys, Inc. (a).......................................... 184,450
- -------------------------------------------------------------------------------------
739,778
- -------------------------------------------------------------------------------------
TRANSPORTATION -- 3.3%
1,500 FDX Corp.................................................... 133,500
3,250 Southwest Airlines Co. ..................................... 72,922
- -------------------------------------------------------------------------------------
206,422
- -------------------------------------------------------------------------------------
UTILITIES -- 6.4%
4,600 AES Corp.................................................... 217,925
3,400 SBC Communications Inc. .................................... 182,325
- -------------------------------------------------------------------------------------
400,250
- -------------------------------------------------------------------------------------
TOTAL STOCK (Cost -- $5,194,102)............................ 5,462,497
- -------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<pg$pcn>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
JURIKA & VOYLES CORE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- --------------------------------------------------------------------------------------
<C> <S> <C>
REPURCHASE AGREEMENT -- 12.7%
$793,000 Morgan Stanley Dean Witter & Co., 4.590% due 1/4/99;
Proceeds at maturity -- $793,404;
(Fully collateralized by U.S. Treasury Note, 4.620% due
5/15/09;
Market value -- $809,025) (Cost -- $793,000)................ $ 793,000
- --------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $5,987,102*)............. $6,255,497
- --------------------------------------------------------------------------------------
</TABLE>
(a) Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
8
<pg$pcn>
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 1998
<TABLE>
<CAPTION>
JURIKA &
NWQ VOYLES
LARGE CAP CORE EQUITY
PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Investments -- Cost....................................... $6,861,769 $5,194,102
Repurchase Agreements -- Cost............................. 1,675,000 793,000
- ---------------------------------------------------------------------------------------
Investments, at Value..................................... $6,747,019.. $5,462,497
Repurchase Agreements, at Value........................... 1,675,000 793,000
Cash...................................................... 391 124
Dividends and interest receivable......................... 8,364 5,423
Receivable for Fund shares sold........................... 38,232 --
Receivable from affiliate................................. 17,700 20,200
- ---------------------------------------------------------------------------------------
TOTAL ASSETS.............................................. 8,486,706 6,281,244
- ---------------------------------------------------------------------------------------
LIABILITIES:
Investment advisory fees payable.......................... 4,998 3,624
Administration fees payable............................... 400 290
Payable for securities purchased.......................... -- 88,212
Payable for Fund shares purchased......................... -- 304
Accrued expenses.......................................... 18,452 19,811
- ---------------------------------------------------------------------------------------
TOTAL LIABILITIES......................................... 23,850 112,241
- ---------------------------------------------------------------------------------------
TOTAL NET ASSETS............................................ $8,462,856 $6,169,003
- ---------------------------------------------------------------------------------------
NET ASSETS:
Paid-in capital........................................... $8,586,181 $5,968,921
Undistributed net investment income....................... -- 420
Accumulated net realized loss from security
transactions............................................ (8,575) (68,733)
Net unrealized appreciation (depreciation) of
investments............................................. (114,750) 268,395
- ---------------------------------------------------------------------------------------
TOTAL NET ASSETS............................................ $8,462,856 $6,169,003
- ---------------------------------------------------------------------------------------
SHARES OUTSTANDING.......................................... 894,792 600,523
- ---------------------------------------------------------------------------------------
NET ASSET VALUE, PER SHARE.................................. $9.46 $10.27
- ---------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<pg$pcn>
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS FOR THE PERIOD ENDED DECEMBER 31, 1998(A)
<TABLE>
<CAPTION>
JURIKA &
NWQ VOYLES
LARGE CAP CORE EQUITY
PORTFOLIO PORTFOLIO
- ----------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME:
Dividends................................................. $ 37,505 $ 27,285
Interest.................................................. 29,234 17,156
Less: Foreign withholding tax............................. (117) --
- ----------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME................................... 66,622 44,441
- ----------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)......................... 20,050 16,506
Audit and legal........................................... 13,500 13,500
Shareholder communications................................ 3,500 3,500
Shareholder and system servicing fees..................... 3,000 3,000
Administration fees (Note 2).............................. 1,604 1,320
Custody................................................... 1,300 1,500
Trustees' fees............................................ 1,000 1,000
Other..................................................... 480 1,882
- ----------------------------------------------------------------------------------------
TOTAL EXPENSES............................................ 44,434 42,208
Less: Expense reimbursement (Note 2)...................... (17,700) (20,200)
- ----------------------------------------------------------------------------------------
NET EXPENSES.............................................. 26,734 22,008
- ----------------------------------------------------------------------------------------
NET INVESTMENT INCOME....................................... 39,888 22,433
- ----------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 3):
Realized Loss From:
Security transactions (excluding short-term
securities)........................................... (8,575) (68,818)
- ----------------------------------------------------------------------------------------
NET REALIZED LOSS......................................... (8,575) (68,818)
- ----------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation (Depreciation) of
Investments:
Beginning of period.................................... -- --
End of period.......................................... (114,750) 268,395
- ----------------------------------------------------------------------------------------
INCREASE IN NET UNREALIZED APPRECIATION (DEPRECIATION).... (114,750) 268,395
- ----------------------------------------------------------------------------------------
NET GAIN (LOSS) ON INVESTMENTS.............................. (123,325) 199,577
- ----------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS........... $ (83,437) $222,010
- ----------------------------------------------------------------------------------------
</TABLE>
(a) For the period from July 20, 1998 (commencement of operations) to December
31, 1998.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<pg$pcn>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS FOR THE PERIOD ENDED DECEMBER 31, 1998(A)
<TABLE>
<CAPTION>
JURIKA &
NWQ VOYLES
LARGE CAP CORE EQUITY
PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income..................................... $ 39,888 $ 22,433
Net realized loss......................................... (8,575) (68,818)
Increase in net unrealized appreciation (depreciation).... (114,750) 268,395
- ---------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS......... (83,437) 222,010
- ---------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income..................................... (39,888) (21,928)
Capital................................................... (1,153) (1,047)
- ---------------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM DISTRIBUTIONS TO
SHAREHOLDERS........................................... (41,041) (22,975)
- ---------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 10):
Net proceeds from sale of shares.......................... 8,565,903 5,954,492
Net asset value of shares issued for reinvestment of
dividends.............................................. 41,041 22,975
Cost of shares reacquired................................. (19,610) (7,499)
- ---------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS....... 8,587,334 5,969,968
- ---------------------------------------------------------------------------------------
INCREASE IN NET ASSETS...................................... 8,462,856 6,169,003
NET ASSETS:
Beginning of period....................................... -- --
- ---------------------------------------------------------------------------------------
END OF PERIOD*............................................ $8,462,856 $6,169,003
- ---------------------------------------------------------------------------------------
* Includes undistributed net investment income of: -- $420
- ---------------------------------------------------------------------------------------
</TABLE>
(a) For the period from July 20, 1998 (commencement of operations) to December
31, 1998.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<pg$pcn>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The NWQ Large Cap and Jurika & Voyles Core Equity 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 eighteen
other separate investment portfolios: Travelers Quality Bond, Lazard
International Stock, MFS Emerging Growth, Federated High Yield, Federated Stock,
Disciplined Mid Cap Stock, 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 2000 and Zero Coupon Bond Fund Portfolio Series 2005
Portfolios. Shares of the Trust are offered only to insurance company separate
accounts that fund certain variable annuity and variable life insurance
contracts. The financial statements and financial highlights for the other
portfolios are presented in separate annual reports.
The significant accounting policies consistently followed by the Portfolios
are: (a) security transactions are accounted for on trade date; (b) securities
traded on national securities markets are valued at the closing price on such
markets or, if there were no sales during the day, at current quoted bid price;
securities primarily traded on foreign exchanges are generally valued at the
closing values of such securities on their respective exchanges, except that
when a significant occurrence exists subsequent to the time a value was so
established and it is likely to have significantly changed the value, then the
fair value of those securities will be determined by consideration of other
factors by or under the direction of the Board of Trustees; securities traded in
the over-the-counter market are valued on the basis of the bid price at the
close of business on each day; U.S. government agencies and obligations are
valued at the mean between the last reported bid and ask prices; (c) securities
maturing within 60 days are valued at cost plus accreted discount or minus
amortized premium, which approximates value; (d) securities that have a maturity
of 60 days or more are valued at prices based on market quotations for
securities of similar type, yield and maturity; (e) interest income, adjusted
for amortization of premium and accretion of discount, is recorded on an accrual
basis and dividend income is recorded on the ex-dividend date; foreign dividends
are recorded on the ex-dividend date or as soon as practical after the Portfolio
determines the existence of a dividend declaration after exercising reasonable
due diligence; (f) gains or losses on the sale of securities are calculated by
using the specific identification method; (g) dividends and distributions to
shareholders are recorded on the ex-dividend date; (h) the accounting records of
the Portfolios are maintained in U.S. dollars. All assets and liabilities
denominated in foreign currencies are translated into U.S. dollars based on the
rate of exchange of such currencies against U.S. dollars on the date of
valuation. Purchases and sales of securities, income and expenses are translated
at the rate of exchange quoted on the respective date that such transactions are
recorded. Differences between income or expense amounts recorded and collected
or paid are adjusted when reported by the custodian bank; (i) the Portfolios
intend to comply with the requirements of the Internal Revenue Code of 1986, as
amended, pertaining to regulated investment companies and to make distributions
of taxable income sufficient to relieve it from substantially all Federal income
and excise taxes; (j) the character of income and gains to be distributed are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. At December 31, 1998,
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. 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 NWQ Large Cap and Jurika & Voyles Core Equity 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 Citigroup Inc., acts as investment adviser to the NWQ
Large Cap ("NWQ") and Jurika & Voyles Core Equity ("JV") Portfolios. NWQ and JV
each pay TAMIC an investment advisory fee calculated at the annual rate of 0.75%
of the average daily net assets. This fee is calculated daily and paid monthly.
TAMIC has entered into sub-advisory agreements with NWQ Investment
Management Co. ("NWQIM") and Jurika & Voyles L.P. ("JVLP"). Pursuant to each
sub-advisory agreement, NWQIM and JVLP are responsible for the day-to-day
12
<pg$pcn>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
portfolio operations and investment decisions for NWQ and JV, respectively. As a
result, the following fees are paid and calculated at an annual rate:
- TAMIC pays NWQIM 0.375% of NWQ's average daily net assets.
- TAMIC pays JVLP 0.375% of JV'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 period ended December 31, 1998, Travelers Insurance reimbursed
expenses in the amounts of $17,700 and $20,200 for NWQ and JV, respectively.
One Trustee and all officers of the Trust are employees of Citigroup 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 December 31, 1998 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO PURCHASES SALES
- -------------------------------------------------------------------------------------
<S> <C> <C>
NWQ Large Cap Portfolio..................................... $6,989,989 $ 119,646
Jurika & Voyles Core Equity Portfolio....................... 6,439,672 1,176,441
- -------------------------------------------------------------------------------------
</TABLE>
At December 31, 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>
NWQ Large Cap Portfolio..................................... $333,836 $(448,586) $(114,750)
Jurika & Voyles Core Equity Portfolio....................... 626,355 (357,960) 268,395
- -----------------------------------------------------------------------------------------
</TABLE>
4. REPURCHASE AGREEMENTS
The Portfolios purchase (and their custodians take possession of) U.S.
government securities from banks and securities dealers subject to agreements to
resell the securities to the sellers at a future date (generally, the next
business day) at an agreed-upon higher repurchase price. The Portfolios require
continual maintenance of the market value of the collateral in amounts at least
equal to the repurchase price.
5. FUTURES CONTRACTS
The NWQ and JV Portfolios may from time to time enter into futures
contracts.
Initial margin deposits made upon entering into futures contracts are
recognized as assets. Securities equal to the initial margin amount are
segregated by the custodian in the name of the broker. Additional securities are
also segregated up to the current market value of the futures contracts. During
the period the futures contract is open, changes in the value of the contract
are recognized as unrealized gains or losses by "marking-to-market" on a daily
basis to reflect the market value of the contract at the end of each day's
trading. Variation margin payments are received or made and recognized as assets
due from or liabilities due to broker, depending upon whether unrealized gains
or losses are incurred. When the contract is closed, the Portfolios record a
realized gain or loss equal to the difference between the proceeds from (or cost
of) the closing transactions and the Portfolio's basis in the contract.
13
<pg$pcn>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Portfolios enter into such contracts to hedge a portion of their
portfolios. The Portfolios bear the market risk that arises from changes in the
value of the financial instruments and securities indices (futures contracts).
At December 31, 1998, the Portfolios had no open futures contracts.
6. OPTIONS CONTRACTS
The NWQ and JV 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 December 31, 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 December 31, 1998, the Portfolios did not write any
options.
7. 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.
8. 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.
At December 31, 1998, the Portfolios had no securities on loan.
14
<pg$pcn>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. CAPITAL LOSS CARRYFORWARD
At December 31, 1998, JV had, for Federal tax purposes, $69,000 of capital
loss carryforwards available to offset future capital gains through 2006. To the
extent that these carryforward losses can be used to offset realized capital
gains, it is probable that such gains will not be distributed.
10. SHARES OF BENEFICIAL INTEREST
The Declaration of Trust authorizes the issuance of an unlimited number of
shares of beneficial interest without par value. Transactions in shares of each
Portfolio were as follows:
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1998(A)
- ------------------------------------------------------------------------------------
<S> <C>
NWQ LARGE CAP PORTFOLIO:
Shares sold................................................. 892,819
Shares issued on reinvestment............................... 4,338
Shares redeemed............................................. (2,365)
- ------------------------------------------------------------------------------------
Net Increase................................................ 894,792
- ------------------------------------------------------------------------------------
JURIKA & VOYLES CORE EQUITY PORTFOLIO:
Shares sold................................................. 599,062
Shares issued on reinvestment............................... 2,237
Shares redeemed............................................. (776)
- ------------------------------------------------------------------------------------
Net Increase................................................ 600,523
- ------------------------------------------------------------------------------------
</TABLE>
(a) For the period from July 20, 1998 (commencement of operations) to December
31, 1998.
15
<pg$pcn>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
For a share of beneficial interest outstanding throughout the period ended
December 31:
<TABLE>
<CAPTION>
NWQ LARGE CAP PORTFOLIO 1998(1)
- ---------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $10.00
- ---------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income(2).................................. 0.05
Net realized and unrealized loss.......................... (0.54)
- ---------------------------------------------------------------------
Total Loss From Operations.................................. (0.49)
- ---------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income..................................... (0.05)
Capital................................................... (0.00)*
- ---------------------------------------------------------------------
Total Distributions......................................... (0.05)
- ---------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.............................. $9.46
- ---------------------------------------------------------------------
TOTAL RETURN++.............................................. (4.94)%
- ---------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000'S)........................... $8,463
- ---------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS+:
Expenses(2)(3)............................................ 0.99%
Net investment income..................................... 1.47
- ---------------------------------------------------------------------
PORTFOLIO TURNOVER RATE..................................... 2%
- ---------------------------------------------------------------------
</TABLE>
(1) For the period from July 20, 1998 (commencement of operations) to December
31, 1998.
(2) Travelers Insurance has agreed to reimburse the Portfolio for expenses in
the amount of $17,700 for the period ended December 31, 1998. If such
expenses were not reimbursed, the per share decrease in net investment
income and the actual expense ratios would have been as follows:
<TABLE>
<CAPTION>
PER SHARE DECREASE EXPENSE RATIO WITHOUT
IN NET INVESTMENT INCOME EXPENSE REIMBURSEMENT
------------------------ ----------------------
<S> <C> <C>
1998 $0.02 1.64%+
</TABLE>
(3) As a result of a voluntary expense limitation, the ratio of expenses to
average net assets will not exceed 1.00%.
* 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 the period ended
December 31:
<TABLE>
<CAPTION>
JURIKA & VOYLES CORE EQUITY PORTFOLIO 1998(1)
- ---------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $10.00
- ---------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income(2).................................. 0.04
Net realized and unrealized gain.......................... 0.27
- ---------------------------------------------------------------------
Total Income From Operations................................ 0.31
- ---------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income..................................... (0.04)
Capital................................................... (0.00)*
- ---------------------------------------------------------------------
Total Distributions......................................... (0.04)
- ---------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.............................. $10.27
- ---------------------------------------------------------------------
TOTAL RETURN++.............................................. 3.08%
- ---------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000'S)........................... $6,169
- ---------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS+:
Expenses(2)(3)............................................ 0.99%
Net investment income..................................... 1.01
- ---------------------------------------------------------------------
PORTFOLIO TURNOVER RATE..................................... 26%
- ---------------------------------------------------------------------
</TABLE>
(1) For the period from July 20, 1998 (commencement of operations) to December
31, 1998.
(2) Travelers Insurance has agreed to reimburse the Portfolio for expenses in
the amount of $20,200 for the period ended December 31, 1998. If such
expenses were not reimbursed, the per share decrease in net investment
income and the actual expense ratios would have been as follows:
<TABLE>
<CAPTION>
PER SHARE DECREASE EXPENSE RATIO WITHOUT
IN NET INVESTMENT INCOME EXPENSE REIMBURSEMENT
------------------------ ----------------------
<S> <C> <C>
1998 $0.03 1.89%+
</TABLE>
(3) As a result of a voluntary expense limitation, the ratio of expenses to
average net assets will not exceed 1.00%.
* Amount represents less than $0.01.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
17
<pg$pcn>
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
TRAVELERS SERIES TRUST:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of NWQ Large Cap Portfolio and Jurika & Voyles Core
Equity Portfolio of Travelers Series Trust as of December 31, 1998, and the
related statements of operations, changes in net assets and financial highlights
for the period from July 20, 1998 (commencement of operations) to December 31,
1998. These financial statements and financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of December 31, 1998, by
correspondence with the custodian. As to securities purchased but not yet
received, we performed other appropriate auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
NWQ Large Cap Portfolio and Jurika & Voyles Core Equity Portfolio of Travelers
Series Trust as of December 31, 1998, the results of their operations, the
changes in their net assets and their financial highlights for the period from
July 20, 1998 (commencement of operations) to December 31, 1998, in conformity
with generally accepted accounting principles.
[KPMG Peat Marwick LLP
Signature]
New York, New York
February 8, 1999
18
<pg$pcn>
- --------------------------------------------------------------------------------
TAX INFORMATION (UNAUDITED)
For Federal tax purposes the Trust hereby designates for the fiscal year ended
December 31, 1998:
- Percentages of ordinary dividends paid as qualifying for the corporate
dividends received deduction:
<TABLE>
<S> <C>
NQW Large Cap Portfolio..................................... 89.07%
Jurika & Voyles Core Equity Portfolio....................... 100.00
</TABLE>
19
<pg$pcn>
(This page intentionally left blank)
<pg$pcn>
Investment Advisers
TRAVELERS ASSET MANAGEMENT INTERNATIONAL CORPORATION
Hartford, Connecticut
Independent Auditors
KPMG 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: NWQ Large Cap and Jurika &
Voyles Core Equity 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 or Travelers Life & Annuity Company and the Prospectuses for the
underlying funds, which collectively contain all pertinent information,
including the applicable sales commissions.
Series Trust (Annual) (2-99) Printed in U.S.A.
THE TRAVELERS VARIABLE
PRODUCTS FUNDS
ANNUAL REPORTS
December 31, 1998
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
[TravelersLife&Annuity
A member of citigroup LOGO]
The Travelers Insurance Company
The Travelers Life and Annuity Company
One Tower Square
Hartford, CT 06183
<PAGE>
ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
We are pleased to provide the annual report for six of the fourteen portfolios
of The Travelers Series Trust ("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 ("Portfolios") for the year ended December 31, 1998. In this letter,
we briefly discuss general economic and market conditions and outline each
Portfolio's investment strategy. A market commentary and detailed summary of
performance and current holdings for each Portfolio 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...................... 3 13
Lazard International Stock Portfolio.................. 4 15
MFS Emerging Growth Portfolio......................... 5 18
Federated High Yield Portfolio........................ 6 25
Federated Stock Portfolio............................. 7 34
Disciplined Mid Cap Stock Portfolio................... 7 38
</TABLE>
ECONOMIC REVIEW AND OUTLOOK
The year 1998 saw a widely gyrating U.S. stock market with different sectors
performing differently. The large-cap oriented S&P 500 Stock Index ("S&P 500")
returned about 28.72% for the year. The S&P 400 MidCap Index had a gain of 19.1%
while the Russell 2000 Index had a negative 2.6% return for the year ended
December 31, 1998. Dividend-paying defensive stocks such as utilities performed
better than the average small- and mid-cap stock. While technology stocks were
adversely impacted by the global financial crisis in late 1997, they have since
rebounded, led by Internet-related names.
The economies of the developed world flourished in 1998 while most emerging
markets went down. Low interest rates, robust consumer spending and benign
inflation fueled economic growth in the U.S. and Europe and created favorable
conditions for corporate profitability. In contrast, Russia's economy collapsed,
Asia's economies remained mired in recession and Brazil's economy faltered at
year-end after $30 billion was spent to defend its currency during the reporting
period.
The year was also a record year for mergers and acquisitions, nearly double
1997's total. The merger of oil giants Exxon and Mobil announced in December
will result in the creation of the world's largest company in terms of revenue.
In the digital world, merger activity between Internet service providers, phone
companies, cable companies and telecommunications firms heated up, as
"convergence" became the new mantra.
We remain guardedly optimistic about the resilient U.S. economy in the first
half of 1999 because we expect interest rates to stay low and the productivity
revolution through technology to continue. However, the risks from foreign
markets cannot be discounted and future corporate earnings may come under
increasing pressure.
FIXED INCOME MARKET COMMENTARY
Problems that started with Asia's currency devaluations in the summer of 1997
hit the bond market hard in August and September of 1998. Bond values fell
dramatically and asset-backed bonds, mortgage-backed securities, emerging-market
debt and corporate bonds all were negatively affected. In 1998, the more risk a
bond investor assumed, the more he or she suffered.
For the year ended December 31, 1998, the Lehman Government/Corporate Index
returned 9.47%. During the year, the spreads between different kinds of bonds
and U.S. Treasuries widened at record speed as investors gravitated to their
safety amidst rising stock market volatility and higher investor anxiety about
the global economy. The Federal Reserve Board ("Fed") then changed its monetary
policy from one of vigilance against inflation to one of combating deflation
during the reporting period and cut rates three times. So far in 1999, spreads
have tightened, bond market liquidity has returned and the bond market has
stabilized.
Markets and policy makers expect real U.S. economic growth to finally slow to
the 1.00%-2.00% level in 1998 after 3 years of 3.00% plus growth. The slowdown
is expected to be led by a sharp reduction in the growth rate of investment
spending and continued weakness in the export sector. The Conference Board
survey of corporate sentiment indicates that capital-spending plans has not yet
rebounded with the stock market and consumer sentiment. Year 2000 ("Y2K")
spending is temporarily
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boosting capital spending, yet industrial overcapacity and several years of
rapid spending in technology make slower investment spending highly likely.
However, a drop in the rate of consumer spending growth is essential to any
meaningful forecast of 1.00%-2.00% real GDP growth. This has not happened yet
despite two years where consumer spending has been close to consumer income. The
wealth effect from three years of 20% plus stock market gains is estimated to
increase spending 1.5% more than implied by income growth. Lower interest rates,
lower oil and other commodity prices, and declining import prices have further
boosted consumer purchasing power.
The tight employment market has also been a major force behind high consumer
confidence and spending plans. December brought a further sharp drop in oil
prices and continued record high (which substantially exceeded expectations)
auto sales and housing starts. Unless they were all caused by unseasonably warm
weather, these factors cause us to push any forecast of a consumer slowdown
further out into the future which will delay any further Fed rate cuts.
There are storm clouds on the horizon that could lead the consumer to retreat.
Latin America has been pushed into recession by last summer's emerging market
meltdown and could be subject to further pressure if a Brazilian crisis erupts.
Latin America has a larger economic impact on the U.S. than Asia and Russia do.
A decline in the stock market could rattle the consumer, although the stock
markets continued resilience means that a sustained downturn is required before
spending would be significantly impacted. Japan is also a big question mark.
Economic activity is now declining there after several years of flat growth.
Despite three rate cuts in the second half of 1998, it would be hard to say the
Fed has an easy monetary policy. Short-term interest rates are still more than
3% above inflation and are high relative to nominal growth. Credit market
spreads are high and banks are tightening credit standards. These factors create
a downward bias for short-term rates over the long-term, but rates are likely to
remain stable until the consumer slows down.
With the Fed on hold, there will be some upward pressure on long-term rates. But
slow growth outside the U.S. and continued low inflation should prevent rates
from rising too much. The fact that so much of the U.S. Treasury curve trades
below the federal-funds rate is a big factor in the continued high spreads in
the investment grade corporate market. Because of this, spreads should move to
offset the change in U.S. Treasury yields -- narrowing when yields rise and
widening when yields fall.
EQUITY MARKET COMMENTARY
The deepening global financial crisis and its adverse impact on global economies
and leveraged hedge funds sent the U.S. stock market into a tailspin during the
third quarter of 1998. The S&P 500 fell by almost 10% in the third quarter while
the Russell 2000 Index of smaller companies fared even worse with a decline of
roughly 20%.
The third quarter began on a promising note as stock prices rose by almost 5% in
the first half of July. From the then all-time highs established on July 17,
1998, a series of bad news related to political and currency turmoil led the
stock market down through the end of August. The market decline over that period
was close to 20%, which qualifies under most scenarios as a bear market.
The bulk of the bad news in August came from the political and economic crisis
in Russia and the continuing spread of the currency contagion. The collapse of
the Russian ruble and the restructuring of Russian debt triggered trading and
lending losses at brokerage firms and banks. The crisis in the financial sector
took a turn for the worse later in the quarter as several hedge funds disclosed
losses related to the global financial turmoil. Several stocks in the financial
sector saw their market value cut in half during the third quarter.
Increased uncertainty over Clinton's presidency and the bigger question of the
damage to corporate profits added to the volatility in the stock market. The
increased prospects of a global and U.S. economic slowdown led to some easing of
monetary policy. Japan first decreased short-term interest rates by 20 basis
points and the Fed followed suit with a 0.25% rate cut in late September. The
U.S. stock market rallied in anticipation of the rate cut and stock prices rose
by almost 6% in September.
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In the large-capitalization stock universe, high-quality growth stocks performed
better than value stocks in the third quarter of 1998. The utilities sector
produced the only positive performance in the third quarter while the financial
services and energy sectors at the other end of the spectrum fell by over 20%.
Large-cap technology and health care stocks held up reasonably well, but
consumer stocks declined sharply against the likely backdrop of an economic
slowdown.
A proactive and aggressive stance by the Fed halted the stock market slide early
in the fourth quarter of 1998 and sent stock prices soaring in November and
December. The fourth quarter rally erased losses from the third quarter and most
market measures reached new all-time highs.
The negative sentiment in the stock market persisted through the first week of
October as the S&P 500 fell another 6%. Investor concerns focused on the impact
of the Russian crisis and global lending and trading losses on U.S. economic and
earnings growth.
Sentiment reversed in the second week of October after most market indexes had
declined over 20% from their all-time highs. The reversal in trend turned into a
significant stock market rally when the Fed cut short-term rates by an
unexpected 25 basis points in the middle of October. The surprise Fed action
raised hopes that a proactive stimulative monetary policy by most central banks
would avert a global recession.
The stock market rally, triggered by the unexpected Fed rate cut in mid-October,
continued almost unabated through the months of November and December. The
market was also helped by economic reports in the fourth quarter which were well
ahead of expectations. Despite the strength in the economy, interest rates
remained low mainly as a result of low inflation.
In the large-cap universe, all sectors except energy which, declined by 3%,
registered strong gains in the fourth quarter. The market rally was led by the
technology and health care sectors which rose by over 30%. The financial
services, transportation and producer durables sectors also performed well.
The performance of the U.S. stock market in 1998 proves yet again that interest
rate changes and liquidity flows may have a more dominant influence on stock
prices than most other factors. In a year where earnings growth was close to
zero, most measures of the U.S. stock market have risen by over 20%. Declining
interest rates, which fell from 5.9% to 5.1% during 1998, have triggered a
significant expansion in the market price/earnings ("P/E") multiple. The upward
pressure on stock prices has been further amplified by strong money flows as
yields on alternative investments have dwindled.
A notable aspect of the stock market performance in 1998 was the divergence in
returns across different styles and segments of the market. While the S&P 500
rose by 28.72% in 1998, the Russell 2000 actually declined by 2.6%. The gain in
large company growth stocks of 42.2% was well ahead of the 14.7% advance of
large company value stocks and almost out of sight compared to small company
value stocks which fell by 6.5%.
With earnings growth slowing down, the market P/E multiple has now reached 23
times 1998 earnings. It appears that the biggest risk to the stock market still
remains on the earnings front. Earnings estimates for 1999 remain high and it is
quite likely that these earnings forecasts will be revised down. Despite the
overhang of possible downward earnings revisions, we believe that support from
low interest rates should limit any excessive downside.
TRAVELERS QUALITY BOND PORTFOLIO
The Travelers Quality Bond Portfolio ("Portfolio") seeks current income,
moderate capital volatility and total return. For the year ended December 31,
1998, the Portfolio posted 8.49% total return versus the Lehman
Government/Corporate Bond Index of 9.47%. (The Lehman Government/Corporate Bond
Index is a combination of publicly issued intermediate- and long-term U.S.
government bonds and corporate bonds.)
1998 began with economic momentum continuing from the year before. It seemed the
next move by the Fed was to tighten its monetary policy. Asian turmoil had not
yet infected the U.S. economy. Credit spreads were amongst the tightest ever,
and the U.S. stock market was poised for another year.
In early August, the world changed and Russia defaulted. This triggered a
massive deleveraging among bond hedge funds. Most Wall Street firms also took
significant trading losses in its trading accounts.
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Responding to the disarray in the marketplace, the Fed cut interest rates 25
basis points on September 29, 1998. Sensing this was not enough to calm market
fears, the Fed again lowered the base rate 25 basis points on October 15, 1998.
This was the first such change in these rates between regularly scheduled Fed
meetings in more than five years, indicating the seriousness on the Fed's part
about the possibility of a global financial meltdown. One last rate cut occurred
on November 2, 1998, bringing the federal-funds rate down to 4.75%.
The U.S. stock market went down from July record highs to the mid-October lows.
Corporate bond spreads almost doubled during this period. And new issuance came
to a complete halt during this time.
By the end of October, a nervous calm descended on the market. Corporate bond
issuance began again, but at sharply discounted spreads. November interestingly
enough set a record pace for new issues with over $40 billion coming to market.
Confidence that the worst was over and that the Fed would provide liquidity set
the stage for a partial rebound of spread tightening.
The fourth quarter performance for the Travelers Quality Bond Portfolio was
about 1.15% versus a 0.29% return for the Lehman Intermediate
Government/Corporate Index. The Portfolio outperformed the index by 86 basis
points. Its duration was modestly long for most of the quarter. The managers
also traded securities more actively than normal as high volumes of new
corporate issuance provided what they believed were many attractive investment
opportunities.
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 12.59% for the year ended December 31, 1998, which underperformed the
20.33% posted by the MSCI EAFE Index. (The MSCI EAFE Index consists of the
equity total returns for Europe, Australia, New Zealand and the Far East.)
Financial markets in 1998 were highlighted by record high stock markets as well
as financial crises, unprecedented corporate consolidation, the impeachment of
President Clinton and the dawn of the European Monetary Union (EMU). Mergers,
acquisitions and restructuring drove equity markets to all-time highs in July
before a sense of deja vu struck as an emerging market financial crisis sent
markets tumbling with indiscriminate selling. In July 1997, the devaluation of
the Thai baht set off the collapse of Southeast Asian currencies and sent a
tremor through equity markets globally. 1998's tempest was sparked by the
Russian government's default on its Treasury bills (GKOs) coupled with the
devaluation of the ruble that triggered margin calls on leveraged investors
worldwide.
This sharp sell-off caused a ripple effect of further margin calls and forced
sales of liquid assets that destabilized both emerging and developed markets.
Investors' faith was nearly dashed with the financial collapse of a major hedge
fund and a rash of corporate profit warnings before three successive U.S.
interest rate cuts and a coordinated Europe-wide rate cut restored stability.
Corporate activity resumed and investors returned, sending international equity
markets up 20.7% during the fourth quarter of 1998 to end the year ahead about
20%. Europe rebounded 18.7% in the quarter to post an impressive 28.5% advance
for the year, while the Pacific region's 26.1% quarterly jump recouped the
losses of the first nine months of the year to ink a 2.4% gain in 1998. The
Portfolio participated in the fourth quarter rally with a 18% rise to end the
year up 12.59%.
Global competition has forced companies to alter radically the way they do
business. Stock prices and valuations are being driven higher as companies
embrace change to improve their return on capital by shedding non-core
activities and bolstering main business operations through mergers and
acquisitions. The total value of worldwide merger and acquisitions ("M&A") in
1998 surpassed $2.4 trillion, more than 50% above 1997's record. The January 1,
1999 introduction of the EMU provided added impetus for European companies to
look past their traditional country borders. In the pharmaceutical industry,
Hoechst (Germany) announced plans to split off the remainder of its industrial
chemicals businesses, which cleared the way to combine its life sciences
operations with Rhone-Poulenc (France). Astra (Sweden) linked with Zeneca (U.K.)
in the largest ever intra-Europe merger. But the biggest actions taken by
European companies bridged the Atlantic as well as country borders. Daimler-Benz
(Germany) surprised the world with its acquisition of Chrysler (U.S.) to create
a global automotive powerhouse. Before investors or even competitors could fully
digest the ramifications of the merger, DaimlerChrysler, was already in talks to
extend its reach with a stake in Nissan Diesel (Japan's fourth largest truck
maker).
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In the oil industry, historically low commodity prices intensified competition
and fuelled consolidation. British Petroleum (U.K.) made the first major move by
purchasing Amoco (U.S.) to join Royal Dutch (Netherlands) and Exxon (U.S.) in
the oil industry super league. Exxon upped the ante by announcing the world's
largest ever acquisition of Mobil (U.S.), while Royal Dutch responded with
massive restructuring plans.
While many have looked outside their own companies for opportunities to
strengthen core businesses, others have taken a surgical knife to unlock value
and cut costs. In a stark departure from Siemens' (Germany) past strategy that
deemed in-house computer chip production was necessary to become a global
electronic equipment leader, Siemens announced plans to spin off its
semiconductor business. Even the traditionally regional retailing sector is
facing global competition. Metro (Germany), the world's second largest retailer
behind Wal-Mart, announced the spin off of one-sixth of its diversified
retailing operations to refocus on its supermarkets and hypermarkets as European
retailers cross national borders.
While the bulk of corporate activity has occurred in Europe and the U.S., Asia
seems ripe for change as its economies and companies are struggling to keep pace
with their global industry peers. The year began with hopes of Japan finally
shaking itself free from recession, but prospects dwindled as proposed
government fiscal spending packages appeared insufficient, the rest of Asia
continued to falter and companies reported weak earnings. While further
government initiatives are not imminent and the current environment is dreary,
some signs of change are appearing.
Companies are finally talking about restructuring, and while most still lack a
sense of urgency, some are taking action. Asahi Breweries sold its stake in
Torii Pharmaceutical to Japan Tobacco. Promise Co., Ltd. was actually able to
improve underlying operating earnings and created a tie-up with JCB, Japan's
largest credit card company, to take advantage of Japanese financial
deregulation. In the auto industry, Nissan showed its commitment to restructure
by selling its headquarter office buildings and leasing operations, while it
prepared to spin-off or sell its automatic transmission business. While it is
impossible to forecast, a turnaround exists for value opportunities in Japan.
However many more Japanese companies must engage in more radical restructuring
to generate globally competitive returns for its stock market to end its decade
long slide.
Competitive pressures on margins should continue in 1999. Top-line revenues will
not be secure as pricing power does not exist and the global outlook remains
uncertain.
Combined with the January 1, 1999 introduction of the EMU, the urge to merge and
restructure will remain. M&A activity in the U.S. and Europe may be joined by
activity in Asia and Latin America if their economies stabilize facilitating
bottom-fishing by foreign investors. Financial crises in each of the last two
years have served a notice of caution, but investment opportunities should
continue to arise as companies take action to improve their own financial
productivity.
MFS EMERGING GROWTH PORTFOLIO
The MFS Emerging Growth Portfolio ("Portfolio") seeks to provide long-term
growth of capital. For the year ended December 31, 1998, the Portfolio provided
a total return of 34.32%. This compares to a negative 2.55% return for the
Russell 2000 Index and a 28.72% return for the S&P 500 for the same period. (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. The S&P 500 is a capitalization-weighted measure of 500 widely held
common stocks.)
The past year was a volatile one buffeted by many crosscurrents. While the U.S.
economy appeared to be in good shape -- helped by generational low interest
rates, non-existent inflation and several easings by the Fed -- the rest of the
world continued to be negatively affected by the Asian contagion of slowing
growth and devaluation. The uncertainty in global markets and the prospect for a
deceleration in U.S. economic growth thus increased the appeal of liquidity and
companies with businesses less subject to the vagaries of international
economies. As a result, the mid- and larger-capitalization stocks in MFS
Emerging Growth Portfolio did better than its smaller holdings, as did the
companies which had little exposure to countries abroad.
The Portfolio continued to benefit from the strong performance of its largest
sector, technology, where earnings were surprisingly robust despite issues
relating to Asia. Stocks which contributed to performance included Compuware,
Cisco Systems, Microsoft, Oracle and Sun Microsystems -- all of whose products
were in solid demand by corporations seeking enhanced productivity. Deregulation
and the rapid growth of data services in the telecommunications industry boosted
the values of holdings such as MCI WorldCom and Global Telesystems. Consumer
demand was more vibrant than expected. This
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helped successful specialty retailers such as Staples and Office Depot and also
provided a positive backdrop for food and drug retailing companies such as
Rite-Aid and Fred Meyer where strong pharmacy sales helped storewide sales.
There were a few areas which did not do as well as the managers had hoped.
Cendant, the company created by the merger of HFS and CUC International,
suffered because of accounting irregularities at CUC. In 1999, a major
restructuring and refocusing of core businesses, combined with a multi-billion
dollar share buyback, should help contribute to that company's performance.
Health maintenance organizations also disappointed as a result of an in-balance
between costs and pricing. Improved pricing and the reduction of unprofitable
businesses should help in 1999.
Technology continues to be a key area of emphasis since software, networking,
and telecom equipment companies are likely to generate some of the strongest
earnings growth in the market. This entire area is being helped by strong
spending on communications and the Internet. Another area which offers great
promise is telecommunications services where mergers and the strong growth of
data transmission are enhancing valuations. In the view of the managers, the
companies that can grow the fastest should be well rewarded by the marketplace.
Thus, the managers believe their strategy of searching out rapidly growing
companies at reasonable prices should benefit shareholders in 1999.
Looking forward, the managers also believe the fundamental outlook for emerging
growth stocks remains positive. They continue to think that they are at the
beginning of a slowdown in profit growth for many of the large-cap multinational
companies that make up the broader market averages. This is a positive for
emerging growth stocks that should be able to grow much faster than the overall
economy. Moreover, inflation and interest rates are both low, and that should
provide a favorable backdrop for the valuation of emerging growth stocks.
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 4.71% for the year ended December 31,
1998. In comparison, the Lehman Brothers High Yield Bond Index returned 1.75%
for the year versus 8.69% 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.)
The year ended December 31, 1998 was marked by volatility and generally
disappointing returns from a high yield bond perspective. There were several
reasons for the volatility and disappointing returns. First, problems in the
international arena and, more importantly, its impact on the domestic economy
were an area of concern for many high yield bond investors. At the start of the
year, Asia was the main concern but this spread to Russia and Latin America as
the year progressed. Also, the stock market swoon in mid-summer and hedge fund
problems in the latter part of the year highlighted the somewhat fragile state
of the world financial system. Also, falling commodity prices, while good for
consumers, is a negative for high yield bond companies in the energy, forest
products, metals and mining sectors. Finally, the economic consensus in the
latter part of 1998 pointed to a slowing of the domestic economy in 1999. These
factors caused the yield spread between high yield bonds and U.S. Treasury
securities, an indicator of the market's perceived default risk, to increase by
approximately 280 basis points during the year. These factors caused high yield
bonds to underperform versus high-quality bonds. For example, the Lehman
Brothers High Yield Bond Index returned 1.87% substantially underperforming the
Lehman Brothers Aggregate Bond Index, a measure of high quality bond
performance, which returned 8.70%.
The Federated High Yield Portfolio returned 4.71% for the year outperforming
both the Lehman Brothers High Yield Bond Index mentioned above as well as the
Lipper high current yield fund average, which returned a negative 0.44% during
the year. (Lipper Inc. is a major fund-tracking organization.) Several factors
positively impacted the Portfolio's returns during the year. First, the
Portfolio's was underweight in "CCC"-rated securities, the lowest quality sector
of the market, which was most impacted by the spread widening that occurred. The
Portfolio had no direct exposure to emerging markets which negatively impacted
several of the funds in the Lipper average. The Portfolio was also underweight
in energy and commodity related issuers that underperformed during the year.
Overweights in the telecommunications, broadcasting and cable TV sectors aided
performance as these sectors outperformed the overall market. Corporate actions
such as calls, tenders or acquisition activity involving Viacom, Echostar,
Charter Communications, Sygnet, Simmons, Vanguard Cellular and Allied Waste
positively impacted performance.
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As the managers look out into 1999, many contradictory factors are present. On
the negative side, concerns continue regarding the domestic economy's ability to
continue to grow while many of the U.S. trading partners, such as Japan, most of
Asia and parts of Latin America, experience economic problems. Falling commodity
prices continue to present problems for specific high yield issuers. The
uncertainty of Y2K and ".com mania" in the equity markets are also causes for
concern.
On the plus side, the consensus economic forecast sees the domestic economy
continuing its remarkable growth for another year although at a somewhat slower
pace. Inflation remains almost non-existent and interest rates are low. The Fed
would appear ready to counteract any signs of recession with further cuts in
interest rates. Most importantly, the yield spread between high yield bonds and
U.S. Treasury securities remains very wide especially in light of the amazing
resilience of the domestic economy. Overall, wide spreads and positive economic
growth should make 1999 a good year for high yield securities although security
selection will be key as slowing growth and little pricing power, especially in
the commodity area, will make for a challenging environment for many high yield
issuers. The managers maintain their bias toward high-quality operating
companies within the high yield market, to companies in secularly growing
industries such as telecommunications and companies in sectors with stable
business profiles like food products, cable TV and broadcasting.
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 common stock 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 year ended December 31, 1998,
the Portfolio had a total return of 17.84% versus the 15.72% and 28.72% total
returns for the Lipper, Inc. Growth and Income Funds Average Index and the S&P
500, respectively.
1998 was an extremely difficult year for active value managers. The S&P 500's
28.72% return was dominated by a handful of ultra-large, growth-oriented
technology, pharmaceutical and telephone companies. The return for the average
stock in the S&P 500, as measured by the equal-weighted S&P 500, was only 12.8%.
This nearly 16% disparity between the average stock and the market itself is
something the market has not experienced in the last 25 years.
Small-capitalization stocks provided negative returns for the year.
Value stocks, due to cyclical concerns and weak commodity prices, returned 14.7%
as measured by S&P Value Index and 15.6% by the Russell 1000 Value Index. This
is the worst relative performance for value versus growth since the inception of
both indexes. In this difficult environment the Portfolio delivered a return of
17.84%. This performance compares favorably to its mutual fund peers: the
average Lipper Growth and Income Fund returned 15.61% and the average
Morningstar, Inc. large-cap value fund returned 12.0%. The managers are
obviously not pleased with their relative performance versus the S&P 500 but
given their investment style and market conditions the returns are not
unreasonable. It is worth noting that historically, after periods of extremely
narrow market leadership dominated by a handful of growth stocks, active value
management can often provide superior return potential.
As they enter 1999, the markets are faced with numerous challenges. At a P/E of
30 times, a price-to-book ratio north of eight times and a dividend yield of
1.3%, the S&P 500 is in uncharted valuation territory for this point in any
business cycle. Confidence in the demographically led "cult of equities" and the
nirvana of low inflation seem to be outweighing fears of a deteriorating profit
landscape and continued global political and economic turmoil. Given the "tulip
bulb" like behavior of the Internet stocks and the market's ability to shake off
some of the earnings disappointments provided by former super-cap global
leaders, it appears that speculation has worked its way into the market. In this
type of environment, the managers believe that their value
disciplines -- identifying leading companies which are temporarily out of favor
and appear inexpensive relative to their history relative to the market as well
as to their expected growth -- should provide a more reasonable ride as
rationality works its way back into the market.
DISCIPLINED MID CAP STOCK PORTFOLIO
The Disciplined Mid Cap Stock Portfolio ("Portfolio") seeks growth of capital by
investing primarily in a broadly diversified portfolio of U.S. common stocks.
For the year ended December 31, 1998, the Portfolio posted a total return of
16.91%, compared to the 16.30% total return of the Lipper, Inc. mid-cap peer
group average.
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The Portfolio is managed to provide diversified exposure to the mid- and
small-capitalization sectors of the U.S. equity 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 attractive relative
value. In order to achieve consistent relative performance, the Portfolio is
managed to mirror the overall risk, sector weightings and growth/value style
characteristics of the Standard & Poor's 400 Stock Index. (The S&P 400 is a
value-weighted index comprised of mid- and small-company stocks.)
During the third quarter of 1998, stock selection in the consumer discretionary,
financial services and utilities sectors had an adverse impact on the
Portfolio's overall relative performance. The prospects of an economic slowdown
and even a recession in the near future hurt several retailing stocks such as
Family Dollar Stores, General Nutrition and Viking Office Products. Specialty
retailers such as Liz Claiborne and Neiman Marcus Group performed especially
poorly during the month of August as the Russian crisis unfolded. The utilities
sector was the best performing sector in the third quarter and a small
underweight position in the sector hurt portfolio performance. In addition,
several positions such as Winstar Communications, Nextel Communications and AES
Corp fell sharply because of downward revisions in earnings estimates.
In the financial services sector, positions in Bear Stearns and Capital One
Financial hurt relative performance. Brokerage firms were hit hard in the third
quarter as trading and lending losses mounted and the perception of consumer
weakness sent Capital One, a leading player in the credit card and consumer
banking business, into a tailspin.
Relative Portfolio performance was enhanced by the manager's stock selection in
the producer durables sector. His position in American Power Conversion helped
performance as the company confirmed strong revenue growth of 25-30% for 1998.
Cordant Technologies also rose sharply at the end of the quarter to boost
portfolio performance. The manager also avoided several underperforming stocks
such as American Standard, Danaher Corp. and Harsco Corp. which helped
performance.
During the fourth quarter of 1998, stock selection in the technology, health
care and financial services sectors had an adverse impact on relative Portfolio
performance. Stock selection was positive in the utilities and materials and
processing sectors. The severe volatility in the technology sector during the
first two weeks of October contributed to underperformance as the manager was
unable to match the timing of his purchases and sales. While the manager
remained neutral to the sector on average, he was unable to execute his
purchases in a rising market quickly enough to replace the exposure that he had
sold during the period of falling prices. In addition, the manager was hurt by
his positions in software companies such as Peoplesoft, BMC Software and Cadence
Design that turned in disappointing earnings performance.
The manager was also hurt in the health care sector by his underweight position
in a number of better performing stocks such as Forest Laboratories and Sybron
International and biotechnology securities such as Genzyme and Chiron. The
manager's modest position in Pharmerica, which reported a negative earnings
surprise, also hurt performance. The theme of underweighted stocks which
performed well in the fourth quarter despite poor earnings fundamentals also
held true in the financial services sector. Several less liquid stocks such as
Zion Bancorpoartion, Old Kent Financial and Reliastar Financial produced strong
gains which the manager missed in the Portfolio.
In the materials and processing sector, the manager was helped by his positions
in construction companies such as Southdown and Vulcan Materials which responded
well to the prospects of economic stability as a result of the Fed action to
lower interest rates. In the utilities sector, the manager has been emphasizing
telecommunications and cellular telephone companies such as Aliant Communication
and Century Telephone at the expense of the local/regional telephone companies
and the electric utilities group. He was rewarded in these positions as
investors paid a premium for the higher growth prospects of these companies
within a relatively low growth sector.
In the manager's disciplined approach to stock selection, the manager screens
his research universe of over 800 mid-cap securities for companies that offer
improving earnings fundamentals at discounted stock valuations. In the
technology sector, the manager focuses on higher growth industries like computer
services and software through his positions in Comverse Technology, Concord EFS,
Siebel Systems and Legato Systems which are still trading at reasonable
valuations. His emphasis on Watson Pharmaceuticals and Guidant Corp, leaders in
the generic drugs and medical devices industries respectively, also seeks growth
at a reasonable price.
8
<PAGE>
ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
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
January 13, 1999
9
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON -- TRAVELERS QUALITY BOND PORTFOLIO AS OF 12/31/98
(UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
--------------------------------------------
<S> <C>
Year Ended 12/31/98 8.49%
8/30/96* through 12/31/98 8.25%
CUMULATIVE TOTAL RETURN
--------------------------------------------
8/30/96* through 12/31/98 20.36%
* Commencement of operations
</TABLE>
This chart assumes an initial investment of $10,000 made on August
30, 1996, assuming reinvestment of dividends, through December 31,
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.
[Travelers Quality Performance Graph]
<TABLE>
<CAPTION>
TRAVELERS QUALITY BOND PORTFOLIO LEHMAN GOVT/CORP. BOND INDEX
-------------------------------- ----------------------------
<S> <C> <C>
8/30/96 10000.00 10000.00
12/96 10356.00 10489.00
6/97 10602.00 10776.00
12/97 11095.00 11512.00
6/98 11439.00 11992.00
12/31/98 12036.00 12603.00
</TABLE>
- --------------------------------------------------------------------------------
Past performance is not predictive of future performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Average annual total returns are historical in nature and measure net investment
income and capital gain or loss from portfolio investments assuming
reinvestments of dividends. The returns do not reflect expenses associated with
the subaccount such as administrative fees, account charges and surrender
charges which, if reflected, would reduce the performance shown.
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON -- LAZARD INTERNATIONAL STOCK PORTFOLIO AS OF 12/31/98
(UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
--------------------------------------------
<S> <C>
Year Ended 12/31/98 12.59%
8/1/96* through 12/31/98 12.06%
CUMULATIVE TOTAL RETURN
--------------------------------------------
8/1/96* through 12/31/98 31.68%
* Commencement of operations
</TABLE>
This chart assumes an initial investment of $10,000 made on August
1, 1996, assuming reinvestment of dividends, through December 31,
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.
[Lazard Int. Performance Graph]
<TABLE>
<CAPTION>
LAZARD INTERNATIONAL STOCK
PORTFOLIO MSCI EAFE
-------------------------- ---------
<S> <C> <C>
8/1/96 10000.00 10000.00
12/96 10780.00 10533.00
6/97 11859.00 11815.00
12/97 11696.00 11180.00
6/98 13507.00 13649.00
12/31/98 13168.00 14149.00
</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
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON -- MFS EMERGING GROWTH PORTFOLIO AS OF 12/31/98
(UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
<S> <C>
Year Ended 12/31/98 34.32%
8/30/96* through 12/31/98 26.28%
CUMULATIVE TOTAL RETURN
---------------------------------------------
8/30/96* through 12/31/98 72.50%
* Commencement of operations
</TABLE>
This chart assumes an initial investment of $10,000 made on August
30, 1996, assuming reinvestment of dividends, through December 31,
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.
[MFS Emerging Growth Portfolio Performance Graph]
<TABLE>
<CAPTION>
MFS EMERGING GROWTH STANDARD & POOR'S 500
PORTFOLIO INDEX RUSSELL 2000 INDEX
------------------- --------------------- ------------------
<S> <C> <C> <C>
8/30/96 10000.00 10000.00 10000.00
12/96 10600.00 11441.00 10931.00
6/97 11726.00 13798.00 12046.00
12/97 12843.00 15258.00 13376.00
6/98 15593.00 17961.00 14035.00
12/31/98 17250.00 19642.00 13036.00
</TABLE>
- --------------------------------------------------------------------------------
Past performance is not predictive of future performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Average annual total returns are historical in nature and measure net investment
income and capital gain or loss from portfolio investments assuming
reinvestments of dividends. The returns do not reflect expenses associated with
the subaccount such as administrative fees, account charges and surrender
charges which, if reflected, would reduce the performance shown.
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON -- FEDERATED HIGH YIELD PORTFOLIO AS OF 12/31/98
(UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
<S> <C>
Year Ended 12/31/98 4.71%
8/30/96* through 12/31/98 11.80%
CUMULATIVE TOTAL RETURN
---------------------------------------------
8/30/96* through 12/31/98 29.78%
* Commencement of operations
</TABLE>
This chart assumes an initial investment of $10,000 made on August
30, 1996, assuming reinvestment of dividends, through December 31,
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.
[Federated High Yield Portfolio Performance Graph]
<TABLE>
<CAPTION>
FEDERATED HIGH YIELD LEHMAN HIGH YIELD BOND LEHMAN AGGREGATE BOND
PORTFOLIO INDEX INDEX
-------------------- ---------------------- ---------------------
<S> <C> <C> <C>
8/30/96 10000.00 10000.00 10000.00
12/96 10761.00 10599.00 10480.00
6/97 11484.00 11216.00 10804.00
12/97 12394.00 11952.00 11491.00
6/98 12997.00 12489.00 11943.00
12/31/98 12978.00 12161.00 12490.00
</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
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON -- FEDERATED STOCK PORTFOLIO AS OF 12/31/98 (UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
<S> <C>
Year Ended 12/31/98 17.84%
8/30/96* through 12/31/98 27.68%
CUMULATIVE TOTAL RETURN
---------------------------------------------
8/30/96* through 12/31/98 77.00%
* Commencement of operations
</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.
[Federated Stock Performance Graph]
<TABLE>
<CAPTION>
FEDERATED STOCK PORTFOLIO STANDARD & POOR'S 500 INDEX
------------------------- ---------------------------
<S> <C> <C>
8/30/96 10000.00 10000.00
12/96 11261.00 11441.00
6/97 13482.00 13798.00
12/97 15023.00 15258.00
6/98 17051.00 17961.00
12/31/98 17701.00 19642.00
</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 12/31/98
(UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
<S> <C>
Year Ended 12/31/98 16.91%
4/1/97* through 12/31/98 29.44%
CUMULATIVE TOTAL RETURN
---------------------------------------------
4/1/97* through 12/31/98 57.10%
* Commencement of operations
</TABLE>
This chart assumes an initial investment of $10,000 made on April
1, 1997, assuming reinvestment of dividends, through December 31,
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.
[Disciplined Mid Cap Stock Performance Graph]
<TABLE>
<CAPTION>
DISCIPLINED MID CAP STOCK
PORTFOLIO STANDARD & POOR'S 400 INDEX
------------------------- ---------------------------
<S> <C> <C>
4/1/97 10000.00 10000.00
6/97 11360.00 11474.00
12/97 13438.00 13425.00
6/98 14647.00 14583.00
12/31/98 15710.00 15875.00
</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
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS DECEMBER 31, 1998
TRAVELERS QUALITY BOND PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT RATING+ SECURITY VALUE
- ----------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
U.S. GOVERNMENT AGENCIES & OBLIGATIONS -- 35.5%
$2,000,000 AAA U.S. Treasury Notes, 6.625% due 4/30/02..................... $ 2,118,800
5,100,000 AAA U.S. Treasury Notes, 5.875% due 9/30/02..................... 5,300,940
1,300,000 AAA U.S. Treasury Notes, 5.875% due 11/15/02.................... 1,389,401
4,000,000 AAA Federal Home Loan Mortgage Corp., 4.750% due 12/14/01....... 3,992,280
- ----------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCIES & OBLIGATIONS (Cost --
$12,829,947) 12,801,421
- ----------------------------------------------------------------------------------------------------
CORPORATE BONDS & NOTES -- 48.9%
- ----------------------------------------------------------------------------------------------------
AEROSPACE/DEFENSE -- 4.1%
1,500,000 BBB Raytheon Co., Debenture, 6.000% due 12/15/10 (a)............ 1,494,375
- ----------------------------------------------------------------------------------------------------
CABLE TV -- 2.9%
1,000,000 BBB- TCI Communications Inc., Debenture, 6.375% due 5/1/03....... 1,037,500
- ----------------------------------------------------------------------------------------------------
ELECTRIC -- 3.3%
1,150,000 NR Indiana Michigan Power, Medium Term Notes, 6.450% due
11/10/08.................................................. 1,173,000
- ----------------------------------------------------------------------------------------------------
GAS TRANSMISSION -- 2.9%
1,000,000 BBB Noram Energy Corp., Debenture, 7.500% due 8/1/00............ 1,030,000
- ----------------------------------------------------------------------------------------------------
HEALTHCARE -- 0.7%
250,000 BBB Columbia HCA Healthcare, Medium Term Notes, 8.700% due
2/10/10................................................... 264,062
- ----------------------------------------------------------------------------------------------------
INDUSTRIALS -- 3.1%
1,000,000 BBB Time Warner Inc., Debenture, 7.250% due 9/1/08.............. 1,102,500
- ----------------------------------------------------------------------------------------------------
FINANCE -- 4.2%
1,500,000 A- Finova Capital Corp., Debenture, 6.250% due 11/1/02......... 1,501,875
- ----------------------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 9.3%
800,000 BBB CarrAmerica Realty Corp., Company Guaranteed, 6.625% due
10/1/00................................................... 797,000
1,500,000 BBB Marlin Water Trust, Sr. Notes, 7.090% due 12/15/01 (a)...... 1,500,000
250,000 BBB Nationwide Health Properties, Inc., Medium Term Notes,
6.900% due 10/1/37........................................ 267,188
800,000 BBB+ Popular Inc., Medium Term Notes, 6.375% due 9/15/03......... 805,000
- ----------------------------------------------------------------------------------------------------
3,369,188
- ----------------------------------------------------------------------------------------------------
OIL/PETROLEUM -- 2.8%
1,000,000 AA- Halliburton Co., Medium Term Notes, 5.625% due 12/1/08...... 1,016,250
- ----------------------------------------------------------------------------------------------------
RAILROADS -- 3.2%
1,100,000 BBB+ Norfolk Southern, Debenture, 6.875% due 5/1/01.............. 1,135,750
- ----------------------------------------------------------------------------------------------------
TOBACCO -- 1.4%
500,000 BBB Nabisco Inc., Debenture, 6.700% due 6/15/02................. 507,500
- ----------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 3.0%
1,045,000 BBB+ MCI Worldcom Inc., Sr. Notes, 6.400% due 8/15/05............ 1,083,560
- ----------------------------------------------------------------------------------------------------
YANKEE -- 8.0%
1,000,000 BBB Ontario Province, Sr. Unsubordinated Debenture, 5.500% due
10/1/08................................................... 1,003,750
1,400,000 BBB Petro Geo-Services, Debenture, 6.250% due 11/19/03 (a)...... 1,386,000
500,000 AA- Telecom Corp. of New Zealand, Sub. Debenture, 6.250% due
2/10/03 (a)............................................... 508,790
- ----------------------------------------------------------------------------------------------------
2,898,540
- ----------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS & NOTES (Cost -- $17,462,193) 17,614,100
- ----------------------------------------------------------------------------------------------------
SUB-TOTAL INVESTMENTS (Cost -- $30,292,140) 30,415,521
- ----------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
TRAVELERS QUALITY BOND PORTFOLIO
<TABLE>
<C> <S> <C> <C>
REPURCHASE AGREEMENTS -- 15.6%
$4,000,000 Chase Securities, Inc., 4.500% due 1/4/99; Proceeds at
maturity -- $4,002,000;
(Fully collateralized by U.S. Treasury Notes, 7.500% due
11/15/16;
Market value -- $4,085,331)................................. $ 4,000,000
1,601,000 Morgan Stanley Dean Witter & Co., Inc., 4.620% due 1/4/99;
Proceeds at maturity -- $1,601,822; (Fully collateralized by
U.S. Treasury Notes, 11.875% due 11/15/03; Market
Value -- $1,633,328)........................................ 1,601,000
- ----------------------------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS (Cost -- $5,601,000) 5,601,000
- ----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $35,893,140**) $36,016,521
- ----------------------------------------------------------------------------------------------------
</TABLE>
+ All ratings are by Standard & Poor's Rating Service, except those identified
by an asterisk (*) which are rated by Moody's Investors Service, Inc.
(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 44 for definition of ratings.
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
LAZARD INTERNATIONAL STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -----------------------------------------------------------------------------------------
<C> <S> <C>
STOCK -- 94.3%
- -----------------------------------------------------------------------------------------
AUSTRALIA -- 2.4%
100,106 Broken Hill Proprietary Co. Ltd. ........................... $ 738,026
81,300 Westpac Banking Corp. Ltd. ................................. 544,573
- -----------------------------------------------------------------------------------------
1,282,599
- -----------------------------------------------------------------------------------------
DENMARK -- 1.2%
7,480 Unidanmark A/S, Class A Shares.............................. 675,780
- -----------------------------------------------------------------------------------------
FINLAND -- 1.0%
37,600 MeritaNordbanken Oyj........................................ 239,112
1 The Rauma Group Oyj......................................... 15
10,900 UPM-Kymmene Oyj............................................. 305,684
- -----------------------------------------------------------------------------------------
544,811
- -----------------------------------------------------------------------------------------
FRANCE -- 14.3%
5,960 Alcatel..................................................... 729,770
6,830 Axa-Uap..................................................... 990,351
11,400 Banque Nationale de Paris................................... 939,150
5,280 Compagnie de Saint Gobain................................... 745,752
7,700 Compagnie Generale des Establissements Michelin, Class B 308,072
Shares......................................................
6,980 Elf Aquitaine SA............................................ 807,182
21,450 Rhone-Poulenc SA............................................ 1,104,332
3,730 Suez Lyonnaise des Eaux..................................... 766,539
5,400 Vivendi..................................................... 1,401,668
- -----------------------------------------------------------------------------------------
7,792,816
- -----------------------------------------------------------------------------------------
GERMANY -- 9.6%
1,961 Allianz AG.................................................. 729,959
7,828 DaimlerChrysler AG.......................................... 777,818
21,700 Hoechst AG.................................................. 897,653
15,634 Metro AG.................................................... 1,229,619
11,800 Siemens AG.................................................. 775,757
1,725 Thyssen AG.................................................. 326,234
859 Viag AG..................................................... 507,994
- -----------------------------------------------------------------------------------------
5,245,034
- -----------------------------------------------------------------------------------------
HONG KONG -- 1.0%
21,073 HSBC Holdings PLC........................................... 524,969
- -----------------------------------------------------------------------------------------
ITALY -- 5.5%
121,200 ENI S.p.A. ................................................. 797,346
62,200 Istituto Bancario San Paolo imi S.p.A. ..................... 1,102,137
179,100 Telecom Italia S.p.A. di Risp NC (a)........................ 1,125,578
- -----------------------------------------------------------------------------------------
3,025,061
- -----------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
LAZARD INTERNATIONAL STOCK PORTFOLIO
<TABLE>
<C> <S> <C>
JAPAN -- 14.8%
43,000 Asahi Breweries Ltd. ....................................... $ 634,708
850 Japan Tobacco, Inc. ........................................ 851,507
43,000 Matsushita Electric Industrial Co. Ltd. .................... 762,030
6,900 Nintendo Co. Ltd. .......................................... 669,814
630 Nippon Telegraph & Telephone Corp. ......................... 487,021
106,000 Nissan Motor Co. Ltd. ...................................... 325,142
210 NTT Mobile Communication Network, Inc. ..................... 865,692
17,000 Omron Corp. ................................................ 233,298
11,100 Orix Corp. ................................................. 830,532
10,900 Promise Co., Ltd. .......................................... 568,191
78,000 Ricoh Co., Ltd. ............................................ 720,532
9,500 Sony Corp. ................................................. 693,129
155,000 Sumitomo Trust & Banking Co. (b)............................ 412,234
- -----------------------------------------------------------------------------------------
8,053,830
- -----------------------------------------------------------------------------------------
MALAYSIA -- 0.2%
60,000 Genting Berhad.............................................. 118,313
- -----------------------------------------------------------------------------------------
NETHERLANDS -- 3.7%
15,600 Heineken N.V. .............................................. 939,308
5,900 ING Groep N.V. ............................................. 359,967
11,100 Koninklijke Philips Electronics N.V. ....................... 745,244
- -----------------------------------------------------------------------------------------
2,044,519
- -----------------------------------------------------------------------------------------
SINGAPORE -- 0.9%
80,000 United Overseas Bank Ltd. .................................. 513,939
- -----------------------------------------------------------------------------------------
SPAIN -- 5.6%
41,200 Argentaria, Caja Postal y Banco Hipotecario de Espana, S.A. 1,068,558
(b).........................................................
28,600 Endesa S.A. ................................................ 758,923
27,218 Telefonica S.A. ............................................ 1,212,074
27,218 Telefonica Rights (c)....................................... 24,203
- -----------------------------------------------------------------------------------------
3,063,758
- -----------------------------------------------------------------------------------------
SWEDEN -- 6.6%
53,800 ABB AB, Series A Shares..................................... 574,120
43,934 Astra AB, Class B Shares.................................... 894,312
41,700 Electrolux AB, Class B Shares............................... 717,653
49,500 Nordbanken Holding AB....................................... 317,550
16,300 Svenska Handelsbanken, Class A Shares....................... 687,730
18,300 Volvo AB, Series B Shares................................... 419,922
- -----------------------------------------------------------------------------------------
3,611,287
- -----------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
LAZARD INTERNATIONAL STOCK PORTFOLIO
<TABLE>
SWITZERLAND -- 5.7%
260 Nestle SA................................................... $ 565,999
59 Roche Holding AG............................................ 719,942
250 SGS Societe Generale de Surveillance Holding SA, Class B 244,813
Shares......................................................
386 Swatch Group AG............................................. 238,879
1,840 Zurich Allied AG............................................ 1,362,417
- -----------------------------------------------------------------------------------------
3,132,050
- -----------------------------------------------------------------------------------------
UNITED KINGDOM -- 21.8%
42,000 Allied Zurich AG............................................ 628,571
166,800 British Aerospace PLC....................................... 1,416,758
84,700 British American Tobacco PLC................................ 751,834
56,100 British Petroleum Co. PLC................................... 837,258
24,898 Cadbury Schweppes PLC....................................... 424,198
74,874 Diageo PLC.................................................. 841,512
45,700 EMI Group PLC............................................... 322,013
47,900 Granada Group PLC........................................... 849,963
53,500 Great Universal Stores PLC.................................. 560,342
80,800 Imperial Chemical Industries PLC............................ 697,722
91,700 Mirror Group PLC............................................ 228,094
52,900 National Westminster Bank PLC............................... 1,019,220
71,500 Prudential Corp. PLC........................................ 1,080,773
96,500 Royal & Sun Alliance Insurance Group PLC.................... 781,113
181,700 Siebe PLC................................................... 713,462
65,800 Unilever PLC................................................ 739,529
- -----------------------------------------------------------------------------------------
11,892,362
- -----------------------------------------------------------------------------------------
51,521,128
TOTAL STOCK (Cost -- $47,746,455)...........................
- -----------------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
- -----------------------------------------------------------------------------------------
<C> <S> <C>
REPURCHASE AGREEMENT -- 5.7%
$3,100,000 CIBC Wood Gundy Securities Inc., 4.620% due 1/4/99; Proceeds
at maturity -- $3,101,591; (Fully collateralized by U.S.
Treasury Notes, 5.875% due 8/31/99;
3,100,000
Market value -- $3,162,737)(Cost -- $3,100,000).............
- -----------------------------------------------------------------------------------------
$54,621,128
TOTAL INVESTMENTS -- 100% (Cost -- $50,846,455**)..........
- -----------------------------------------------------------------------------------------
</TABLE>
(a) Risp NC -- Risparmio Non-Convertible (non-convertible saving shares).
(b) All or a portion of this security is on loan.
(c) Non-income producing security.
** Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
MFS EMERGING GROWTH PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ---------------------------------------------------------------------------------------
<C> <S> <C>
STOCK -- 97.9%
- ---------------------------------------------------------------------------------------
ADVERTISING -- 0.0%
200 Lamar Advertising Co. (a)................................... $ 7,450
200 Mail-Well, Inc. (a)......................................... 2,287
400 Outdoor Systems, Inc. (a)................................... 12,000
- ---------------------------------------------------------------------------------------
21,737
- ---------------------------------------------------------------------------------------
AEROSPACE -- 0.4%
6,300 Gulfstream Aerospace Corp. (a).............................. 335,475
12,000 Newport News Shipbuilding Inc. ............................. 401,250
- ---------------------------------------------------------------------------------------
736,725
- ---------------------------------------------------------------------------------------
AIRLINES -- 0.0%
200 Atlas Air, Inc. (a)......................................... 9,788
- ---------------------------------------------------------------------------------------
AUTOMOTIVE -- 0.0%
200 Dura Automotive Systems, Inc. (a)........................... 6,825
- ---------------------------------------------------------------------------------------
BANKS & CREDIT COS. -- 0.2%
2,700 Capital One Financial Corp. ................................ 310,500
700 U.S. Trust Corp. ........................................... 53,200
- ---------------------------------------------------------------------------------------
363,700
- ---------------------------------------------------------------------------------------
BIOTECHNOLOGY -- 1.7%
24,500 Guidant Corp. (a)........................................... 2,701,125
100 Icon PLC ADR (a)............................................ 3,350
8,300 IDEXX Laboratories, Inc. (a)................................ 223,321
- ---------------------------------------------------------------------------------------
2,927,796
- ---------------------------------------------------------------------------------------
BUSINESS MACHINES -- 1.2%
10,900 Compaq Computer Corp. ...................................... 457,118
200 Insight Enterprises, Inc. (a)............................... 10,175
18,650 Sun Microsystems, Inc. (a).................................. 1,596,906
- ---------------------------------------------------------------------------------------
2,064,199
- ---------------------------------------------------------------------------------------
BUSINESS SERVICES -- 8.7%
5,000 Affiliated Computer Services, Inc., Class A Shares (a)...... 225,000
2,600 Amgen Inc. (a).............................................. 271,862
9,600 The BISYS Group, Inc. (a)................................... 495,600
500 Building One Services Corp. (a)............................. 10,437
8,800 Cambridge Technology Partners, Inc. (a)..................... 194,700
9,100 CBT Group PLC ADR (a)....................................... 135,362
5,300 Ceridian Corp. (a).......................................... 370,006
3,300 Computer Sciences Corp. (a)................................. 212,643
113,900 Compuware Corp. (a)......................................... 8,898,437
140 CSG Systems International, Inc. (a)......................... 11,060
5,700 DST Systems, Inc. (a)....................................... 325,256
8500 FDX Corp. (a)............................................... 756,500
1,600 First Data Corp. ........................................... 50,700
300 Fiserv, Inc. (a)............................................ 15,431
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
MFS EMERGING GROWTH PORTFOLIO
<TABLE>
9,000 Galileo International, Inc. . $ 391,500
<C> <S> <C>
400 Interim Services Inc. (a)................................... 9,350
21,850 Learning Tree International, Inc. (a)....................... 198,015
800 Loewen Group, Inc. ......................................... 6,750
400 Metamor Worldwide, Inc. (a)................................. 10,000
47,000 Modis Professional Services, Inc. (a)....................... 681,500
200 National Data Corp. ........................................ 9,737
22,700 Policy Management Systems Corp. (a)......................... 1,146,350
300 Professional Detailing, Inc. (a)............................ 8,475
3,200 Renaissance Worldwide, Inc. (a)............................. 19,600
5,050 SunGard Data Systems, Inc. (a).............................. 200,421
9,300 Technology Solutions Co. (a)................................ 99,684
400 Verio, Inc. (a)............................................. 8,950
- ---------------------------------------------------------------------------------------
14,763,326
- ---------------------------------------------------------------------------------------
CELLULAR PHONES -- 1.4%
32,100 Century Telephone Enterprises............................... 2,166,750
3,500 Iridium World Communications Ltd., Class A Shares (a)....... 138,468
- ---------------------------------------------------------------------------------------
2,305,218
- ---------------------------------------------------------------------------------------
COMMUNICATIONS SERVICES -- 10.5%
15,000 ALLTEL Corp. ............................................... 897,187
49,100 Global Telesystems Group, Inc. (a).......................... 2,737,325
800 Hyperion Telecommunications, Inc., Class A Shares (a)....... 12,100
130,831 MCI WorldCom, Inc. (a)...................................... 9,387,124
400 Metromedia Fiber Network, Inc., Class A Shares (a).......... 13,400
46,100 Qwest Communications International Inc. (a)................. 2,305,000
26,100 Sprint Corp. (FON Group).................................... 2,195,662
14,500 Tel-Save.com, Inc. (a)...................................... 242,875
- ---------------------------------------------------------------------------------------
17,790,673
- ---------------------------------------------------------------------------------------
COMPUTER SOFTWARE -- 0.3%
200 Advantage Learning Systems, Inc. (a)........................ 13,150
5,435 ARM Holdings PLC ADR (a).................................... 327,458
6,700 Mobius Management Systems, Inc. (a)......................... 99,662
- ---------------------------------------------------------------------------------------
440,270
- ---------------------------------------------------------------------------------------
COMPUTER SOFTWARE - PERSONAL COMPUTER -- 5.8%
325 Autodesk, Inc. ............................................. 13,873
300 Boole & Babbage, Inc. (a)................................... 8,831
700 DSP Communications, Inc. (a)................................ 10,718
160 Intuit, Inc. (a)............................................ 11,600
3,300 Macromedia, Inc. (a)........................................ 111,169
61,000 Microsoft Corp. (a)......................................... 8,459,938
19,050 Network Associates, Inc. (a)................................ 1,262,063
- ---------------------------------------------------------------------------------------
9,878,192
- ---------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
MFS EMERGING GROWTH PORTFOLIO
<TABLE>
<C> <S> <C>
COMPUTER SOFTWARE - SYSTEMS -- 15.9%
8300 Alcatel SA.................................................. $ 202,831
200 Aspen Technology, Inc. (a).................................. 2,900
114,900 BMC Software, Inc. (a)...................................... 5,120,231
98,510 Cadence Design System, Inc. (a)............................. 2,930,673
450 Clarify, Inc. (a)........................................... 10,997
138,202 Computer Associates International, Inc. .................... 5,890,860
40,600 EMC Corp. of Massachusetts (a).............................. 3,451,000
200 Ingram Micro, Inc., Class A Shares (a)...................... 6,975
300 Learning Co. Inc. (a)....................................... 7,781
200 New Era of Networks, Inc. (a)............................... 8,800
209,500 Oracle Corp. (a)............................................ 9,034,688
400 Rational Software Corp. (a)................................. 10,600
300 Siebel Systems, Inc. (a).................................... 10,181
7,800 Synopsys, Inc. (a).......................................... 423,150
- ---------------------------------------------------------------------------------------
27,111,667
- ---------------------------------------------------------------------------------------
CONSUMER GOODS & SERVICES -- 9.3%
200 Abercrombie & Fitch Co., Class A Shares (a)................. 14,150
8,400 Carson, Inc. (a)............................................ 33,600
263,734 Cendant Corp. (a)........................................... 5,027,429
400 Dial Corp. ................................................. 11,550
270 First Brands Corp. ......................................... 10,648
400 Sotheby's Holdings, Inc., Class A Shares.................... 12,800
12,400 Sportsline USA, Inc. (a).................................... 192,975
139,581 Tyco International Ltd. .................................... 10,529,642
- ---------------------------------------------------------------------------------------
15,832,794
- ---------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT -- 0.1%
700 Cable Design Technologies Corp. (a)......................... 12,950
4,000 Elsag Bailey Process Automation N.V. (a).................... 156,500
140 Jabil Circuit, Inc. (a)..................................... 10,448
200 Micrel, Inc. (a)............................................ 11,000
700 Rayovac Corp. (a)........................................... 18,681
- ---------------------------------------------------------------------------------------
209,579
- ---------------------------------------------------------------------------------------
ELECTRONICS -- 4.6%
25,700 Altera Corp. (a)............................................ 1,564,488
25,100 Analog Devices, Inc. (a).................................... 787,513
300 Applied Micro Circuits Corp. (a)............................ 10,191
400 Burr-Brown Corp. (a)........................................ 9,375
500 DII Group, Inc. (a)......................................... 11,656
120 Flextronics International Ltd. (a).......................... 10,275
800 Galileo Technology Ltd. (a)................................. 21,600
26,300 Intel Corp. ................................................ 3,118,194
14,800 Lattice Semiconductor Corp. (a)............................. 679,413
300 Level One Communications, Inc. (a).......................... 10,650
4,800 Linear Technology Corp. .................................... 429,900
210 Maxim Integrated Products, Inc. (a)......................... 9,174
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
MFS EMERGING GROWTH PORTFOLIO
<TABLE>
300 Microchip Technology Inc. (a). $ 11,100
<C> <S> <C>
470 Phototronics, Inc. (a)...................................... 11,265
200 PMC - Sierra, Inc. (a)...................................... 12,625
200 SCI Systems, Inc. (a)....................................... 11,550
180 Sanmina Corp. (a)........................................... 11,250
300 SIPEX Corp. (a)............................................. 10,538
400 Teradyne, Inc. (a).......................................... 16,950
1,000 Waters Corp. (a)............................................ 87,250
15,200 Xilinx, Inc. (a)............................................ 989,900
- ---------------------------------------------------------------------------------------
7,824,857
- ---------------------------------------------------------------------------------------
ENTERTAINMENT -- 5.5%
9,600 CBS Corp. (a)............................................... 314,400
27,300 Clear Channel Communications, Inc. (a)...................... 1,487,850
21,700 Comcast Corp., Class A Shares............................... 1,273,519
11,700 Cox Radio, Inc., Class A Shares (a)......................... 494,325
4,000 Gemstar International Group Ltd. (a)........................ 229,000
300 Hearst-Argyle TV, Inc. (a).................................. 9,900
13,400 Jacor Communications, Inc. (a).............................. 862,625
15,400 MediaOne Group, Inc. (a).................................... 723,800
400 Premier Parks, Inc. (a)..................................... 12,100
320 TCA Cable TV, Inc. ......................................... 11,420
63,800 Time Warner, Inc. .......................................... 3,959,588
400 Univision Communications, Inc., Class A Shares (a).......... 14,475
- ---------------------------------------------------------------------------------------
9,393,002
- ---------------------------------------------------------------------------------------
FINANCIAL INSTITUTIONS -- 1.2%
320 Affiliated Managers Group, Inc. (a)......................... 9,560
11,000 Associates First Capital Corp. ............................. 466,125
11,300 The Bear Stearns Cos., Inc.................................. 422,338
300 C.I.T. Group, Inc., Class A Shares.......................... 9,544
14,074 Franklin Resources, Inc. ................................... 450,368
10,400 Morgan Stanley Dean Witter & Co. ........................... 738,400
200 Paine Webber Group Inc. .................................... 7,725
400 Waddell & Reed Financial, Inc., Class A Shares.............. 9,475
- ---------------------------------------------------------------------------------------
2,113,535
- ---------------------------------------------------------------------------------------
FOOD & BEVERAGE PRODUCTS -- 0.1%
1,500 Adolph Coors Co., Class B Shares............................ 84,656
300 Keebler Foods Co. (a)....................................... 11,287
300 Smithfield Foods, Inc. (a).................................. 10,163
- ---------------------------------------------------------------------------------------
106,106
- ---------------------------------------------------------------------------------------
INSURANCE -- 0.0%
400 Ace, Ltd. .................................................. 13,775
- ---------------------------------------------------------------------------------------
MACHINERY -- 0.0%
4,650 SI Handling Systems, Inc. .................................. 65,100
- ---------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
MFS EMERGING GROWTH PORTFOLIO
<TABLE>
<C> <S> <C>
MEDICAL & HEALTH PRODUCTS -- 3.7%
200 Agouron Pharmaceuticals, Inc. (a)........................... $ 11,750
22,300 Allegiance Corp. ........................................... 1,039,738
9,500 Allergan, Inc. ............................................. 615,125
200 Arterial Vascular Engineering, Inc. (a)..................... 10,500
300 Bausch & Lomb, Inc. ........................................ 18,000
400 Boston Scientific Corp. (a)................................. 10,725
210 Chattem, Inc. (a)........................................... 10,054
7,000 Elan Corp. PLC ADR (a)...................................... 486,938
600 Haemonetics Corp. (a)....................................... 13,650
5,100 IDEC Pharmaceuticals Corp. (a).............................. 239,700
100 Immunex Corp. (a)........................................... 12,581
900 King Pharmaceuticals, Inc. (a).............................. 23,513
16,100 McKesson Corp. ............................................. 1,272,906
26,200 Sepracor, Inc. (a).......................................... 2,294,138
3,500 Watson Pharmaceuticals, Inc. (a)............................ 220,063
- ---------------------------------------------------------------------------------------
6,279,381
- ---------------------------------------------------------------------------------------
MEDICAL & HEALTH SERVICES -- 3.9%
300 Alpharma Inc., Class A Shares............................... 10,594
100 AmeriSource Health Corp., Class A Shares (a)................ 6,500
4,800 Bergen Brunswig Corp., Class A Shares....................... 167,400
2,700 Biogen, Inc. (a)............................................ 224,100
400 Biomet, Inc................................................. 16,100
11,450 Cardinal Health, Inc. ...................................... 868,769
100 Cyberonics, Inc. (a)........................................ 1,350
200 Express Scripts, Inc., Class A Shares (a)................... 13,425
500 Gentex Corp. (a)............................................ 10,000
230 Genzyme Corp. (General Division) (a)........................ 11,443
675 Health Management Associates, Inc. (a)...................... 14,597
1,200 HEALTHSOUTH Corp. (a)....................................... 18,525
200 Henry Schein, Inc. (a)...................................... 8,950
31,200 Medtronic, Inc. ............................................ 2,316,600
1,000 Mid Atlantic Medical Services, Inc. (a)..................... 9,813
500 Orthodontic Centers of America, Inc. (a).................... 9,719
200 PacifiCare Health Systems, Inc., Class B Shares (a)......... 15,900
300 Province Healthcare Co. (a)................................. 10,763
19,100 PSS World Medical, Inc. (a)................................. 439,300
400 STERIS Corp. (a)............................................ 11,375
345 Total Renal Care Holdings, Inc. (a)......................... 10,199
54,800 United HealthCare Corp. .................................... 2,359,825
100 Wellpoint Health Networks, Inc. (a)......................... 8,700
- ---------------------------------------------------------------------------------------
6,563,947
- ---------------------------------------------------------------------------------------
OIL SERVICES -- 0.0%
1,600 Global Industries, Ltd. (a)................................. 9,800
- ---------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
MFS EMERGING GROWTH PORTFOLIO
<TABLE>
<C> <S> <C>
PRINTING & PUBLISHING -- 0.2%
300 Electronics for Imaging, Inc. (a)........................... $ 12,056
2,700 Lexmark International Group, Inc. (a)....................... 271,350
- ---------------------------------------------------------------------------------------
283,406
- ---------------------------------------------------------------------------------------
RAILROAD -- 0.2%
6,400 Kansas City Southern Industries, Inc. ...................... 314,800
- ---------------------------------------------------------------------------------------
RESTAURANTS & LODGING -- 0.1%
500 Applebee's International, Inc. ............................. 10,312
400 Brinker International, Inc. (a)............................. 11,550
1,100 Buffets, Inc. (a)........................................... 13,131
300 CEC Entertainment, Inc. (a)................................. 8,325
220 CKE Restaurants, Inc. ...................................... 6,476
200 IHOP Corp. (a).............................................. 7,988
300 Outback Steakhouse, Inc. (a)................................ 11,963
200 Papa John's International, Inc. (a)......................... 8,825
2,357 Promus Hotel Corp. (a)...................................... 76,308
- ---------------------------------------------------------------------------------------
154,878
- ---------------------------------------------------------------------------------------
SPECIAL PRODUCTS & SERVICES -- 0.0%
200 VeriSign, Inc. (a).......................................... 11,825
- ---------------------------------------------------------------------------------------
STORES -- 9.1%
300 AnnTaylor Stores Corp. (a).................................. 11,831
500 Boise Cascade Office Products Corp. (a)..................... 6,750
300 Borders Group, Inc. (a)..................................... 7,481
4,900 CompUSA Inc. (a)............................................ 64,006
250 Consolidated Stores Corp. (a)............................... 5,047
21,500 Corporate Express, Inc. (a)................................. 111,531
300 CSK Auto Corp. (a).......................................... 8,006
52,300 CVS Corp. .................................................. 2,876,500
200 Duane Reade, Inc. (a)....................................... 7,700
600 General Nutrition Cos., Inc. (a)............................ 9,750
500 Global DirectMail Corp (a).................................. 11,688
6,100 Gymboree Corp. (a).......................................... 38,888
17,400 Home Depot, Inc. ........................................... 1,064,663
300 Linens 'n Things, Inc. (a).................................. 11,888
35,400 Micro Warehouse, Inc. (a)................................... 1,196,963
102,700 Office Depot, Inc. (a)...................................... 3,793,481
3,400 Republic Industries, Inc. (a)............................... 50,150
58,100 Rite Aid Corp. ............................................. 2,879,581
68,800 Staples, Inc. (a)........................................... 3,005,700
8,800 TJX Cos., Inc. ............................................. 255,200
- ---------------------------------------------------------------------------------------
15,416,804
- ---------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
MFS EMERGING GROWTH PORTFOLIO
<TABLE>
<C> <S> <C>
SUPERMARKETS -- 3.2%
52,670 Fred Meyer, Inc. (a)........................................ $ 3,173,368
11400 Kroger Co. (a).............................................. 689,700
24,600 Safeway Inc. (a)............................................ 1,499,063
- ---------------------------------------------------------------------------------------
5,362,131
- ---------------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 10.5%
700 Amdocs Ltd. (a)............................................. 11,988
25,400 Ascend Communications, Inc. (a)............................. 1,670,050
500 Aspect Telecommunications Corp. (a)......................... 8,625
116,027 Cisco Systems, Inc. (a)..................................... 10,768,756
300 Echostar Communications Corp., Class A Shares (a)........... 14,513
7,900 Equant NV (a)............................................... 535,719
200 Gilat Satellite Networks Ltd. (a)........................... 11,025
700 Global Crossing Ltd. (a).................................... 31,588
1,600 L-3 Communications Holdings, Inc. (a)....................... 74,500
3,600 Liberty Media Group, Class A Shares (a)..................... 165,825
21,800 Lucent Technologies Inc..................................... 2,398,000
400 MIPS Technologies, Inc. (a)................................. 12,800
8,000 Nokia Corp. ADR, Class A Shares............................. 963,500
4,800 Tellabs, Inc. (a)........................................... 329,100
20,300 3Com Corp. (a).............................................. 909,694
600 USA Networks, Inc. (a)...................................... 19,875
- ---------------------------------------------------------------------------------------
17,925,558
- ---------------------------------------------------------------------------------------
WIRELESS EQUIPMENT -- 0.1%
4,100 American Tower Corp. (a) ................................... 121,206
- ---------------------------------------------------------------------------------------
TOTAL STOCK (Cost -- $123,153,394).......................... 166,422,600
- ---------------------------------------------------------------------------------------
FOREIGN STOCK -- 0.3%
- ---------------------------------------------------------------------------------------
GREAT BRITAIN -- 0.3%
42,600 SEMA Group PLC.............................................. 418,537
121,300 Taylor Nelson Sofres PLC.................................... 153,383
- ---------------------------------------------------------------------------------------
TOTAL FOREIGN STOCK (Cost -- $714,514)...................... 571,920
- ---------------------------------------------------------------------------------------
SHORT-TERM INVESTMENT -- 1.8%
$3,000,000 Federal Home Loan Mortgage Discount Note, 4.700% due 1/4/99
(Cost -- $2,998,825)........................................ 2,998,825
- ---------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $126,866,733*)........... $169,993,345
- ---------------------------------------------------------------------------------------
</TABLE>
(a) Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
FEDERATED HIGH YIELD PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT RATING+ SECURITY VALUE
- -------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
CORPORATE BONDS & NOTES -- 88.6%
- -------------------------------------------------------------------------------------------------
ADVERTISING -- 1.3%
$125,000 B Lamar Advertising Co., Company Guaranteed Notes, 8.625% due
9/15/07..................................................... $ 129,531
350,000 B Outdoor Systems Inc., Sr. Sub. Notes, 8.875% due 6/15/07.... 373,187
- -------------------------------------------------------------------------------------------------
502,718
- -------------------------------------------------------------------------------------------------
AGRICULTURE -- 0.2%
75,000 B Purina Mills Inc., Sr. Sub. Notes, 9.000% due 3/15/10....... 77,250
- -------------------------------------------------------------------------------------------------
AUTOMOTIVE -- 1.3%
200,000 B- Accuride Corp., Sr. Sub. Notes, 9.250% due 2/1/08........... 204,000
150,000 B- HDA Parts System Inc., Sr. Sub. Notes, 12.000% due
8/1/05(a)................................................... 135,750
100,000 BB+ Lear Corp., Sub. Notes, 9.500% due 7/15/06.................. 108,500
75,000 B OshKosh Truck Corp., Company Guaranteed Notes, 8.750% due
3/1/08...................................................... 74,250
- -------------------------------------------------------------------------------------------------
522,500
- -------------------------------------------------------------------------------------------------
BEVERAGE -- 0.3%
125,000 BB+ Dimon Inc., Sr. Notes, 8.875% due 6/1/06.................... 122,188
- -------------------------------------------------------------------------------------------------
BROADCASTING, RADIO, CABLE & TV -- 6.0%
125,000 B- ACME Television LLC Financial Corp., Sr. Discount Notes,
10.875% due 9/30/04....................................... 100,000
225,000 BB Big City Radio Inc., Sr. Notes, step bond to yield 11.250%
due 3/15/05................................................. 147,375
100,000 B- Capstar Broadcasting Partners, Sr. Sub. Notes, 9.250% due
7/1/07...................................................... 104,250
105,200 Ba2* CBS Radio Inc., Sub. Debentures, 11.375% due 1/15/09........ 123,873
Chancellor Media Corp:
50,000 B Company Guaranty, 10.500% due 1/15/07....................... 54,688
100,000 B Sr. Sub. Notes, 9.375% due 10/1/04.......................... 104,875
550,000 B Sr. Sub. Notes, 8.125% due 12/15/07......................... 547,250
200,000 CCC+ Cumulus Media Inc., Company Guaranteed Notes, 10.375% due
7/1/08...................................................... 212,750
Fox/Liberty Networks LLC Inc.:
500,000 B1* Sr. Discount Notes, 9.375% due 8/15/07...................... 337,500
100,000 B Sr. Notes, 8.875% due 8/15/07............................... 102,250
Sinclair Broadcast Group:
50,000 B2* Sr. Notes, 9.000% due 7/15/07............................... 50,687
100,000 B Sr. Sub. Notes, 10.000% due 9/30/05......................... 105,500
425,000 B Sr. Sub. Notes, 8.750% due 12/15/07......................... 429,250
- -------------------------------------------------------------------------------------------------
2,420,248
- -------------------------------------------------------------------------------------------------
BUILDING/CONSTRUCTION -- 0.5%
100,000 B American Builders & Contractors, Sr. Sub. Notes, 10.625% due
5/15/07..................................................... 94,500
100,000 BB Building Materials Corp., Sr. Notes, 8.000% due 10/15/07.... 96,000
- -------------------------------------------------------------------------------------------------
190,500
- -------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
25
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
FEDERATED HIGH YIELD PORTFOLIO
<TABLE>
<C> <S> <C> <C>
BUSINESS EQUIPMENT & SERVICES -- 1.6%
Fisher Scientific International Inc.:
$ 50,000 B- Sr. Sub. Notes, 9.000% due 2/1/08(a)........................ $ 50,000
275,000 B- Sr. Sub. Notes, 9.000% due 2/1/08........................... 275,000
United Stationers Supply, Sr. Sub. Notes:
33,000 B 12.750% due 5/1/05.......................................... 36,795
100,000 B 8.375% due 4/15/08.......................................... 100,375
300,000 CCC U.S. Office Products Co., Company Guaranteed Notes, 9.750%
due 6/15/08................................................. 198,000
- -------------------------------------------------------------------------------------------------
660,170
- -------------------------------------------------------------------------------------------------
CABLE TELEVISION -- 6.8%
100,000 B Charter Communications Southeast LP Charter, Sr. Notes,
11.250% due 3/15/06......................................... 111,750
100,000 BB+ Comcast Cellular HLDGS, Sr. Notes, 9.500% due 5/1/07........ 106,750
100,000 BB+ Comcast Corp., 9.375% due 5/15/05........................... 106,375
CSC Holdings Inc., Sr. Sub. Notes:
300,000 BB- 9.250% due 11/1/05.......................................... 314,250
100,000 BB- 9.875% due 2/15/13.......................................... 112,375
125,000 B- Diamond Cable Communications PLC, Sr. Discount Notes, step
bond to yield
9.900% due 2/15/07.......................................... 90,000
150,000 B- Diamond Holdings PLC, Company Guaranteed Notes, 9.125% due
2/1/08...................................................... 143,250
100,000 NR Diva Systems Corp., Sr. Discount Notes, step bond to yield
12.020% due 3/1/08 (b)...................................... 42,500
125,000 Caa* Echostar DBS Corp., Company Guaranty, 12.500% due 7/1/02.... 144,688
225,000 B3* Echostar Satellite Broadcast, Sr. Discount Notes, step bond
to yield
13.125% due 3/15/04......................................... 229,500
Lenfest Communications, Inc.:
150,000 BB+ Sr. Notes, 8.375% due 11/1/05............................... 162,375
100,000 BB- Sr. Sub. Notes, 8.250% due 2/15/08.......................... 103,750
375,000 B3* International Cabletel Inc., Sr. Notes, step bond to yield,
11.550% due 2/1/06.......................................... 301,875
325,000 B- Pegasus Communications Corp., Sr. Notes, 9.625% due
10/15/05.................................................... 325,000
350,000 BB+ Rogers Cable Systems Inc., Sr. Notes, 10.000% due 3/15/05... 394,187
100,000 B UIH Australia Inc., Sr. Discount Notes, step bond to yield
12.114% due 5/15/06......................................... 46,000
- -------------------------------------------------------------------------------------------------
2,734,625
- -------------------------------------------------------------------------------------------------
CHEMICALS -- 3.1%
Buckeye Cellulose Corp., Sr. Sub. Notes:
75,000 BB- 8.500% due 12/15/05......................................... 77,813
100,000 BB- 9.250% due 9/15/08.......................................... 103,875
250,000 NR Huntsman Corp., Sr. Sub. Notes, 9.500% due 7/1/07........... 249,625
225,000 BB- ISP Holdings Inc., Sr. Notes, 9.000% due 10/15/03........... 237,657
Polymer Group, Inc.:
225,000 B 9.000% due 7/1/07........................................... 222,750
300,000 B 8.750% due 3/1/08........................................... 294,000
Sterling Chemicals Holdings Inc.:
50,000 B+ Sr. Secured Discount Notes, step bond to yield 12.485% due
8/15/08..................................................... 20,500
50,000 B+ Sr. Sub. Notes, 11.750% due 8/15/06......................... 43,000
- -------------------------------------------------------------------------------------------------
1,249,220
- -------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
26
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
FEDERATED HIGH YIELD PORTFOLIO
<TABLE>
<C> <S> <C> <C>
CLOTHING & TEXTILES -- 2.4%
$150,000 B- Collins Aikman Floorcovering Inc., Sr. Sub. Notes, 10.00%
due 1/15/07................................................. $ 156,938
325,000 B Collins Aikman Products Co., Company Guaranteed, 11.500% due
4/15/06..................................................... 338,813
150,000 B- Gear For Sports Inc., Sr. Sub. Notes, 9.625% due 3/1/07..... 141,000
Pillowtex Corp. Co. Guaranteed Notes:
150,000 B+ 10.000% due 11/15/06........................................ 162,000
175,000 B+ 9.000% due 12/15/07......................................... 182,000
- -------------------------------------------------------------------------------------------------
980,751
- -------------------------------------------------------------------------------------------------
CONGLOMERATES -- 0.6%
250,000 B- Eagle-Picher Industries Inc., Sr. Sub. Note, 9.375% due
3/1/08...................................................... 240,000
- -------------------------------------------------------------------------------------------------
CONSUMER PRODUCTS -- 5.0%
200,000 B- Albecca Inc., Sr. Sub. Notes, 10.750% due 8/15/08(a)........ 204,000
100,000 BB- American Safety Razor, 9.875% due 8/1/05.................... 100,875
175,000 B- Amscan Holdings Inc., Sr. Sub. Notes, 9.875% due 12/15/07... 164,500
250,000 B- Boyds Collection, Ltd., Sr. Sub. Notes, 9.000% due
5/15/08(a).................................................. 255,937
225,000 B2* Chattem Inc., Sr. Notes, 8.875% due 4/1/08.................. 231,188
50,000 CCC+ Diamond Brands Operating, Company Guaranteed Notes, 10.125%
due 4/15/08................................................. 47,125
50,000 CCC Icon Fitness Corp., Sr. Discount Notes, step bond to yield
14.000% due 11/15/06........................................ 1,500
100,000 CCC NBTY Inc., Sr. Sub. Notes, 8.625% due 9/15/07............... 98,375
250,000 B Playtex Family Products Corp., Sr. Sub. Notes, 9.000% due
12/15/03.................................................... 260,625
100,000 B+ Playtex Products Inc., Company Guaranteed Notes, 8.875% due
7/15/04..................................................... 104,000
500,000 B- Revlon Consumer Products Corp., Sr. Sub. Notes, 8.625% due
2/1/08...................................................... 460,000
125,000 B- Sealy Mattress Co., Sr. Sub. Notes, 9.875% due 12/15/07..... 117,656
- -------------------------------------------------------------------------------------------------
2,045,781
- -------------------------------------------------------------------------------------------------
CONTAINERS -- 0.4%
150,000 B- Tekni Plex Inc., Sr. Sub. Notes, 9.250% due 3/1/08.......... 157,687
- -------------------------------------------------------------------------------------------------
ELECTRONICS -- 0.4%
150,000 B- PX Escrow Corp., Sr. Discount Notes, step bond to yield,
9.625% due 2/1/06........................................... 83,062
100,000 B- Viasystems Inc., Sr. Sub. Notes, 9.750% due 6/1/07.......... 95,000
- -------------------------------------------------------------------------------------------------
178,062
- -------------------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 0.3%
200,000 B+ Contifinancial Corp., 8.125% due 4/1/08..................... 130,000
- -------------------------------------------------------------------------------------------------
FOOD PRODUCTS -- 1.7%
175,000 B Agrilink Foods Inc., Sr. Sub. Notes, 11.875% due
11/1/08(a).................................................. 178,500
Aurora Foods Inc., Sr. Sub. Notes:
100,000 B+ 9.875% due 2/15/07.......................................... 109,000
100,000 B+ 8.750% due 7/1/08........................................... 104,375
300,000 B- Eagle Family Foods Inc., Company Guaranteed, 8.750% due
1/15/08..................................................... 284,250
- -------------------------------------------------------------------------------------------------
676,125
- -------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
27
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
FEDERATED HIGH YIELD PORTFOLIO
<TABLE>
<C> <S> <C> <C>
FOOD SERVICES -- 2.1%
$275,000 B- Ameriserve Food Distribution Inc. Company Guaranty, 10.125%
due 7/15/07................................................. $ 250,250
100,000 B- Carrols Corp., Sr. Sub. Notes, 9.500% due 12/1/08........... 102,000
125,000 B- Dominos Inc., Sr. Sub. Notes, 10.375% due 1/15/09(a)........ 124,375
300,000 B- International Home Foods Inc., Company Guaranteed Notes,
10.375% due 11/1/06......................................... 323,625
100,000 B- Nebco Evans Holding Co., Sr. Discount Notes, step bond to
yield,
10.820% due 7/15/07......................................... 48,000
- -------------------------------------------------------------------------------------------------
848,250
- -------------------------------------------------------------------------------------------------
FOREST PRODUCTS -- 0.6%
100,000 B Four M Corp., Sr. Notes, 12.000% due 6/1/06................. 75,000
175,000 B- Stone Container Corp., Sr. Sub. Debentures, 12.250% due
4/1/02(b)................................................... 175,437
- -------------------------------------------------------------------------------------------------
250,437
- -------------------------------------------------------------------------------------------------
HEALTH CARE -- 3.3%
150,000 B- Alliance Imaging Inc, Sr. Sub. Notes Callable 12/15/01,
9.625% due 12/15/05......................................... 147,750
250,000 B Dade International Inc., Sr. Sub. Notes, 11.125% due
5/1/06...................................................... 277,813
100,000 B- Everest Healthcare Services, Company Guaranteed, 9.750% due
5/1/08...................................................... 99,625
Tenet Healthcare Corp.:
Sr. Notes:
300,000 BB+ 8.000% due 1/15/05.......................................... 310,500
100,000 BB+ 7.625% due 6/1/08(a)........................................ 102,375
400,000 BB- Sr. Sub. Notes, 8.125% due 12/1/08(a)....................... 414,500
- -------------------------------------------------------------------------------------------------
1,352,563
- -------------------------------------------------------------------------------------------------
HOTELS -- 1.5%
HMH Properties Inc.:
350,000 BB 7.875% due 8/1/08........................................... 341,688
250,000 BB Sr. Notes, 8.450% due 12/1/08............................... 250,938
- -------------------------------------------------------------------------------------------------
592,626
- -------------------------------------------------------------------------------------------------
INDUSTRIAL PRODUCTS & EQUIPMENT -- 3.8%
150,000 B- Amphenol Corp., Sr. Sub. Notes, Callable 5/15/02, 9.875% due
5/15/07..................................................... 153,937
150,000 B Continental Global Group, Sr. Notes, 11.000% due 4/1/07..... 132,188
150,000 B Euramax International PLC., Sr. Sub. Notes, 11.250% due
10/1/06..................................................... 149,063
100,000 B Grove Worldwide LLC, Sr. Sub. Notes, 9.250% due 5/1/08...... 92,500
100,000 B- International Utility Structures, Sr. Sub. Notes, 10.750%
due 2/1/08.................................................. 94,000
175,000 B- ISG Resources Inc., Sr. Sub. Notes, 10.000% due 4/15/08..... 175,000
50,000 B Johnstown America Industries, Company Guaranteed, 11.750%
due 8/15/05................................................. 52,750
150,000 B- MMI Products Inc., Sr. Sub. Notes, 11.250% due 4/15/07...... 163,500
150,000 B- Neenah Corp., Sr. Sub. Notes, 11.125% due 5/1/07............ 155,250
225,000 B Wesco Distribution Inc., Company Guaranteed Notes, 9.125%
due 6/1/08.................................................. 228,656
250,000 B Wesco International Inc., Sr. Discount Notes, step bond to
yield
11.121% due 6/1/08.......................................... 150,000
- -------------------------------------------------------------------------------------------------
1,546,844
- -------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
28
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
FEDERATED HIGH YIELD PORTFOLIO
<TABLE>
<C> <S> <C> <C>
LEISURE & ENTERTAINMENT -- 3.0%
$208,000 CCC+ AMF Bowling Worldwide Inc., Sr. Discount Notes, step bond to
yield
10.587% due 3/15/06......................................... $ 120,640
100,000 B Loews Cineplex Entertainment, Sr. Sub. Notes, 8.875% due
8/1/08...................................................... 102,750
Premier Parks Inc.:
550,000 B- Sr. Discount Notes, step bond to yield 10.040% due 4/1/08... 374,000
100,000 B Sr. Notes, 9.750% due 1/15/07............................... 109,125
Regal Cinemas Inc., Sr. Sub. Notes:
250,000 B 9.500% due 6/1/08........................................... 260,625
100,000 B 9.500% due 6/1/08........................................... 104,250
150,000 B- Six Flags Theme Parks Inc., Sr. Sub. Discount Notes, 12.250%
due 6/15/05................................................. 164,437
- -------------------------------------------------------------------------------------------------
1,235,827
- -------------------------------------------------------------------------------------------------
MACHINERY & EQUIPMENT -- 1.9%
35,000 B- Alvey Systems Inc., Sr. Sub. Notes, 11.375% due 1/31/03..... 35,263
150,000 B+ Clark Material Handling Co., Company Guaranteed Notes,
10.750% due 11/15/06........................................ 154,500
50,000 B Columbus McKinnon Corp., Company Guaranteed Notes, 8.500%
due 4/1/08.................................................. 47,250
100,000 B National Equipment Services Inc., Sr. Sub. Notes, 10.000%
due 11/30/04................................................ 99,000
200,000 B Nationsrent Inc., Sr. Sub. Notes, 10.375% due 12/15/08(a)... 200,000
250,000 BB- United Rentals Inc., Sr. Sub. Notes, 9.250% due 1/15/09..... 252,500
- -------------------------------------------------------------------------------------------------
788,513
- -------------------------------------------------------------------------------------------------
METALS AND MINING -- 0.7%
150,000 B- AEI Holdings Co. Inc., 10.500% due 12/15/05(a).............. 150,000
150,000 B- AEI Resources Inc., Sr. Sub. Notes, 11.500% due
12/15/06(a)................................................. 151,313
- -------------------------------------------------------------------------------------------------
301,313
- -------------------------------------------------------------------------------------------------
MISCELLANEOUS -- 3.0%
325,000 B Chancellor Media Corp., Sr. Sub. Notes, 9.000% due
10/1/08(a).................................................. 345,313
350,000 Ba1* GS Escrow Corp., Sr. Sub. Notes, 7.125% due 8/1/05.......... 349,563
850,000 Ba3* NTL Inc., Sr. Notes, step bond to yield 10.750% due
4/1/08...................................................... 518,500
- -------------------------------------------------------------------------------------------------
1,213,376
- -------------------------------------------------------------------------------------------------
OIL & GAS -- 2.8%
200,000 B Chiles Offshore LLC/FIN, Company Guaranteed Notes, 10.000%
due 5/1/08.................................................. 164,000
250,000 B- Dailey International Inc, 9.500% due 2/15/08................ 112,500
Forcenergy Inc., Sr. Sub. Notes:
50,000 B- 9.500% due 11/1/06.......................................... 30,000
50,000 B 8.500% due 2/15/07.......................................... 30,000
200,000 B Houston Exploration Co., Sr. Sub. Notes, 8.625% due
1/1/08...................................................... 194,000
175,000 B+ Nuevo Energy Co., Company Guaranteed Notes, 8.875% due
6/1/08...................................................... 166,250
50,000 BB- Ocean Energy Inc., Sr. Sub. Notes, 10.375% due 10/15/05..... 53,000
275,000 BB Pride International Inc., Sr. Notes, 9.375% due 5/1/07...... 259,875
225,000 B Universal Compress Inc., Sr. Discount Notes, step bond to
yield
9.822% due 2/15/08.......................................... 135,000
- -------------------------------------------------------------------------------------------------
1,144,625
- -------------------------------------------------------------------------------------------------
OIL & GAS PRODUCTS -- 0.4%
200,000 B3* Continental Resources, Notes, 10.250% due 8/1/08............ 172,000
- -------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
29
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
FEDERATED HIGH YIELD PORTFOLIO
<TABLE>
<C> <S> <C> <C>
PUBLISHING -- 1.3%
$250,000 B+ Garden State Newspapers, Sr. Sub. Notes, 8.750% due
10/1/09..................................................... $ 242,187
Hollinger International Publishing Inc.:
50,000 BB- 9.250% due 2/1/06........................................... 52,688
100,000 BB- 9.250% due 3/15/07.......................................... 106,000
150,000 B Ziff-Davis Inc., Sr. Sub. Notes, 8.500% due 5/1/08.......... 144,750
- -------------------------------------------------------------------------------------------------
545,625
- -------------------------------------------------------------------------------------------------
RETAIL -- 2.3%
175,000 B Dialog Corp. PLS, Sr. Sub. Notes, 11.000% due 11/15/07...... 174,125
150,000 B Di Giorgio Corp., Sr. Notes, 10.000% due 6/15/07............ 140,250
350,000 BB+ Fred Meyer Inc., Company Guaranteed Notes, 7.450% due
3/1/08...................................................... 378,875
150,000 B- Jitney-Jungle Stores, Company Guaranteed Notes, 10.375% due
9/15/07..................................................... 154,875
100,000 B Stater Brothers Holdings Inc., Sr. Sub. Notes, 9.000% due
7/1/04...................................................... 93,000
- -------------------------------------------------------------------------------------------------
941,125
- -------------------------------------------------------------------------------------------------
SERVICES -- 0.5%
100,000 B+ Coinmach Corp., Sr. Notes, 11.750% due 11/15/05............. 109,125
100,000 B Sitel Corp., Sr. Sub. Notes, 9.250% due 3/15/06............. 80,000
- -------------------------------------------------------------------------------------------------
189,125
- -------------------------------------------------------------------------------------------------
STEEL -- 0.9%
175,000 BB- AK Steel Corp., Sr. Notes, 9.125% due 12/15/06.............. 182,875
100,000 B Metals USA Inc., Company Guaranteed Notes, 8.625% due
2/15/08..................................................... 90,875
100,000 BBB Ryerson Tull Inc., Notes, 8.500% due 7/15/01................ 104,250
- -------------------------------------------------------------------------------------------------
378,000
- -------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 1.6%
525,000 B3* Level 3 Communications, Sr. Discount Notes, step bond to
yield
11.085% due 12/1/08(a)...................................... 307,125
425,000 CCC+ Triton PCS Inc., Company Guaranteed Notes, step bond to
yield
13.043% due 5/1/08.......................................... 195,500
150,000 NR US Xchange LLC, Sr. Notes, 15.000% due 7/1/08............... 156,000
- -------------------------------------------------------------------------------------------------
658,625
- -------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS & CELLULAR -- 21.3%
200,000 CCC+ American Cellular Corp., Sr. Notes, Callable 5/15/03,
10.500% due 5/15/08(a)...................................... 196,000
Call Net Enterprises Inc., Sr. Discount Notes:
375,000 BB- 8.902% due 8/15/07.......................................... 243,750
375,000 BB- Step bond to yield 10.148% due 8/15/08...................... 219,375
125,000 CCC+ Centennial Cellular, Sr. Notes, 10.750% due 12/15/08........ 125,938
E. Spire Communications Inc.:
100,000 NR Sr. Discount Notes, step bond to yield 10.789% due 4/1/06... 68,250
125,000 NR Sr. Sub. Notes, step bond to yield 10.865% due 11/1/05...... 94,531
350,000 B Hermes Europe Railtel BV, Sr. Notes, 11.500% due 8/15/07.... 377,125
375,000 CCC+ IXC Communications Inc., Sr. Sub. Notes, 9.000% due
4/15/08..................................................... 372,187
275,000 B Intelcom Group Inc., Company Guaranty, step bond to yield
10.034% due 5/1/06.......................................... 203,500
175,000 NR Intermedia Communications, Sr. Notes, 8.600% due 6/1/08..... 172,375
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
30
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
FEDERATED HIGH YIELD PORTFOLIO
<TABLE>
Intermedia Communications of Florida:
<C> <S> <C> <C>
$225,000 B Sr. Discount Notes, step bond to yield 9.911% due 7/15/07... $ 184,500
225,000 B Sr. Notes, step bond to yield 10.183% due 5/15/06........... 157,500
725,000 B Level 3 Communications, Sr. Notes, 9.125% due 5/1/08........ 721,375
575,000 B+ McLeod USA Inc., Sr. Discount Notes, step bond to yield
9.598% due 3/1/07........................................... 439,875
Metronet Communications Corp.:
Sr. Notes:
50,000 B 12.000% due 8/15/07......................................... 55,750
100,000 B 10.625% due 11/1/08(a)...................................... 107,000
Sr. Sub. Notes:
150,000 B Step bond to yield 12.990% due 11/1/07...................... 91,500
525,000 B Step bond to yield 9.891% due 6/15/08....................... 324,188
225,000 B- Millicom International Cellular SA, Sr. Sub. Discount Notes,
step bond to yield
11.306% due 6/1/06.......................................... 166,500
Nextel Communications, Sr. Discount Notes:
525,000 CCC+ 10.003% due 2/15/08......................................... 316,312
500,000 CCC+ Step bond to yield 10.832% due 9/15/07...................... 322,500
75,000 CCC+ Nextel International Inc., Sr. Discount Notes, step bond to
yield
10.003% due 4/15/08......................................... 33,750
Nextlink Communications Inc.:
250,000 NR Sr. Discount Notes, 11.209% due 4/15/08..................... 143,125
100,000 B Sr. Notes, 9.625% due 10/1/07............................... 96,750
325,000 B- NTL Inc., Sr. Notes, step bond to yield 12.375% due
10/1/03(a).................................................. 205,562
150,000 B+ Orange PLC, Sr. Notes, 8.000% due 8/1/08.................... 150,750
225,000 B Paging Network, Sr. Sub. Notes, 10.000% due 10/15/08........ 219,375
100,000 NR Pathnet Inc., Sr. Notes, 12.250% due 4/15/08................ 70,000
350,000 B- PSINet Inc., Sr. Notes, 10.000% due 2/15/05................. 346,500
700,000 BB+ Qwest Communications International Inc., Sr. Discount Notes,
step bond to yield 8.378% due 10/15/07...................... 546,000
275,000 BB- Rogers Cantel Inc., Sr. Sub. Notes, 8.800% due 10/1/07...... 277,406
300,000 B- Telecomm Techniques Co., Company Guaranteed Notes, 9.750%
due 5/15/08................................................. 292,125
300,000 CCC+ Telesystem International Wireless, Sr. Discount Notes, step
bond to yield
13.250% due 6/30/07......................................... 135,000
675,000 B+ Telewest Communications, step bond to yield 10.758% due
10/1/07..................................................... 563,625
50,000 B+ Telewest Communications PLC, Sr. Notes, 11.250% due
11/1/08(a).................................................. 56,125
Teligent Inc.:
75,000 CCC Sr. Discount Notes, 11.708% due 3/1/08...................... 36,750
250,000 CCC Sr. Notes, 11.500% due 12/1/07.............................. 235,000
275,000 B3* United International Holdings Inc., Sr. Discount Notes, step
bond to yield
10.647% due 2/15/08(a)...................................... 148,500
Viatel Inc.:
50,000 Caa* Sr. Discount Notes, step bond to yield 11.473% due
4/15/08..................................................... 28,812
100,000 Caa* Sr. Notes, 11.250% due 4/15/08.............................. 99,750
- -------------------------------------------------------------------------------------------------
8,644,936
- -------------------------------------------------------------------------------------------------
TEXTILES -- 0.1%
50,000 B- Glenoit Corp., Company Guaranteed Notes, 11.000% due
4/15/07..................................................... 46,875
- -------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
31
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
FEDERATED HIGH YIELD PORTFOLIO
<TABLE>
TRANSPORTATION -- 2.2%
$100,000 BB- Allied Holdings Inc., Sr. Notes, Callable 10/1/02, 8.625%
due 10/1/07................................................. $ 100,500
200,000 BB Gearbulk Holding Ltd., Sr. Notes, 11.250% due 12/1/04....... 208,750
100,000 B+ Holt Group Inc., Sr. Notes, 9.750% due 1/15/06(a)........... 70,000
50,000 B Statia Terminals, 1st Mortgage, 11.750% due 11/15/03........ 50,500
Stena AB:
275,000 BB Sr. Notes, 10.500% due 12/15/05............................. 279,812
100,000 BB Sr. Notes, 8.750% due 6/15/07............................... 94,125
100,000 BB Stena Line AB, Sr. Notes, 10.625% due 6/1/08................ 90,625
- -------------------------------------------------------------------------------------------------
894,312
- -------------------------------------------------------------------------------------------------
UTILITIES -- 1.6%
250,000 BB+ El Paso Electric Co., 1st Mortgage, 9.400% due 5/1/11....... 290,313
450,000 BB+ Niagara Mohawk Power Corp., Sr. Discount Notes, step bond to
yield 8.075% due 7/1/10................................... 345,375
- -------------------------------------------------------------------------------------------------
635,688
- -------------------------------------------------------------------------------------------------
WASTE MANAGEMENT -- 1.8%
700,000 BB Allied Waste North America, Sr. Notes, 7.625% due
1/1/06(a)................................................... 710,500
- -------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS & NOTES (Cost -- $37,075,875)......... 35,979,010
- -------------------------------------------------------------------------------------------------
SHARES SECURITY VALUE
- -------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
PREFERRED STOCK -- 3.3%
- -------------------------------------------------------------------------------------------------
BROADCASTING, RADIO & TV -- 1.0%
1,000 Benedek Communications, 11.500% Payment-in-Kind............. 99,000
563 Capstar Broadcasting Partners Sr. Preferred 12.000%......... 64,182
1,030 Cumulus Media Inc., Fixed, 13.750%.......................... 112,270
282 SFX Broadcasting Inc., Exchanges 12.625% Payment-in-Kind.... 34,968
1,000 Sinclair Capital, 11.625%................................... 108,777
- -------------------------------------------------------------------------------------------------
419,197
- -------------------------------------------------------------------------------------------------
CABLE TELEVISION -- 0.1%
60 Pegasus Communications, 12.750% due 1/1/02
Payment-in-Kind............................................. 57,187
- -------------------------------------------------------------------------------------------------
COMMUNICATIONS -- 0.1%
575 Echostar Communications Corp., Payment-in-Kind.............. 59,764
- -------------------------------------------------------------------------------------------------
FOOD SERVICES -- 0.2%
1,083 Nebco Evans Holding Co., 11.250% due 6/1/03
Payment-in-Kind............................................. 72,831
- -------------------------------------------------------------------------------------------------
PUBLISHING -- 1.1%
1,500 Primedia Inc., 8.625%....................................... 145,500
2,850 Primedia Inc., 9.200%....................................... 277,162
- -------------------------------------------------------------------------------------------------
422,662
- -------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS & CELLULAR -- 0.2%
810 Nextel Communications, 11.125% due 2/15/03
Payment-in-Kind............................................. 72,900
75 Viatel Inc., 10.000%........................................ 4,485
- -------------------------------------------------------------------------------------------------
77,385
- -------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
32
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
FEDERATED HIGH YIELD PORTFOLIO
<TABLE>
UTILITIES -- 0.6%
4,000 Texas Utilities Co., 9.250%................................. $ 225,500
- -------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCK (Cost -- $1,345,669).................. 1,334,526
- -------------------------------------------------------------------------------------------------
WARRANTS (c) -- 0.0%
- -------------------------------------------------------------------------------------------------
CABLE TELEVISION -- 0.0%
100 UIH Australia Pacific Inc., Expire 5/15/06.................. 100
50 Pegasus Communications Corp................................. 1,000
- -------------------------------------------------------------------------------------------------
1,100
- -------------------------------------------------------------------------------------------------
CHEMICALS -- 0.0%
100 Sterling Chemicals Holdings Inc., Expire 8/15/08............ 1,500
- -------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS & CELLULAR -- 0.0%
50 Metronet Communications Corp., Class B, Expire 8/15/07...... 175
100 Pathnet Inc., Expire 5/15/08................................ 1,000
- -------------------------------------------------------------------------------------------------
1,175
- -------------------------------------------------------------------------------------------------
TOTAL WARRANTS (Cost -- $9,672)............................. 3,775
- -------------------------------------------------------------------------------------------------
SUB-TOTAL INVESTMENTS (Cost -- $38,431,216)................. $37,317,311
- -------------------------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
- -------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
REPURCHASE AGREEMENT -- 8.1%
$3,273,000 Chase Securities Inc., 4.494% due 1/4/99; Proceeds at
maturity -- $3,274,634;
(Fully collateralized by U.S. Treasury Notes, 7.500% due
11/15/16;
Market value -- $3,340,837) (Cost -- $3,273,000)............ 3,273,000
- -------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $41,704,216**)........... $40,590,311
- -------------------------------------------------------------------------------------------------
</TABLE>
+ All ratings are by Standard & Poor's Rating Service, except those
identified by an asterisk (*) which are rated by Moody's Investors Service,
Inc.
(a) Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers.
(b) Security has been issued with attached warrants.
(c) Non-income producing security.
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 44 for definition of ratings.
SEE NOTES TO FINANCIAL STATEMENTS.
33
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
FEDERATED STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCK -- 96.0%
- -------------------------------------------------------------------------------------
AEROSPACE/DEFENSE -- 0.9%
4,500 Northrop Grumman Corp. ..................................... $ 329,062
- -------------------------------------------------------------------------------------
AGRICULTURE -- 1.1%
22,840 Archer-Daniels-Midland Co. ................................. 392,563
- -------------------------------------------------------------------------------------
AIRLINES -- 0.7%
8,157 KLM Royal Dutch Airlines.................................... 244,710
- -------------------------------------------------------------------------------------
AUTO PARTS & EQUIPMENT -- 1.1%
18,700 Cooper Tire & Rubber Co. ................................... 382,181
- -------------------------------------------------------------------------------------
AUTOMOTIVE -- 1.1%
5,600 General Motors Corp. ....................................... 400,750
- -------------------------------------------------------------------------------------
CHEMICALS - DIVERSIFIED -- 1.0%
3,700 Dow Chemical Corp. ......................................... 336,469
- -------------------------------------------------------------------------------------
CONSUMER DURABLES -- 2.1%
5,200 Eastman Kodak Co. .......................................... 374,400
10,300 Hasbro, Inc. ............................................... 372,087
- -------------------------------------------------------------------------------------
746,487
- -------------------------------------------------------------------------------------
CONSUMER NON-DURABLES -- 0.9%
6,300 Kimberly-Clark Corp. ....................................... 343,350
- -------------------------------------------------------------------------------------
CONTAINERS -- 1.1%
12,700 Crown Cork & Seal Co., Inc. ................................ 391,319
- -------------------------------------------------------------------------------------
ELECTRONICS -- 7.7%
8,216 AMP, Inc. .................................................. 427,745
14,800 Entergy Corp. .............................................. 460,650
6,000 FPL Group, Inc. ............................................ 369,750
11,200 Houston Industries, Inc. ................................... 359,800
12,600 PG&E Corp. ................................................. 396,900
5,700 Philips Electronics NV ..................................... 385,819
9,100 Public Service Enterprise Group, Inc. ...................... 364,000
- -------------------------------------------------------------------------------------
2,764,664
- -------------------------------------------------------------------------------------
ENERGY -- 1.7%
3,100 Atlantic Richfield Co. ..................................... 202,275
9,100 Occidental Petroleum Corp. ................................. 153,563
9,200 YPF Sociedad Anonima ADR.................................... 257,025
- -------------------------------------------------------------------------------------
612,863
- -------------------------------------------------------------------------------------
ENTERTAINMENT -- 2.3%
13,500 King World Productions, Inc. ............................... 397,406
5,800 Viacom Inc., Class A Shares................................. 426,663
- -------------------------------------------------------------------------------------
824,069
- -------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
34
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
FEDERATED STOCK PORTFOLIO
<TABLE>
<C> <S> <C>
FINANCIAL SERVICES -- 7.1%
34,000 ABB AB-Sponsored ADR........................................ $ 374,000
9,600 Bear Stearns Cos. Inc. ..................................... 358,800
9,600 Boston Properties, Inc. .................................... 292,800
16,200 The CIT Group, Inc. ........................................ 515,362
4,700 MBIA, Inc. ................................................. 308,144
5,000 Morgan Stanley Dean Witter & Co. ........................... 355,000
8,700 Washington Mutual, Inc. .................................... 332,231
- -------------------------------------------------------------------------------------
2,536,337
- -------------------------------------------------------------------------------------
FOODS -- 3.0%
10,600 RJR Nabisco Holdings Corp. ................................. 314,688
10,400 Sara Lee Corp. ............................................. 293,150
5,800 Unilever NV................................................. 481,038
- -------------------------------------------------------------------------------------
1,088,876
- -------------------------------------------------------------------------------------
HEALTH CARE -- 10.5%
10,200 Abbott Laboratories, Inc. .................................. 499,800
5,700 Baxter International Inc. .................................. 366,581
44,200 Beverly Enterprises, Inc. (a)............................... 298,350
5,500 Bristol-Myers Squibb & Co................................... 735,969
3,300 Merck & Co., Inc. .......................................... 487,369
11,800 Pharmacia & Upjohn, Inc. ................................... 668,175
5,200 Smithkline Beecham PLC...................................... 361,400
7,800 United Healthcare Corp. .................................... 335,888
- -------------------------------------------------------------------------------------
3,753,532
- -------------------------------------------------------------------------------------
INSURANCE -- 10.1%
5,500 Allmerica Financial Corp. .................................. 318,312
8,600 Allstate Corp. ............................................. 332,175
10,600 Cigna Corp. ................................................ 819,512
20,900 Conseco, Inc. .............................................. 638,756
6,100 Hartford Financial Services Group, Inc. .................... 334,737
4,000 Lincoln National Corp. ..................................... 327,250
5,900 Loews Corp. ................................................ 579,675
5,400 Marsh & McLennan, Inc. ..................................... 315,563
- -------------------------------------------------------------------------------------
3,665,980
- -------------------------------------------------------------------------------------
MACHINERY -- 2.0%
7,500 Deere & Co. ................................................ 248,437
10,200 Ingersoll-Rand Co. ......................................... 478,762
- -------------------------------------------------------------------------------------
727,199
- -------------------------------------------------------------------------------------
MANUFACTURING -- 3.3%
3,300 AlliedSignal Inc. .......................................... 146,231
6,300 Johnson Controls, Inc. ..................................... 371,700
10,600 Parker-Hannifin Corp. ...................................... 347,150
9,500 Tenneco Inc. ............................................... 323,594
- -------------------------------------------------------------------------------------
1,188,675
- -------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
35
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
FEDERATED STOCK PORTFOLIO
<TABLE>
<C> <S> <C>
OIL & GAS -- 6.9%
3,900 Chevron Corp. .............................................. $ 323,456
7,900 Coastal Corp. .............................................. 276,006
19,900 Ensco International Inc. ................................... 212,681
5,200 Exxon Corp. ................................................ 380,250
4,200 Royal Dutch Petroleum Co. ADR............................... 201,075
12,900 Sunoco, Inc. ............................................... 465,206
4,800 Texaco Inc. ................................................ 253,800
12,900 USX Marathon Group, Inc. ................................... 388,613
- -------------------------------------------------------------------------------------
2,501,087
- -------------------------------------------------------------------------------------
PUBLISHING -- 1.5%
22,000 News Corp Ltd., ADR......................................... 543,125
- -------------------------------------------------------------------------------------
RESTAURANTS -- 1.0%
7,300 Tricon Global Restaurants, Inc. (a)......................... 365,913
- -------------------------------------------------------------------------------------
RETAIL TRADE -- 3.7%
8,800 Dillard, Inc., Class A Shares............................... 249,700
23,400 K-Mart Corp. (a)............................................ 358,313
8,900 Wal-Mart Stores, Inc. ...................................... 724,794
- -------------------------------------------------------------------------------------
1,332,807
- -------------------------------------------------------------------------------------
SERVICES -- 4.1%
10,400 Electronic Data Systems Corp. .............................. 522,600
20,500 First Data Corp. ........................................... 649,594
6,900 H&R Block, Inc. ............................................ 310,500
- -------------------------------------------------------------------------------------
1,482,694
- -------------------------------------------------------------------------------------
STEEL & IRON -- 0.8%
49,600 LTV Corp. .................................................. 288,300
- -------------------------------------------------------------------------------------
TECHNOLOGY -- 10.0%
3,500 International Business Machines Corp. ...................... 646,625
7,800 Lexmark International Group, Inc., Class A Shares (a)....... 783,900
5,400 Raytheon Co., Class A Shares................................ 279,112
10,100 Seagate Technology, Inc. (a)................................ 305,525
12,800 Storage Technology Corp. (a)................................ 455,200
13,800 Sun Microsystems, Inc. (a).................................. 1,181,625
- -------------------------------------------------------------------------------------
3,651,987
- -------------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 4.6%
5,600 AT&T Corp. ................................................. 421,400
7,100 Bell Atlantic Corp. ........................................ 403,369
5,600 GTE Corp. .................................................. 377,650
7,000 U.S. West, Inc. ............................................ 452,375
- -------------------------------------------------------------------------------------
1,654,794
- -------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
36
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
FEDERATED STOCK PORTFOLIO
<TABLE>
<C> <S> <C>
TOBACCO -- 3.0%
9,700 Phillip Morris Cos. Inc. ................................... $ 518,950
15,700 UST Inc. ................................................... 547,538
- -------------------------------------------------------------------------------------
1,066,488
- -------------------------------------------------------------------------------------
TRANSPORTATION -- 1.8%
9,700 CNF Transportation, Inc. ................................... 364,356
10,300 Ryder System, Inc. ......................................... 267,800
- -------------------------------------------------------------------------------------
632,156
- -------------------------------------------------------------------------------------
WASTE MANAGEMENT -- 0.9%
6,990 Waste Management, Inc. ..................................... 325,909
- -------------------------------------------------------------------------------------
TOTAL COMMON STOCK (Cost -- $30,831,447).................... 34,574,346
- -------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- --------------------------------------------------------------------------------------
<C> <S> <C>
REPURCHASE AGREEMENT -- 4.0%
$1,438,000 Chase Securities Inc., 4.486% due 1/4/99; Proceeds at
maturity -- $1,438,717;
(Fully collateralized by U.S. Treasury Notes, 7.500% due
11/15/16;
Market Value -- $1,470,219) (Cost -- $1,438,000)............ 1,438,000
- --------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $32,269,447*)............ $36,012,346
- --------------------------------------------------------------------------------------
</TABLE>
(a) Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
37
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
DISCIPLINED MID CAP STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCK -- 92.9%
- -------------------------------------------------------------------------------------
AUTOMOTIVE & TRANSPORTATION -- 4.3%
2,349 Airborne Freight Corp. ..................................... $ 84,711
808 Alaska Air Group Inc.+...................................... 35,754
1,655 Arvin Industries Inc. ...................................... 68,993
659 Continental Airlines, Inc., Class B Shares+................. 22,077
819 Crane Co. .................................................. 24,724
2,286 GATX Corp. ................................................. 86,582
1,400 Gulfstream Aerospace Corp.+................................. 74,550
1,821 Harley Davidson Inc. ....................................... 86,270
1,903 J.B. Hunt Transportation Services, Inc. .................... 43,769
1,442 Kansas City Southern Industries, Inc. ...................... 70,928
2,000 Lear Corp.+................................................. 77,000
1,080 Navistar International Corp.+............................... 30,780
2,019 Trinity Industries, Inc. ................................... 77,732
- -------------------------------------------------------------------------------------
783,870
- -------------------------------------------------------------------------------------
CONSTRUCTION SERVICES -- 0.6%
1,572 Centex Corp. ............................................... 70,838
2,741 Clayton Homes Inc. ......................................... 37,860
- -------------------------------------------------------------------------------------
108,698
- -------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY -- 14.9%
1,600 Abercrombie & Fitch Co., Class A Shares+.................... 113,200
1,125 Autozone Inc.+.............................................. 37,055
4,951 Bed Bath & Beyond Inc.+..................................... 168,953
1,772 Best Buy Co., Inc.+......................................... 108,757
1,125 Borders Group, Inc.+........................................ 28,055
3,010 Brinker International Inc.+................................. 86,914
99 Central Newspapers, Inc., Class A Shares.................... 7,072
3,153 Cintas Corp. ............................................... 222,089
1,100 Cox Radio, Inc., Class A Shares+............................ 46,475
2,248 Cracker Barrel Old Country Store, Inc. ..................... 52,407
1,713 CVS Corp. .................................................. 94,215
742 Ethan Allen Interiors Inc. ................................. 30,422
6,426 Family Dollar Stores, Inc. ................................. 141,372
2,200 Furniture Brands International, Inc.+....................... 59,950
2,115 HON Industries, Inc. ....................................... 50,628
3,608 International Game Technology............................... 87,720
665 Interpublic Group of Cos., Inc. ............................ 53,034
2,000 Jones Apparel Group, Inc.+.................................. 44,125
665 Knight-Ridder, Inc. ........................................ 33,998
1,054 Kroger Co.+................................................. 63,767
4,980 Leggett & Platt, Inc. ...................................... 109,560
665 Maytag Corp. ............................................... 41,396
907 Meredith Corp. ............................................. 34,353
1,816 New York Times Co., Class A Shares.......................... 62,993
5,750 Office Depot Inc.+.......................................... 212,391
2,210 Officemax Inc.+............................................. 26,796
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
38
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
DISCIPLINED MID CAP STOCK PORTFOLIO
<TABLE>
943 Payless ShoeSource, Inc.+. $ 44,675
<C> <S> <C>
1,346 Reynolds & Reynolds Co., Class A Shares..................... 30,874
1,663 Robert Half International, Inc.+............................ 74,315
907 Ross Stores, Inc. .......................................... 35,713
1,200 Saks Inc.+ ................................................. 37,875
1,655 Starbucks Corp.+............................................ 92,887
826 TCA Cable TV, Inc. ......................................... 29,478
2,202 TJX Cos. Inc. .............................................. 63,858
2,019 U.S. Foodservice+........................................... 98,931
638 Universal Corp. ............................................ 22,410
665 VF Corp. ................................................... 31,172
808 Valassis Communications, Inc.+ ............................. 41,713
98 Washington Post Co., Class B Shares......................... 56,638
447 Whirlpool Corp. ............................................ 24,753
- -------------------------------------------------------------------------------------
2,702,989
- -------------------------------------------------------------------------------------
CONSUMER STAPLES -- 4.0%
1,037 Brown-Forman Corp., Class B Shares.......................... 78,488
1,505 Dean Foods Co. ............................................. 61,423
3,000 Flowers Industries, Inc. ................................... 71,813
1,572 Hannaford Brothers Co. ..................................... 83,316
907 Hertz Corp., Class A Shares................................. 41,382
3,500 IBP, Inc. .................................................. 101,938
218 International Multifoods Corp. ............................. 5,627
2,823 Interstate Bakeries Corp. .................................. 74,633
2,054 Suiza Foods Corp.+.......................................... 104,626
4,500 Tyson Foods Inc., Class A Shares............................ 95,625
- -------------------------------------------------------------------------------------
718,871
- -------------------------------------------------------------------------------------
ENERGY -- 1.3%
3,226 Ensco International Inc..................................... 34,478
2,882 Global Marine, Inc.+........................................ 26,478
4,440 Noble Drilling Corp.+....................................... 57,443
3,330 Transocean Offshore, Inc. .................................. 89,286
3,170 Varco International, Inc.+.................................. 24,568
- -------------------------------------------------------------------------------------
232,253
- -------------------------------------------------------------------------------------
FINANCIAL -- 13.5%
5,218 AFLAC Inc. ................................................. 229,592
2,494 A.G. Edwards, Inc. ......................................... 92,902
1,151 Ambac Financial Group, Inc. ................................ 69,276
1,354 AmSouth Bancorp............................................. 61,776
2,140 Associated Banc-Corp........................................ 73,161
470 Capital One Financial Corp. ................................ 54,050
2,000 City National Corp. ........................................ 83,250
1,400 Concord EFS, Inc.+ ......................................... 59,325
1,700 Convergys Corp.+ ........................................... 38,038
808 Countrywide Credit Industries, Inc. ........................ 40,552
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
39
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
DISCIPLINED MID CAP STOCK PORTFOLIO
<TABLE>
2,096 Dime Bancorp, Inc. . $ 55,413
<C> <S> <C>
1,272 Enhance Financial Services Group, Inc. ..................... 38,160
1,701 Finova Group, Inc. ......................................... 91,748
4,946 First Security Corp. ....................................... 115,613
1,865 First Tennessee National Corp. ............................. 70,987
907 First Virginia Banks, Inc. ................................. 42,629
2,500 GreenPoint Financial Corp. ................................. 87,813
697 Hartford Life, Inc., Class A Shares......................... 40,600
5,994 Hibernia Corp., Class A Shares.............................. 104,146
90 M & T Bank Corp. ........................................... 46,704
1,882 Marshall & Ilsley Corp. .................................... 109,979
2,210 Mercantile Bankshares Corp. ................................ 85,085
1,848 Modis Professional Services, Inc.+ ......................... 26,796
3,800 North Fork Bancorp., Inc. .................................. 90,963
800 Old Kent Financial Corp. ................................... 37,200
4,074 Old Republic International Corp. ........................... 91,665
554 The PMI Group Inc. ......................................... 27,354
2,641 PaineWebber Group Inc. ..................................... 102,009
2,000 Protective Life Corp. ...................................... 79,625
3,033 SouthTrust Corp. ........................................... 112,031
5,100 Sovereign Bancorp., Inc. ................................... 72,675
2,638 T. Rowe Price Associates, Inc. ............................. 90,352
546 Wilmington Trust Corp. ..................................... 33,647
- -------------------------------------------------------------------------------------
2,455,116
- -------------------------------------------------------------------------------------
HEALTH CARE -- 11.4%
1,886 Allegiance Corp. ........................................... 87,935
3,644 Bergen Brunswig Corp., Class A Shares....................... 127,085
2,029 Biogen, Inc.+............................................... 168,407
1,427 Biomet, Inc. ............................................... 57,437
2,200 Centocor Inc.+ ............................................. 99,275
3,400 Chiron Corp.+ .............................................. 89,038
900 Covance Inc.+ .............................................. 26,213
2,400 Foundation Health Systems Inc., Class A Shares+............. 28,650
880 Guidant Corp. .............................................. 97,020
205 HCR Manor Care, Inc.+ ...................................... 6,022
7,313 Health Management Associates, Inc., Class A Shares+......... 158,144
600 Hillenbrand Industries, Inc. ............................... 34,125
3,051 ICN Pharmaceuticals, Inc. .................................. 69,029
1,500 Lincare Holdings, Inc.+ .................................... 60,844
2,554 McKesson Corp............................................... 201,926
2,248 Mylan Laboratories Inc. .................................... 70,811
6,883 Olsten Corp. ............................................... 50,762
1,701 Omnicare, Inc. ............................................. 59,110
2,900 Oxford Health Plans, Inc.+.................................. 43,138
1,237 PacifiCare Health Systems, Inc.+ ........................... 98,342
1,400 Quintiles Transnational Corp.+ ............................. 74,725
1,794 Stryker Corp. .............................................. 98,782
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
40
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
DISCIPLINED MID CAP STOCK PORTFOLIO
<TABLE>
2,672 Total Renal Care Holdings, Inc.+. $ 78,991
<C> <S> <C>
2,726 Watson Pharmaceuticals, Inc.+............................... 171,397
- -------------------------------------------------------------------------------------
2,057,208
- -------------------------------------------------------------------------------------
INTEGRATED OILS -- 1.3%
1,080 Ashland Inc. ............................................... 52,245
875 Murphy Oil Corp. ........................................... 36,094
3,118 Pennzoil-Quaker State Co.+ ................................. 46,178
2,970 Tosco Corp. ................................................ 76,849
1,159 Valero Energy Corp. ........................................ 24,629
- -------------------------------------------------------------------------------------
235,995
- -------------------------------------------------------------------------------------
MATERIALS & PROCESSING -- 5.9%
3,155 Albemarle Corp. ............................................ 74,931
2,900 Allied Waste Industries, Inc. .............................. 68,513
1,700 Boise Cascade Corp. ........................................ 52,700
3,602 Crompton & Knowles Corp. ................................... 74,516
1,800 Ecolab Inc. ................................................ 65,138
2,742 Inland Steel Industries Inc. ............................... 46,271
7,523 Mail-Well, Inc. ............................................ 86,044
1,572 Masco Corp. ................................................ 45,195
1,900 Mead Corp. ................................................. 55,694
2,956 P.H. Glatfelter Co. ........................................ 36,581
5,643 Solutia Inc................................................. 126,262
1,805 Sonoco Products Co. ........................................ 53,473
1,720 Southdown Inc. ............................................. 101,803
1,109 USX-U.S. Steel Group, Inc. ................................. 25,507
1,118 Vulcan Materials Co. ....................................... 147,087
- -------------------------------------------------------------------------------------
1,059,715
- -------------------------------------------------------------------------------------
PRODUCER DURABLES -- 4.1%
2,842 American Power Conversion Corp.+ ........................... 137,659
2,881 Herman Miller, Inc. ........................................ 77,427
1,125 Ingersoll-Rand Co. ......................................... 52,805
1,574 National Service Industries, Inc. .......................... 59,812
1,354 Parker-Hannifin Corp. ...................................... 44,344
1,655 Pentair, Inc. .............................................. 65,890
1,539 Precision Castparts Corp. .................................. 68,101
1,309 Smith International, Inc.+ ................................. 32,970
1,655 Teleflex Inc. .............................................. 75,509
907 Thomas & Betts Corp. ....................................... 39,284
3,889 U.S. Filter Corp.+.......................................... 88,961
- -------------------------------------------------------------------------------------
742,762
- -------------------------------------------------------------------------------------
TECHNOLOGY -- 20.3%
2,449 ADC Telecommunications, Inc.+............................... 85,103
778 Affiliated Computer Services, Inc.+ ........................ 35,010
2,594 Aliant Communications, Inc. ................................ 106,030
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
41
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
DISCIPLINED MID CAP STOCK PORTFOLIO
<TABLE>
2,646 Altera Corp.+. $ 161,075
<C> <S> <C>
1,600 Analog Devices Inc.+........................................ 50,200
4,604 Atmel Corp.+ ............................................... 70,499
5,577 Cadence Design Systems, Inc.+............................... 165,916
662 Citrix Systems, Inc.+ ...................................... 64,255
5,291 Comdisco, Inc. ............................................. 89,286
4,081 Compuware Corp.+............................................ 318,809
1,500 Comverse Technology, Inc.+ ................................. 106,500
1,854 Cordant Technologies Inc. .................................. 69,525
1,474 Fiserv Inc.+ ............................................... 75,819
1,630 General Instrument Corp.+ .................................. 55,318
1,100 Intuit Inc.+ ............................................... 79,750
1,911 Keane, Inc.+................................................ 76,321
900 Legato Systems, Inc.+ ...................................... 59,344
1,965 Lexmark International Group, Inc., Class A Shares+.......... 197,483
1,561 Linear Technology Corp. .................................... 139,807
2,213 Maxim Integrated Products, Inc.+............................ 96,680
748 Minerals Technologies Inc. ................................. 30,621
2,582 Molex Inc. ................................................. 98,439
2,993 Networks Associates Inc.+................................... 198,286
1,274 QUALCOMM Inc.+ ............................................. 66,009
1,173 Sanmina Corp.+ ............................................. 73,313
2,807 Siebel Systems, Inc.+ ...................................... 95,263
1,935 Sterling Commerce, Inc.+.................................... 87,075
2,582 Storage Technology Corp.+................................... 91,822
3,032 SunGard Data Systems Inc.+.................................. 120,333
1,996 Sunstrand Corp. ............................................ 103,543
1,909 Symbol Technologies, Inc. .................................. 122,057
1,119 Synopsys, Inc.+............................................. 60,706
2,084 Tech Data Corp.+ ........................................... 83,881
1,600 Teradyne, Inc.+............................................. 67,800
1,188 Tidewater, Inc. ............................................ 27,547
907 Transaction Systems Architects, Inc., Class A Shares+....... 45,350
514 VERITAS Software Corp.+ .................................... 30,808
1,080 WinStar Communications, Inc.+............................... 42,120
1,832 Xilinx, Inc.+ .............................................. 119,309
- -------------------------------------------------------------------------------------
3,667,012
- -------------------------------------------------------------------------------------
UTILITIES -- 11.3%
1,178 AES Corp.+.................................................. 55,808
1,492 ALLTELL Corp. .............................................. 89,240
1,346 Baltimore Gas & Electric Co. ............................... 41,558
2,581 CalEnergy Co. Inc.+......................................... 89,528
2,965 Century Telephone Enterprises, Inc.......................... 200,138
900 CMS Energy Corp. ........................................... 43,594
958 Dominion Resources, Inc. ................................... 44,787
2,749 El Paso Energy Corp. ....................................... 95,700
2,277 FirstEnergy Corp. .......................................... 74,145
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
42
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
DISCIPLINED MID CAP STOCK PORTFOLIO
<TABLE>
960 GPU, Inc. . $ 42,420
<C> <S> <C>
2,321 KeySpan Energy Corp. ....................................... 71,951
1,346 MCN Energy Group, Inc. ..................................... 25,658
1,817 Minnesota Power Inc. ....................................... 79,948
2,300 Montana Power Co. .......................................... 130,094
4,343 NIPSCO Industries, Inc. .................................... 132,190
1,380 National Fuel Gas Co. ...................................... 62,359
2,038 New England Electric System................................. 98,079
2,399 Northeast Utilities+........................................ 38,384
2,394 OGE Energy Corp. ........................................... 69,276
1,197 PECO Energy Co. ............................................ 49,825
2,949 Pinnacle West Capital Corp. ................................ 124,964
3,788 Public Service Co. of New Mexico............................ 77,417
3,557 SCANA Corp. ................................................ 114,713
3,626 TECO Energy, Inc. .......................................... 102,208
3,038 Wisconsin Energy Corp. ..................................... 95,507
- -------------------------------------------------------------------------------------
2,049,491
- -------------------------------------------------------------------------------------
TOTAL COMMON STOCK (Cost -- $14,893,648).................... 16,813,980
- -------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- ---------------------------------------------------------------------------------------
<C> <S> <C>
U.S. TREASURY OBLIGATION -- 0.5%
$95,000 U.S. Treasury Bill, 4.330% due 3/18/99 (Cost -- $94,132) 94,132
(b).........................................................
- ---------------------------------------------------------------------------------------
16,908,112
SUB-TOTAL INVESTMENTS (Cost -- $14,987,780).................
- ---------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 6.6%
1,191,000 Morgan Stanley Dean Witter & Co., 4.620% due 1/4/99; 1,191,000
Proceeds at maturity -- $1,191,609; (Fully collateralized by
U.S. Treasury Notes, 10.750% due 2/15/03; Market value --
$1,191,611) (Cost -- $1,191,000)............................
- ---------------------------------------------------------------------------------------
$18,099,112
TOTAL INVESTMENTS -- 100% (Cost -- $16,178,780*)............
- ---------------------------------------------------------------------------------------
</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.
43
<PAGE>
- --------------------------------------------------------------------------------
BOND RATINGS (UNAUDITED)
The definitions of the applicable rating symbols are set forth below:
Standard & Poor's Rating Service ("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 Investors Service, Inc. ("Moody's") -- Numerical modifiers 1, 2, and 3
may be applied to each generic rating from "Aa" to "Caa", where 1 is the highest
and 3 the lowest rating within its generic category.
<TABLE>
<S> <C> <C>
</TABLE>
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.
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.
NR -- Indicates that the bond is not rated by Standard & Poor's or
Moody's.
[/TABLE]
44
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 1998
<TABLE>
<CAPTION>
TRAVELERS LAZARD MFS FEDERATED DISCIPLINED
QUALITY INTERNATIONAL EMERGING HIGH FEDERATED MID CAP
BOND STOCK GROWTH YIELD STOCK STOCK
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments -- Cost..................... $30,292,140 $47,746,455 $126,866,733 $38,431,216 $30,831,447 $14,987,780
Repurchase agreements -- Cost........... 5,601,000 3,100,000 -- 3,273,000 1,438,000 1,191,000
- ---------------------------------------------------------------------------------------------------------------------------------
Investments, at value................... $30,415,521 $51,521,128 $169,993,345 $37,317,311 $34,574,346 $16,908,112
Repurchase agreements, at value......... 5,601,000 3,100,000 -- 3,273,000 1,438,000 1,191,000
Cash.................................... 174,609 148,928 18,269 602 525 576
Collateral for securities on loan (Note
9).................................... -- 1,062,000 -- -- -- --
Dividends and interest receivable....... 341,962 42,524 21,566 592,789 51,888 12,869
Receivable for open forward foreign
currency contracts (Note 7)........... -- 4,811 -- -- -- --
Receivable for securities sold.......... -- -- 140,502 -- -- 1,880,852
Receivable from broker -- variation
margin................................ -- -- -- -- -- 22,276
Receivable for Fund shares sold......... 124,724 103,840 378,170 15,143 57,401 47,837
Receivable from affiliate............... 2,351 -- 4,833 -- -- 33,998
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS............................ 36,660,167 55,983,231 170,556,685 41,198,845 36,122,160 20,097,520
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities on loan (Note
9).................................... -- 1,062,000 -- -- -- --
Payable for open forward foreign
currency contracts (Note 7)........... -- 16,807 -- -- -- --
Investment advisory fees payable........ 9,275 34,608 95,315 21,990 17,930 10,122
Administration fees payable............. 1,829 2,539 12,004 2,029 1,721 866
Payable for securities purchased........ 1,111,608 1,799,210 331,383 156,338 652,128 601,416
Accrued expenses........................ 30,060 59,766 58,859 29,744 30,254 25,296
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES....................... 1,152,772 2,974,930 497,561 210,101 702,033 637,700
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS.......................... $35,507,395 $53,008,301 $170,059,124 $40,988,744 $35,420,127 $19,459,820
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Paid-in capital......................... $35,118,991 $49,463,121 $128,975,715 $42,049,120 $31,256,202 $16,356,605
Undistributed net investment income..... 854 475 -- -- 2,365 51,154
Accumulated net realized gain (loss) on
security transactions, foreign
currencies and futures contracts...... 264,169 (211,873) (2,043,324) 59,057 418,661 1,064,772
Net unrealized appreciation
(depreciation) of investments, futures
contracts and foreign currencies...... 123,381 3,756,578 43,126,733 (1,119,433) 3,742,899 1,987,289
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS.......................... $35,507,395 $53,008,301 $170,059,124 $40,988,744 $35,420,127 $19,459,820
- ---------------------------------------------------------------------------------------------------------------------------------
SHARES OUTSTANDING........................ 3,301,090 4,114,048 10,081,086 3,689,694 2,262,329 1,356,946
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, PER SHARE................ $10.76 $12.88 $16.87 $11.11 $15.66 $14.34
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
45
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
TRAVELERS LAZARD MFS FEDERATED DISCIPLINED
QUALITY INTERNATIONAL EMERGING HIGH FEDERATED MID CAP
BOND STOCK GROWTH YIELD STOCK STOCK
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest..................................... $1,304,774 $ 158,597 $ 326,415 $2,617,653 $ 60,966 $ 46,849
Dividends.................................... -- 504,148 144,780 104,299 455,019 106,573
Less: Foreign withholding tax................ -- (54,777) (2,071) -- (4,990) --
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME...................... 1,304,774 607,968 469,124 2,721,952 510,995 153,422
- ---------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)............ 68,452 246,573 837,712 185,665 155,197 75,088
Audit and legal.............................. 19,405 17,800 21,500 21,706 21,131 14,500
Pricing service fees......................... 16,586 8,302 400 1,621 -- --
Administration fees (Note 2)................. 12,704 17,955 67,017 17,138 14,899 6,436
Shareholder and system servicing fees........ 8,740 7,815 7,010 7,581 7,457 7,340
Shareholder communications................... 3,381 8,000 23,000 6,000 5,001 2,000
Custody...................................... 2,973 59,616 36,500 6,000 7,340 24,450
Trustees' fees............................... 1,000 2,000 2,800 2,936 2,902 --
Registration fees............................ -- 3,000 1,500 1,000 -- --
Other........................................ 1,200 2,534 1,384 9,174 12,462 1,229
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES............................... 134,441 373,595 998,823 258,821 226,389 131,043
Less: Expense reimbursement (Note 2)......... -- -- -- -- -- (29,138)
- ---------------------------------------------------------------------------------------------------------------------------------
NET EXPENSES................................. 134,441 373,595 998,823 258,821 226,389 101,905
- ---------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS)................... 1,170,333 234,373 (529,699) 2,463,131 284,606 51,517
- ---------------------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS, FUTURES CONTRACTS AND FOREIGN
CURRENCIES (NOTES 3, 5 AND 7):
Realized Gain (Loss) From:
Security transactions (excluding short-term
securities)............................... 505,011 708,244 (1,228,852) 196,895 1,324,694 1,051,055
Foreign currency transactions.............. -- (519,467) 3,362 -- -- --
Futures contracts.......................... -- -- -- -- -- 36,373
- ---------------------------------------------------------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS)..................... 505,011 188,777 (1,225,490) 196,895 1,324,694 1,087,428
- ---------------------------------------------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation
(Depreciation) of Investments, Futures
Contracts and Foreign Currencies:
Beginning of year.......................... 62,830 613,193 5,784,835 518,084 1,360,255 553,589
End of year................................ 123,381 3,756,578 43,126,733 (1,119,433) 3,742,899 1,987,289
- ---------------------------------------------------------------------------------------------------------------------------------
CHANGE IN NET UNREALIZED APPRECIATION
(DEPRECIATION)............................. 60,551 3,143,385 37,341,898 (1,637,517) 2,382,644 1,433,700
- ---------------------------------------------------------------------------------------------------------------------------------
NET GAIN (LOSS) ON INVESTMENTS, FUTURES
CONTRACTS AND FOREIGN CURRENCIES............. 565,562 3,332,162 36,116,408 (1,440,622) 3,707,338 2,521,128
- ---------------------------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS......... $1,735,895 $3,566,535 $35,586,709 $1,022,509 $3,991,944 $2,572,645
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
46
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
TRAVELERS LAZARD MFS
QUALITY INTERNATIONAL EMERGING FEDERATED FEDERATED DISCIPLINED
BOND STOCK GROWTH HIGH YIELD STOCK MID CAP
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO STOCK
- ------------------------------------------------------------------------------------------------------------------- PORTFOLIO
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss)............ $ 1,170,333 $ 234,373 $ (529,699) $ 2,463,131 $ 284,606 $ 51,517
Net realized gain (loss)................ 505,011 188,777 (1,225,490) 196,895 1,324,694 1,087,428
Change in net unrealized appreciation
(depreciation)....................... 60,551 3,143,385 37,341,898 (1,637,517) 2,382,644 1,433,700
- -------------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM
OPERATIONS........................... 1,735,895 3,566,535 35,586,709 1,022,509 3,991,944 2,572,645
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income................... (1,166,254) (172,299) -- (2,424,991) (283,680) --
Net realized gains...................... (301,730) (430,710) -- (203,459) (1,053,266) (169,722)
- -------------------------------------------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM
DISTRIBUTIONS TO SHAREHOLDERS........ (1,467,984) (603,009) -- (2,628,450) (1,336,946) (169,722)
- -------------------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 10):
Net proceeds from sale of shares........ 25,413,325 56,682,700 74,091,479 29,338,305 23,019,020 11,121,611
Net asset value of shares issued for
reinvestment of dividends............ 1,467,984 603,009 -- 2,628,450 1,336,946 169,722
Cost of shares reacquired............... (1,109,975) (21,469,988) (9,966,117) (3,421,555) (3,690,826) (403,490)
- -------------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM FUND SHARE
TRANSACTIONS......................... 25,771,334 35,815,721 64,125,362 28,545,200 20,665,140 10,887,843
- -------------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS.................... 26,039,245 38,779,247 99,712,071 26,939,259 23,320,138 13,290,766
NET ASSETS:
Beginning of year....................... 9,468,150 14,229,054 70,347,053 14,049,485 12,099,989 6,169,054
- -------------------------------------------------------------------------------------------------------------------
END OF YEAR*............................ $35,507,395 $ 53,008,301 $170,059,124 $40,988,744 $35,420,127 $19,459,820
- -------------------------------------------------------------------------------------------------------------------
* Includes undistributed net investment
income of: $854 $475 -- -- $2,365 $51,154
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
47
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
LAZARD MFS
TRAVELERS INTERNATIONAL EMERGING FEDERATED FEDERATED DISCIPLINED
QUALITY BOND STOCK GROWTH HIGH YIELD STOCK MID CAP
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO STOCK
- ------------------------------------------------------------------------------------------------------------------ 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.
48
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Travelers Quality Bond, Lazard International Stock, MFS Emerging
Growth, Federated High Yield, Federated Stock and Disciplined Mid Cap Stock
Portfolio, 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 fourteen 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 2000, Zero Coupon Bond Fund Portfolio Series 2005, NWQ Large Cap and
Jurika & Voyles Core Equity Portfolios. Shares of the Trust are offered only to
insurance company separate accounts that fund certain variable annuity and
variable life insurance contracts. The financial statements and financial
highlights for the other portfolios are presented in separate annual reports.
The significant accounting policies consistently followed by the Portfolios
are: (a) security transactions are accounted for on trade date; (b) securities
traded on national securities markets are valued at the closing price on such
markets or, if there were no sales during the day, at current quoted bid price;
securities primarily traded on foreign exchanges are generally valued at the
closing values of such securities on their respective exchanges, except that
when a significant occurrence exists subsequent to the time a value was so
established and it is likely to have significantly changed the value, then the
fair value of those securities will be determined by consideration of other
factors by or under the direction of the Board of Trustees; securities traded in
the over-the-counter market are valued on the basis of the bid price at the
close of business on each day; U.S. government agencies and obligations are
valued at the mean between the last reported bid and ask prices; (c) securities
for which market quotations are not available will be valued in good faith at
fair value by or under the direction of the Board of Trustees; (d) securities
maturing within 60 days are valued at cost plus accreted discount or minus
amortized premium, which approximates value; (e) 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; (f) 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 a Portfolio
determines the existence of a dividend declaration after exercising reasonable
due diligence; (g) gains or losses on the sale of securities are calculated by
using the specific identification method; (h) dividends and distributions to
shareholders are recorded on the ex-dividend date; (i) 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; (j) 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; (k) 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, 1998,
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 $9 and $318,844 was reclassified to paid-in
capital for Lazard International Stock and MFS Emerging Growth, respectively.
Net investment income, net realized gains and net assets for each Portfolio were
not affected by these changes; and (l) 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 Citigroup, 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 ("DMCS")
49
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Portfolios. 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 year ended December 31, 1998, Travelers Insurance reimbursed
expenses in the amount of $29,138 for DMCS.
One Trustee and all officers of the Trust are employees of Citigroup Inc.,
or its subsidiaries.
3. INVESTMENTS
The aggregate costs of purchases and proceeds from sales of investments
(including maturities, but excluding short-term securities), during the year
ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO PURCHASES SALES
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Travelers Quality Bond Portfolio............................ $ 90,575,166 $69,625,383
Lazard International Stock Portfolio........................ 46,472,206 12,365,689
MFS Emerging Growth Portfolio............................... 146,702,576 82,737,157
Federated High Yield Portfolio.............................. 33,161,515 8,206,330
Federated Stock Portfolio................................... 26,663,309 7,371,469
Disciplined Mid Cap Stock Portfolio......................... 20,096,796 10,831,031
- ----------------------------------------------------------------------------------------
</TABLE>
At December 31, 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>
Travelers Quality Bond Portfolio............................ $ 177,041 $ (53,660) $ 123,381
Lazard International Stock Portfolio........................ 5,762,882 (1,988,209) 3,774,673
MFS Emerging Growth Portfolio............................... 47,250,391 (4,123,779) 43,126,612
Federated High Yield Portfolio.............................. 589,625 (1,703,530) (1,113,905)
Federated Stock Portfolio................................... 5,148,369 (1,405,470) 3,742,899
Disciplined Mid Cap Stock Portfolio......................... 2,519,370 (599,038) 1,920,332
- -----------------------------------------------------------------------------------------
</TABLE>
50
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. REPURCHASE AGREEMENTS
The Portfolios purchase (and their custodians take possession of) U.S.
government securities from banks and securities dealers subject to agreements to
resell the securities to the sellers at a future date (generally, the next
business day) at an agreed-upon higher repurchase price. The Portfolios require
continual maintenance of the market value of the collateral in amounts at least
equal to 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 December 31, 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................... 3/99 11 $2,087,668 $2,154,625 $66,957
- ---------------------------------------------------------------------------------------------------------
</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 December 31, 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.
51
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The risk associated with purchasing options is limited to the premium
originally paid. The Portfolios enter into options for hedging purposes. The
risk in writing a covered call option is that the Portfolios give up the
opportunity to participate in any increase in the price of the underlying
security beyond the exercise price. The risk in writing a put option is that the
Portfolios are exposed to the risk of a loss if the market price of the
underlying security declines.
During the year ended December 31, 1998, the Portfolios did not write any
options.
7. FORWARD FOREIGN CURRENCY CONTRACTS
LIS and MFS may enter into forward foreign currency contracts.
At December 31, 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:
Australian Dollar................................ 142,537 $ 87,437 1/5/99 $ (1,477)
Australian Dollar................................ 155,416 95,338 1/6/99 (1,615)
British Pound.................................... 325,065 540,714 1/7/99 (4,590)
British Pound.................................... 54,189 90,138 1/8/99 (298)
Danish Krone..................................... 581,740 91,417 1/5/99 (2,281)
Dutch Guilder.................................... 189,366 100,929 1/5/99 507
Japanese Yen..................................... 37,134,619 329,432 1/5/99 4,304
Singapore Dollar................................. 152,281 92,350 1/6/99 (1,298)
Spanish Peseta................................... 26,633,361 188,001 1/4/99 (2,862)
Swedish Krona.................................... 782,340 96,538 1/5/99 (551)
Swiss Franc...................................... 119,708 87,194 1/4/99 (1,835)
- --------------------------------------------------------------------------------------------------------
Net Unrealized Loss on Forward Foreign Currency
Contracts...................................... $(11,996)
- --------------------------------------------------------------------------------------------------------
</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.
52
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1998, LIS loaned common stocks having a value of
approximately $1,012,091 and holds the following collateral for loaned
securities:
<TABLE>
<CAPTION>
SECURITY DESCRIPTION VALUE
- ------------------------------------------------------------------------
<S> <C>
TIME DEPOSITS:
Bayerische Landesbank, Munich, 8.375% due 1/4/99.......... $ 57,633
Commerzbank AG, Frankfurt, 7.125% due 1/4/99.............. 50,853
Landesbank Hessen Thuringen, 6.750% due 1/4/99............ 50,853
Toronto Dominion-Grand Cayman, 5.750% due 1/4/99.......... 50,853
Unibank, 5.750% due 1/4/99................................ 50,853
COMMERCIAL PAPER:
Alpine Securitization Corp., 5.503% due 1/4/99............ 50,822
Citibank Capital Markets, 5.303% due 1/4/99............... 50,822
General Electric Credit, 5.133% due 1/4/99................ 51,136
Market Street Funding, 5.353% due 1/4/99.................. 50,822
New Center Asset Trust, 5.553% due 1/4/99................. 50,821
Newport Funding Corp., 5.503% due 1/4/99.................. 50,822
Sheffield Receivable Corp., 5.253% due 1/4/99............. 50,822
Twin Towers Inc., 5.503% due 1/4/99....................... 50,822
MONEY MARKET FUND:
Dreyfus Cash Management, 4.928% due 1/4/99................ 50,853
Dreyfus Cash Management Plus, 4.979% due 1/4/99........... 50,853
REPURCHASE AGREEMENTS:
JP Morgan Securities, GNMA Collateralized, 5.500% due
1/4/99................................................. 92,340
Merrill Lynch Securities, AAA Asset Backed, 5.580% due
1/4/99................................................. 200,020
- ------------------------------------------------------------------------
Total....................................................... $1,062,000
- ------------------------------------------------------------------------
</TABLE>
Interest income earned by LIS from securities loaned for the year ended
December 31, 1998 was $10,853.
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>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
TRAVELERS QUALITY BOND PORTFOLIO
Shares sold.............................................. 2,353,028 387,874
Shares issued on reinvestment............................ 136,485 25,688
Shares redeemed.......................................... (102,056) (21,988)
- ------------------------------------------------------------------------------
Net Increase............................................. 2,387,457 391,574
- ------------------------------------------------------------------------------
LAZARD INTERNATIONAL STOCK PORTFOLIO
Shares sold.............................................. 4,545,655 946,470
Shares issued on reinvestment............................ 46,711 11,082
Shares redeemed.......................................... (1,708,356) (128,394)
- ------------------------------------------------------------------------------
Net Increase............................................. 2,884,010 829,158
- ------------------------------------------------------------------------------
MFS EMERGING GROWTH PORTFOLIO
Shares sold.............................................. 5,189,246 4,341,790
Shares issued on reinvestment............................ -- 101,412
Shares redeemed.......................................... (709,159) (67,367)
- ------------------------------------------------------------------------------
Net Increase............................................. 4,480,087 4,375,835
- ------------------------------------------------------------------------------
</TABLE>
53
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
FEDERATED HIGH YIELD PORTFOLIO
Shares sold.............................................. 2,511,163 655,864
Shares issued on reinvestment............................ 236,428 69,193
Shares redeemed.......................................... (296,346) (2,983)
- ------------------------------------------------------------------------------
Net Increase............................................. 2,451,245 722,074
- ------------------------------------------------------------------------------
FEDERATED STOCK PORTFOLIO
Shares sold.............................................. 1,542,339 916,896
Shares issued on reinvestment............................ 85,478 55,752
Shares redeemed.......................................... (240,375) (402,093)
- ------------------------------------------------------------------------------
Net Increase............................................. 1,387,442 570,555
- ------------------------------------------------------------------------------
DISCIPLINED MID CAP STOCK PORTFOLIO*
Shares sold.............................................. 883,471 461,398
Shares issued on reinvestment............................ 12,780 35,196
Shares redeemed.......................................... (34,061) (1,838)
- ------------------------------------------------------------------------------
Net Increase............................................. 862,190 494,756
- ------------------------------------------------------------------------------
</TABLE>
* For the period from April 1, 1997 (commencement of operations) to December 31,
1997.
11. CAPITAL LOSS CARRYFORWARD
At December 31, 1998, MFS Emerging Growth Portfolio had, for Federal income
tax purposes, approximately $882,000 of capital loss carryforward, expiring in
December 2006, 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.
54
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
For a share of beneficial interest outstanding throughout each year ended
December 31:
<TABLE>
<CAPTION>
TRAVELERS QUALITY BOND PORTFOLIO 1998 1997 1996(1)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR.......................... $10.36 $10.10 $10.00
- -----------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income(2).................................. 0.37 0.43 0.19
Net realized and unrealized gain.......................... 0.51 0.29 0.16
- -----------------------------------------------------------------------------------------------
Total Income From Operations................................ 0.88 0.72 0.35
- -----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income..................................... (0.37) (0.43) (0.19)
Net realized gain......................................... (0.11) (0.03) (0.06)
- -----------------------------------------------------------------------------------------------
Total Distributions......................................... (0.48) (0.46) (0.25)
- -----------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR................................ $10.76 $10.36 $10.10
- -----------------------------------------------------------------------------------------------
TOTAL RETURN................................................ 8.49% 7.14% 3.56%++
- -----------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S)............................. $35,507 $9,468 $5,273
- -----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(2)(3)............................................ 0.63% 0.75% 0.75%+
Net investment income..................................... 5.51 5.80 5.62+
- -----------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE..................................... 364% 295% 35%
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) For the period from August 30, 1996 (commencement of operations) to December
31, 1996.
(2) Travelers Insurance has waived part or all of its fees for the year ended
December 31, 1997 and the period ended December 31, 1996. In addition,
Travelers Insurance has 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>
(3) As a result of a voluntary expense limitation, the ratio of expenses to
average net assets will not exceed 0.75%.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
55
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of beneficial interest outstanding throughout each year ended
December 31:
<TABLE>
<CAPTION>
LAZARD INTERNATIONAL STOCK PORTFOLIO 1998(1) 1997 1996(2)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR.......................... $11.57 $10.78 $10.00
- -------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income(3).................................. 0.10 0.05 0.02
Net realized and unrealized gain.......................... 1.37 0.87 0.76
- -------------------------------------------------------------------------------------------
Total Income From Operations................................ 1.47 0.92 0.78
- -------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income..................................... (0.04) (0.09) --
Net realized gain......................................... (0.12) (0.04) --
- -------------------------------------------------------------------------------------------
Total Distributions......................................... (0.16) (0.13) --
- -------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR................................ $12.88 $11.57 $10.78
- -------------------------------------------------------------------------------------------
TOTAL RETURN................................................ 12.59% 8.50% 7.80%++
- -------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S)............................. $53,008 $14,229 $4,322
- -------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(3)(4)............................................ 1.25% 1.25% 1.25%+
Net investment income..................................... 0.78 0.66 0.42+
- -------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE..................................... 44% 22% 9%
- -------------------------------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the year.
(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 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>
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.
56
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of beneficial interest outstanding throughout each year ended
December 31:
<TABLE>
<CAPTION>
MFS EMERGING GROWTH PORTFOLIO 1998(1) 1997 1996(2)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR.......................... $12.56 $10.55 $10.00
- --------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income (loss)(3)........................... (0.07) (0.03) 0.03
Net realized and unrealized gain.......................... 4.38 2.26 0.57
- --------------------------------------------------------------------------------------------
Total Income From Operations................................ 4.31 2.23 0.60
- --------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income..................................... -- -- (0.03)
Net realized gain......................................... -- (0.21) (0.01)
Capital................................................... -- (0.01) (0.01)
- --------------------------------------------------------------------------------------------
Total Distributions......................................... -- (0.22) (0.05)
- --------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR................................ $16.87 $12.56 $10.55
- --------------------------------------------------------------------------------------------
TOTAL RETURN................................................ 34.32% 21.15% 6.00%++
- --------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S)............................. $170,059 $70,347 $12,924
- --------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(3)(4)............................................ 0.89% 0.95% 0.95%+
Net investment income (loss).............................. (0.47) (0.40) 0.55+
- --------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE..................................... 77% 94% 49%
- --------------------------------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the year.
(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.
57
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of beneficial interest outstanding throughout each year ended
December 31:
<TABLE>
<CAPTION>
FEDERATED HIGH YIELD PORTFOLIO 1998 1997 1996(1)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR.......................... $11.34 $10.42 $10.00
- -----------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income(2).................................. 0.71 0.60 0.31
Net realized and unrealized gain (loss)................... (0.18) 1.01 0.46
- -----------------------------------------------------------------------------------------------
Total Income From Operations................................ 0.53 1.61 0.77
- -----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income..................................... (0.71) (0.60) (0.31)
Net realized gain......................................... (0.05) (0.09) (0.04)
- -----------------------------------------------------------------------------------------------
Total Distributions......................................... (0.76) (0.69) (0.35)
- -----------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR................................ $11.11 $11.34 $10.42
- -----------------------------------------------------------------------------------------------
TOTAL RETURN................................................ 4.71% 15.45% 7.61%++
- -----------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S)............................. $40,989 $14,049 $5,381
- -----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(2)(3)............................................ 0.90% 0.95% 0.95%+
Net investment income..................................... 8.60 8.82 8.78+
- -----------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE..................................... 31% 43% 23%
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) For the period from August 30, 1996 (commencement of operations) to December
31, 1996.
(2) Travelers Insurance has waived part or all of its fees for the year ended
December 31, 1997 and the period ended December 31, 1996. In addition,
Travelers Insurance has 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>
(3) As a result of a voluntary expense limitation, the ratio of expenses to
average net assets will not exceed 0.95%.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
58
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of beneficial interest outstanding throughout the year ended
December 31:
<TABLE>
<CAPTION>
FEDERATED STOCK PORTFOLIO 1998 1997 1996(1)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR.......................... $13.83 $11.10 $10.00
- -----------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income(2).................................. 0.13 0.10 0.06
Net realized and unrealized gain.......................... 2.33 3.60 1.20
- -----------------------------------------------------------------------------------------------
Total Income From Operations................................ 2.46 3.70 1.26
- -----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income..................................... (0.13) (0.10) (0.06)
Net realized gain......................................... (0.50) (0.87) (0.09)
Capital................................................... -- -- (0.01)
- -----------------------------------------------------------------------------------------------
Total Distributions......................................... (0.63) (0.97) (0.16)
- -----------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR................................ $15.66 $13.83 $11.10
- -----------------------------------------------------------------------------------------------
TOTAL RETURN................................................ 17.84% 33.41% 12.61%++
- -----------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S)............................. $35,420 $12,100 $3,380
- -----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(2)(3)............................................ 0.91% 0.95% 0.95%+
Net investment income..................................... 1.14 1.11 1.55+
- -----------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE..................................... 31% 74% 11%
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) For the period from August 30, 1996 (commencement of operations) to December
31, 1996.
(2) Travelers Insurance has waived part or all of its fees for the year ended
December 31, 1997 and the period ended December 31, 1996. In addition,
Travelers Insurance has 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>
(3) As a result of a voluntary expense limitation, the ratio of expenses to
average net assets will not exceed 0.95%.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
59
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of beneficial interest outstanding throughout the year ended
December 31:
<TABLE>
<CAPTION>
DISCIPLINED MID CAP STOCK PORTFOLIO 1998 1997(1)
- ----------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR.......................... $ 12.47 $10.00
- ----------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income(2).................................. 0.04 0.06
Net realized and unrealized gain.......................... 2.05 3.37
- ----------------------------------------------------------------------------------
Total Income From Operations................................ 2.09 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 YEAR................................ $ 14.34 $12.47
- ----------------------------------------------------------------------------------
TOTAL RETURN................................................ 16.91% 34.38%++
- ----------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S)............................. $19,460 $6,169
- ----------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(2)(3)............................................ 0.95% 0.95%+
Net investment income..................................... 0.48 0.85+
- ----------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE..................................... 109% 74%
- ----------------------------------------------------------------------------------
</TABLE>
(1) For the period from April 1, 1997 (commencement of operations) to December
31, 1997.
(2) Travelers Insurance has waived all or a portion of its fees for the year
ended December 31, 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 1.22%
1997 0.08 1.82+
</TABLE>
(3) As a result of voluntary expense limitation, the ratio of expenses to
average net assets will not exceed 0.95%.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
60
<PAGE>
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
THE TRAVELERS SERIES TRUST:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of the Travelers Quality Bond, Lazard
International Stock, MFS Emerging Growth, Federated High Yield, Federated Stock
and Disciplined Mid Cap Stock Portfolios ("Portfolios") of the Travelers Series
Trust ("Trust") as of December 31, 1998, the related statements of operations
for the year then ended, the statements of changes in net assets for each of the
years in the two year period then ended, and the financial highlights for the
year ended December 31, 1998 and for the period from April 1, 1997 (commencement
of operations) to December 31, 1997 with respect to the Mid Cap Disciplined
Equity Fund, for the two years ended December 31, 1998 and for the period from
August 30, 1996 (commencement of operations) to December 31, 1996 with respect
to the Travelers Quality Bond, MFS Emerging Growth, Federated High Yield and
Federated Stock Portfolios, for the two years ended December 31, 1998 and for
the period from August 1, 1996 (commencement of operations) to December 31, 1996
with respect to the Lazard International Stock Portfolio. These financial
statements and financial highlights are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1998, by correspondence with the custodian. As to securities
purchased or sold but not yet received or delivered, we performed other
appropriate auditing procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Portfolios as of December 31, 1998, the result of their operations, the changes
in their net assets and their financial highlights for the periods referred to
above, in conformity with generally accepted accounting principles.
[KPMG Peat Marwick LLP
Signature]
New York, New York
February 8, 1999
61
<PAGE>
- --------------------------------------------------------------------------------
TAX INFORMATION (UNAUDITED)
For Federal tax purposes the Trust hereby designates for the fiscal year ended
December 31, 1998:
- Percentages of ordinary dividends paid as qualifying for the corporate
dividends received deduction:
<TABLE>
<S> <C>
Federated High Yield Portfolio......................... 4.30%
Federated Stock Portfolio.............................. 41.08
Disciplined Mid Cap Stock Portfolio.................... 7.47
</TABLE>
- Total long-term capital gain distributions paid:
<TABLE>
<S> <C>
Travelers Quality Bond Portfolio....................... $ 7,947
Lazard International Stock Portfolio................... 419,997
Federated High Yield Portfolio......................... 195,107
Federated Stock Portfolio.............................. 476,876
Disciplined Mid Cap Stock Portfolio.................... 12,837
</TABLE>
A total of 31.20% of the ordinary distributions paid by the Travelers Quality
Bond Portfolio from net investment income are derived from Federal obligations
and may be exempt from taxation at the state level.
62
<PAGE>
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<PAGE>
(This page intentionally left blank)
<PAGE>
Investment Advisers
TRAVELERS ASSET MANAGEMENT INTERNATIONAL CORPORATION
Hartford, Connecticut
Independent Auditors
KPMG 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 or Travelers Life & Annuity Company, and the
Prospectuses for the underlying funds, which collectively contain all pertinent
information, including the applicable sales commissions.
Series Trust (Annual) (2-99) Printed in U.S.A.
THE TRAVELERS VARIABLE
PRODUCTS FUNDS
ANNUAL REPORTS
December 31, 19998
The Travelers Series Trust:
Convertible Bond Portfolio
Strategic Stock Portfolio
Disciplined Small Cap Stock Portfolio
MFS Mid Cap Growth Portfolio
MFS Research Portfolio
[TravelersLife&Annuity
A member of citigroup LOGO]
The Travelers Insurance Company
The Travelers Life and Annuity Company
One Tower Square
Hartford, CT 06183
<PAGE>
ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
We are pleased to provide the annual report for The Travelers Series Trust
("Trust") -- Convertible Bond Portfolio, Strategic Stock Portfolio, Disciplined
Small Cap Stock Portfolio, MFS Mid-Cap Growth Portfolio and MFS Research
Portfolio ("Portfolios") for the year ended December 31, 1998. 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>
Convertible Bond Portfolio............................ 3 10
Strategic Stock Portfolio............................. 4 14
Disciplined Small Cap Stock Portfolio................. 4 16
MFS Mid-Cap Growth Portfolio.......................... 4 22
MFS Research Portfolio................................ 5 26
</TABLE>
ECONOMIC REVIEW AND OUTLOOK
The year 1998 saw a widely gyrating U.S. stock market with different sectors
performing differently. The large-cap oriented S&P 500 Stock Index ("S&P 500")
returned about 28.72% for the year. The S&P 400 MidCap Index had a gain of
roughly 19% while the Russell 2000 Index ("Russell 2000") had a negative return
of 2.6% for the year ended December 31, 1998. Dividend-paying defensive stocks
such as utilities performed better than the average small- and mid-cap stock.
While technology stocks were adversely impacted by the global financial crisis
in late 1997, they have since rebounded, led by Internet-related names.
The economies of the developed world flourished in 1998 while most emerging
markets went down. Low interest rates, robust consumer spending and benign
inflation fueled economic growth in the U.S. and Europe and created favorable
conditions for corporate profitability. In contrast, Russia's economy collapsed,
Asia's economies remained mired in recession and Brazil's economy faltered at
year-end after $30 billion was spent to defend its currency during the reporting
period.
The year was also a record year for mergers and acquisitions, nearly double
1997's total. The merger of oil giants Exxon and Mobil announced in December
will result in the creation of the world's largest company in terms of revenue.
In the digital world, merger activity between Internet service providers, phone
companies, cable companies and telecommunications firms heated up, as
"convergence" became the new mantra.
We remain guardedly optimistic about the resilient U.S. economy in the first
half of 1999 because we expect interest rates to stay low and the productivity
revolution through technology to continue. However, the risks from foreign
markets cannot be discounted and future corporate earnings may come under
increasing pressure.
FIXED INCOME MARKET COMMENTARY
Problems that started with Asia's currency devaluations in the summer of 1997
hit the bond market hard in August and September of 1998. Bond values fell
dramatically and asset-backed bonds, mortgage-backed securities, emerging-market
debt and corporate bonds all were negatively affected. In 1998, the more risk a
bond investor assumed, the more he or she suffered.
For the year ended December 31, 1998, the Lehman Government/Corporate Index
returned 9.47%. During the year, the spreads between different kinds of bonds
and U.S. Treasuries widened at record speed as investors gravitated to their
safety amidst rising stock market volatility and higher investor anxiety about
the global economy. The Federal Reserve Board ("Fed") then changed its monetary
policy from one of vigilance against inflation to one of combating deflation
during the reporting period and cut rates three times. So far in 1999, spreads
have tightened, bond market liquidity has returned and the bond market has
stabilized.
Markets and policy makers expect real U.S. economic growth to finally slow to
the 1%-2% level in 1999 after 3 years of 3% plus growth. The slowdown is
expected to be led by a sharp reduction in the growth rate of investment
spending and continued weakness in the export sector. The Conference Board
survey of corporate sentiment indicates that capital-spending plans have not yet
rebounded with the stock market and consumer sentiment. Year 2000 ("Y2K")
spending is temporarily boosting capital spending, yet industrial overcapacity
and several years of rapid spending in technology, make slower investment
spending highly likely.
1
<PAGE>
ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
However, a drop in the rate of consumer spending growth is essential to any
meaningful forecast of 1%-2% real GDP growth. This has not happened yet despite
two years where consumer spending has been close to consumer income. The wealth
effect from three years of 20%-plus stock market gains is estimated to increase
spending 1.5% more than implied by income growth. Lower interest rates, lower
oil and other commodity prices, and declining import prices have further boosted
consumer purchasing power.
The tight employment market has also been a major force behind high consumer
confidence and spending plans. December brought a further sharp drop in oil
prices and continued record high (which substantially exceeded expectations)
auto sales and housing starts. Unless they were all caused by unseasonably warm
weather, these factors cause us to push any forecast of a consumer slowdown
further out into the future which will delay any further Fed rate cuts.
There are storm clouds on the horizon that could lead the consumer to retreat.
Latin America has been pushed into recession by last summer's emerging market
meltdown and could be subject to further pressure if a Brazilian crisis erupts.
Latin America has a larger economic impact on the U.S. than Asia and Russia do.
A decline in the stock market could rattle the consumer, although the stock
market's continued resilience means that a sustained downturn is required before
spending would be significantly impacted. Japan is also a big question mark.
Economic activity is now declining there after several years of flat growth.
Despite three rate cuts in the second half of 1998, it would be hard to say the
Fed has an easy monetary policy. Short-term interest rates are still more than
3% above inflation and are high relative to nominal growth. Credit market
spreads are high and banks are tightening credit standards. These factors create
a downward bias for short-term rates over the long-term, but rates are likely to
remain stable until the consumer slows down.
With the Fed on hold, there will be some upward pressure on long-term rates. But
slow growth outside the U.S. and continued low inflation should prevent rates
from rising too much. The fact that so much of the U.S. Treasury curve trades
below the federal-funds rate is a big factor in the continued high spreads in
the investment grade corporate market. Because of this, spreads should move to
offset the change in U.S. Treasury yields -- narrowing when yields rise and
widening when yields fall.
EQUITY MARKET COMMENTARY
The deepening global financial crisis and its adverse impact on global economies
and leveraged hedge funds sent the U.S. stock market into a tailspin during the
third quarter of 1998. The S&P 500 fell by almost 10% in the third quarter while
the Russell 2000 of smaller companies fared even worse with a decline of 20%.
The third quarter began on a promising note as stock prices rose by almost 5% in
the first half of July. From the then all-time highs established on July 17,
1998, a series of bad news related to political and currency turmoil led the
stock market down through the end of August. The market decline over that period
was close to 20%, which qualifies under most scenarios as a bear market.
The bulk of the bad news in August came from the political and economic crisis
in Russia and the continuing spread of the currency contagion. The collapse of
the Russian ruble and the restructuring of Russian debt triggered trading and
lending losses at brokerage firms and banks. The crisis in the financial sector
took a turn for the worse later in the quarter as several hedge funds disclosed
losses related to the global financial turmoil. Several stocks in the financial
sector saw their market value cut in half during the third quarter.
Increased uncertainty over Clinton's presidency and the bigger question of the
damage to corporate profits added to the volatility in the stock market. The
increased prospects of a global and U.S. economic slowdown led to some easing of
monetary policy. Japan first decreased short-term interest rates by 20 basis
points and the Fed followed suit with a 0.25% rate cut in late September. The
U.S. stock market rallied in anticipation of the rate cut and stock prices rose
by almost 6% in September.
In the large-capitalization stock universe, high-quality growth stocks performed
better than value stocks in the third quarter of 1998. The utilities sector
produced the only positive performance in the third quarter while the financial
services and energy sectors at the other end of the spectrum fell by over 20%.
Large-cap technology and health care stocks held up reasonably well, but
consumer stocks declined sharply against the likely backdrop of an economic
slowdown.
2
<PAGE>
ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
A proactive and aggressive stance by the Fed halted the stock market slide early
in the fourth quarter of 1998 and sent stock prices soaring in November and
December. The fourth quarter rally erased losses from the third quarter and most
market measures reached new all-time highs.
The negative sentiment in the stock market persisted through the first week of
October as the S&P 500 fell another 6%. Investor concerns focused on the impact
of the Russian crisis and global lending and trading losses on U.S. economic and
earnings growth.
Sentiment reversed in the second week of October after most market indexes had
declined over 20% from their all-time highs. The reversal in trend turned into a
significant stock market rally when the Fed cut short term rates by an
unexpected 25 basis points in the middle of October. The surprise Fed action
raised hopes that a proactive stimulative monetary policy by most central banks
would avert a global recession.
The stock market rally, triggered by the unexpected Fed rate cut in mid-October,
continued almost unabated through the months of November and December. The
market was also helped by economic reports in the fourth quarter which were well
ahead of expectations. Despite the strength in the economy, interest rates
remained low mainly as a result of low inflation.
In the large-cap universe, all sectors except energy (which declined by 3%)
registered strong gains in the fourth quarter. The market rally was led by the
technology and health care sectors which rose by over 30%. The financial
services, transportation and producer durables sectors also performed well.
The performance of the U.S. stock market in 1998 proves yet again that interest
rate changes and liquidity flows may have a more dominant influence on stock
prices than most other factors. In a year where earnings growth was close to
zero, most measures of the U.S. stock market have risen by over 20%. Declining
interest rates, which fell from 5.9% to 5.1% during 1998, have triggered a
significant expansion in the market price/earnings ("P/E") multiple. The upward
pressure on stock prices has been further amplified by strong money flows as
yields on alternative investments have dwindled.
A notable aspect of the stock market performance in 1998 was the divergence in
returns across different styles and segments of the market. While the S&P 500
rose by 28.72% in 1998, the Russell 2000 actually declined by 2.6%. The gain in
large-company growth stocks of 42.2% was well ahead of the 14.7% advance of
large-company value stocks and almost out of sight compared to small-company
value stocks which fell by 6.5%.
With earnings growth slowing down, the market P/E multiple has now reached 23
times 1998 earnings. It appears that the biggest risk to the stock market still
remains on the earnings front. Earnings estimates for 1999 remain high and it is
quite likely that these earnings forecasts will be revised down. Despite the
overhang of possible downward earnings revisions, we believe that support from
low interest rates should limit an excessive downside.
CONVERTIBLE BOND PORTFOLIO
The Convertible Bond Portfolio ("Portfolio") commenced operations on May 1,
1998. For the period ended December 31, 1998, the Portfolio produced a total
return of a 0.98% compared to the 11.41% return for the Lipper, Inc. peer group
average. 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 Citigroup Inc.
The convertible bond market rebounded sharply in the fourth quarter of 1998. The
Portfolio underperformed its benchmark, (i.e., the Merrill Lynch Investment
Grade Convertible Bond Index), by 5.6% in the fourth quarter of 1998 after
having outperformed it by 2.6% in the third quarter.
Since the Portfolio started on May 1, 1998, it has underperformed its benchmark
by 1.1%. According to the managers, the fourth quarter underperformance was
driven by strong performance in low premium names like Home Depot. Moreover, the
managers sold out of Home Depot earlier in the year when the price was around
$150. The Home Depot issue was up 22% in December and because of its high value
made up almost 8% of the index adding about 1.5% itself to the benchmark's
return. The managers' technology exposure helped their performance but their
real estate investment trust ("REITs") exposure hurt.
3
<PAGE>
ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
While convertible bond valuation improved in the fourth quarter, the managers
have identified many attractive opportunities. The average market yield on the
Portfolio is still 5.9%. The managers believe that the broader stock market is
reasonably valued. Lower quality bond spreads are at recession wide levels.
Return towards normal spreads in corporate bonds should provide a tailwind that
may help convertible bond performance.
STRATEGIC STOCK PORTFOLIO
The Strategic Stock Portfolio ("Portfolio") was launched on May 1, 1998. For the
period ended December 31, 1998, the Portfolio produced a total return of a
negative 4.24% compared to a 2.51% return for the Dow Jones Industrial Average.
During the reporting period, large-cap stocks continued to dominate the market
as investors moved money into the perceived safer haven of well-diversified,
larger-company stocks. Growth stocks generally performed well.
The Portfolio invests in stocks with a relatively high yield. The ten highest
dividend yielding stocks from the Dow Jones Industrial Average are identified
each month. To supplement the original ten Dow Jones stocks, another ten stocks
are selected from the S&P 100 Index based on dividend yield and subject to a
high standard of quality ranking by Standard and Poors. The list of twenty
stocks is recreated each month for the investment of new deposits.
DISCIPLINED SMALL CAP STOCK PORTFOLIO
Since its inception date on May 1, 1998, the Disciplined Small Cap Stock
Portfolio ("Portfolio") posted a total return of a negative 11.04%. In
comparison, the Russell 2000 returned a negative 11.94% during the same period.
(The Russell 2000 is a value-weighted index comprised of mid- and small-company
stocks.) Small-capitalization stocks continued to lag their large-cap
counterparts during the reporting period and that adversely impacted the
Portfolio's performance.
The Portfolio was launched on May 1, 1998 and is managed to provide diversified
exposure to the small-capitalization sector of the U.S. equity 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
attractive relative value. In order to achieve consistent relative performance,
the Portfolio is managed to mirror the overall risk, sector weightings and
growth/value style characteristics of the Russell 2000.
The manager's stock selection in 1998 was favorable in the technology sector
where his positions in Internet stocks such as Lycos and Excite, software
companies like Legato Systems and networking companies such as Network Appliance
paid off handsomely. He also benefited in the health care sector from his larger
positions in Watson Pharmaceuticals and Arterial Vascular. The manager's most
disappointing performance came in the consumer services and energy sectors. The
near-recession panic of the third quarter took a heavy toll on retailers such as
Mail-Well, United Stationers and Men's Warehouse. Falling oil prices put
significant selling pressure on energy stocks where his positions in Ensco
International and Marine Drilling hurt performance.
The sustained underperformance of small-cap stocks has dramatically improved
their valuation levels compared to large-cap stocks. At a more fundamental
level, small-cap stocks have also seen more upward earnings revisions than
large-cap stocks. In the view of the manager, despite these attractive
fundamentals, the key to the prospects for small-cap stocks remain at the macro
level. Continued easing by central banks should help the stock market in general
and small-cap stocks in particular. Small-cap stocks usually perform well in the
early stages of the economic cycle and the recent Fed action promotes the
likelihood of a recovery for small company issues.
MFS MID-CAP GROWTH PORTFOLIO
Since it began on March 23, 1998, the MFS Mid-Cap Growth Portfolio ("Portfolio")
provided a total return of 0.50% which compares to the negative 11.45% return
for the Russell 2000 and a 5.30% return for the Russell Midcap Index, both of
which are unmanaged indices. (The Russell 2000 is made up of 2,000
smaller-capitalized U.S.-based companies whose common stocks trade on either the
New York, American or NASDAQ stock exchanges. The Russell Midcap Index contains
the lowest 800 companies in the Russell 2000 as ranked by total capitalization
and is an unmanaged index of mid-cap stocks.)
4
<PAGE>
ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
To state the obvious, 1998 was a very unusual year in the market. The U.S.
economy has been walking a fine line between growth, re-accelerating
inflationary pressures and worldwide economic crisis which has been pulling the
U.S. economy into a recession. The current "consensus" of the market is that
they have attained the best of both scenarios. Because of the dramatic slowdown
in Asia, South America and Eastern European economies, there is significant
excess capacity of all raw materials, an excess worldwide plant capacity and
therefore cheaper "inputs" to the U.S. economy. This implies little or no
inflation. On the other side, the U.S. economy remains "robust" with corporate
earnings -- especially with the technology sector remaining strong. Therefore,
the U.S. economy is in a period of good earnings, low inflation, and a high
multiple of earnings and from this has come a strong stock market.
In 1998, the Portfolio was favorably impacted by investments in technology,
leisure and retailing sectors as well as by a number of "buyouts" by larger
companies. In technology most of the managers' larger holdings performed very
well. Ascend Communications, a top holding in the Portfolio, was up 168%. Ascend
sells the underlying telecommunication equipment that is the core of the
Internet. Software companies such as Compuware, BMC Software, Synopsis and
Cadence all were strong contributors to the Portfolio. In leisure, Gemstar and
radio broadcasters provided great returns. Gemstar was up 135% for the year, and
started 1998 as the largest holding in the Portfolio. Gemstar owns, through
patents, the software to allow television viewers to interact with TV satellite
and cable broadcasters. The company has formed partnerships with Microsoft,
Sony, NBC, Deutsch Telecom and a number of other large companies to capitalize
on the interactive markets.
Holdings of Jacor Communications, Heftel Broadcasting as well as a number of
other smaller broadcast companies proved very successful, as the consolidation
in the industry continued -- and advertising remained strong. Retailing
performed very well with holdings such as Viking Office Products, Rite-Aid, Fred
Meyer, Giant Foods, and Office Depot all providing strong performance.
On the negative side, the Portfolio was hurt by investments in energy, health
care, and a number of smaller technology companies that failed to make their
projected earnings. The managers' energy holdings consisted of deep water
drillers. As a group they were down over 60% last year. The Portfolio took
larger positions in energy stocks after a significant correction in that sector.
The portfolio managers believe these stocks should provide strong returns in
1999. However, the price of crude oil -- at a 30-year low -- needs to stabilize
and increase from here for energy stocks to get back on track.
The health care sector was also a difficult one last year, as service providers
largely failed to deliver the projected earnings. Although their exposure to
this sector was minimized, the portfolio managers' holdings in Concentra Managed
Care -- a company that manages workers comp costs for companies -- had an impact
on performance. Concentra was down about 65% last year, although down less than
45% from our cost.
With the markets dramatic recovery from the October lows, the managers are
cautious about the risks posed by international markets and the general slowdown
of U.S. multinationals may not be appropriately discounted in the market. In
light of this, the Portfolio has increased its weightings in retailing, energy,
business services and health care. The managers think that this is a more
prudent position given current market valuations.
MFS RESEARCH PORTFOLIO
Since its inception date of March 23, 1998, the MFS Research Portfolio
("Portfolio") had a total return of 5.77%. This compares to a return of 12.87%
for the S&P 500, an unmanaged index of common stock total return performance,
for the same time period.
Regarding the underperformance of the Portfolio in comparison to the S&P 500, it
pays to note that this Portfolio is truly a "best ideas" subaccount that invests
in what the managers believe are strong stocks regardless of their market
capitalizations or industry sectors. The roller-coaster ride that the market has
been on in the past few months has been driven by a narrow band of
large-capitalization, multinational companies, while the Portfolio has
significant holdings in small- and mid-cap stocks. As a result, the Portfolio
does not move in lock-step with the S&P 500, and the portfolio managers think
that this flexibility will better position the Portfolio for long-term growth as
the valuation gap between large and small companies closes. The Portfolio is
managed through the MFS(R) Original Research(SM) approach whereby the managers
select companies that they believe can demonstrate earnings growth in a variety
of market conditions. This approach is very important in a market such as this
one in which the portfolio managers see few companies with the ability to raise
prices on their products.
5
<PAGE>
ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
While volatility bothers some investors, the portfolio managers believe it has
created some compelling bargains for what they think are fundamentally sound
companies. They tried to take advantage of these during the market's downturn
and added to positions that had shown weaker stock prices, but still
demonstrated a sound fundamental outlook. Now, with share prices rebounding
across market capitalizations, they are paying additional attention to
companies' valuations. If they find instances of valuations that are not
supported by fundamentals, the managers intend to pare back their positions in
order to preserve gains for investors.
Two of their best ideas are MCI WorldCom and Lucent Technologies, both of which
are benefiting from the growth in demand for data communications products. The
portfolio managers believe MCI WorldCom has achieved the best strategic position
in the industry by focusing on the business market, which is the fastest-growing
and most-profitable segment of the data communications and Internet arena. It is
also expanding internationally and has been successfully taking market share
from larger, more-entrenched European telecommunications companies, many of
which were formerly nationalized industries. MCI is following the same
entrepreneurial model in Europe that it did in the United States, where it had
similar success in competition with AT&T. Finally, the managers think that the
stock's current valuation, or the ratio of its share price to its projected
earnings, is attractive at 22 times 1999 earnings estimates.
Lucent Technologies is the leading telecommunications equipment supplier in the
United States. It continues to benefit from increased capital spending, as
telecommunications companies such as MCI WorldCom and AT&T spend to accommodate
the growth in data and Internet traffic. Lucent is also increasing its market
share overseas. Though the stock is not inexpensive at 40 times its estimated
1999 earnings growth, the managers believe that its strong growth justifies its
valuation.
The managers continue to be overweighted in growth areas such as technology,
health care and consumer staples. In technology, the Portfolio features
Microsoft, its largest holding, Cisco, Intel, and Oracle. They see positive
prospects for continued earnings growth in these companies as the world's
corporations continue to leverage all types of technology to reduce costs and
boost productivity. In health care, their weightings have changed little from
one year ago and include major pharmaceutical companies such as Pfizer, American
Home Products, and Bristol-Myers Squibb, all of which have strong product
pipelines and should benefit from the worldwide trend toward increased
prescription volumes. The managers also have large holdings in consumer staples
companies such as Colgate Palmolive and Clorox, both of which they see as
benefiting from continued consumer confidence in a growing economy.
On the flip side, the managers are underweighted in a number of cyclical and
commodity-driven industries such as oil, chemical, and paper and forest
products. They see these industries suffering from pricing pressures that have
hurt their ability to generate consistent earnings growth.
In closing, we thank you for your investment in The Travelers Series Trust. We
look forward to continuing to help you pursue your financial goals.
Sincerely,
/s/ HEATH B. MCLENDON
Heath B. McLendon
Chairman
January 13, 1999
6
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON -- CONVERTIBLE BOND PORTFOLIO AS OF 12/31/98 (UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
--------------------------------------------
<S> <C>
5/1/98* through 12/31/98 0.98%+
CUMULATIVE TOTAL RETURN
--------------------------------------------
5/1/98* through 12/31/98 0.98%+
* 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 at
inception on May 1, 1998, assuming reinvestment of dividends,
through December 31, 1998. The Merrill Lynch Investment Grade
Convertible Bond Index is comprised of 115 investment grade
convertible bond issues. The index excludes those issues that have
mandatory conversion features. (Investment grade bonds are those
rated in one of the four highest rating categories by any
nationally recognized statistical rating organization.)
<TABLE>
<CAPTION>
Merrill Lynch
Investment
Grade
Convertible Convertible
Bond Portfolio Bond Index
<S> <C> <C>
5/1/98 10000 10000
May-98 10000 9857
Jun-98 10120 9983
Jul-98 10060 9861
Aug-98 9390 9007
Sep-98 9570 9207
Oct-98 9630 9559
Nov-98 9910 10024
12/31/98 10098 10528
</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 -- STRATEGIC STOCK PORTFOLIO AS OF 12/31/98 (UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
-------------------------------------------
<S> <C>
5/1/98* through 12/31/98 (4.24)%+
CUMULATIVE TOTAL RETURN
-------------------------------------------
5/1/98* through 12/31/98 (4.24)%+
* 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 at
inception on May 1, 1998, assuming reinvestment of dividends,
through December 31, 1998. The Dow Jones Industrial Average
("DJIA") is a price weighted average based on the price only
performance of 30 blue chip stocks.
<TABLE>
<CAPTION>
Dow Jones
Strategic Stock Industrial
Portfolio Average
<S> <C> <C>
5/1/98 10000 10000
May-98 9830 9833
Jun-98 9690 9904
Jul-98 9530 9842
Aug-98 8440 8367
Sep-98 8780 8718
Oct-98 9180 9566
Nov-98 9550 10164
12/31/98 9576 10250
</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.
7
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON -- DISCIPLINED SMALL CAP STOCK PORTFOLIO AS OF 12/31/98
(UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
-------------------------------------------
<S> <C>
5/1/98* through 12/31/98 (11.04)%+
CUMULATIVE TOTAL RETURN
-------------------------------------------
5/1/98* through 12/31/98 (11.04)%+
* 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 at
inception on May 1, 1998, assuming reinvestment of dividends,
through December 31, 1998. 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 on the New York Stock Exchange, American Stock
Exchange and NASDAQ.
<TABLE>
<CAPTION>
Disciplined
Small Cap Russell 2000
Stock Portfolio Index
<S> <C> <C>
5/1/98 10000 10000
May-98 9400 9461
Jun-98 9540 9481
Jul-98 8770 8713
Aug-98 7110 7021
Sep-98 7510 7571
Oct-98 7780 7879
Nov-98 8240 8292
12/31/98 8896 8806
</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 -- MFS MID CAP GROWTH PORTFOLIO AS OF 12/31/98
(UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
--------------------------------------------
<S> <C>
3/23/98* through 12/31/98 0.50%+
CUMULATIVE TOTAL RETURN
--------------------------------------------
3/23/98* through 12/31/98 0.50%+
* 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 at
inception on March 23, 1998, assuming reinvestment of dividends,
through December 31, 1998. The Russell Midcap Index contains the
lowest 800 companies in the Russell 1000 Index as ranked by total
market capitalization. The Russell Midcap Index accurately captures
the medium-sized universe of securities and represents
approximately 34.9% of the Russell 1000 total market
capitalization.
<TABLE>
<CAPTION>
MFS Mid Cap
Growth Russell Midcap
Portfolio Index
<S> <C> <C>
3/23/98 10000 10000
Apr-98 10110 10025
May-98 9710 9715
Jun-98 9800 9850
Jul-98 9230 9380
Aug-98 7230 7880
Sep-98 8200 8389
Oct-98 8990 8962
Nov-98 9330 9385
12/31/98 10050 8881
</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.
8
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON -- MFS RESEARCH PORTFOLIO AS OF 12/31/98 (UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
--------------------------------------------
<S> <C>
3/23/98* through 12/31/98 5.77%+
CUMULATIVE TOTAL RETURN
--------------------------------------------
3/23/98* through 12/31/98 5.77%+
* 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 at
inception on March 23, 1998, assuming reinvestment of dividends,
through December 31, 1998. The S&P 500 Stock 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>
MFS RESEARCH PORTFOLIO S&P 500 STOCK INDEX
---------------------- -------------------
<S> <C> <C>
3/23/98 10000.00 10000.00
4/98 10050.00 10102.00
5/98 9860.00 9928.00
6/98 10230.00 10331.00
7/98 10000.00 10222.00
8/98 8360.00 8745.00
9/98 8760.00 9305.00
10/98 9300.00 10061.00
11/98 9890.00 10671.00
12/31/98 10577.00 11285.00
</TABLE>
- --------------------------------------------------------------------------------
Past performance is not predictive of future performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Average annual total returns are historical in nature and measure net investment
income and capital gain or loss from portfolio investments assuming
reinvestments of dividends. The returns do not reflect expenses associated with
the subaccount such as administrative fees, account charges and surrender
charges which, if reflected, would reduce the performance shown.
9
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS DECEMBER 31, 1998
CONVERTIBLE BOND PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C>
CONVERTIBLE PREFERRED STOCK -- 21.7%
- --------------------------------------------------------------------------------------------
AUTOMOBILE PARTS AND EQUIPMENT -- 4.1%
2,000 Budget Group Capital Trust, Exchange 6.250%................. $ 82,000
2,000 Tower Automotive Cap Trust, Exchange 6.750%................. 104,750
- --------------------------------------------------------------------------------------------
186,750
- --------------------------------------------------------------------------------------------
ENERGY -- 3.4%
Calenergy Capital Trust:
2,000 Exchange 6.500%............................................. 97,750
1,150 Exchange 6.250%............................................. 57,069
- --------------------------------------------------------------------------------------------
154,819
- --------------------------------------------------------------------------------------------
MISCELLANEOUS -- 2.2%
2,245 Union Pacific Cap Trust, Exchange 6.250%.................... 102,989
- --------------------------------------------------------------------------------------------
MULTIMEDIA -- 0.2%
100 News Corp. Ltd., Exchange 5.000% (a)........................ 8,775
- --------------------------------------------------------------------------------------------
PAPER, FOREST PRODUCTS AND PRINTING -- 2.1%
2,000 International Paper Capital Trust, Exchange 5.250%.......... 97,500
- --------------------------------------------------------------------------------------------
REAL ESTATE -- 9.7%
3,215 Equity Office PPTYS Trust, Exchange 5.250%.................. 122,572
6,241 Equity Residential Properties, Exchange 7.250%.............. 134,181
4,000 General Growth Properties, Exchange 7.250%.................. 103,000
4,000 Reckson Associates Realty, Exchange 7.625%.................. 84,500
- --------------------------------------------------------------------------------------------
444,253
- --------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCK (Cost -- $1,056,360)...... 995,086
- --------------------------------------------------------------------------------------------
FACE
AMOUNT RATING(B) SECURITY VALUE
- --------------------------------------------------------------------------------------------
CONVERTIBLE BONDS AND NOTES -- 59.8%
- --------------------------------------------------------------------------------------------
ADVERTISING -- 5.4%
$100,000 A- Omnicom Group Inc., 2.250% due 1/6/13....................... 134,750
100,000 NR Interpublic Group Cos., Inc., 1.800% due 9/16/04............ 111,125
- --------------------------------------------------------------------------------------------
245,875
- --------------------------------------------------------------------------------------------
BUILDING AND CONSTRUCTION -- 2.1%
216,000 BBB- Lennar Corp., zero coupon due 7/29/18....................... 96,120
- --------------------------------------------------------------------------------------------
COMPUTER SOFTWARE -- 6.6%
100,000 NR Bea Systems, 4.000% due 6/15/05............................. 65,375
100,000 NR Comverse Technology Inc., 4.500% due 7/1/05................. 125,375
100,000 Aa2* GVC Corp. Ltd., zero coupon due 5/21/02 (a)................. 111,000
- --------------------------------------------------------------------------------------------
301,750
- --------------------------------------------------------------------------------------------
ELECTRONICS -- 4.4%
100,000 A2* Potomac Electric Power Co., 5.000% due 9/1/02............... 97,000
119,000 Baa1* STMicroelectronics, zero coupon due 6/10/08................. 107,695
- --------------------------------------------------------------------------------------------
204,695
- --------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
CONVERTIBLE BOND PORTFOLIO
<TABLE>
<C> <S> <C> <C>
FINANCIAL SERVICES -- 4.7%
$100,000 NR Financial Federal Corp. Ltd., 4.500% due 5/1/05 (a)......... $ 100,500
200,000 BBB- Elan Finance, zero coupon due 12/14/18...................... 113,250
- --------------------------------------------------------------------------------------------
213,750
- --------------------------------------------------------------------------------------------
HEALTHCARE -- 10.0%
100,000 NR Genzyme Corp., 5.250% due 6/1/05 (a)........................ 132,125
100,000 BBB Rite Aid Corp., 5.250% due 9/15/02.......................... 145,625
100,000 BB- Tenet Healthcare Corp., 6.000% due 12/1/05.................. 91,000
100,000 A Thermo Instrument System, 4.500% due 10/15/03 (a)........... 90,705
- --------------------------------------------------------------------------------------------
459,455
- --------------------------------------------------------------------------------------------
HUMAN RESOURCES -- 1.9%
100,000 BB+ Interim Services Inc., 4.500% due 6/1/05.................... 88,125
- --------------------------------------------------------------------------------------------
MISCELLANEOUS -- 6.7%
107,000 A- Diamond Offshore Drilling, 3.750% due 2/15/07............... 96,434
190,000 A- Koninklijke Ahold NV, 3.000% due 9/30/03.................... 120,631
100,000 A- Thermo Electron Corp., 4.250% due 1/1/03 (a)................ 90,125
- --------------------------------------------------------------------------------------------
307,190
- --------------------------------------------------------------------------------------------
MULTI-LINE INSURANCE -- 1.7%
100,000 A+ Loews Corp., 3.125% due 9/15/07............................. 79,250
- --------------------------------------------------------------------------------------------
OIL AND NATURAL GAS -- 2.7%
100,000 A Baker Hughes Inc., zero coupon due 5/5/08................... 65,125
100,000 B- Parker Drilling Co., 5.500% due 8/1/04...................... 60,875
- --------------------------------------------------------------------------------------------
126,000
- --------------------------------------------------------------------------------------------
REAL ESTATE -- 1.7%
100,000 NR Security Cap U.S. Realty, 2.000% due 5/22/03 (a)............ 79,000
- --------------------------------------------------------------------------------------------
RETAIL -- 2.3%
300,000 BBB Ingram Micro Inc., zero coupon due 6/9/18................... 104,250
- --------------------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 9.6%
100,000 NR Aspect Telecommunications, zero coupon due 8/10/18.......... 21,750
Bell Atlantic Financial Service:
99,000 A+ 5.750% due 4/1/03 (a)....................................... 103,517
100,000 A+ 4.250% due 9/15/05.......................................... 103,875
98,000 A+ DSC Communications Corp., 7.000% due 8/1/04................. 103,268
100,000 B Total Renal Care Holdings, 7.000% due 5/15/09 (a)........... 106,875
- --------------------------------------------------------------------------------------------
439,285
- --------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE BONDS AND NOTES (Cost -- $2,716,330)...... 2,744,745
- --------------------------------------------------------------------------------------------
SUB-TOTAL INVESTMENTS (Cost -- $3,772,690).................. 3,739,831
- --------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
CONVERTIBLE BOND PORTFOLIO
<TABLE>
<C> <S> <C> <C>
REPURCHASE AGREEMENT -- 18.5%
$847,000 Chase Securities Inc., 4.476% due 1/4/99; Proceeds at
maturity -- $847,421; (Fully collateralized by U.S. Treasury
Note, 7.500% due 11/15/16; Market value -- $869,619)
(Cost -- $847,000).......................................... $ 847,000
- --------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $4,619,690**)............ $4,586,831
- --------------------------------------------------------------------------------------------
</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.
(b) All ratings are by Standard & Poor's Ratings Service ("Standard & Poor's")
with the exception of those identified by an asterisk(*), which are rated by
Moody's Investor Service, Inc. ("Moody's").
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 13 for a definition of ratings.
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
- --------------------------------------------------------------------------------
BOND RATINGS (UNAUDITED)
The definitions of the applicable rating symbols are set forth below:
Standard & Poor's -- Ratings from "AAA" 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 S&P to
a debt obligation. 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 differs from the highest rated
issues 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 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 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 "Aaa" to "Caa", where 1 is the highest and 3 the lowest rating within its
generic category.
<TABLE>
<S> <C> <C>
</TABLE>
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 these bonds.
Aa -- Bonds rated "Aa" are judged to be of the 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 that 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 that
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 may 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.
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.
NR -- Indicates that the bond is not rated by Standard & Poor's or
Moody's.
[/TABLE]
13
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
STRATEGIC STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK -- 71.7%
- ------------------------------------------------------------------------------------------
AUTO AND TRANSPORTATION -- 8.1%
4,273 General Motors Corp. ....................................... $ 305,786
1,700 Goodyear Tire & Rubber Co. ................................. 85,744
9,185 Norfolk Southern Corp. ..................................... 291,050
- ------------------------------------------------------------------------------------------
682,580
- ------------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY -- 11.7%
3,911 Eastman Kodak Co. .......................................... 281,592
6,532 International Flavors & Fragrances Inc. .................... 288,633
4,641 Limited, Inc. .............................................. 135,169
4,757 May Department Stores Co. .................................. 287,204
- ------------------------------------------------------------------------------------------
992,598
- ------------------------------------------------------------------------------------------
CONSUMER STAPLES -- 10.2%
5,038 H.J. Heinz & Co. ........................................... 285,277
4,898 PepsiCo, Inc. .............................................. 200,512
7,159 Philip Morris Cos. Inc. .................................... 383,006
- ------------------------------------------------------------------------------------------
868,795
- ------------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 3.2%
2,582 J.P. Morgan & Co. Inc. ..................................... 271,270
- ------------------------------------------------------------------------------------------
HEALTHCARE -- 4.0%
2,551 Bristol-Myers Squibb Co. ................................... 341,356
- ------------------------------------------------------------------------------------------
INTEGRATED OIL -- 9.8%
3,542 Chevron Corp. .............................................. 293,765
2,901 Exxon Corp. ................................................ 212,136
3,708 Mobil Corp. ................................................ 323,059
- ------------------------------------------------------------------------------------------
828,960
- ------------------------------------------------------------------------------------------
MATERIALS AND PROCESSING -- 6.5%
1,714 E.I. du Pont de Nemours & Co. .............................. 90,949
6,603 International Paper Co. .................................... 295,897
3,949 Union Carbide Corp. ........................................ 167,832
- ------------------------------------------------------------------------------------------
554,678
- ------------------------------------------------------------------------------------------
PRODUCER DURABLES -- 12.1%
2,755 Caterpillar Inc. ........................................... 126,730
6,683 Fluor Corp. ................................................ 284,445
1,677 Honeywell Inc. ............................................. 126,299
3,630 Minnesota Mining and Manufacturing Co. ..................... 258,184
4,796 Rockwell International Corp. ............................... 232,906
- ------------------------------------------------------------------------------------------
1,028,564
- ------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
STRATEGIC STOCK PORTFOLIO
<TABLE>
<S> <C> <C> <C>
TECHNOLOGY -- 3.0%
4,459 Harris Corp. ............................................... $ 163,311
700 Intel Corp. ................................................ 82,994
- ------------------------------------------------------------------------------------------
246,305
- ------------------------------------------------------------------------------------------
UTILITIES -- 3.1%
3,522 American Telephone & Telegraph Corp. ....................... 265,031
- ------------------------------------------------------------------------------------------
TOTAL COMMON STOCK (Cost -- $6,095,478)..................... 6,080,137
- ------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REPURCHASE AGREEMENTS -- 28.3%
$2,000,000 Chase Manhattan Bank, 4.500% due 1/4/99; Proceeds at
maturity -- $2,001,000; (Fully collateralized by U.S.
Treasury Notes, 8.750% due 5/15/17; Market
value -- $2,040,638)........................................ 2,000,000
404,000 Morgan Stanley Dean Witter & Co., 4.620% due 1/4/99;
Proceeds at maturity -- $404,205; (Fully collateralized by
U.S. Treasury Notes, 6.125% due 12/31/01; Market value --
$412,160)................................................... 404,000
- ------------------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS (Cost -- $2,404,000)............ 2,404,000
- ------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $8,499,478*)............. $8,484,137
- ------------------------------------------------------------------------------------------
</TABLE>
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
DISCIPLINED SMALL CAP STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -----------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCK -- 93.4%
- -----------------------------------------------------------------------------------
AUTOS AND TRANSPORTATION -- 4.8%
895 Airborne Freight Corp. ..................................... $ 32,276
570 Arvin Industries, Inc. ..................................... 23,762
824 Avondale Industries, Inc. (a) .............................. 23,896
513 CNF Transportation Inc. .................................... 19,270
1,090 Mesaba Holdings, Inc. (a) .................................. 22,481
646 MotivePower Industries, Inc. (a) ........................... 20,793
743 Navistar International Corp. (a) ........................... 21,175
865 SkyWest, Inc. .............................................. 28,275
741 Superior Industries International, Inc. .................... 20,609
1,222 Swift Transportation Co., Inc. (a) ......................... 34,254
- -----------------------------------------------------------------------------------
246,791
- -----------------------------------------------------------------------------------
CONSUMER DISCRETIONARY -- 19.0%
400 Abacus Direct Corp. (a)..................................... 18,200
402 Abercrombie & Fitch Co., Class A Shares (a)................. 28,442
600 Action Performance Cos., Inc. (a)........................... 21,225
960 ADVO, Inc. (a) ............................................. 25,320
741 AnnTaylor Stores Corp. (a).................................. 29,223
646 Apollo Group, Inc., Class A Shares (a)...................... 21,883
866 Bed Bath & Beyond, Inc. (a) ................................ 29,552
1,178 Bob Evans Farms, Inc. ...................................... 30,702
576 Brinker International, Inc. (a)............................. 16,632
1,359 Cato Corp. Class A Shares................................... 13,378
310 CMGI, Inc. (a).............................................. 33,015
570 Coach USA, Inc. (a)......................................... 19,772
800 Complete Business Solutions, Inc. (a)....................... 27,100
581 Consolidated Graphics, Inc. (a)............................. 39,254
557 Cort Business Services Corp. (a)............................ 13,507
475 Cox Radio, Inc., Class A Shares (a)......................... 20,069
950 Daisytek International Corp. (a)............................ 18,050
963 Data Processing Resources Corp. (a)......................... 28,168
493 Ethan Allen Interiors, Inc. ................................ 20,213
1,410 Family Dollar Stores, Inc. ................................. 31,020
1,352 Foodmaker, Inc. (a)......................................... 29,828
1,123 Fossil, Inc. (a)............................................ 32,286
950 Furniture Brands International, Inc. (a).................... 25,888
875 Guitar Center, Inc. (a)..................................... 21,547
400 Heftel Broadcasting Corp., Class A Shares (a)............... 19,700
973 International Game Technology............................... 23,656
363 Jacor Communications Inc. (a)............................... 23,368
310 Lason, Inc. (a)............................................. 18,038
1,296 Mail-Well, Inc. (a)......................................... 14,823
839 The Men's Wearhouse, Inc. (a)............................... 26,638
513 Meredith Corp. ............................................. 19,430
4 Ogden Corp. ................................................ 100
1 Outdoor Systems Inc. (a).................................... 15
776 Pacific Sunwear of Calif., Inc. (a)......................... 12,707
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
DISCIPLINED SMALL CAP STOCK PORTFOLIO
<TABLE>
533 Pillowtex Corp. . $ 14,258
<C> <S> <C>
776 Renters Choice, Inc. (a).................................... 24,638
960 Romac International, Inc. (a)............................... 21,360
708 Safeskin Corp. (a).......................................... 17,080
1,112 Silverleaf Resorts, Inc. (a)................................ 10,355
618 Snyder Communications, Inc. (a) ............................ 20,857
1,054 Sonic Corp. (a)............................................. 26,218
865 Speedway Motorsports, Inc. (a) ............................. 24,652
1,000 Trans World Entertainment Corp. (a)......................... 19,062
754 United Stationers Supply Co. (a) ........................... 19,604
1,112 Vistana, Inc. (a)........................................... 15,568
- -----------------------------------------------------------------------------------
966,401
- -----------------------------------------------------------------------------------
CONSUMER STAPLES -- 1.9%
493 Canadaigua Brands, Inc., Class A Shares (a)................. 28,502
818 Earthgrains Co. ............................................ 25,307
800 IBP, Inc. .................................................. 23,300
931 Pilgrim's Pride Corp. ...................................... 18,562
- -----------------------------------------------------------------------------------
95,671
- -----------------------------------------------------------------------------------
FINANCIAL SERVICES -- 13.0%
900 20th Century Industries..................................... 20,869
645 Associated Banc-Corp. ...................................... 22,051
382 Astoria Financial Corp. .................................... 17,477
909 Brenton Banks, Inc. ........................................ 15,226
439 Centura Banks, Inc. ........................................ 32,651
458 CCB Financial Corp. ........................................ 26,106
591 City National Corp. ........................................ 24,600
463 CMAC Investment Corp. ...................................... 21,269
865 Dime Bancorp, Inc. ......................................... 22,868
1,300 Dollar Financial Group Inc. ................................ 28,763
1,222 Eaton Vance Corp. .......................................... 25,509
1,066 Enhance Financial Services Group, Inc. ..................... 31,980
741 EVEREN Capital Corp. ....................................... 16,858
591 Everest Reinsurance Holdings, Inc. ......................... 23,012
900 Fidelity National Financial, Inc. .......................... 27,444
382 Financial Security Assurance Holdings, Ltd. ................ 20,724
942 FirstFed Financial Corp. (a) ............................... 16,838
610 GBC Bancorp................................................. 15,708
800 HCC Insurance Holdings, Inc. ............................... 14,100
457 Liberty Financial Cos., Inc. ............................... 12,339
586 Medical Assurance, Inc. (a)................................. 19,385
686 Mercantile Bankshares Corp. ................................ 26,411
512 Mutual Risk Management, Ltd. ............................... 20,032
1,543 National Commerce Bancorporation............................ 29,028
1,222 Peoples Heritage Financial Group, Inc. ..................... 24,440
1,761 Republic Bancorp, Inc. ..................................... 23,994
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
DISCIPLINED SMALL CAP STOCK PORTFOLIO
<TABLE>
973 United Bankshares, Inc. . $ 25,785
<C> <S> <C>
610 Westamerica Bancorporation.................................. 22,417
513 Zions Bancorporation........................................ 31,998
- -----------------------------------------------------------------------------------
659,882
- -----------------------------------------------------------------------------------
HEALTHCARE -- 9.6%
44 Allergan, Inc. ............................................. 2,849
538 Alpharma, Inc., Class A Shares.............................. 18,998
395 Arterial Vascular Engineering, Inc. (a)..................... 20,738
741 Bergen Brunswig Corp., Class A Shares....................... 25,842
610 Bindley Western Industries, Inc. ........................... 30,043
618 CareMatrix Corp. (a)........................................ 18,926
494 Centocor, Inc. (a).......................................... 22,292
741 Curative Health Services, Inc. (a).......................... 24,824
4,459 Gensia Sicor, Inc. (a)...................................... 20,205
200 IDEC Pharmaceuticals Corp. (a).............................. 9,400
976 Medical Manager Corp. (a)................................... 30,622
304 MiniMed, Inc. (a)........................................... 31,844
1,112 Protein Design Labs, Inc. (a)............................... 25,854
960 QuadraMed Corp. (a)......................................... 19,680
685 Renal Care Group, Inc. (a).................................. 19,737
914 Res-Care, Inc. (a).......................................... 22,564
1,112 Roberts Pharmaceutical Corp. (a)............................ 24,186
666 Trigon Healthcare, Inc. (a)................................. 24,850
482 VISX, Inc. (a).............................................. 42,145
456 Watson Pharmaceuticals, Inc. (a)............................ 28,671
741 Xomed Surgical Products, Inc. (a)........................... 23,712
- -----------------------------------------------------------------------------------
487,982
- -----------------------------------------------------------------------------------
INTEGRATED OIL -- 0.7%
570 Murphy Oil Corp. ........................................... 23,512
494 Ultramar Diamond Shamrock Corp. ............................ 11,979
- -----------------------------------------------------------------------------------
35,491
- -----------------------------------------------------------------------------------
MATERIALS AND PROCESSING -- 13.6%
1,410 AK Steel Holding Corp. ..................................... 33,135
876 AptarGroup, Inc. ........................................... 24,583
610 Arden Realty, Inc. ......................................... 14,144
762 Avalon Bay Communities, Inc. ............................... 26,094
267 Bowater Inc. ............................................... 11,064
570 Cousins Properties, Inc. ................................... 18,383
1,028 Crompton & Knowles Corp. ................................... 21,267
686 Dexter Corp. ............................................... 21,566
741 EastGroup Properties, Inc. ................................. 13,662
1,693 Equity Inns, Inc. .......................................... 16,295
743 First Industrial Realty Trust, Inc. ........................ 19,922
1,123 Glenborough Realty Trust, Inc. ............................. 22,881
513 Health Care Properties Investors, Inc. ..................... 15,775
769 IMCO Recycling, Inc. ....................................... 11,871
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
DISCIPLINED SMALL CAP STOCK PORTFOLIO
<TABLE>
1,401 International Specialty Products, Inc. (a) . $ 19,001
<C> <S> <C>
1,070 Liberty Property Trust...................................... 26,349
570 Lone Star Industries, Inc. ................................. 20,983
399 Mead Corp. ................................................. 11,696
533 Mid-America Apartment Communities, Inc. .................... 12,092
1,048 Nationwide Health Properties, Inc. ......................... 22,597
1,277 NL Industries, Inc. ........................................ 18,117
694 NVR, Inc. (a) .............................................. 33,095
457 OM Group, Inc. ............................................. 16,680
1 Pope & Talbot, Inc. ........................................ 8
1,332 Prime Retail, Inc. ......................................... 13,070
1,314 Reckson Associates Realty Corp. ............................ 29,154
646 Regency Realty Corp. ....................................... 14,374
694 Reliance Steel & Aluminum Co. .............................. 19,172
570 Simpson Manufacturing Co., Inc. (a)......................... 21,339
1,178 Solutia, Inc. .............................................. 26,358
409 Southdown, Inc. ............................................ 24,208
533 Spieker Properties, Inc. ................................... 18,455
1,404 Tower Automotive, Inc. (a).................................. 35,012
760 Tredegar Industries, Inc. .................................. 17,100
493 USG Corp. .................................................. 25,112
- -----------------------------------------------------------------------------------
694,614
- -----------------------------------------------------------------------------------
OTHER ENERGY -- 1.4%
865 Barrett Resources Corp. (a) ................................ 20,760
1,466 ENSCO International, Inc. .................................. 15,668
1,733 Marine Drilling Cos., Inc. (a).............................. 13,322
933 Newfield Exploration Co. (a)................................ 19,476
- -----------------------------------------------------------------------------------
69,226
- -----------------------------------------------------------------------------------
PRODUCER DURABLES -- 5.3%
976 Allied Waste Industries, Inc. (a)........................... 23,058
619 Astec Industries, Inc. (a).................................. 34,432
776 Briggs & Stratton Corp. .................................... 38,703
1,066 C&D Technologies, Inc. ..................................... 29,315
666 Centex Corp. ............................................... 30,012
646 Cordant Technologies, Inc. ................................. 24,225
619 Gulfstream Aerospace Corp. (a).............................. 32,962
766 Jacobs Engineering Group Inc. (a) .......................... 31,214
1,085 Lennar Corp. ............................................... 27,396
- -----------------------------------------------------------------------------------
271,317
- -----------------------------------------------------------------------------------
TECHNOLOGY -- 18.7%
533 Advent Software, Inc. (a) .................................. 25,118
267 Altera Corp. (a)............................................ 16,254
1,028 CIBER Inc. (a).............................................. 28,720
247 Citrix Systems Inc. (a)..................................... 23,974
839 Computer Horizons Corp. (a)................................. 22,338
760 Computer Task Group, Inc. .................................. 20,615
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
DISCIPLINED SMALL CAP STOCK PORTFOLIO
<TABLE>
513 COMSAT Corp. . $ 18,468
<C> <S> <C>
648 Comverse Technology, Inc. .................................. 46,008
310 DST Systems, Inc. (a)....................................... 17,689
776 Dycom Industries, Inc. (a).................................. 44,329
591 Envoy Corp. (a)............................................. 34,426
989 Esterline Technologies Corp. (a)............................ 21,511
618 Excite, Inc. (a)............................................ 25,995
800 GeoTel Communications Corp. (a)............................. 29,800
735 IMRglobal Corp. (a)......................................... 21,637
741 International Network Services (a).......................... 49,277
676 Keane, Inc. (a) ............................................ 26,998
1,020 Legato Systems, Inc. (a).................................... 67,256
681 Lycos, Inc. (a)............................................. 37,838
1,332 Network Appliance, Inc. (a)................................. 59,940
566 Novellus Systems, Inc. (a).................................. 28,017
931 Progress Software Corp. (a)................................. 31,421
429 Sanmina Corp. (a)........................................... 26,812
1,239 Semtech Corp. (a)........................................... 44,449
669 Sterling Commerce, Inc. (a) ................................ 30,105
466 Symbol Technologies, Inc. .................................. 29,795
666 Tech Data Corp. (a)......................................... 26,806
570 Tekelec (a)................................................. 9,441
827 Vitesse Semiconductor Corp. (a)............................. 37,732
267 Xilinx, Inc. (a)............................................ 17,388
865 Xircom, Inc. (a)............................................ 29,410
- -----------------------------------------------------------------------------------
949,567
- -----------------------------------------------------------------------------------
UTILITIES -- 5.4%
323 BEC Energy.................................................. 13,304
1,133 Calpine Corp. (a)........................................... 28,608
582 CILCORP, Inc. .............................................. 35,611
697 Connecticut Energy Corp. ................................... 21,259
2,858 El Paso Electric Co. (a) ................................... 25,008
1,095 MDU Resources Group, Inc. .................................. 28,812
494 New Jersey Resources Corp. ................................. 19,513
1,100 Skytel Communications, Inc. (a) ............................ 24,338
741 Southwest Gas Corp. ........................................ 19,914
371 Teligent, Inc. (a).......................................... 10,666
865 UGI Corp. .................................................. 20,544
1,332 Western Wireless Corp. Class A Shares (a)................... 29,304
- -----------------------------------------------------------------------------------
276,881
- -----------------------------------------------------------------------------------
TOTAL COMMON STOCK (Cost -- $4,424,711)..................... 4,753,823
- -----------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
DISCIPLINED SMALL CAP STOCK PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- -----------------------------------------------------------------------------------
<C> <S> <C>
U.S. TREASURY BILL -- 0.8%
$ 40,000 U.S. Treasury Bill due 3/18/99 (Cost -- $39,633)............ $ 39,646
- -----------------------------------------------------------------------------------
SUB-TOTAL INVESTMENTS (Cost -- $4,464,344).................. 4,793,469
- -----------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 5.8%
298,000 Chase Manhattan Bank, 4.500% due 1/4/99; Proceeds at
maturity -- $298,149; (Fully collateralized by U.S. Treasury
Notes, 7.500% due 11/15/16; Market value -- $306,556)
(Cost -- $298,000).......................................... 298,000
- -----------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $4,762,344*)............. $5,091,469
- -----------------------------------------------------------------------------------
</TABLE>
(a) Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
MFS MID CAP GROWTH PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCK -- 91.5%
- ------------------------------------------------------------------------------------
AUTOMOTIVE -- 1.7%
3,690 Federal-Mogul Corp. ........................................ $ 219,555
- ------------------------------------------------------------------------------------
BANKS AND CREDIT COMPANIES -- 1.5%
2,310 Compass Bancshares, Inc. ................................... 87,924
3,280 First Security Corp. ....................................... 76,670
820 Regions Financial Corp. .................................... 33,056
- ------------------------------------------------------------------------------------
197,650
- ------------------------------------------------------------------------------------
BIOTECHNOLOGY -- 1.9%
9,270 IDEXX Laboratories, Inc. (a)................................ 249,421
- ------------------------------------------------------------------------------------
BUSINESS SERVICES -- 13.8%
2,180 Affiliated Computer Services, Inc., Class A Shares (a)...... 98,100
1,550 BISYS Group, Inc. (a)....................................... 80,019
13,100 CBT Group Plc. (a).......................................... 194,863
6,360 Cambridge Technology Partners, Inc. (a)..................... 140,714
1,710 Compuware Corp. (a)......................................... 133,594
1,130 Cytoclonal Pharmaceutics Inc. (a)........................... 7,769
1,790 DST Systems, Inc. (a)....................................... 102,142
3,630 Fiserv, Inc. (a)............................................ 186,719
6,990 Learning Tree International, Inc. (a)....................... 63,347
5,790 Paymentech, Inc. (a)........................................ 107,115
3,920 Policy Management Systems Corp. (a)......................... 197,960
2,460 Quintiles Transnational Corp. (a)........................... 131,303
3,960 Shared Medical Systems Corp. ............................... 197,505
640 Sylvan Learning Systems, Inc. (a)........................... 19,520
16,170 Technology Solutions Co. (a)................................ 173,322
- ------------------------------------------------------------------------------------
1,833,992
- ------------------------------------------------------------------------------------
CELLULAR PHONES -- 0.6%
13,640 Aerial Communications, Inc. (a)............................. 80,135
- ------------------------------------------------------------------------------------
CHEMICALS -- 0.6%
3,500 Cambrex Corp. .............................................. 84,000
- ------------------------------------------------------------------------------------
COMPUTER SOFTWARE -- 0.0%
140 Ardent Software, Inc. (a)................................... 3,220
- ------------------------------------------------------------------------------------
COMPUTER SOFTWARE PC -- 2.1%
2,890 Electronic Arts, Inc. (a)................................... 162,201
1,530 Intuit, Inc. (a)............................................ 110,925
- ------------------------------------------------------------------------------------
273,126
- ------------------------------------------------------------------------------------
COMPUTER SOFTWARE/SYSTEMS -- 6.0%
4,960 Aspen Technology, Inc. (a).................................. 71,920
2,330 BMC Software, Inc. (a)...................................... 103,831
2,300 Cadence Design Systems, Inc. (a)............................ 68,425
13,000 Edify Corp. (a)............................................. 108,063
11,900 JDA Software Group, Inc. (a)................................ 115,281
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
MFS MID CAP GROWTH PORTFOLIO
<TABLE>
5,650 Synopsys, Inc. (a). $ 306,513
<C> <S> <C>
3,760 Vantive Corp. (a)........................................... 30,080
- ------------------------------------------------------------------------------------
804,113
- ------------------------------------------------------------------------------------
CONSUMER GOODS AND SERVICES -- 2.5%
21,540 SportsLine USA, Inc. (a).................................... 335,216
- ------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT -- 2.3%
10,530 Cable Design Technologies (a)............................... 194,805
9,070 LoJack Corp. (a)............................................ 107,706
- ------------------------------------------------------------------------------------
302,511
- ------------------------------------------------------------------------------------
ELECTRONICS -- 0.0%
140 SIPEX Corp. (a)............................................. 4,918
- ------------------------------------------------------------------------------------
ENTERTAINMENT -- 7.8%
9,060 Gemstar International Group Ltd. (a)........................ 518,685
3,460 Heftel Broadcasting Corp., Class A Shares (a)............... 170,405
2,200 Jacor Communications, Inc. (a).............................. 141,625
4,570 MediaOne Group, Inc. (a).................................... 214,790
- ------------------------------------------------------------------------------------
1,045,505
- ------------------------------------------------------------------------------------
FINANCIAL INSTITUTIONS -- 4.7%
8,070 AG Edwards, Inc. ........................................... 300,608
1,460 Enhance Financial Services Group Inc. ...................... 43,800
2,310 The FINOVA Group Inc. ...................................... 124,596
6,630 Waddell & Reed Financial Inc. .............................. 157,048
- ------------------------------------------------------------------------------------
626,052
- ------------------------------------------------------------------------------------
FOOD AND BEVERAGE PRODUCTS -- 0.4%
1,780 McCormick & Co., Inc. ...................................... 60,186
- ------------------------------------------------------------------------------------
INSURANCE -- 1.7%
2,770 Ace, Ltd. .................................................. 95,392
2,180 ESG Re Ltd. ................................................ 44,145
384 EXEL Limited, Class A Shares................................ 28,800
1,300 Mutual Risk Management Ltd. ................................ 50,863
- ------------------------------------------------------------------------------------
219,200
- ------------------------------------------------------------------------------------
MANUFACTURING -- 1.6%
7,930 Federal Signal Corp. ....................................... 217,084
- ------------------------------------------------------------------------------------
MEDICAL AND HEALTH PRODUCTS -- 2.9%
2,740 PAREXEL International Corp. (a)............................. 68,500
3,640 Sepracor Inc. (a)........................................... 318,728
- ------------------------------------------------------------------------------------
387,228
- ------------------------------------------------------------------------------------
MEDICAL AND HEALTH TECHNOLOGY AND SERVICES -- 10.3%
19,900 Concentra Managed Care, Inc. (a)............................ 212,681
800 Cyberonics, Inc. (a)........................................ 10,800
10,800 Cytyc Corp. (a)............................................. 278,100
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
MFS MID CAP GROWTH PORTFOLIO
<TABLE>
10,390 Health Management Associates, Inc. (a). $ 224,684
<C> <S> <C>
3,620 Lincare Holdings Inc. (a)................................... 146,835
7,740 PSS World Medical, Inc. (a)................................. 178,020
4,700 STERIS Corp. (a)............................................ 133,655
3,500 Total Renal Care Holdings, Inc. (a)......................... 103,469
3,900 Ventana Medical Systems, Inc. (a)........................... 84,338
- ------------------------------------------------------------------------------------
1,372,582
- ------------------------------------------------------------------------------------
OIL SERVICES -- 7.5%
12,980 Cooper Cameron Corp. (a).................................... 318,010
5,350 Diamond Offshore Drilling, Inc. ............................ 126,727
32,040 Global Industries Ltd. (a).................................. 196,245
20,120 Noble Drilling Corp. (a).................................... 260,303
3,720 Transocean Offshore, Inc. .................................. 99,743
- ------------------------------------------------------------------------------------
1,001,028
- ------------------------------------------------------------------------------------
PRINTING AND PUBLISHING -- 1.4%
3,370 Scholastic Corp. (a)........................................ 180,716
- ------------------------------------------------------------------------------------
SPECIAL PRODUCTS AND SERVICES -- 0.2%
1,240 Gartner Group, Inc. (a)..................................... 26,350
- ------------------------------------------------------------------------------------
RETAIL -- 8.2%
11,060 BJ's Wholesale Club, Inc. (a)............................... 512,215
25,400 CompUSA, Inc. (a)........................................... 331,787
2,280 Elder-Beerman Stores Corp. (a).............................. 26,363
19,360 Gymboree Corp. (a).......................................... 123,420
1,140 Office Depot, Inc. (a)...................................... 42,109
5,940 PETCO Animal Supplies, Inc. (a)............................. 59,771
- ------------------------------------------------------------------------------------
1,095,665
- ------------------------------------------------------------------------------------
SUPERMARKETS -- 1.7%
3,770 Fred Meyer, Inc. (a)........................................ 227,143
- ------------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 10.1%
15,040 Advanced Fibre Communications, Inc. (a)..................... 164,500
4,400 Amdocs, Ltd. (a)............................................ 75,350
10,730 Ascend Communications, Inc. (a)............................. 705,497
13,120 Aspect Telecommunications Corp. (a)......................... 226,320
7,040 Lightbridge, Inc. (a)....................................... 38,720
2,636 Qwest Communications, Intl. (a)............................. 131,800
- ------------------------------------------------------------------------------------
1,342,187
- ------------------------------------------------------------------------------------
TOTAL COMMON STOCK (Cost -- $11,161,244).................... 12,188,783
- ------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
MFS MID CAP GROWTH PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
<C> <S> <C>
- ------------------------------------------------------------------------------------
<CAPTION>
<C> <S> <C>
CONVERTIBLE CORPORATE BONDS -- 1.5%
Concentra Managed Care:
$ 47,000 6.000% due 12/15/01......................................... $ 39,715
205,000 4.500% due 3/15/03.......................................... 157,338
- ------------------------------------------------------------------------------------
TOTAL CONVERTIBLE CORPORATE BONDS (Cost -- $169,883)........ 197,053
- ------------------------------------------------------------------------------------
SHORT-TERM SECURITY -- 7.0%
930,000 Federal Home Loan Mortgage Corp., 4.700% due 1/4/99
(Cost -- $929,636).......................................... 929,635
- ------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $12,260,763*)............ $13,315,471
- ------------------------------------------------------------------------------------
</TABLE>
(a) Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
25
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
MFS RESEARCH PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- --------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCK -- 90.6%
- --------------------------------------------------------------------------------------
AEROSPACE -- 3.2%
2,810 Lockheed Martin Corp. ...................................... $ 238,147
3,400 Newport News Shipbuilding, Inc. ............................ 113,687
8,030 United Technologies Corp. .................................. 873,262
- --------------------------------------------------------------------------------------
1,225,096
- --------------------------------------------------------------------------------------
AUTOMOTIVE -- 0.2%
1,200 Federal-Mogul Corp. ........................................ 71,400
- --------------------------------------------------------------------------------------
BANKS AND CREDIT COMPANIES -- 2.4%
8,200 Bank of New York Co., Inc. ................................. 330,050
4,400 The Chase Manhattan Corp. .................................. 299,475
6,700 Wells Fargo & Co. .......................................... 267,581
- --------------------------------------------------------------------------------------
897,106
- --------------------------------------------------------------------------------------
BIOTECHNOLOGY -- 1.5%
5,010 Guidant Corp. (a)........................................... 552,352
- --------------------------------------------------------------------------------------
BUSINESS MACHINES -- 1.1%
4,870 Sun Microsystems, Inc. (a).................................. 416,994
- --------------------------------------------------------------------------------------
BUSINESS SERVICES -- 2.4%
8,030 Compuware Corp. (a)......................................... 627,344
2,920 Modis Professional Services, Inc. (a)....................... 42,340
15,243 Smurfit-Stone Container Corp. (a)........................... 241,030
- --------------------------------------------------------------------------------------
910,714
- --------------------------------------------------------------------------------------
CELLULAR PHONES -- 0.1%
1,925 Sprint PCS (a).............................................. 44,515
- --------------------------------------------------------------------------------------
CHEMICALS -- 0.9%
3,280 Cambrex Corp. .............................................. 78,720
2,630 E.I. du Pont de Nemours and Co. ............................ 139,554
2,700 Monsanto Co. ............................................... 128,250
- --------------------------------------------------------------------------------------
346,524
- --------------------------------------------------------------------------------------
COMPUTER SOFTWARE/PC -- 5.1%
13,810 Microsoft Corp. (a)......................................... 1,915,274
- --------------------------------------------------------------------------------------
COMPUTER SOFTWARE SYSTEMS -- 6.1%
9,400 Alcatel Alsthom CGE, Sponsored ADR.......................... 229,712
10,350 BMC Software Inc. (a)....................................... 461,222
3,310 Cadence Design Systems, Inc. ............................... 98,472
9,780 Computer Associates International Inc. ..................... 416,872
3,680 EMC Corp. (a)............................................... 312,800
17,630 Oracle Corp. (a)............................................ 760,294
350 Synopsys, Inc. (a).......................................... 18,987
- --------------------------------------------------------------------------------------
2,298,359
- --------------------------------------------------------------------------------------
CONGLOMERATES -- 3.3%
16,610 Tyco International Ltd. .................................... 1,253,017
- --------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
26
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
MFS RESEARCH PORTFOLIO
<TABLE>
<C> <S> <C>
CONSUMER GOODS AND SERVICES -- 7.1%
1,900 Black & Decker Corp. ....................................... $ 106,519
8,270 Cendant Corp. (a)........................................... 157,647
4,420 Colgate-Palmolive Co. ...................................... 410,507
6,630 Gillette Co. ............................................... 320,312
10,210 Philip Morris Cos., Inc. ................................... 546,235
3,240 The Clorox Co. ............................................. 378,472
9,390 The Dial Corp. ............................................. 271,136
5,440 The Procter & Gamble Co. ................................... 496,740
- --------------------------------------------------------------------------------------
2,687,568
- --------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT -- 1.4%
8,740 Emerson Electric Co. ....................................... 546,796
- --------------------------------------------------------------------------------------
ELECTRONICS -- 3.0%
14,420 Analog Devices, Inc. (a).................................... 452,427
4,840 Intel Corp. ................................................ 573,842
1,800 Lattice Semiconductor Corp. (a)............................. 82,631
- --------------------------------------------------------------------------------------
1,108,900
- --------------------------------------------------------------------------------------
ENTERTAINMENT -- 4.1%
12,310 CBS Corp. .................................................. 403,153
100 Jacor Communications, Inc. (a).............................. 6,437
6,090 MediaOne Group, Inc. (a).................................... 286,230
6,700 Time Warner Inc. ........................................... 415,819
15,000 Walt Disney Co. ............................................ 450,000
- --------------------------------------------------------------------------------------
1,561,639
- --------------------------------------------------------------------------------------
FINANCIAL INSTITUTIONS -- 5.6%
1,900 American Express Co. ....................................... 194,275
5,828 Associates First Capital Corp. ............................. 246,962
4,900 Bear Stearns Cos. Inc. ..................................... 183,138
7,480 Freddie Mac................................................. 481,993
4,700 Fannie Mae.................................................. 347,800
5,390 First Union Corp. .......................................... 327,779
2,190 Morgan Stanley Dean Witter & Co. ........................... 155,490
5,780 The CIT Group Inc., Class A Shares.......................... 183,876
- --------------------------------------------------------------------------------------
2,121,313
- --------------------------------------------------------------------------------------
FOOD AND BEVERAGE PRODUCTS -- 3.0%
9,847 Archer-Daniels-Midland Co. ................................. 169,245
3,000 Dean Foods Co. ............................................. 122,438
4,870 Hershey Foods Corp. ........................................ 302,853
3,100 Hormel Foods Corp. ......................................... 101,525
3,950 McCormick & Co., Inc. ...................................... 133,559
9,700 Ralston Purina Group........................................ 314,038
- --------------------------------------------------------------------------------------
1,143,658
- --------------------------------------------------------------------------------------
HOME DECORATIONS -- 0.5%
4,480 Newell Co. ................................................. 184,800
- --------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
27
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
MFS RESEARCH PORTFOLIO
<TABLE>
<C> <S> <C>
INSURANCE -- 7.0%
5,170 Ace, Limited................................................ $ 178,042
4,120 Allstate Corp. ............................................. 159,135
6,080 CIGNA Corp. ................................................ 470,060
6,380 Conseco, Inc. .............................................. 194,989
7,490 Equitable Cos. ............................................. 433,484
630 EXCEL Limited............................................... 47,250
6,230 Hartford Financial Services Group, Inc. .................... 341,871
4,780 Lincoln National Corp. ..................................... 391,064
3,480 Nationwide Financial Services, Inc. ........................ 179,873
5,370 Reliastar Financial Corp. .................................. 247,691
- --------------------------------------------------------------------------------------
2,643,459
- --------------------------------------------------------------------------------------
MANUFACTURING -- 0.2%
3,100 Federal Signal Corp. ....................................... 84,863
- --------------------------------------------------------------------------------------
MEDICAL AND HEALTH PRODUCTS -- 5.7%
15,270 American Home Products Corp. ............................... 859,892
3,850 Bristol-Myers Squibb Co. ................................... 515,178
6,150 Pfizer, Inc. ............................................... 771,441
- --------------------------------------------------------------------------------------
2,146,511
- --------------------------------------------------------------------------------------
MEDICAL AND HEALTH TECHNOLOGY AND SERVICES -- 4.4%
3,955 Cardinal Health, Inc. ...................................... 300,086
24,130 HBO & Co. .................................................. 692,229
22,150 HEATHSOUTH Corp. (a)........................................ 341,941
7,640 United Healthcare Corp. .................................... 328,998
- --------------------------------------------------------------------------------------
1,663,254
- --------------------------------------------------------------------------------------
NETWORKING -- 0.7%
6,200 3Com Corp. (a).............................................. 277,838
- --------------------------------------------------------------------------------------
OIL SERVICES -- 0.1%
1,140 Cooper Cameron Corp. (a).................................... 27,930
- --------------------------------------------------------------------------------------
OILS -- 1.9%
200 Amoco Corp. ................................................ 12,075
7,117 British Petroleum Co., Sponsored ADR........................ 637,861
1,000 Mobil Corp. ................................................ 87,125
- --------------------------------------------------------------------------------------
737,061
- --------------------------------------------------------------------------------------
POLLUTION CONTROL -- 0.4%
5,380 Browning-Ferris Industries, Inc. ........................... 152,994
- --------------------------------------------------------------------------------------
RESTAURANTS AND LODGING -- 0.6%
7,904 CKE Restaurants, Inc. ...................................... 232,674
- --------------------------------------------------------------------------------------
SPECIAL PRODUCTS AND SERVICES -- 2.2%
1,510 Illinois Tool Works, Inc. .................................. 87,580
5,130 McDonald's Corp. ........................................... 393,086
2,970 Xerox Corp. ................................................ 350,460
- --------------------------------------------------------------------------------------
831,126
- --------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
28
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
MFS RESEARCH PORTFOLIO
<TABLE>
<C> <S> <C>
RETAIL/STORES -- 6.0%
3,110 American Stores Co. ........................................ $ 114,876
8,420 CVS Corp. .................................................. 463,100
8,030 CompUSA Inc. (a)............................................ 104,892
7,480 Dayton Hudson Corp. ........................................ 405,790
6,200 Office Depot, Inc. (a)...................................... 229,013
14,790 Rite Aid Corp. ............................................. 733,029
1,980 The Home Depot, Inc. ....................................... 121,151
3,000 TJX Cos., Inc. ............................................. 87,000
- --------------------------------------------------------------------------------------
2,258,851
- --------------------------------------------------------------------------------------
SUPERMARKETS -- 3.0%
1,800 Albertson's, Inc. .......................................... 114,637
8,030 Fred Meyer Inc. (a)......................................... 483,808
8,580 Safeway Inc. (a)............................................ 522,844
- --------------------------------------------------------------------------------------
1,121,289
- --------------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 6.2%
1,300 Aspect Telecommunications Corp. (a)......................... 22,425
4,880 Cisco Systems, Inc. (a)..................................... 452,925
2,970 Intermedia Communications Inc. (a).......................... 51,233
3,800 Lucent Technologies, Inc.................................... 418,000
15,037 MCI Worldcom, Inc. (a)...................................... 1,078,905
3,950 Sprint Corp. ............................................... 332,294
- --------------------------------------------------------------------------------------
2,355,782
- --------------------------------------------------------------------------------------
UTILITIES/ELECTRIC -- 0.5%
5,380 CalEnergy Co., Inc. (a)..................................... 186,619
- --------------------------------------------------------------------------------------
UTILITIES/GAS -- 0.7%
1,730 Columbia Energy Group....................................... 99,908
4,820 K N Energy, Inc. ........................................... 175,328
- --------------------------------------------------------------------------------------
275,236
- --------------------------------------------------------------------------------------
TOTAL COMMON STOCK (Cost -- $30,174,451).................... 34,281,512
- --------------------------------------------------------------------------------------
FOREIGN STOCK -- 2.7%
- --------------------------------------------------------------------------------------
GREAT BRITAIN -- 0.9%
29,670 British Aerospace........................................... 252,010
24,210 Lucas Varity................................................ 79,756
- --------------------------------------------------------------------------------------
331,766
- --------------------------------------------------------------------------------------
ITALY -- 0.8%
16,357 San Paolo -- IMI Spa........................................ 289,843
- --------------------------------------------------------------------------------------
NETHERLANDS -- 1.0%
6,208 ING Groep N.V. ............................................. 378,758
- --------------------------------------------------------------------------------------
TOTAL FOREIGN STOCK (Cost -- $938,604)...................... 1,000,367
- --------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
29
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
MFS RESEARCH PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
<C> <S> <C>
- --------------------------------------------------------------------------------------
<CAPTION>
<C> <S> <C>
SHORT-TERM INVESTMENTS -- 6.7%
Federal Home Loan Mortgage Corp.:
$2,000,000 4.70% due 1/4/99............................................ $ 1,999,217
530,000 5.13% due 1/15/99........................................... 528,943
- --------------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS (Cost -- $2,528,160)........... 2,528,160
- --------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $33,641,215*)............ $37,810,039
- --------------------------------------------------------------------------------------
</TABLE>
(a) Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
30
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 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............................. $3,772,690 $6,095,478 $4,464,344 $12,260,763 $33,641,215
Repurchase Agreements -- Cost................... 847,000 2,404,000 298,000 -- --
- ----------------------------------------------------------------------------------------------------------------------
Investments, at Value........................... $3,739,831 $6,080,137 $4,793,469 $13,315,471 $37,810,039
Repurchase Agreements, at Value................. 847,000 2,404,000 298,000 -- --
Cash............................................ 883 124 726 4,771 86,499
Dividends and interest receivable............... 31,896 11,410 5,774 7,067 17,833
Receivable for securities sold.................. -- 54,237 -- 115,175
Receivable from broker -- variation margin...... -- -- 5,497 -- --
Receivable for Fund shares sold................. -- 95,201 33,159 71,121 165,114
Receivable for open forward foreign
currency contracts (Note 9)................... -- -- -- -- 527
Receivable from affiliate....................... 24,996 21,016 45,146 32,634 41,049
- ----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS.................................... 4,644,606 8,611,888 5,236,008 13,431,064 38,236,236
- ----------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for Fund shares purchased............... 3,594 -- -- -- --
Investment advisory fees payable................ 2,276 4,468 2,980 11,208 26,253
Administration fees payable..................... 227 447 387 1,427 3,055
Payable for securities purchased................ -- 1,698,375 45,243 162,115 307,596
Payable for open forward foreign
currency contracts (Note 9)................... -- -- -- -- 341
Accrued expenses................................ 21,299 21,831 25,180 22,501 28,550
- ----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES............................... 27,396 1,725,121 73,790 197,251 365,795
- ----------------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS.................................. $4,617,210 $6,886,767 $5,162,218 $13,233,813 $37,870,441
- ----------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Paid-in capital................................. $4,641,464 $6,903,653 $5,301,574 $12,192,420 $34,371,859
Undistributed (overdistributed) net investment
income........................................ -- 60 1,715 -- (10,432)
Accumulated net realized gain (loss) from
security transactions, futures contracts and
foreign currencies............................ 8,605 (1,605) (488,906) (13,315) (659,817)
Net unrealized appreciation (depreciation)
of investments, futures contracts and foreign
currencies.................................... (32,859) (15,341) 347,835 1,054,708 4,168,831
- ----------------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS.................................. $4,617,210 $6,886,767 $5,162,218 $13,233,813 $37,870,441
- ----------------------------------------------------------------------------------------------------------------------
SHARES OUTSTANDING................................ 468,298 727,932 582,194 1,316,229 3,587,001
- ----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, PER SHARE........................ $9.86 $9.46 $8.87 $10.05 $10.56
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
31
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS FOR THE PERIOD ENDED DECEMBER 31, 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........................................ $ 88,721 $ 43,665 $ 10,662 $ 27,404 $ 62,069
Dividends....................................... 31,421 68,772 26,434 11,903 97,086
Less: Foreign withholding tax................... -- -- -- -- (1,347)
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME......................... 120,142 112,437 37,096 39,307 157,808
- ---------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)............... 14,036 20,263 18,102 41,903 88,733
Audit and legal................................. 13,000 12,470 10,670 16,300 20,183
Shareholder and system servicing fees........... 4,294 6,790 5,810 4,877 5,057
Shareholder communications...................... 4,000 1,465 1,248 3,000 4,937
Trustees' fees.................................. 3,000 3,120 2,670 2,800 2,800
Administration fees (Note 2).................... 1,403 2,026 1,358 3,145 6,655
Custody......................................... 1,370 3,300 27,207 12,297 22,100
Registration fees............................... 1,000 1,580 500 400 1,000
Other........................................... 1,607 395 211 300 500
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES.................................. 43,710 51,409 67,776 85,022 151,965
Less: Expense reimbursement (Note 2)............ (24,996) (21,016) (45,146) (32,634) (41,049)
- ---------------------------------------------------------------------------------------------------------------------------------
NET EXPENSES.................................... 18,714 30,393 22,630 52,388 110,916
- ---------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS)...................... 101,428 82,044 14,466 (13,081) 46,892
- ---------------------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS, FUTURES CONTRACTS AND FOREIGN
CURRENCIES (NOTES 3, 6 AND 9):
Realized Gain (Loss) From:
Security transactions (excluding short-term
securities)................................ 16,179 (1,605) (478,646) (234) (659,451)
Futures contracts............................. -- -- (10,427) -- --
Foreign currency transactions................. -- -- -- -- (12)
- ---------------------------------------------------------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS)........................ 16,179 (1,605) (489,073) (234) (659,463)
- ---------------------------------------------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of
Investments, Futures Contracts and Foreign
Currencies:
Beginning of period........................... -- -- -- -- --
End of period................................. (32,859) (15,341) 347,835 1,054,708 4,168,831
- ---------------------------------------------------------------------------------------------------------------------------------
INCREASE IN NET UNREALIZED APPRECIATION
(DEPRECIATION)................................ (32,859) (15,341) 347,835 1,054,708 4,168,831
- ---------------------------------------------------------------------------------------------------------------------------------
NET GAIN (LOSS) ON INVESTMENTS, FUTURES CONTRACTS
AND FOREIGN CURRENCIES.......................... (16,680) (16,946) (141,238) 1,054,474 3,509,368
- ---------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS...................................... $ 84,748 $ 65,098 $(126,772) $1,041,393 $3,556,260
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) For the period May 1, 1998 (commencement of operations) to December 31,
1998.
(b) For the period March 23, 1998 (commencement of operations) to December 31,
1998.
SEE NOTES TO FINANCIAL STATEMENTS.
32
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS FOR THE PERIOD ENDED DECEMBER 31, 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).................. $ 101,428 $ 82,044 $ 14,466 $ (13,081) $ 46,892
Net realized gain (loss)...................... 16,179 (1,605) (489,073) (234) (659,463)
Increase in net unrealized appreciation
(depreciation).............................. (32,859) (15,341) 347,835 1,054,708 4,168,831
- -------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS.................................. 84,748 65,098 (126,772) 1,041,393 3,556,260
- -------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income......................... (101,365) (81,984) (12,584) -- (57,678)
Net realized gains............................ (7,637) -- -- -- --
Capital....................................... -- -- (2,412) -- (1,158)
- -------------------------------------------------------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM DISTRIBUTIONS TO
SHAREHOLDERS................................ (109,002) (81,984) (14,996) -- (58,836)
- -------------------------------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 15):
Net proceeds from sale of shares.............. 4,632,057 9,903,403 5,417,586 12,312,206 35,252,585
Net asset value of shares issued for
reinvestment of dividends................... 109,002 81,984 14,996 -- 58,836
Cost of shares reacquired..................... (99,595) (3,081,734) (128,596) (119,786) (938,404)
- -------------------------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM FUND SHARE
TRANSACTIONS................................ 4,641,464 6,903,653 5,303,986 12,192,420 34,373,017
- -------------------------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS.......................... 4,617,210 6,886,767 5,162,218 13,233,813 37,870,441
NET ASSETS:
Beginning of period........................... -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
END OF PERIOD*................................ $4,617,210 $6,886,767 $5,162,218 $13,233,813 $37,870,441
- -------------------------------------------------------------------------------------------------------------------------------
* Includes undistributed (overdistributed) net
investment income of: -- $60 $1,715 -- $(10,432)
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) For the period May 1, 1998 (commencement of operations) to December 31,
1998.
(b) For the period March 23, 1998 (commencement of operations) to December 31,
1998.
SEE NOTES TO FINANCIAL STATEMENTS.
33
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
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 fifteen 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
2000, Zero Coupon Bond Fund Portfolio Series 2005, NWQ Large Cap and Jurika &
Voyles Core Equity Portfolios. Shares of the Trust are offered only to insurance
company separate accounts that fund certain variable annuity and variable life
insurance contracts. The financial statements and financial highlights for the
other portfolios are presented in separate annual reports.
The significant accounting policies consistently followed by the Portfolios
are: (a) security transactions are accounted for on trade date; (b) securities
traded on national securities markets are valued at the closing price on such
markets or, if there were no sales during the day, at current quoted bid price;
securities primarily traded on foreign exchanges are generally valued at the
closing values of such securities on their respective exchanges, except that
when a significant occurrence exists subsequent to the time a value was so
established and it is likely to have significantly changed the value, then the
fair value of those securities will be determined by consideration of other
factors by or under the direction of the Board of Trustees; securities traded in
the over-the-counter market are valued on the basis of the bid price at the
close of business on each day; U.S. government agencies and obligations are
valued at the mean between the last reported bid and ask prices; (c) securities
maturing within 60 days are valued at cost plus accreted discount or minus
amortized premium, which approximates value; (d) securities that have a maturity
of 60 days or more are valued at prices based on market quotations for
securities of similar type, yield and maturity; (e) interest income, adjusted
for amortization of premium and accretion of discount, is recorded on an accrual
basis and dividend income is recorded on the ex-dividend date; foreign dividends
are recorded on the ex-dividend date or as soon as practical after the Portfolio
determines the existence of a dividend declaration after exercising reasonable
due diligence; (f) gains or losses on the sale of securities are calculated by
using the specific identification method; (g) dividends and distributions to
shareholders are recorded on the ex-dividend date; (h) the accounting records of
the Portfolios are maintained in U.S. dollars. All assets and liabilities
denominated in foreign currencies are translated into U.S. dollars based on the
rate of exchange of such currencies against U.S. dollars on the date of
valuation. Purchases and sales of securities, income and expenses are translated
at the rate of exchange quoted on the respective date that such transactions are
recorded. Differences between income or expense amounts recorded and collected
or paid are adjusted when reported by the custodian bank; (i) the Portfolios
intend to comply with the requirements of the Internal Revenue Code of 1986, as
amended, pertaining to regulated investment companies and to make distributions
of taxable income sufficient to relieve it from substantially all Federal income
and excise taxes; (j) the character of income and gains to be distributed are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. At December 31, 1998,
reclassifications were made to the capital accounts of the Convertible Bond
Portfolio, Disciplined Small Cap Stock Portfolio, MFS Mid Cap Growth Portfolio
and MFS Research Portfolio to reflect permanent book/tax differences and income
and gains available for distributions under income tax regulations. Net
investment income, net realized gains and net assets were not affected by this
change; 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 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 Citigroup 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 annual rates of 0.60%, 0.80%, 0.80%, 0.80% and 0.60%,
respectively. This fee is calculated daily and paid monthly.
34
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 is responsible for the day-to-day
portfolio operations and investment decisions for MMCG and MRP and TIMCO is
responsible for the day-to-day portfolio operations and investment decisions for
DSCS and SSP. 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.
- TAMIC pays TIMCO 0.40% and 0.20% of the average daily net assets of
DSCS and SSP, 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 year ended December 31, 1998, Travelers Insurance reimbursed
expenses in the amounts of $24,996, $21,016, $45,146, $32,634 and $41,049 for
CB, SSP, DSCS, MMCG and MRP, respectively.
One Trustee and all officers of the Trust are employees of Citigroup Inc.,
or its subsidiaries.
3. INVESTMENTS
The aggregate costs of purchases and proceeds from sales of investments
(including maturities, but excluding short-term securities), during the year
ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO PURCHASES SALES
- --------------------------------------------------------------------------------------
<S> <C> <C>
Convertible Bond Portfolio.................................. $ 3,953,509 $ 213,519
Strategic Stock Portfolio................................... 6,126,389 29,306
Disciplined Small Cap Stock Portfolio....................... 7,814,211 2,910,854
MFS Mid Cap Growth Portfolio................................ 17,608,430 6,277,066
MFS Research Portfolio...................................... 39,422,704 7,650,201
- --------------------------------------------------------------------------------------
</TABLE>
At December 31, 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.................................. $ 199,483 $(232,342) $ (32,859)
Strategic Stock Portfolio................................... 238,199 (253,540) (15,341)
Disciplined Small Cap Stock Portfolio....................... 554,008 (224,883) 329,125
MFS Mid Cap Growth Portfolio................................ 1,587,088 (532,380) 1,054,708
MFS Research Portfolio...................................... 4,724,560 (555,736) 4,168,824
- -----------------------------------------------------------------------------------------
</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 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
35
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Portfolio will establish a segregated account with its custodian, in which the
Portfolio will maintain cash, U.S. government securities or other liquid
high-grade debt obligations equal in value to its obligations with respect to
the reverse repurchase agreements.
At December 31, 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 December 31, 1998, DSCS had purchased 2 financial futures contracts on
the Mid Cap 400 Index expiring in March 1999. The basis value of such contracts
was $373,040. The market value of such contracts on December 31, 1998 was
$391,750, resulting in an unrealized gain of $18,710.
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 December 31, 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 year ended December 31, 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
36
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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. FORWARD FOREIGN CURRENCY CONTRACTS
MMCG and MRP may enter into forward foreign currency contracts.
At December 31, 1998, MRP 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:
British Pound........................................ 17,278 $28,749 1/7/99 $(341)
Dutch Guilder........................................ 46,562 24,811 1/5/99 103
Italian Lira......................................... 35,095,289 21,284 1/8/99 53
- ---------------------------------------------------------------------------------------------------------
(185)
- ---------------------------------------------------------------------------------------------------------
TO SELL:
British Pound........................................ 19,962 33,208 1/4/99 228
British Pound........................................ 802 1,335 1/5/99 9
British Pound........................................ 6,786 11,291 1/7/99 134
- ---------------------------------------------------------------------------------------------------------
371
- ---------------------------------------------------------------------------------------------------------
Net Unrealized Gain on Forward Foreign Currency
Contracts.......................................... $ 186
- ---------------------------------------------------------------------------------------------------------
</TABLE>
10. 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 December 31, 1998, there were no when-issued securities held by the
Portfolios.
11. 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 December 31, 1998, there were no mortgage dollar roll transactions held
by the Portfolios.
12. 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
37
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 December 31, 1998, there were no open short sales against the box.
13. CAPITAL LOSS CARRYFORWARD
At December 31, 1998, DSCS and MRP had, for Federal tax purposes, $455,000
and $308,000, respectively, of capital loss carryforwards available to offset
future capital gains through 2006. 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.
14. LENDING OF SECURITIES
The Portfolios have an agreement with their custodian whereby the custodian
may lend securities owned by the Portfolios 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 investment of amounts received as
collateral.
At December 31, 1998, there were no loaned securities held by the
Portfolios.
38
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
15. 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
DECEMBER 31, 1998
- ---------------------------------------------------------------------------------
<S> <C>
CONVERTIBLE BOND PORTFOLIO(A):
Shares sold................................................. 467,540
Shares issued for reinvestment.............................. 11,055
Shares redeemed............................................. (10,297)
- ---------------------------------------------------------------------------------
Net Increase................................................ 468,298
- ---------------------------------------------------------------------------------
STRATEGIC STOCK PORTFOLIO(A):
Shares sold................................................. 1,041,160
Shares issued for reinvestment.............................. 8,666
Shares redeemed............................................. (321,894)
- ---------------------------------------------------------------------------------
Net Increase................................................ 727,932
- ---------------------------------------------------------------------------------
DISCIPLINED SMALL CAP STOCK PORTFOLIO(A):
Shares sold................................................. 597,608
Shares issued for reinvestment.............................. 1,691
Shares redeemed............................................. (17,105)
- ---------------------------------------------------------------------------------
Net Increase................................................ 582,194
- ---------------------------------------------------------------------------------
MFS MID CAP GROWTH PORTFOLIO(B):
Shares sold................................................. 1,328,144
Shares issued for reinvestment.............................. --
Shares redeemed............................................. (11,915)
- ---------------------------------------------------------------------------------
Net Increase................................................ 1,316,229
- ---------------------------------------------------------------------------------
MFS RESEARCH PORTFOLIO(B):
Shares sold................................................. 3,675,328
Shares issued for reinvestment.............................. 5,571
Shares redeemed............................................. (93,898)
- ---------------------------------------------------------------------------------
Net Increase................................................ 3,587,001
- ---------------------------------------------------------------------------------
</TABLE>
(a) Transactions are for the period from May 1, 1998 (commencement of
operations) to December 31, 1998.
(b) Transactions are for the period from March 23, 1998 (commencement of
operations) to December 31, 1998.
39
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
For a share of beneficial interest outstanding throughout the period ended
December 31:
<TABLE>
<CAPTION>
CONVERTIBLE BOND PORTFOLIO 1998(1)
- ---------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $10.00
- ---------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income(2).................................. 0.22
Net realized and unrealized loss.......................... (0.12)
- ---------------------------------------------------------------------
Total Income From Operations................................ 0.10
- ---------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income..................................... (0.22)
Net realized gains........................................ (0.02)
- ---------------------------------------------------------------------
Total Distribution.......................................... (0.24)
- ---------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.............................. $ 9.86
- ---------------------------------------------------------------------
TOTAL RETURN++.............................................. 0.98%
- ---------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000'S)........................... $4,617
- ---------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS+:
Expenses(2)............................................... 0.80%
Net investment income..................................... 4.31
- ---------------------------------------------------------------------
PORTFOLIO TURNOVER RATE..................................... 7%
- ---------------------------------------------------------------------
</TABLE>
(1) For the period from May 1, 1998 (commencement of operations) to December 31,
1998.
(2) Travelers Insurance has agreed to reimburse the Portfolio for expenses in
the amount of $24,996 for the period ended December 31, 1998. If such
expenses were not 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 EXPENSE REIMBURSEMENT
------------------------ ------------------------------
<S> <C> <C>
1998 $0.05 1.86%+
</TABLE>
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
40
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of beneficial interest outstanding throughout the period ended
December 31:
<TABLE>
<CAPTION>
STRATEGIC STOCK PORTFOLIO 1998(1)
- ---------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $10.00
- ---------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income(2).................................. 0.12
Net realized and unrealized loss.......................... (0.54)
- ---------------------------------------------------------------------
Total Loss From Operations.................................. (0.42)
- ---------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income..................................... (0.12)
Net realized gains........................................ --
- ---------------------------------------------------------------------
Total Distributions......................................... (0.12)
- ---------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.............................. $9.46
- ---------------------------------------------------------------------
TOTAL RETURN++.............................................. (4.24)%
- ---------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000'S)........................... $6,887
- ---------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS+:
Expenses(2)............................................... 0.90%
Net investment income..................................... 2.42
- ---------------------------------------------------------------------
PORTFOLIO TURNOVER RATE..................................... 1%
- ---------------------------------------------------------------------
</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(2).................................. 0.03
Net realized and unrealized loss.......................... (1.13)
- ---------------------------------------------------------------------
Total Loss From Operations.................................. (1.10)
- ---------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income..................................... (0.03)
Capital................................................... (0.00)*
- ---------------------------------------------------------------------
Total Distributions......................................... (0.03)
- ---------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.............................. $8.87
- ---------------------------------------------------------------------
TOTAL RETURN++.............................................. (11.04)%
- ---------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000'S)........................... $5,162
- ---------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS+:
Expenses(2)............................................... 1.00%
Net investment income..................................... 0.64
- ---------------------------------------------------------------------
PORTFOLIO TURNOVER RATE..................................... 89%
- ---------------------------------------------------------------------
</TABLE>
(1) For the period from May 1, 1998 (commencement of operations) to December 31,
1998.
(2) Travelers Insurance has agreed to reimburse the Strategic Stock Portfolio
and the Disciplined Small Cap Stock Portfolio for expenses in the amounts of
$21,016 and $45,146, respectively, for the period ended December 31, 1998.
If such expenses were not 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 EXPENSE REIMBURSEMENT
------------------------ ----------------------
1998 1998
---- ----
<S> <C> <C>
Strategic Stock Portfolio $0.03 1.51%+
Disciplined Small Cap Stock Portfolio 0.08 2.98+
</TABLE>
* 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.
41
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of beneficial interest outstanding throughout the period ended
December 31:
<TABLE>
<CAPTION>
MFS MID CAP GROWTH PORTFOLIO 1998(1)(2)
- ------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $10.00
- ------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment loss(3).................................... (0.02)
Net realized and unrealized gain.......................... 0.07
- ------------------------------------------------------------------------
Total Income From Operations................................ 0.05
- ------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income..................................... --
- ------------------------------------------------------------------------
Total Distributions......................................... --
- ------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.............................. $10.05
- ------------------------------------------------------------------------
TOTAL RETURN++.............................................. 0.50%
- ------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000'S)........................... $13,234
- ------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS+:
Expenses(3)............................................... 1.00%
Net investment loss....................................... (0.25)
- ------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE..................................... 100%
- ------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MFS RESEARCH PORTFOLIO 1998(1)
- ---------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $10.00
- ---------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income(3).................................. 0.01
Net realized and unrealized gain.......................... 0.57
- ---------------------------------------------------------------------
Total Income From Operations................................ 0.58
- ---------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income..................................... (0.02)
Capital................................................... (0.00)*
- ---------------------------------------------------------------------
Total Distributions......................................... (0.02)
- ---------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.............................. $10.56
- ---------------------------------------------------------------------
TOTAL RETURN++.............................................. 5.77%
- ---------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000'S)........................... $37,870
- ---------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS+:
Expenses(3)............................................... 1.00%
Net investment income..................................... 0.42
- ---------------------------------------------------------------------
PORTFOLIO TURNOVER RATE..................................... 54%
- ---------------------------------------------------------------------
</TABLE>
(1) For the period from March 23, 1998 (commencement of operations) to December
31, 1998.
(2) Per share amounts have been calculated using the average shares method,
rather than the undistributed net investment income method, because it more
accurately reflects the per share data for the period.
(3) Travelers Insurance has agreed to reimburse the MFS Mid Cap Growth Portfolio
and the MFS Research Portfolio for expenses in the amounts of $32,634 and
$41,049, respectively, for the period ended December 31, 1998. If such
expenses were not 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 EXPENSE REIMBURSEMENT
------------------------ ----------------------
1998 1998
------------------------ ----
<S> <C> <C>
MFS Mid Cap Growth Portfolio $0.04 1.62%+
MFS Research Portfolio 0.01 1.37+
</TABLE>
* 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.
42
<PAGE>
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
TRAVELERS SERIES TRUST:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of the Convertible Bond Portfolio, Strategic Stock
Portfolio, Disciplined Small Cap Stock Portfolio, MFS Mid Cap Growth Portfolio
and MFS Research Portfolio of Travelers Series Trust, as of December 31, 1998,
and the related statements of operations, statements of changes in net assets
and financial highlights for the period from March 23, 1998 (commencement of
operations) to December 31, 1998, with respect to the MFS Mid Cap Growth
Portfolio and MFS Research Portfolio, from May 1, 1998 (commencement of
operations) to December 31, 1998, with respect to the Convertible Bond
Portfolio, Strategic Stock Portfolio and Disciplined Small Cap Stock Portfolio.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1998, by correspondence with the custodian. As to securities
purchased or sold but not yet received or delivered, we performed other
appropriate auditing procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Convertible Bond Portfolio, Strategic Stock Portfolio, Disciplined Small Cap
Stock Portfolio, MFS Mid Cap Growth Portfolio and MFS Research Portfolio of
Travelers Series Trust as of December 31, 1998, the results of their operations,
the changes in their net assets and financial highlights for the periods
referred to above in conformity with generally accepted accounting principles.
[KPMG Peat Marwick LLP
Signature]
New York, New York
February 8, 1999
43
<PAGE>
- --------------------------------------------------------------------------------
TAX INFORMATION (UNAUDITED)
For Federal tax purposes the Trust hereby designates for the fiscal year ended
December 31, 1998:
- Percentage of the ordinary dividends paid as qualifying for the corporate
dividends received deduction:
<TABLE>
<S> <C>
Convertible Bond Portfolio............................. 12.86%
Strategic Stock Portfolio.............................. 83.82%
Disciplined Small Cap Stock Portfolio.................. 100.00%
MFS Research Portfolio................................. 100.00%
</TABLE>
The following percentages of ordinary dividends paid from net investment income
are derived from Federal obligations and may be exempt from taxation at the
state level:
<TABLE>
<S> <C>
Disciplined Small Cap Stock Portfolio....................... 1.82%
MFS Research Portfolio...................................... 20.14%
</TABLE>
44
<PAGE>
Investment Advisers
TRAVELERS ASSET MANAGEMENT INTERNATIONAL CORPORATION
Hartford, Connecticut
Independent Auditors
KPMG 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 or
The Travelers Life & Annuity Company and the Prospectuses for the underlying
funds, which collectively contain all pertinent information, including the
applicable sales commissions.
Series Trust (Annual) (2-99) Printed in U.S.A.
CONTENTS
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 over the past six
months.
INVESTMENTS 6 A complete list of the fund's
investments with their
market values.
FINANCIAL STATEMENTS 12 Statements of assets and
liabilities, operations, and
changes in net assets, as
well as financial highlights.
LARGE CAP PORTFOLIO
PERFORMANCE 14 How the fund has done over
time.
FUND TALK 15 The manager's review of fund
performance, strategy and
outlook over the past six
months.
INVESTMENTS 16 A complete list of the fund's
investments with their
market values.
FINANCIAL STATEMENTS 19 Statements of assets and
liabilities, operations, and
changes in net assets, as
well as financial highlights.
NOTES 21 Notes to the financial
statements.
REPORT OF INDEPENDENT 23 The auditors' opinion.
ACCOUNTANTS
DISTRIBUTIONS 24
Standard & Poor's, S&P and S&P 500 are registered service marks of The
McGraw-Hill Companies, Inc. and have been licensed for use by Fidelity
Distributors Corporation.
Other third party marks appearing herein are the property of their
respective owners.
All other marks appearing herein are registered or unregistered
trademarks or service marks of FMR Corp. or an affiliated company.
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
Demonstrating erratic mood swings throughout the period, the sometimes
gloomy, sometimes exuberant, oftentimes volatile worldwide stock and
bond markets in 1998 will long be remembered for their turbulent
behavior. When all was said and done, the U.S. and European stock
markets posted impressive returns for the year. Most U.S. bond markets
experienced positive - albeit moderate - performance, with U.S.
Treasuries ending the year as the overall front-runner. Economic and
currency turmoil continued to plague stock and bond performance in
Asia and, in particular, emerging markets.
U.S. STOCK MARKETS
The Standard & Poor's 500 Index - a broad measure of U.S. stock market
performance - rose 28.58% for the 12 months that ended December 31,
1998, well above the index's long-term average annual return of about
12%. For the first time in its history, the Dow Jones Industrial
Average - an index of 30 blue-chip stocks - posted double-digit
percentage gains in four consecutive years, thanks to an 18.07%
increase for the year. Large-cap stocks - particularly in the
technology sector - led the U.S. equity market's charge, as once again
investors preferred the liquidity and the perceived safety of owning
what they know. Small-cap stocks - in comparison - took a beating. The
Russell 2000 Index - a popular measure of small stock performance -
fell -2.55% for the year.
Throughout the period, the U.S. enjoyed a strong economy. Unemployment
averaged 4.5% for the year, the lowest since 1969 and the lowest
peacetime level in 41 years. Inflation levels also were low, while
interest-rates were stable. In comparison to the economy's relative
tranquility, the U.S. stock markets were fluctuating wildly. To
illustrate, the Dow typically had fewer than five swings of 5% in each
year since 1946. In 1998 alone, the Dow experienced 10 such swings.
Much of these gyrations were due to fears about Asia's economic woes,
Russia's currency devaluation and loan defaults, and the subsequent
consequences on emerging markets. On August 31, the Dow plunged 512.61
points - a loss that erased all previous gains for the year to that
point. Faced with global economic chaos, investors began fleeing the
equity markets in droves, searching for safer, less volatile havens,
particularly U.S. Treasuries. To address the lack of confidence in
domestic and global equity markets, the U.S. Federal Reserve Board
stepped in with three separate 0.25% interest-rate cuts during the
fall. Those cuts helped boost confidence in the U.S. economy, and
stocks began to quickly ascend to their former lofty levels,
culminating in a new Dow record of 9374.27 on November 23, 1998.
On a sector-by-sector basis, technology stocks reigned supreme in
1998, thanks in large part to the skyrocketing Internet industry. For
the year, nine of the top 10 best-performing stocks in the S&P 500
were technology stocks. The health care sector was another big winner.
Pharmaceuticals helped drive the strong performance of the health care
industry, as a slew of new products was rushed to the market sooner
than normal thanks to streamlined approval regulations.
Natural resources, on the other hand, suffered tremendously.
Overproduction and poor demand caused oil's price per barrel to plunge
considerably. Gold prices also were down in 1998. The financial sector
- - a top performer for several years - found 1998 to be a challenge.
The financial crises overseas and credit concerns contributed to the
poor showing of many brokerage and investment management firms.
FOREIGN STOCK MARKETS
Foreign stock markets posted mixed results in 1998. The Morgan Stanley
Capital International (MSCI) EAFE Index - which measures stock
performance in Europe, Australasia, and the Far East - returned 20.27%
in 1998. Europe posted the most consistently strong equity markets
when compared to other regions, with the MSCI Europe Index up 28.87%
for the year. The much-maligned Japanese stock market ended the year
on a positive note, thanks in part to long-awaited government
intercession on the ailing banking sector's behalf. For the year, the
Tokyo Stock Exchange Index (TOPIX) was up 7.76%. 1998 proved to be
disastrous for emerging markets. The MSCI Emerging Markets Free Index
suffered a -25.34% loss during the period, as the Asian crisis and
Russia's currency devaluation and loan defaults played havoc with
Latin America, Brazil, Thailand and other emerging-market nations.
U.S. BOND MARKETS
In a year as volatile as 1998, it's not surprising that the
performance of the U.S bond market was mostly positive. Still, most of
the major bond indexes trailed their returns of 1997, as investors
continued to seek out the high returns found in the equity markets.
For the year, the Lehman Brothers Aggregate Bond Index - a broad
measure of the performance of the U.S. taxable bond market - posted a
total return of 8.69%. The Lehman Brothers Corporate Bond Index
returned 8.57% in 1998. General U.S. Treasury funds were the safe
haven of choice in 1998, benefiting from the flight to safety as
investors worldwide reacted to global economic concerns. As a result,
the yield on the benchmark 30-year Treasury fell to its lowest levels
in three decades, tumbling to 5.09% at the end of the period compared
to 5.92% at the start of the year.
FOREIGN BOND MARKETS
Typically, continued low inflation and economic growth in the U.S.
would help provide a positive backdrop for U.S.-based bonds relative
to most foreign bonds. But there was nothing typical about 1998. The
Salomon Brothers World Government Bond Index - a measure of government
bond market performance in developed nations - returned an impressive
15.30% for the 12 months that ended December 31, 1998. Many European
nations - particularly France, Italy and Spain - boasted strong
performance that helped drive the index's overall return. Not all was
rosy in the international bond market, however. In stark contrast to
the developed world, the often-volatile emerging debt markets
experienced a particularly difficult year, illustrated by the J.P.
Morgan Emerging Markets Bond Index return of -11.04% during the
period. Once again, the impact of financial and economic woes in Asia
and Russia was the primary contributor to the poor performance of
emerging markets.
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). If certain fund expenses had not been
reimbursed, the total returns would have been lower.
CUMULATIVE TOTAL RETURNS
PERIODS ENDED DECEMBER 31, PAST 1 YEAR LIFE OF FUND
1998
Equity Income Portfolio 12.38% 65.74%
S&P 500 (registered trademark) 28.58% 96.22%
CUMULATIVE TOTAL RETURNS show the fund's performance in percentage
terms over a set period - in this case, one year or since the fund
started on August 30, 1996.
You can compare the fund's return to the performance of the Standard &
Poor's 500 Index - a market capitalization-weighted index of common
stocks. This benchmark includes reinvested dividends and capital
gains, if any.
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 DECEMBER 31, PAST 1 YEAR LIFE OF FUND
1998
Equity Income Portfolio 12.38% 24.18%
S&P 500 28.58% 33.49%
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.
$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
1998/07/31 15960.40 17772.84
1998/08/31 13523.78 15203.24
1998/09/30 14300.52 16177.16
1998/10/31 15343.26 17493.01
1998/11/30 16002.96 18553.26
1998/12/31 16573.91 19622.30
IMATRL PRASUN SHR__CHT 19981231 19990111 115115 R00000000000031
$10,000 OVER LIFE OF FUND: Let's say hypothetically that $10,000 was
invested in the Equity Income Portfolio on August 30, 1996, when the
fund started. As the chart shows, by December 31, 1998, the value of
the investment would have grown to $16,574 - a 65.74% 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
$19,622 - a 96.22% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
General Electric Co. 4.3
Fannie Mae 2.5
Philip Morris Companies, Inc. 2.5
Bank of New York Co., Inc. 2.4
Bank One Corp. 2.1
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
FINANCE 23.1
UTILITIES 13.3
ENERGY 10.6
INDUSTRIAL MACHINERY & 8.8
EQUIPMENT
BASIC INDUSTRIES 6.2
ASSET ALLOCATION AS OF DECEMBER 31, 1998*
Row: 1, Col: 1, Value: 93.8
Row: 1, Col: 2, Value: 2.4
Row: 1, Col: 3, Value: 3.8
Stocks 93.8%
Convertible
securities 2.4%
Short-term investments 3.8%
*FOREIGN INVESTMENTS 8.8%
AS OF DECEMBER 31, 1998
EQUITY INCOME PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
(photograph of Steve Petersen)
An interview with Steve Petersen, Portfolio Manager of Equity Income
Portfolio
Q. HOW DID THE FUND PERFORM, STEVE?
A. The fund performed well compared to its peer group but
underperformed the Standard & Poor's 500 Index, which returned 28.58%
for the 12-month period ending December 31, 1998.
Q. WHAT WAS THE INVESTING ENVIRONMENT LIKE DURING THE YEAR?
A. During the first half of 1998, investors focused on larger
companies with predictable earnings growth rather than smaller or more
cyclical stocks. The market's free-fall in late August - triggered by
Russia's currency devaluation and debt defaults, problems in emerging
markets and concerns about the soundness of hedge fund management
companies - spurred investors' flight to the perceived safer haven of
the largest companies. As the Federal Reserve Board moved to lower
interest rates and add liquidity to the economy and prevent a possible
recession, the market rebounded strongly, with most of the fourth
quarter's strong performance concentrated in larger issues, as well as
in technology and Internet-related stocks.
Q. HOW DID THIS ENVIRONMENT AFFECT THE FUND'S PERFORMANCE?
A. The fund invests primarily in large-capitalization stocks, but its
holdings in medium and small companies, as well as its emphasis on
dividend-paying stocks rather than growth stocks, contributed to its
underperformance relative to the S&P 500. The fund's limited
technology stock holdings also had a negative impact, as did the
higher percentage of energy stocks in the portfolio. Technology stocks
made a significant contribution to the stock market's performance
during 1998. Energy stocks suffered as oil and gas prices dropped due
to declining demand worldwide, reflecting Asia's economic slowdown. A
warmer than usual winter in the U.S last year and so far this year
also contributed to the slack demand. On the other hand, the fund
benefited from the strong performance of utilities stocks - telephone
company stocks in particular.
Q. WHAT ACCOUNTED FOR TELEPHONE COMPANIES' GOOD PERFORMANCE?
A. In general, their earnings performance was better than expected as
these companies went through the process of deregulation. Technology
pushed up demand faster than anticipated as consumers added phone
lines at a surprising pace, reflecting growing demand for Internet
access and data transmission in the home. Telephone companies also
successfully cut costs during the year and branched out into different
technologies, helping their earnings growth and increasing their
attractiveness to investors. As a result, companies such as AT&T and
Bell Atlantic performed well.
Q. WHICH HOLDINGS HELPED THE FUND'S PERFORMANCE?
A. As I mentioned, AT&T, one of the fund's top holdings, performed
well. After going through a management change, its new leadership has
been building the company's competitive strength in the long distance
phone business. Also, it is improving profitability and diversifying
through acquisition activity. Schering-Plough also performed strongly
during the year. Schering-Plough produces the leading allergy drug,
Claritin, and has had steady stronger-than-expected earnings growth.
American Express, another top holding, performed well, reflecting its
successful transformation over the last few years into a steady growth
company. General Electric, the fund's number-one holding at the end of
the period, continued its good performance. The company has recently
released a statement that its outlook for earnings growth remains
strong. GE has also been active in making some international
acquisitions that have the potential to boost earnings growth.
Q. WHICH HOLDINGS WERE DISAPPOINTMENTS?
A. As I mentioned earlier, energy companies suffered from the
significant decline in the price of oil, which dropped $5-$7 per
barrel since 1997. As a result, oil companies British Petroleum, Royal
Dutch Petroleum and Chevron all performed poorly. In addition,
companies that provide service to the oil companies, such as
Halliburton and Schlumberger, fared even worse. That's because oil
companies, which tend to spend only the cash flow that they generate,
took in less revenues and, as a result, had less business for their
suppliers.
Q. STEVE, WHAT'S YOUR OUTLOOK FOR THE COMING MONTHS?
A. Near term, I believe that we're in for more of the same. The U.S.
economy still looks good, with low inflation and healthy consumer
spending. However, worldwide trends do not look exceptionally strong,
and multinational corporations are still exposed to the problems in
Asia, Russia and emerging markets. In this environment, the market
will probably continue to focus on large-capitalization growth
companies, rather than small-cap and cyclical stocks. My strategy will
be to continue to look for companies with excellent underlying
financials and interesting business fundamentals, which I believe can
perform well over time.
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 December 31, 1998, more than
$79 million
MANAGER: Stephen Petersen, since inception;
joined Fidelity in 1980
EQUITY INCOME PORTFOLIO
INVESTMENTS DECEMBER 31, 1998
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 93.8%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 3.8%
AEROSPACE & DEFENSE - 2.6%
AlliedSignal, Inc. 12,200 $ 540,613
Harsco Corp. 5,600 170,450
Textron, Inc. 8,300 630,281
United Technologies Corp. 6,700 728,625
2,069,969
DEFENSE ELECTRONICS - 1.0%
Northrop Grumman Corp. 2,100 153,563
Raytheon Co. Class B 11,800 628,350
781,913
SHIP BUILDING & REPAIR - 0.2%
General Dynamics Corp. 2,800 164,150
TOTAL AEROSPACE & DEFENSE 3,016,032
BASIC INDUSTRIES - 6.0%
CHEMICALS & PLASTICS - 2.7%
du Pont (E.I.) de Nemours & 5,500 291,844
Co.
Great Lakes Chemical Corp. 6,800 272,000
Hanna (M.A.) Co. 6,500 80,031
Hercules, Inc. 6,300 172,463
IMC Global, Inc. 6,700 143,213
Lawter International, Inc. 1,900 22,088
Millennium Chemicals, Inc. 5,200 103,350
Monsanto Co. 7,000 332,500
Nalco Chemical Co. 3,500 108,500
Octel Corp. (a) 575 7,978
Olin Corp. 4,300 121,744
Solutia, Inc. 7,800 174,525
Union Carbide Corp. 4,500 191,250
Witco Corp. 5,700 90,844
2,112,330
IRON & STEEL - 0.2%
Dofasco, Inc. 3,900 49,945
Inland Steel Industries, Inc. 5,550 93,656
USX-U.S. Steel Group 1,700 39,100
182,701
METALS & MINING - 1.3%
Alcan Aluminium Ltd. 10,900 295,557
Alcoa, Inc. 8,317 620,136
Phelps Dodge Corp. 2,600 132,275
1,047,968
PACKAGING & CONTAINERS - 0.0%
Tupperware Corp. 1,900 31,231
PAPER & FOREST PRODUCTS - 1.8%
Boise Cascade Corp. 200 6,200
Bowater, Inc. 1,600 66,300
Champion International Corp. 4,800 194,400
Domtar, Inc. 5,300 30,647
Fort James Corp. 3,800 152,000
SHARES VALUE (NOTE 1)
Georgia-Pacific Corp. 4,300 $ 251,819
Kimberly-Clark Corp. 8,200 446,900
Weyerhaeuser Co. 5,200 264,225
1,412,491
TOTAL BASIC INDUSTRIES 4,786,721
CONSTRUCTION & REAL ESTATE -
1.4%
BUILDING MATERIALS - 0.5%
American Standard Companies, 4,200 150,938
Inc. (a)
Masco Corp. 6,500 186,875
Sherwin-Williams Co. 2,000 58,750
396,563
ENGINEERING - 0.1%
EG & G, Inc. 2,300 63,969
Fluor Corp. 900 38,306
102,275
REAL ESTATE INVESTMENT TRUSTS
- - 0.8%
Crescent Real Estate Equities 4,900 112,700
Co.
Duke Realty Investments, Inc. 1,000 23,250
Equity Office Properties Trust 3,200 76,800
Equity Residential Properties 4,100 165,794
Trust (SBI)
Starwood Hotels & Resorts 11,524 261,451
Trust
639,995
TOTAL CONSTRUCTION & REAL 1,138,833
ESTATE
DURABLES - 2.8%
AUTOS, TIRES, & ACCESSORIES -
2.0%
DaimlerChrysler AG (a) 4,923 472,916
Eaton Corp. 2,100 148,444
Ford Motor Co. 5,000 293,438
Meritor Automotive, Inc. 4,800 101,700
Pep Boys-Manny, Moe & Jack 4,400 69,025
Snap-On, Inc. 5,400 187,988
TRW, Inc. 5,800 325,888
1,599,399
CONSUMER DURABLES - 0.2%
Minnesota Mining & 1,900 135,138
Manufacturing Co.
CONSUMER ELECTRONICS - 0.1%
General Motors Corp. Class H 1,000 39,688
Maytag Corp. 600 37,350
Newell Co. 1,300 53,625
130,663
TEXTILES & APPAREL - 0.5%
Dexter Corp. 3,500 110,031
Kellwood Co. 2,400 60,000
Liz Claiborne, Inc. 1,500 47,344
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
DURABLES - CONTINUED
TEXTILES & APPAREL - CONTINUED
NIKE, Inc. Class B 3,500 $ 141,969
Unifi, Inc. 1,300 25,431
384,775
TOTAL DURABLES 2,249,975
ENERGY - 10.5%
ENERGY SERVICES - 0.9%
Halliburton Co. 16,700 494,738
Schlumberger Ltd. 4,700 216,788
711,526
OIL & GAS - 9.6%
Amerada Hess Corp. 5,100 253,725
Amoco Corp. 8,200 483,800
Anadarko Petroleum Corp. 4,100 126,588
Atlantic Richfield Co. 700 45,675
British Petroleum PLC 17,675 264,020
British Petroleum PLC ADR 15,586 1,480,670
Burlington Resources, Inc. 6,800 243,525
Chevron Corp. 10,360 859,233
Coastal Corp. (The) 3,600 125,775
Conoco, Inc. Class A (a) 5,000 104,375
Elf Aquitaine SA sponsored ADR 5,800 328,425
Exxon Corp. 5,200 380,250
Mobil Corp. 3,300 287,513
Occidental Petroleum Corp. 17,800 300,375
Phillips Petroleum Co. 5,300 225,913
Royal Dutch Petroleum Co. (NY 16,000 766,000
Registry Gilder 1.25)
Total SA sponsored ADR 15,900 791,025
Ultramar Diamond Shamrock 3,300 80,025
Corp.
Unocal Corp. 3,225 94,130
USX-Marathon Group 11,900 358,488
Valero Energy Corp. 900 19,125
7,618,655
TOTAL ENERGY 8,330,181
FINANCE - 22.8%
BANKS - 10.1%
Bank of New York Co., Inc. 47,000 1,891,750
Bank of Nova Scotia 5,100 112,463
Bank One Corp. 32,560 1,662,595
BankAmerica Corp. 20,487 1,231,781
Chase Manhattan Corp. 6,600 449,213
Comerica, Inc. 6,800 463,675
National Bank of Canada 16,900 273,845
Royal Bank of Canada 4,400 220,072
SHARES VALUE (NOTE 1)
U.S. Bancorp 14,100 $ 500,550
Wells Fargo & Co. 29,300 1,170,169
7,976,113
CREDIT & OTHER FINANCE - 4.6%
American Express Co. 16,200 1,656,450
Associates First Capital 17,324 734,112
Corp. Class A
Fleet Financial Group, Inc. 10,500 469,219
Household International, Inc. 18,799 744,910
3,604,691
FEDERAL SPONSORED CREDIT - 2.8%
Fannie Mae 27,300 2,020,200
Freddie Mac 900 57,994
SLM Holding Corp. 2,900 139,200
2,217,394
INSURANCE - 3.9%
Aetna, Inc. 500 39,313
Allstate Corp. 19,000 733,875
American Bankers Insurance 2,000 96,750
Group, Inc.
Berkshire Hathaway, Inc. 15 35,250
Class B
Berkshire Hathaway, Inc. 3 210,000
Class A
Chubb Corp. (The) 900 58,388
CIGNA Corp. 2,500 193,281
Fremont General Corp. 12,800 316,800
Hartford Financial Services 12,200 669,475
Group, Inc.
Highlands Insurance Group, 1,800 23,513
Inc. (a)
Marsh & McLennan Companies, 1,600 93,500
Inc.
PMI Group, Inc. 1,700 83,938
Reliastar Financial Corp. 7,830 361,159
Torchmark Corp. 5,700 201,281
3,116,523
SAVINGS & LOANS - 1.0%
Washington Mutual, Inc. 21,245 811,294
SECURITIES INDUSTRY - 0.4%
First Marathon, Inc. Class A 7,100 82,342
(non-vtg.)
Lehman Brothers Holdings, 3,300 145,406
Inc.
Nomura Securities Co. Ltd. 2,000 17,395
Waddell & Reed Financial, Inc.:
Class A 2,101 49,767
Class B 1,297 30,155
325,065
TOTAL FINANCE 18,051,080
HEALTH - 6.0%
DRUGS & PHARMACEUTICALS - 4.5%
American Home Products Corp. 13,400 754,588
Bristol-Myers Squibb Co. 6,600 883,163
Lilly (Eli) & Co. 2,500 222,188
Merck & Co., Inc. 3,900 575,981
Schering-Plough Corp. 20,000 1,105,000
3,540,920
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
HEALTH - CONTINUED
MEDICAL EQUIPMENT & SUPPLIES
- - 0.9%
Baxter International, Inc. 3,900 $ 250,819
Johnson & Johnson 4,200 352,275
Pall Corp. 2,900 73,406
676,500
MEDICAL FACILITIES MANAGEMENT
- - 0.6%
Columbia/HCA Healthcare Corp. 17,200 425,700
Humana, Inc. (a) 2,000 35,625
United HealthCare Corp. 1,200 51,675
513,000
TOTAL HEALTH 4,730,420
HOLDING COMPANIES - 0.1%
U.S. Industries, Inc. 4,360 81,205
INDUSTRIAL MACHINERY &
EQUIPMENT - 8.7%
ELECTRICAL EQUIPMENT - 5.4%
Alcatel Alsthom Compagnie 2,000 244,375
Generale d'Electricite SA
(RFD)
Emerson Electric Co. 5,600 350,350
General Electric Co. 33,000 3,368,036
Honeywell, Inc. 1,400 105,438
Loral Space & Communications 1,400 24,938
Ltd. (a)
Siemens AG 3,200 206,951
4,300,088
INDUSTRIAL MACHINERY &
EQUIPMENT - 2.2%
Case Corp. 900 19,631
Coltec Industries, Inc. (a) 2,000 39,000
Cooper Industries, Inc. 900 42,919
Ingersoll-Rand Co. 4,850 227,647
Parker-Hannifin Corp. 3,850 126,088
Stewart & Stevenson Services, 1,500 14,625
Inc.
Tyco International Ltd. 16,870 1,272,631
1,742,541
POLLUTION CONTROL - 1.1%
Allied Waste Industries, Inc. 4,300 101,588
(a)
Browning-Ferris Industries, 7,314 207,992
Inc.
Ogden Corp. 3,900 97,744
Waste Management, Inc. 8,807 410,626
817,950
TOTAL INDUSTRIAL MACHINERY & 6,860,579
EQUIPMENT
MEDIA & LEISURE - 3.7%
BROADCASTING - 1.7%
CBS Corp. 12,008 393,262
Infinity Broadcasting Corp. 2,100 57,488
(a)
Time Warner, Inc. 14,090 874,461
1,325,211
SHARES VALUE (NOTE 1)
ENTERTAINMENT - 0.9%
King World Productions, Inc. 3,100 $ 91,256
(a)
Viacom, Inc. Class B 8,400 621,600
(non-vtg.) (a)
712,856
LEISURE DURABLES & TOYS - 0.1%
Brunswick Corp. 3,600 89,100
LODGING & GAMING - 0.1%
Circus Circus Enterprises, 2,700 30,881
Inc. (a)
Mirage Resorts, Inc. (a) 2,600 38,838
69,719
PUBLISHING - 0.4%
Harcourt General, Inc. 4,000 212,750
Reader's Digest Association, 4,100 103,269
Inc. Class A (non-vtg.)
316,019
RESTAURANTS - 0.5%
McDonald's Corp. 5,200 398,450
TOTAL MEDIA & LEISURE 2,911,355
NONDURABLES - 5.6%
AGRICULTURE - 0.4%
Edperbrascan Corp. Class A 22,150 308,262
(ltd. vtg.)
BEVERAGES - 0.5%
Anheuser-Busch Companies, 3,300 216,563
Inc.
PepsiCo, Inc. 2,200 90,063
Seagram Co. Ltd. 2,700 102,761
409,387
FOODS - 0.5%
Bestfoods 2,500 133,125
Corn Products International, 2,675 81,253
Inc.
Heinz (H.J.) Co. 3,200 181,200
395,578
HOUSEHOLD PRODUCTS - 1.7%
Avon Products, Inc. 2,400 106,200
Clorox Co. 2,000 233,625
Gillette Co. 3,600 173,925
Premark International, Inc. 800 27,700
Procter & Gamble Co. 2,300 210,019
Unilever NV (NY shares) 1,700 140,994
Unilever PLC 41,800 470,253
1,362,716
TOBACCO - 2.5%
Dimon, Inc. 2,200 16,363
Philip Morris Companies, Inc. 36,400 1,947,400
RJR Nabisco Holdings Corp. 940 27,906
1,991,669
TOTAL NONDURABLES 4,467,612
PRECIOUS METALS - 0.1%
Newmont Mining Corp. 4,600 83,088
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
RETAIL & WHOLESALE - 3.7%
APPAREL STORES - 1.3%
Charming Shoppes, Inc. (a) 2,900 $ 12,506
Footstar, Inc. (a) 4,100 102,500
Intimate Brands, Inc. Class A 800 23,900
Limited, Inc. (The) 7,700 224,263
Payless ShoeSource, Inc. (a) 900 42,638
TJX Companies, Inc. 22,700 658,300
1,064,107
GENERAL MERCHANDISE STORES -
2.4%
Dayton Hudson Corp. 6,400 347,200
Federated Department Stores, 9,200 400,775
Inc. (a)
Hudson's Bay Co. 3,400 42,986
Sears, Roebuck & Co. 2,400 102,000
Wal-Mart Stores, Inc. 12,300 1,001,681
1,894,642
TOTAL RETAIL & WHOLESALE 2,958,749
SERVICES - 1.0%
LEASING & RENTAL - 0.2%
Ryder Systems, Inc. 5,000 130,000
PRINTING - 0.4%
Donnelley (R.R.) & Sons Co. 4,700 205,919
New England Business Service, 1,000 39,125
Inc.
Wallace Computer Services, 3,000 79,125
Inc.
324,169
SERVICES - 0.4%
ACNielsen Corp. (a) 4,866 137,465
Dun & Bradstreet Corp. 2,800 88,375
Manpower, Inc. 1,900 47,856
Modis Professional Services, 2,600 37,700
Inc. (a)
311,396
TOTAL SERVICES 765,565
TECHNOLOGY - 3.6%
COMPUTER SERVICES & SOFTWARE
- - 1.1%
Electronic Data Systems Corp. 10,500 527,625
First Data Corp. 3,800 120,413
IMS Health, Inc. 600 45,263
NCR Corp. (a) 4,300 179,525
872,826
COMPUTERS & OFFICE EQUIPMENT
- - 1.5%
International Business 3,500 646,625
Machines Corp.
Unisys Corp. (a) 16,200 557,888
1,204,513
ELECTRONICS - 1.0%
AMP, Inc. 3,266 170,036
SHARES VALUE (NOTE 1)
Motorola, Inc. 8,500 $ 519,031
Texas Instruments, Inc. 1,300 111,231
800,298
TOTAL TECHNOLOGY 2,877,637
TRANSPORTATION - 1.4%
AIR TRANSPORTATION - 0.3%
Viad Corp. 7,100 215,663
RAILROADS - 1.1%
Burlington Northern Santa Fe 14,600 492,750
Corp.
CSX Corp. 8,200 340,300
Norfolk Southern Corp. 2,200 69,713
902,763
TOTAL TRANSPORTATION 1,118,426
UTILITIES - 12.6%
ELECTRIC UTILITY - 3.3%
Allegheny Energy, Inc. 8,800 303,600
American Electric Power Co., 8,200 385,913
Inc.
Central & South West Corp. 3,100 85,056
CINergy Corp. 3,700 127,188
CMP Group, Inc. 3,900 73,613
Consolidated Edison, Inc. 3,600 190,350
DPL, Inc. 7,350 158,944
Duke Energy Corp. 3,122 200,003
Entergy Corp. 15,000 466,875
Illinova Corp. 300 7,500
Niagara Mohawk Power Corp. (a) 11,000 177,375
PG&E Corp. 9,200 289,800
Pinnacle West Capital Corp. 1,500 63,563
Washington Water & Power Co. 5,200 100,100
2,629,880
GAS - 0.6%
Questar Corp. 8,900 172,438
Sempra Energy 10,967 278,288
450,726
TELEPHONE SERVICES - 8.7%
ALLTEL Corp. 4,100 245,231
Ameritech Corp. 13,200 836,550
AT&T Corp. 21,500 1,617,875
Bell Atlantic Corp. 21,010 1,193,631
BellSouth Corp. 15,800 788,025
GTE Corp. 9,200 620,425
MCI WorldCom, Inc. (a) 9,914 711,330
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
UTILITIES - CONTINUED
TELEPHONE SERVICES - CONTINUED
SBC Communications, Inc. 12,200 $ 654,225
Sprint Corp. (FON Group) 2,500 210,313
6,877,605
TOTAL UTILITIES 9,958,211
TOTAL COMMON STOCKS 74,385,669
(Cost $68,228,632)
CONVERTIBLE PREFERRED STOCKS
- - 1.7%
BASIC INDUSTRIES - 0.2%
CHEMICALS & PLASTICS - 0.2%
Monsanto Co. $1.625 ACES (a) 2,900 142,100
ENERGY - 0.1%
OIL & GAS - 0.1%
Occidental Petroleum Corp. 1,100 51,631
$3.00
FINANCE - 0.3%
CREDIT & OTHER FINANCE - 0.2%
Federal-Mogul Financing Trust 600 39,600
$3.50
Union Pacific Capital Trust 2,600 118,300
$3.125
157,900
INSURANCE - 0.1%
Aetna, Inc. Class C, $4.7578 700 53,244
PRIDES
Conseco, Inc. $4.279 PRIDES 600 63,600
116,844
TOTAL FINANCE 274,744
INDUSTRIAL MACHINERY &
EQUIPMENT - 0.1%
ELECTRICAL EQUIPMENT - 0.0%
Loral Space & Communications 600 31,800
Ltd. Series C, $3.00
INDUSTRIAL MACHINERY &
EQUIPMENT - 0.1%
Ingersoll Rand Co./Ingersoll 2,100 42,000
Rand Finance $0.195 Growth
PRIDES
TOTAL INDUSTRIAL MACHINERY & 73,800
EQUIPMENT
MEDIA & LEISURE - 0.3%
BROADCASTING - 0.3%
MediaOne Group, Inc.:
$3.63 PIES 1,400 93,100
Class D $2.25 1,900 180,500
273,600
SHARES VALUE (NOTE 1)
UTILITIES - 0.7%
CELLULAR - 0.2%
AirTouch Communications, Inc. 2,000 $ 119,000
Class B, $1.74
ELECTRIC UTILITY - 0.3%
Houston Industries, Inc. 1,300 138,288
$3.216 ACES
Texas Utilities Co. $1.6575 2,500 119,195
257,483
TELEPHONE SERVICES - 0.2%
Qwest Trends Trust $2.04 3,000 150,000
(a)(c)
TOTAL UTILITIES 526,483
TOTAL CONVERTIBLE PREFERRED 1,342,358
STOCKS
(Cost $1,215,442)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
CONVERTIBLE BONDS - 0.7%
MOODY'S RATINGS (UNAUDITED) PRINCIPAL AMOUNT
MEDIA & LEISURE - 0.2%
PUBLISHING - 0.2%
News America Holdings, Inc. Baa3 $ 297,000 166,691
liquid yield option notes 0%
3/11/13
RETAIL & WHOLESALE - 0.2%
RETAIL & WHOLESALE,
MISCELLANEOUS - 0.2%
Home Depot, Inc. 3.25% 10/1/01 A1 60,000 157,500
SERVICES - 0.1%
ADT Operations, Inc. liquid Baa1 51,000 104,468
yield option notes 0%, 7/6/10
TECHNOLOGY - 0.2%
COMPUTER SERVICES & SOFTWARE
- - 0.0%
Softkey International, Inc. - 10,000 9,825
5.5% 11/1/00 (c)
ELECTRONICS - 0.2%
Micron Technology, Inc. 7% B2 140,000 148,435
7/1/04
TOTAL TECHNOLOGY 158,260
TOTAL CONVERTIBLE BONDS 586,919
(Cost $434,730)
CASH EQUIVALENTS - 3.8%
SHARES
Taxable Central Cash Fund (b) 2,981,367 2,981,367
(Cost $2,981,367)
TOTAL INVESTMENT IN $ 79,296,313
SECURITIES - 100%
(Cost $72,860,171)
</TABLE>
SECURITY TYPE ABBREVIATIONS
ACES - Automatic Common Exchange Securities
PIES - Premium Income 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 4.80%. The yield refers to the income earned by investing in
the fund over the seven-day period, expressed as an annual percentage.
(c) 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. At the period end, the value of these securities
amounted to $159,825 or 0.2% of net assets (see Note 2 of Notes to
Finacial Statements).
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $66,714,522 and $16,750,307, 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 $6,473 and $0,
respectively, for the period (see Note 4 of Notes to Financial
Statements).
INCOME TAX INFORMATION
At December 31, 1998, the aggregate cost of investment securities for
income tax purposes was $72,917,455. Net unrealized appreciation
aggregated $6,378,858, of which $10,527,811 related to appreciated
investment securities and $4,148,953 related to depreciated investment
securities.
The fund hereby designates approximately $190,000 as a capital gain
dividend for the purpose of the dividend paid deduction.
EQUITY INCOME PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
ASSETS
Investment in securities, at $ 79,296,313
value (cost $72,860,171) -
See accompanying schedule
Cash 24,363
Receivable for investments 147,401
sold
Receivable for fund shares 8,184
sold
Dividends receivable 133,223
Interest receivable 17,231
TOTAL ASSETS 79,626,715
LIABILITIES
Payable for investments $ 239,421
purchased
Payable for fund shares 92,005
redeemed
Accrued management fee 43,442
Other payables and accrued 53,874
expenses
TOTAL LIABILITIES 428,742
NET ASSETS $ 79,197,973
Net Assets consist of:
Paid in capital $ 72,699,194
Undistributed net investment 201
income
Accumulated undistributed net 62,412
realized gain (loss) on
investments and foreign
currency transactions
Net unrealized appreciation 6,436,166
(depreciation) on
investments and assets and
liabilities in foreign
currencies
NET ASSETS, for 5,139,586 $ 79,197,973
shares outstanding
NET ASSET VALUE, offering $15.41
price and redemption price
per share ($79,197,973
(divided by) 5,139,586
shares)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
INVESTMENT INCOME $ 988,085
Dividends
Interest 132,055
TOTAL INCOME 1,120,140
EXPENSES
Management fee $ 385,866
Transfer agent fees 12,652
Accounting fees and expenses 60,174
Non-interested trustees' 4,833
compensation
Custodian fees and expenses 51,054
Registration fees 2,145
Audit 37,810
Legal 3,618
Miscellaneous 5,533
Total expenses before 563,685
reductions
Expense reductions (75,696) 487,989
NET INVESTMENT INCOME 632,151
REALIZED AND UNREALIZED GAIN
(LOSS)
Net realized gain (loss) on:
Investment securities 253,010
Foreign currency transactions 1,688 254,698
Change in net unrealized
appreciation (depreciation)
on:
Investment securities 4,685,386
Assets and liabilities in 25 4,685,411
foreign currencies
NET GAIN (LOSS) 4,940,109
NET INCREASE (DECREASE) IN $ 5,572,260
NET ASSETS RESULTING FROM
OPERATIONS
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
INCREASE (DECREASE) IN NET YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
ASSETS
Operations Net investment $ 632,151 $ 171,247
income
Net realized gain (loss) 254,698 899,730
Change in net unrealized 4,685,411 1,438,705
appreciation (depreciation)
NET INCREASE (DECREASE) IN 5,572,260 2,509,682
NET ASSETS RESULTING FROM
OPERATIONS
Distributions to shareholders (633,580) (171,176)
From net investment income
From net realized gain (261,969) (841,389)
TOTAL DISTRIBUTIONS (895,549) (1,012,565)
Share transactions Net 62,650,949 20,040,415
proceeds from sales of shares
Reinvestment of distributions 895,549 1,012,565
Cost of shares redeemed (11,164,488) (4,011,242)
NET INCREASE (DECREASE) IN 52,382,010 17,041,738
NET ASSETS RESULTING FROM
SHARE TRANSACTIONS
TOTAL INCREASE (DECREASE) 57,058,721 18,538,855
IN NET ASSETS
NET ASSETS
Beginning of period 22,139,252 3,600,397
End of period (including $ 79,197,973 $ 22,139,252
undistributed net investment
income of $201 and $0,
respectively)
OTHER INFORMATION
Shares
Sold 4,266,429 1,503,025
Issued in reinvestment of 60,795 74,849
distributions
Redeemed (779,709) (310,550)
Net increase (decrease) 3,547,515 1,267,324
SEE ACCOMPANYING NOTES WHICH
ARE AN INTEGRAL PART OF THE
FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1998 1997 1996 D
Net asset value, beginning of $ 13.91 $ 11.09 $ 10.00
period
Income from Investment
Operations
Net investment income .18 G .21 G .08
Net realized and unrealized 1.53 3.32 1.09
gain (loss)
Total from investment 1.71 3.53 1.17
operations
Less Distributions
From net investment income (.13) (.12) (.08)
From net realized gain (.08) (.59) -
Total distributions (.21) (.71) (.08)
Net asset value, end of period $ 15.41 $ 13.91 $ 11.09
TOTAL RETURN B, C 12.38% 32.05% 11.69%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 79,198 $ 22,139 $ 3,600
(000 omitted)
Ratio of expenses to average .95% E .95% E .95% A, E
net assets
Ratio of expenses to average .94% F .95% .95% A
net assets after expense
reductions
Ratio of net investment 1.22% 1.60% 2.34% A
income to average net assets
Portfolio turnover rate 34% 52% 14% A
</TABLE>
A ANNUALIZED B TOTAL RETURNS
FOR PERIODS OF LESS THAN ONE
YEAR ARE NOT ANNUALIZED AND
DO NOT REFLECT CHARGES
ATTRIBUTABLE TO INSURANCE
COMPANY SEPARATE ACCOUNTS.
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 FOR THE
PERIOD AUGUST 30, 1996
(COMMENCEMENT OF SALE OF
SHARES) TO DECEMBER 31,
1996. E THE TRAVELERS AGREED
TO REIMBURSE A PORTION OF
THE FUND'S EXPENSES DURING
THE PERIOD. WITHOUT THIS
REIMBURSEMENT, THE FUND'S
EXPENSE RATIO WOULD HAVE
BEEN 1.09%, 1.90% AND 4.56%
(ANNUALIZED) FOR 1998, 1997
AND 1996, RESPECTIVELY (SEE
NOTE 5 OF NOTES TO FINANCIAL
STATEMENTS). F THE TRAVELERS
HAS ENTERED INTO VARYING
ARRANGEMENTS WITH THIRD
PARTIES WHO EITHER PAID OR
REDUCED A PORTION OF THE
FUND'S EXPENSES (SEE NOTE 5
OF NOTES TO FINANCIAL
STATEMENTS). G NET
INVESTMENT INCOME PER SHARE
HAS BEEN CALCULATED BASED ON
AVERAGE SHARES OUTSTANDING
DURING THE PERIOD.
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). If certain fund expenses had not been
reimbursed, the total returns would have been lower.
CUMULATIVE TOTAL RETURNS
PERIODS ENDED DECEMBER 31, PAST 1 YEAR LIFE OF FUND
1998
Large Cap Portfolio 35.65% 89.66%
S&P 500 28.58% 96.22%
CUMULATIVE TOTAL RETURNS show the fund's performance in percentage
terms over a set period - in this case, one year or since the fund
started on August 30, 1996.
You can compare the fund's return to the performance of the Standard &
Poor's 500 Index - a market capitalization-weighted index of common
stocks. This benchmark includes reinvested dividends and capital
gains, if any.
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 DECEMBER 31, PAST 1 YEAR LIFE OF FUND
1998
Large Cap Portfolio 35.65% 31.56%
S&P 500 28.58% 33.49%
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.
$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
1998/07/31 16603.51 17772.84
1998/08/31 14188.64 15203.24
1998/09/30 15349.43 16177.16
1998/10/31 16344.40 17493.01
1998/11/30 17443.01 18553.26
1998/12/31 18966.49 19622.30
IMATRL PRASUN SHR__CHT 19981231 19990113 155059 R00000000000031
$10,000 OVER LIFE OF FUND: Let's say hypothetically that $10,000 was
invested in the Large Cap Portfolio on August 30, 1996, when the fund
started. As the chart shows, by December 31, 1998, the value of the
investment would have grown to $18,966 - an 89.66% 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
$19,622 - a 96.22% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF
DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
Microsoft Corp. 3.9
General Electric Co. 3.8
Pfizer, Inc. 2.8
Intel Corp. 2.8
MCI WorldCom, Inc. 2.2
TOP FIVE MARKET SECTORS AS OF
DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
TECHNOLOGY 23.5
HEALTH 20.9
NONDURABLES 10.6
FINANCE 8.9
MEDIA & LEISURE 7.5
ASSET ALLOCATION AS OF DECEMBER 31, 1998*
AS OF DECEMBER 31, 1998
Row: 1, Col: 1, Value: 94.7
Row: 1, Col: 2, Value: 5.3
Stocks 94.7%
Short-term investments 5.3%
*FOREIGN INVESTMENTS 4.5%
LARGE CAP PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
(photograph of Karen Firestone)
An interview with
Karen Firestone,
Portfolio Manager of
Large Cap Portfolio
Q. HOW DID THE FUND PERFORM, KAREN?
A. Quite well. For the 12 months that ended December 31, 1998 the fund
outperformed the Standard & Poor's 500 Index, which returned 28.58%.
Q. THE FUND'S STRONG RETURNS OVER THE PAST YEAR ARE NOT NECESSARILY
SURPRISING GIVEN THAT LARGE-CAPITALIZATION STOCKS GENERALLY
OUTPERFORMED THE REST OF THE MARKET OVER THAT PERIOD. THAT SAID, WHY
DID THE FUND PERFORM BETTER THAN THE S&P 500 INDEX?
A. Mostly for two reasons. First, I believe the fund had a larger
weighting in a number of the period's top-performing, large-cap stocks
than the S&P 500. That's largely because when the market stumbled in
July and August of 1998, many investors became leery of large growth
stocks with high price-to-earnings ratios. As a result, they sold out
of many large growth stocks or reduced their weightings in them. I
took the opposite approach and continued to hold these stocks. In the
very short term, these investors made the right decision - many large
growth stocks were hit the hardest as the market dropped. However,
when the market picked up in the following months, these stocks became
the market leaders. Because I held on to such rebounding stocks as
pharmaceutical giant Merck and Intel, the dominant name in the
microprocessor business, the fund got a boost relative to the S&P 500.
Q. WHAT WAS THE SECOND REASON THE FUND DID SO WELL?
A. Good stock selection. In addition to my holdings in
very-large-capitalization stocks, I also owned a handful of
strong-performing smaller names. For example, the fund benefited from
its investment in Dominick's Supermarket, a grocery store chain that
was acquired by Safeway during the period. Internet and cable stocks
also were outstanding contributors to the fund.
Q. IN TERMS OF THE FUND'S VERY-LARGE-CAPITALIZATION STOCKS, WHAT
SPECIFIC HOLDINGS HELPED THE FUND THE MOST?
A. In general, the fund benefited the most from its top holdings in
the health care, utilities and technology sectors. As I just noted,
pharmaceutical company Merck saw strong revenue growth in the third
quarter. Another top-five holding in the health care sector, Pfizer,
also helped the fund. After Pfizer introduced Viagra and the company
recovered from initial profit estimates that were too high, I
significantly increased the fund's holdings in this company. In terms
of communication stocks, the recently merged company MCI WorldCom -
the biggest player in the new age of communications - enjoyed a strong
year of outperformance. In technology, Intel generated a huge amount
of cash flow, and Microsoft, the fund's top holding at the end of the
period, saw strong growth and excellent profit margins over the
period. Outside of these sectors, top-five holding General Electric
benefited from excellent management, continued strong market share,
margin improvements and a solid performance from its financial
services division.
Q. DID YOU REGRET ANY OF THE INVESTMENT DECISIONS YOU MADE OVER THE
PERIOD?
A. Sure. For instance, I wish I had bought more technology stocks -
especially PC manufacturer Dell and computer networking company Cisco
- - in the third quarter when prices were low.
Q. KAREN, WHAT'S YOUR OUTLOOK FOR THE FUND?
A. My goal is to remain positioned in sectors and specific stocks that
achieve higher growth in sales and earnings than the S&P 500 index.
Short term, I need to and expect to focus on a market that is showing
rapid group rotation. By this I mean that in the current market,
investors love pharmaceutical stocks one week, then three weeks later
these stocks are out of favor and retail stocks, for instance, are
strong. The swings in prices can be extreme, so I have to be nimble
and anticipate these changes in market direction. Going forward, I
plan to modify the fund's holdings for the short term based on market
conditions, without losing sight of its long-term goals.
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 December 31, 1998, more than
$79 million
MANAGER: Stephen Petersen, since inception;
joined Fidelity in 1980
LARGE CAP PORTFOLIO
INVESTMENTS DECEMBER 31, 1998
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 94.7%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 0.2%
Boeing Co. 3,300 $ 107,663
BASIC INDUSTRIES - 0.8%
CHEMICALS & PLASTICS - 0.5%
Monsanto Co. 4,900 232,750
PACKAGING & CONTAINERS - 0.3%
Owens-Illinois, Inc. (a) 5,600 171,500
TOTAL BASIC INDUSTRIES 404,250
DURABLES - 1.2%
AUTOS, TIRES, & ACCESSORIES -
0.2%
Honda Motor Co. Ltd. 1,300 86,775
sponsored ADR
CONSUMER ELECTRONICS - 0.3%
Black & Decker Corp. 2,700 151,369
HOME FURNISHINGS - 0.3%
Leggett & Platt, Inc. 7,100 156,200
TEXTILES & APPAREL - 0.4%
Boss (Hugo) AG 48 80,743
NIKE, Inc. Class B 3,900 158,194
238,937
TOTAL DURABLES 633,281
ENERGY - 3.2%
ENERGY SERVICES - 0.9%
Baker Hughes, Inc. 6,900 122,044
Halliburton Co. 7,300 216,263
Schlumberger Ltd. 3,300 152,213
490,520
OIL & GAS - 2.3%
Amoco Corp. 3,000 172,488
British Petroleum Co. PLC ADR 1,500 142,500
Exxon Corp. 2,900 212,063
Royal Dutch Petroleum Co. (NY 2,200 105,325
Registry Gilder 1.25)
Texaco, Inc. 3,300 174,488
Total SA sponsored ADR 5,000 248,750
USX-Marathon Group 4,900 147,613
1,203,227
TOTAL ENERGY 1,693,747
FINANCE - 8.9%
BANKS - 1.1%
AmSouth Bancorp. 3,500 159,688
Bank of Ireland, Inc. 3,900 84,972
SHARES VALUE (NOTE 1)
Bank of New York Co., Inc. 6,000 $ 241,500
Bank One Corp. 2,300 117,444
603,604
CREDIT & OTHER FINANCE - 2.5%
American Express Co. 4,100 419,225
Associates First Capital 8,200 347,475
Corp. Class A
Fleet Financial Group, Inc. 9,600 429,000
Household International, Inc. 3,100 122,838
1,318,538
FEDERAL SPONSORED CREDIT - 2.5%
Fannie Mae 9,600 710,400
Freddie Mac 9,900 637,931
1,348,331
INSURANCE - 2.1%
Ambac Financial Group, Inc. 3,000 180,563
American International Group, 2,700 260,888
Inc.
Hartford Financial Services 3,800 208,525
Group, Inc.
MGIC Investment Corp. 2,300 91,569
Progressive Corp. 1,600 271,000
UNUM Corp. 1,900 110,913
1,123,458
SAVINGS & LOANS - 0.7%
Charter One Financial, Inc. 5,040 139,860
Dime Bancorp, Inc. 7,500 198,281
338,141
TOTAL FINANCE 4,732,072
HEALTH - 20.9%
DRUGS & PHARMACEUTICALS - 16.4%
American Home Products Corp. 10,900 613,806
Amgen, Inc. (a) 5,200 543,725
Bristol-Myers Squibb Co. 6,400 856,400
Elan Corp. PLC ADR (a) 4,100 285,206
Genentech, Inc. (special) (a) 2,500 199,219
Glaxo Wellcome PLC sponsored 4,000 278,000
ADR
Lilly (Eli) & Co. 10,200 906,525
Merck & Co., Inc. 7,300 1,078,119
Millennium Pharmaceuticals, 4,100 106,088
Inc. (a)
Pfizer, Inc. 12,100 1,517,794
Pharmacia & Upjohn, Inc. 6,900 390,713
Protein Design Labs, Inc. (a) 5,100 118,575
Quintiles Transnational Corp. 2,900 154,788
(a)
Schering-Plough Corp. 14,000 773,500
SmithKline Beecham PLC ADR 4,600 319,700
Warner-Lambert Co. 8,200 616,538
8,758,696
MEDICAL EQUIPMENT & SUPPLIES
- - 4.0%
Abbott Laboratories 8,400 411,600
Becton, Dickinson & Co. 4,600 196,363
Guidant Corp. 3,700 407,925
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
HEALTH - CONTINUED
MEDICAL EQUIPMENT & SUPPLIES
- - CONTINUED
Johnson & Johnson 7,800 $ 654,225
Medtronic, Inc. 6,100 452,925
2,123,038
MEDICAL FACILITIES MANAGEMENT
- - 0.5%
Health Management Associates, 9,175 198,409
Inc. Class A (a)
Humana, Inc. (a) 5,600 99,750
298,159
TOTAL HEALTH 11,179,893
INDUSTRIAL MACHINERY &
EQUIPMENT - 4.3%
ELECTRICAL EQUIPMENT - 4.0%
General Electric Co. 19,900 2,031,044
Honeywell, Inc. 1,400 105,438
2,136,482
INDUSTRIAL MACHINERY &
EQUIPMENT - 0.3%
ASM Lithography Holding N V 5,700 173,850
(a)
TOTAL INDUSTRIAL MACHINERY & 2,310,332
EQUIPMENT
MEDIA & LEISURE - 7.5%
BROADCASTING - 3.4%
Cablevision Systems Corp. 4,200 210,788
Class A (a)
CBS Corp. 14,400 471,600
Comcast Corp. Class A 9,300 545,794
(special)
MediaOne Group, Inc. 4,400 206,800
Time Warner, Inc. 6,000 372,375
1,807,357
ENTERTAINMENT - 1.3%
Disney (Walt) Co. 15,500 465,000
Tele-Communications, Inc. 10,800 254,475
(TCI Ventures Group) Series
A (a)
719,475
PUBLISHING - 1.9%
New York Times Co. (The) 13,700 475,219
Class A
Tribune Co. 7,900 521,400
996,619
RESTAURANTS - 0.9%
McDonald's Corp. 6,600 505,725
TOTAL MEDIA & LEISURE 4,029,176
NONDURABLES - 10.6%
BEVERAGES - 3.8%
Anheuser-Busch Companies, 6,800 446,250
Inc.
Cadbury Schweppes PLC ADR 2,600 180,050
SHARES VALUE (NOTE 1)
Coca-Cola Co. (The) 13,900 $ 929,563
PepsiCo, Inc. 11,900 487,156
2,043,019
FOODS - 1.8%
Heinz (H.J.) Co. 5,000 283,125
Hershey Foods Corp. 2,800 174,125
Quaker Oats Co. 4,400 261,800
Raisio Group PLC 5,100 56,012
Sara Lee Corp. 5,800 163,488
938,550
HOUSEHOLD PRODUCTS - 3.0%
Clorox Co. 1,700 198,581
Colgate-Palmolive Co. 1,000 92,875
Gillette Co. 10,600 512,113
Procter & Gamble Co. 8,500 776,156
1,579,725
TOBACCO - 2.0%
Philip Morris Companies, Inc. 20,400 1,091,400
TOTAL NONDURABLES 5,652,694
RETAIL & WHOLESALE - 7.1%
APPAREL STORES - 1.0%
Abercrombie & Fitch Co. Class 4,505 318,729
A (a)
Gap, Inc. 3,750 210,938
529,667
DRUG STORES - 0.9%
CVS Corp. 3,500 192,500
Walgreen Co. 4,700 275,244
467,744
GENERAL MERCHANDISE STORES -
2.9%
Dayton Hudson Corp. 5,700 309,225
Federated Department Stores, 8,800 383,350
Inc. (a)
Wal-Mart Stores, Inc. 10,800 879,525
1,572,100
GROCERY STORES - 0.9%
Safeway, Inc. (a) 7,900 481,406
RETAIL & WHOLESALE,
MISCELLANEOUS - 1.4%
Castorama Dubois 400 91,238
Investissements SA
Home Depot, Inc. 7,300 446,669
Staples, Inc. (a) 5,000 218,438
756,345
TOTAL RETAIL & WHOLESALE 3,807,262
SERVICES - 1.4%
ADVERTISING - 1.4%
DoubleClick, Inc. (a) 4,500 205,031
Omnicom Group, Inc. 4,500 261,000
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
SERVICES - CONTINUED
ADVERTISING - CONTINUED
Outdoor Systems, Inc. (a) 6,150 $ 184,500
WPP Group PLC sponsored ADR 1,900 117,325
767,856
TECHNOLOGY - 23.5%
COMMUNICATIONS EQUIPMENT - 3.8%
Ascend Communications, Inc. 4,500 295,875
(a)
Cisco Systems, Inc. (a) 10,425 967,570
Lucent Technologies, Inc. 7,100 781,000
2,044,445
COMPUTER SERVICES & SOFTWARE
- - 7.6%
Amazon.com, Inc. (a) 500 160,625
America Online, Inc. 3,400 544,000
Computer Associates 3,500 149,188
International, Inc.
Compuware Corp. (a) 1,800 140,625
Electronic Data Systems Corp. 3,200 160,800
Equifax, Inc. 3,600 123,075
First Data Corp. 10,400 329,550
Microsoft Corp. (a) 14,900 2,066,428
Oracle Corp. (a) 5,500 237,188
Siebel Systems, Inc. (a) 3,600 122,175
4,033,654
COMPUTERS & OFFICE EQUIPMENT
- - 5.7%
Compaq Computer Corp. 15,600 654,225
Dell Computer Corp. (a) 9,800 717,238
EMC Corp. (a) 4,200 357,000
Gateway 2000, Inc. (a) 1,600 81,900
Hewlett-Packard Co. 6,100 416,706
International Business 2,800 517,300
Machines Corp.
Pitney Bowes, Inc. 2,600 171,763
Tech Data Corp. (a) 2,900 116,725
3,032,857
ELECTRONIC INSTRUMENTS - 1.2%
Applied Materials, Inc. (a) 6,400 273,200
KLA-Tencor Corp. (a) 4,500 195,188
Perkin-Elmer Corp. 2,000 195,125
663,513
ELECTRONICS - 5.2%
Altera Corp. (a) 4,600 280,025
Intel Corp. 12,500 1,482,031
Micron Technology, Inc. (a) 4,500 227,531
Motorola, Inc. 4,300 262,569
Texas Instruments, Inc. 4,600 393,588
Vitesse Semiconductor Corp. 2,800 127,750
(a)
2,773,494
TOTAL TECHNOLOGY 12,547,963
UTILITIES - 5.1%
CELLULAR - 0.7%
AirTouch Communications, Inc. 4,900 353,413
(a)
SHARES VALUE (NOTE 1)
ELECTRIC UTILITY - 0.2%
CMS Energy Corp. 2,400 $ 116,250
TELEPHONE SERVICES - 4.2%
ALLTEL Corp. 2,600 155,513
AT&T Corp. 6,100 459,025
Bell Atlantic Corp. 1,900 107,944
BellSouth Corp. 3,000 149,625
Global TeleSystems Group, 3,600 200,700
Inc. (a)
MCI WorldCom, Inc. (a) 16,751 1,201,884
2,274,691
TOTAL UTILITIES 2,744,354
TOTAL COMMON STOCKS 50,610,543
(Cost $42,413,752)
CASH EQUIVALENTS - 5.3%
Taxable Central Cash Fund (b) 2,850,372 2,850,372
(Cost $2,850,372)
TOTAL INVESTMENT IN $ 53,460,915
SECURITIES - 100%
(Cost $45,264,124)
LEGEND
(a) Non-income producing
(b) At period end, the seven-day yield on the Taxable Central Cash
Fund was 4.80%. 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 $59,909,345 and $30,436,435, 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 $9,077 and $0,
respectively, for the period (see Note 4 of Notes to Financial
Statements).
INCOME TAX INFORMATION
At December 31, 1998, the aggregate cost of investment securities for
income tax purposes was $45,475,314. Net unrealized appreciation
aggregated $7,985,601, of which $8,907,473 related to appreciated
investment securities and $921,872 related to depreciated investment
securities.
The fund hereby designates approximately $1,229,000 as a capital gain
dividend for the purpose of the dividend paid deduction.
LARGE CAP PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
ASSETS
Investment in securities, at $ 53,460,915
value (cost $45,264,124) -
See accompanying schedule
Cash 34,186
Receivable for fund shares 94,628
sold
Dividends receivable 43,331
Interest receivable 11,517
TOTAL ASSETS 53,644,577
LIABILITIES
Payable for investments $ 944,426
purchased
Payable for fund shares 36,277
redeemed
Accrued management fee 24,671
Other payables and accrued 40,182
expenses
TOTAL LIABILITIES 1,045,556
NET ASSETS $ 52,599,021
Net Assets consist of:
Paid in capital $ 43,661,627
Undistributed net investment 10,182
income
Accumulated undistributed net 730,352
realized gain (loss) on
investments and foreign
currency transactions
Net unrealized appreciation 8,196,860
(depreciation) on
investments and assets and
liabilities in foreign
currencies
NET ASSETS, for 3,016,792 $ 52,599,021
shares outstanding
NET ASSET VALUE, offering $17.44
price and redemption price
per share ($52,599,021
(divided by) 3,016,792
shares)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
INVESTMENT INCOME $ 245,464
Dividends
Interest 85,999
TOTAL INCOME 331,463
EXPENSES
Management fee $ 210,887
Transfer agent fees 7,920
Accounting fees and expenses 60,099
Non-interested trustees' 4,833
compensation
Custodian fees and expenses 21,510
Registration fees 384
Audit 34,401
Legal 2,953
Miscellaneous 5,533
Total expenses before 348,520
reductions
Expense reductions (83,136) 265,384
NET INVESTMENT INCOME 66,079
REALIZED AND UNREALIZED GAIN
(LOSS)
Net realized gain (loss) on:
Investment securities 2,954,872
Foreign currency transactions (493) 2,954,379
Change in net unrealized
appreciation (depreciation)
on:
Investment securities 6,971,478
Assets and liabilities in 69 6,971,547
foreign currencies
NET GAIN (LOSS) 9,925,926
NET INCREASE (DECREASE) IN $ 9,992,005
NET ASSETS RESULTING FROM
OPERATIONS
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
INCREASE (DECREASE) IN NET YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
ASSETS
Operations Net investment $ 66,079 $ 32,734
income
Net realized gain (loss) 2,954,379 184,372
Change in net unrealized 6,971,547 879,845
appreciation (depreciation)
NET INCREASE (DECREASE) IN 9,992,005 1,096,951
NET ASSETS RESULTING FROM
OPERATIONS
Distributions to shareholders (55,404) (32,734)
From net investment income
From net realized gain (2,224,055) (225,320)
TOTAL DISTRIBUTIONS (2,279,459) (258,054)
Share transactions Net 36,122,003 7,699,498
proceeds from sales of shares
Reinvestment of distributions 2,279,459 258,054
Cost of shares redeemed (5,584,574) (138,346)
NET INCREASE (DECREASE) IN 32,816,888 7,819,206
NET ASSETS RESULTING FROM
SHARE TRANSACTIONS
TOTAL INCREASE (DECREASE) 40,529,434 8,658,103
IN NET ASSETS
NET ASSETS
Beginning of period 12,069,587 3,411,484
End of period (including $ 52,599,021 $ 12,069,587
undistributed net investment
income of $10,182 and $0,
respectively)
OTHER INFORMATION
Shares
Sold 2,333,777 582,424
Issued in reinvestment of 137,185 20,100
distributions
Redeemed (348,188) (10,566)
Net increase (decrease) 2,122,774 591,958
SEE ACCOMPANYING NOTES WHICH
ARE AN INTEGRAL PART OF THE
FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1998 1997 1996 D
Net asset value, beginning of $ 13.50 $ 11.29 $ 10.00
period
Income from Investment
Operations
Net investment income .04 G .07 G .04
Net realized and unrealized 4.73 2.54 1.29
gain (loss)
Total from investment 4.77 2.61 1.33
operations
Less Distributions
From net investment income (.02) (.04) (.04)
From net realized gain (.81) (.36) -
Total distributions (.83) (.40) (.04)
Net asset value, end of period $ 17.44 $ 13.50 $ 11.29
TOTAL RETURN B, C 35.65% 23.41% 13.30%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 52,599 $ 12,070 $ 3,411
(000 omitted)
Ratio of expenses to average .95% E .95% E .95% A, E
net assets
Ratio of expenses to average .94% F .95% .95% A
net assets after expense
reductions
Ratio of net investment .23% .55% .98% A
income to average net assets
Portfolio turnover rate 112% 60% 57% A
</TABLE>
A ANNUALIZED B TOTAL RETURNS
FOR PERIODS OF LESS THAN ONE
YEAR ARE NOT ANNUALIZED AND
DO NOT REFLECT CHARGES
ATTRIBUTABLE TO INSURANCE
COMPANY SEPARATE ACCOUNTS.
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 FOR THE
PERIOD AUGUST 30, 1996
(COMMENCEMENT OF SALE OF
SHARES) TO DECEMBER 31,
1996. E THE TRAVELERS AGREED
TO REIMBURSE A PORTION OF
THE FUND'S EXPENSES DURING
THE PERIOD. WITHOUT THIS
REIMBURSEMENT, THE FUND'S
EXPENSE RATIO WOULD HAVE
BEEN 1.23%, 2.65% AND 4.57%
(ANNUALIZED) FOR 1998, 1997
AND 1996, RESPECTIVELY (SEE
NOTE 5 OF NOTES TO FINANCIAL
STATEMENTS). F THE TRAVELERS
HAS ENTERED INTO VARYING
ARRANGEMENTS WITH THIRD
PARTIES WHO EITHER PAID OR
REDUCED A PORTION OF THE
FUND'S EXPENSES (SEE NOTE 5
OF NOTES TO FINANCIAL
STATEMENTS). G NET
INVESTMENT INCOME PER SHARE
HAS BEEN CALCULATED BASED ON
AVERAGE SHARES OUTSTANDING
DURING THE PERIOD.
NOTES TO FINANCIAL STATEMENTS
For the period ended December 31, 1998
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, 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 require management
to make certain estimates and assumptions at the date of the financial
statements. The following summarizes the significant accounting
policies of the funds:
SECURITY VALUATION. Securities for which exchange quotations are
readily available are valued at the last sale price, or if no sale
price, at the closing bid price. Securities (including restricted
securities) for which exchange quotations are not readily available
(and in certain cases debt securities which trade on an exchange) are
valued primarily using dealer-supplied valuations or at their fair
value as determined in good faith under consistently applied
procedures under the general supervision of the Board of Trustees.
Short-term securities with remaining maturities of sixty days or less
for which quotations are not readily available are valued at amortized
cost or original cost plus accrued interest, both of which approximate
current value.
FOREIGN CURRENCY TRANSLATION. The accounting records of the funds are
maintained in U.S. dollars. Investment securities and other assets and
liabilities denominated in a foreign currency are translated into U.S.
dollars at the prevailing rates of exchange at period end. 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
and settlement date 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 foreign currency transactions and 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.
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., an
affiliate of FMR. The Cash Fund is an open-end money market fund
available only to investment companies and other accounts managed by
FMR and its affiliates. The Cash Fund seeks preservation of capital,
liquidity, and current income by investing in U.S. Treasury securities
and repurchase agreements for these securities. Income distributions
from the Cash Fund are declared daily and paid monthly from net
interest income. Income distributions earned by the funds are recorded
as interest income in the accompanying financial statements.
RESTRICTED SECURITIES. Certain funds are permitted to invest in
securities that are subject to legal or contractual restrictions on
resale. These securities generally may be resold in transactions
2. OPERATING POLICIES - CONTINUED
RESTRICTED SECURITIES - CONTINUED
exempt from registration or to the public if the securities are
registered. Disposal of these securities may involve time-consuming
negotiations and expense, and prompt sale at an acceptable price may
be difficult. Information regarding restricted securities is included
under the caption "Other Information" at the end of each applicable
fund's schedule of investments.
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
Citigroup, Inc. (formerly The Travelers Group) (The Travelers),
receives a fee that is computed daily at an annual rate of .75% of
each fund's average net assets. TAMIC, on behalf of each fund, has
entered into a sub-advisory agreement with FMR. For its services as
each fund's sub-adviser, FMR is paid a portion of TAMIC's management
fee that is computed at an annual rate of .45% of each fund's average
net assets.
TRANSFER AGENT FEES. The Travelers Insurance Company, (The Travelers,
an affiliate of Citigroup), is each fund's transfer, dividend
disbursing, and shareholder servicing agent. The trust, on behalf of
each fund, has entered into a sub-arrangement with Fidelity
Investments Institutional Operations Company, Inc. (FIIOC), an
affiliate of FMR, under which FIIOC performs each fund's transfer,
dividend disbursing, and shareholder servicing agent functions. For
its services, FIIOC receives account fees and asset-based fees that
vary according to account size and type of account.
ACCOUNTING FEES. The trust, on behalf of each fund, has entered into a
service agent agreement with Fidelity Service Company, Inc. (FSC), an
affiliate of FMR, under which FSC maintains each fund's accounting
records. The fee is based on the level of average net assets for the
month plus out-of-pocket expenses.
BROKERAGE COMMISSIONS. The funds placed a portion of their portfolio
transactions with brokerage firms which are affiliates of FMR or
TAMIC. The commissions paid to these affiliated firms are shown under
the caption "Other Information" at the end of each applicable fund's
schedule of investments.
5. EXPENSE REDUCTIONS.
The Travelers voluntarily agreed to reimburse each fund's operating
expenses above an annual rate of .95% of average net assets. For the
period, the reimbursement reduced the expenses by $71,761 and $79,567
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.
The Travelers have directed certain portfolio trades to brokers who
paid a portion of each applicable fund's expenses. For the period, the
expenses were reduced by $3,593 and $3,311 for Equity Income Portfolio
and Large Cap Portfolio, respectively, under this arrangement.
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 $342 and $258 for Equity
Income Portfolio, and Large Cap Portfolio, respectively, under this
arrangement.
6. BENEFICIAL INTEREST.
At the end of the period, Citigroup, its affiliates and Separate
Accounts of The Travelers were record owners of 100% of the total
outstanding shares of the fund.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Travelers Series Trust and the Shareholders of
Equity Income Portfolio and Large Cap Portfolio:
In our opinion, the accompanying statements of assets and liabilities,
including the schedules of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of
Equity Income Portfolio and Large Cap Portfolio (funds of The
Travelers Series Trust) at December 31, 1998, and the results of their
operations, the changes in their net assets and the financial
highlights for the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements")
are the responsibility of the The Travelers Series Trust's management;
our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which
included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 11, 1999
DISTRIBUTIONS
The Board of Trustees of Travelers Series Trust voted to pay to
shareholders of record at the opening of business on record date, the
following distributions derived from capital gains realized from sales
of portfolio securities, and dividends derived from net investment
income:
PAY DATE RECORD DATE DIVIDENDS CAPITAL GAINS
Equity Income 2/5/99 2/5/99 - $.03
Large Cap 2/5/99 2/5/99 - $.26
The fund hereby designates 100% of the long-term capital gain
dividends distributed during the fiscal year as 20%-rate capital gain
dividend.
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.
