<PAGE> 1
ANNUAL REPORT
DECEMBER 31, 1998
THE TRAVELERS VARIABLE LIFE INSURANCE
SEPARATE ACCOUNT THREE
[TRAVELERS LOGO]
The Travelers Insurance Company
The Travelers Life and Annuity Company
One Tower Square
Hartford, CT 06183
<PAGE> 2
THE TRAVELERS VARIABLE LIFE INSURANCE
SEPARATE ACCOUNT THREE
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
ASSETS:
Investments in eligible funds at market value:
Greenwich Street Series Fund, 129,109 shares (cost $2,200,095) ........... $ 2,265,856
Smith Barney Concert Allocation Series Inc., 16,202 shares (cost $196,699) 196,806
The Travelers Series Trust, 67,242 shares (cost $761,785) ................ 826,735
Travelers Series Fund Inc., 3,668,029 shares (cost $20,629,557) .......... 23,426,120
-----------
Total Investments (cost $23,788,136) ................................... $26,715,517
Receivables:
Dividends .................................................................. 34,044
-----------
Total Assets ........................................................... 26,749,561
-----------
LIABILITIES:
Payables:
Insurance charges ........................................................ 4,837
Administrative fees ...................................................... 2,315
Accrued liabilities ........................................................ 19
-----------
Total Liabilities ........................................................ 7,171
-----------
NET ASSETS: .................................................................. $26,742,390
===========
</TABLE>
See Notes to Financial Statements
-1-
<PAGE> 3
THE TRAVELERS VARIABLE LIFE INSURANCE
SEPARATE ACCOUNT THREE
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends ............................................................. $ 983,611
EXPENSES:
Insurance charges ..................................................... $ 187,268
Administrative fees ................................................... 90,563
----------
Total expenses ...................................................... 277,831
----------
Net investment income ............................................. 705,780
----------
REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) from investment transactions:
Proceeds from investments sold ...................................... 9,513,348
Cost of investments sold ............................................ 9,159,876
----------
Net realized gain (loss) .......................................... 353,472
Change in unrealized gain (loss) on investments:
Unrealized gain at December 31, 1997 ................................ 1,623,358
Unrealized gain at December 31, 1998 ................................ 2,927,381
----------
Net change in unrealized gain (loss) for the year ................. 1,304,023
----------
Net realized gain (loss) and change in unrealized gain (loss) ..... 1,657,495
----------
Net increase in net assets resulting from operations .................... $2,363,275
==========
</TABLE>
See Notes to Financial Statements
-2-
<PAGE> 4
THE TRAVELERS VARIABLE LIFE INSURANCE
SEPARATE ACCOUNT THREE
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
OPERATIONS:
<S> <C> <C>
Net investment income ....................................... $ 705,780 $ 57,855
Net realized gain (loss) from investment transactions ....... 353,472 198,491
Net change in unrealized gain (loss) on investments ......... 1,304,023 1,339,147
------------ ------------
Net increase in net assets resulting from operations ...... 2,363,275 1,595,493
------------ ------------
UNIT TRANSACTIONS:
Participant premium payments
(applicable to 8,130,176 and 9,499,785 units, respectively) 8,920,352 10,072,788
Participant transfers from other Travelers accounts
(applicable to 6,758,795 and 5,814,161 units, respectively) 9,841,235 7,483,363
Growth rate intra-fund transfers in
(applicable to 5,722,722 and 5,507,303 units, respectively) 8,383,600 7,198,001
Contract surrenders
(applicable to 454,917 and 318,674 units, respectively) ... (627,508) (403,189)
Participant transfers to other Travelers accounts
(applicable to 9,228,749 and 8,564,026 units, respectively) (10,278,808) (9,195,127)
Growth rate intra-fund transfers out
(applicable to 5,729,503 and 5,520,915 units, respectively) (8,383,600) (7,198,001)
------------ ------------
Net increase in net assets resulting from unit transactions ... 7,855,271 7,957,835
------------ ------------
Net increase in net assets .................................. 10,218,546 9,553,328
NET ASSETS:
Beginning of year ........................................... 16,523,844 6,970,516
------------ ------------
End of year ................................................. $ 26,742,390 $ 16,523,844
============ ============
</TABLE>
See Notes to Financial Statements
-3-
<PAGE> 5
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Travelers Variable Life Insurance Separate Account Three ("Separate Account
Three") is a separate account of The Travelers Insurance Company ("The
Travelers"), an indirect wholly owned subsidiary of Citigroup Inc. (formerly
Travelers Group Inc.), and is available for funding certain variable life
insurance contracts issued by The Travelers. Separate Account Three is
registered under the Investment Company Act of 1940, as amended, as a unit
investment trust.
Participant premium payments applied to Separate Account Three are invested in
one or more eligible funds in accordance with the selection made by the contract
owner. As of December 31, 1998, the eligible funds available under Separate
Account Three were: Zero Coupon Bond Fund Portfolio Series 2000, Zero Coupon
Bond Fund Portfolio Series 2005 and MFS Emerging Growth Portfolio of The
Travelers Series Trust; Alliance Growth Portfolio, Van Kampen Enterprise
Portfolio (formerly Van Kampen American Capital Enterprise Portfolio), TBC
Managed Income Portfolio, Smith Barney High Income Portfolio, Smith Barney
International Equity Portfolio, Smith Barney Large Cap Value Portfolio (formerly
Smith Barney Income and Growth Portfolio), Smith Barney Money Market Portfolio,
Putnam Diversified Income Portfolio, MFS Total Return Portfolio and AIM Capital
Appreciation Portfolio of Travelers Series Fund Inc.; Total Return Portfolio of
Greenwich Street Series Fund; and Select High Growth Portfolio, Select Growth
Portfolio, Select Balanced Portfolio, Select Conservative Portfolio and Select
Income Portfolio of Smith Barney Concert Allocation Series Inc. The Travelers
Series Trust and Greenwich Street Series Fund are registered as Massachusetts
business trusts. Travelers Series Fund Inc. and Smith Barney Concert Allocation
Series Inc. are incorporated under Maryland law. All eligible funds are managed
by affiliates of The Travelers. Not all funds may be available in all states or
to all contract owners.
Effective December 18, 1998, the Zero Coupon Bond Fund Portfolio Series 1998 of
The Travelers Series Trust was fully liquidated.
The following is a summary of significant accounting policies consistently
followed by Separate Account Three in the preparation of its financial
statements.
SECURITY VALUATION. Investments are valued daily at the net asset values per
share of the underlying funds.
SECURITY TRANSACTIONS. Security transactions are accounted for on the trade
date. Dividend income is recorded on the ex-dividend date.
FEDERAL INCOME TAXES. The operations of Separate Account Three form a part of
the total operations of The Travelers and are not taxed separately. The
Travelers is taxed as a life insurance company under the Internal Revenue Code
of 1986, as amended (the "Code"). Under existing federal income tax law, no
taxes are payable on the investment income of Separate Account Three. Separate
Account Three is not taxed as a "regulated investment company" under Subchapter
M of the Code.
OTHER. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. INVESTMENTS
The aggregate costs of purchases and proceeds from sales of investments were
$18,051,860 and $9,513,348, respectively, for the year ended December 31, 1998.
Realized gains and losses from investment transactions are reported on an
identified cost basis. The cost of investments in eligible funds was $23,788,136
at December 31, 1998. Gross unrealized appreciation for all investments at
December 31, 1998 was $2,973,645. Gross unrealized depreciation for all
investments at December 31, 1998 was $46,264.
-4-
<PAGE> 6
NOTES TO FINANCIAL STATEMENTS - CONTINUED
3. CONTRACT CHARGES
Insurance charges are paid for the mortality and expense risks assumed by The
Travelers. These charges are equivalent to 0.90% of the average net assets of
Separate Account Three on an annual basis. (Contracts in this category are
identified as Price 1 in Note 4.) For any contract year that follows a contract
year in which the participant's average net fund growth rate (as described in
the prospectus) is 6.5% or greater, these charges will be reduced to 0.75%.
(Contracts in this category are identified as Price 2 in Note 4.)
Administrative fees are paid for administrative expenses incurred by The
Travelers. This charge is equivalent to 0.40% of the average net assets of
Separate Account Three on an annual basis.
Travelers Life receives contingent surrender charges on full or partial contract
surrenders. Such charges are computed by applying various percentages to
premiums and/or stated contract amounts (as described in the prospectus).
Travelers Life received $15,869 in satisfaction of such contingent surrender
charges for the year ended December 31, 1998. No contingent surrender charges
were received for the year ended December 31, 1997.
4. NET CONTRACT OWNERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------------
UNIT NET
UNITS VALUE ASSETS
----------- --------- ------------
<S> <C> <C> <C>
Greenwich Street Series Fund
Total Return Portfolio
Price 1 ............................... 784,945 $1.545 $1,212,749
Price 2 ............................... 677,997 1.552 1,052,503
Smith Barney Concert Allocation Series Inc.
Select Balanced Portfolio
Price 1 ............................... 105,397 1.057 111,442
Select Conservative Portfolio
Price 2 ............................... 5,744 1.042 5,986
Select Growth Portfolio
Price 1 ............................... 69,854 1.136 79,323
The Travelers Series Trust
MFS Emerging Growth Portfolio
Price 1 ............................... 82,740 1.515 125,379
Price 2 ............................... 70,886 1.519 107,671
Zero Coupon Bond Fund Portfolio Series 2000
Price 1 ............................... 27,032 1.139 30,784
Price 2 ............................... 48,307 1.144 55,261
Zero Coupon Bond Fund Portfolio Series 2005
Price 1 ............................... 197,135 1.215 239,439
Price 2 ............................... 244,036 1.220 297,733
</TABLE>
-5-
<PAGE> 7
NOTES TO FINANCIAL STATEMENTS - CONTINUED
4. NET CONTRACT OWNERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------------
UNIT NET
UNITS VALUE ASSETS
---------- --------- --------------
<S> <C> <C> <C>
Travelers Series Fund Inc.
AIM Capital Appreciation Portfolio
Price 1 ................................. 917,451 $1.483 $ 1,360,232
Price 2 ................................. 907,038 1.489 1,350,961
Alliance Growth Portfolio
Price 1 ................................. 1,189,163 2.138 2,542,991
Price 2 ................................. 1,323,768 2.149 2,844,371
MFS Total Return Portfolio
Price 1 ................................. 1,487,860 1.502 2,234,145
Price 2 ................................. 1,181,502 1.509 1,782,319
Putnam Diversified Income Portfolio
Price 1 ................................. 559,849 1.126 630,614
Price 2 ................................. 347,000 1.131 392,610
Smith Barney International Equity Portfolio
Price 1 ................................. 887,532 1.274 1,130,565
Price 2 ................................. 807,884 1.280 1,033,787
Smith Barney Money Market Portfolio
Price 1 ................................. 1,933,615 1.124 2,173,012
Price 2 ................................. 291,581 1.129 329,267
Smith Barney High Income Portfolio
Price 1 ................................. 496,847 1.279 635,280
Price 2 ................................. 315,096 1.285 404,804
Smith Barney Large Cap Value Portfolio
Price 1 ................................. 570,415 1.597 910,893
Price 2 ................................. 484,666 1.604 777,535
TBC Managed Income Portfolio
Price 1 ................................. 128,191 1.135 145,436
Price 2 ................................. 131,866 1.139 150,254
Van Kampen Enterprise Portfolio
Price 1 ................................. 682,741 1.927 1,315,586
Price 2 ................................. 660,966 1.936 1,279,458
-----------
Net Contract Owners' Equity ................. $26,742,390
===========
</TABLE>
-6-
<PAGE> 8
NOTES TO FINANCIAL STATEMENTS - CONTINUED
5. STATEMENT OF INVESTMENTS
<TABLE>
<CAPTION>
INVESTMENT OPTIONS NO. OF MARKET
SHARES VALUE
----------- -----------
<S> <C> <C>
GREENWICH STREET SERIES FUND (8.5%)
Total Return Portfolio
Total (Cost $2,200,095) ................................... 129,109 $ 2,265,856
----------- -----------
SMITH BARNEY CONCERT ALLOCATION SERIES INC. (0.7%)
Select Balanced Portfolio (Cost $111,762) ................... 9,344 111,473
Select Conservative Portfolio (Cost $5,846) ................. 515 5,987
Select Growth Portfolio (Cost $79,091) ...................... 6,343 79,346
----------- -----------
Total (Cost $196,699) ..................................... 16,202 196,806
----------- -----------
THE TRAVELERS SERIES TRUST (3.1%)
MFS Emerging Growth Portfolio (Cost $190,094) ............... 13,818 233,112
Zero Coupon Bond Fund Portfolio Series 2000 (Cost $82,635) .. 7,933 81,394
Zero Coupon Bond Fund Portfolio Series 2005 (Cost $489,056) . 45,491 512,229
----------- -----------
Total (Cost $761,785) ..................................... 67,242 826,735
----------- -----------
TRAVELERS SERIES FUND INC. (87.7%)
AIM Capital Appreciation Portfolio (Cost $2,266,251) ........ 187,286 2,711,899
Alliance Growth Portfolio (Cost $4,072,852) ................. 204,819 5,388,785
MFS Total Return Portfolio (Cost $3,664,815) ................ 235,910 4,017,546
Putnam Diversified Income Portfolio (Cost $1,043,326) ....... 85,292 1,023,502
Smith Barney International Equity Portfolio (Cost $2,114,489) 157,564 2,164,934
Smith Barney Money Market Portfolio (Cost $2,498,712) ....... 2,498,712 2,498,712
Smith Barney High Income Portfolio (Cost $1,065,276) ........ 82,177 1,040,366
Smith Barney Large Cap Value Portfolio (Cost $1,503,178) .... 83,567 1,688,882
TBC Managed Income Portfolio (Cost $286,245) ................ 25,129 295,769
Van Kampen Enterprise Portfolio (Cost $2,114,413) ........... 107,573 2,595,725
----------- -----------
Total (Cost $20,629,557) .................................. 3,668,029 23,426,120
----------- -----------
TOTAL INVESTMENT OPTIONS (100%)
(COST $23,788,136) ............................................ $26,715,517
===========
</TABLE>
-7-
<PAGE> 9
NOTES TO FINANCIAL STATEMENTS - CONTINUED
6. SCHEDULE OF SEPARATE ACCOUNT THREE OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
TOTAL RETURN SELECT BALANCED SELECT CONSERVATIVE
PORTFOLIO PORTFOLIO PORTFOLIO
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
INVESTMENT INCOME:
<S> <C> <C> <C> <C> <C> <C>
Dividends ......................................... $ 109,725 $ 61,473 $ 2,762 $ -- $ 136 $ --
----------- ----------- ----------- ----- ----------- -----
EXPENSES:
Insurance charges ................................. 16,528 9,145 601 -- 41 --
Administrative fees ............................... 8,096 4,287 267 -- 21 --
----------- ----------- ----------- ----- ----------- -----
Net investment income (loss) .................... 85,101 48,041 1,894 -- 74 --
----------- ----------- ----------- ----- ----------- -----
REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) from investment transactions:
Proceeds from investments sold .................. 106,311 140,410 2,065 -- 373 --
Cost of investments sold ........................ 82,668 112,153 2,141 -- 363 --
----------- ----------- ----------- ----- ----------- -----
Net realized gain (loss) ...................... 23,643 28,257 (76) -- 10 --
----------- ----------- ----------- ----- ----------- -----
Change in unrealized gain (loss) on investments:
Unrealized gain (loss) beginning of year ........ 129,670 46,648 -- -- -- --
Unrealized gain (loss) end of year .............. 65,761 129,670 (289) -- 141 --
----------- ----------- ----------- ----- ----------- -----
Net change in unrealized gain (loss) for the year . (63,909) 83,022 (289) -- 141 --
----------- ----------- ----------- ----- ----------- -----
Net increase (decrease) in net assets
resulting from operations ....................... 44,835 159,320 1,529 -- 225 --
----------- ----------- ----------- ----- ----------- -----
UNIT TRANSACTIONS:
Participant premium payments ...................... 2,106 -- (1) -- 1 --
Participant transfers from other Travelers accounts 756,221 917,596 111,141 -- 5,854 --
Growth rate intra-fund transfers in ............... 1,159,660 699,667 -- -- 17,044 --
Contract surrenders ............................... (48,984) (61,941) (1,227) -- (94) --
Participant transfers to other Travelers accounts . (34,171) (30,242) -- -- -- --
Growth rate intra-fund transfers out .............. (1,159,660) (699,667) -- -- (17,044) --
----------- ----------- ----------- ----- ----------- -----
Net increase (decrease) in net assets
resulting from unit transactions .............. 675,172 825,413 109,913 -- 5,761 --
----------- ----------- ----------- ----- ----------- -----
Net increase (decrease) in net assets ......... 720,007 984,733 111,442 -- 5,986 --
NET ASSETS:
Beginning of year ............................... 1,545,245 560,512 -- -- -- --
----------- ----------- ----------- ----- ----------- -----
End of year ..................................... $ 2,265,252 $ 1,545,245 $ 111,442 $ -- $ 5,986 $ --
=========== =========== =========== ===== =========== =====
</TABLE>
-8-
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
SELECT GROWTH MFS EMERGING ZERO COUPON BOND FUND ZERO COUPON BOND FUND
PORTFOLIO GROWTH PORTFOLIO PORTFOLIO SERIES 1998 PORTFOLIO SERIES 2000
- ------------------------ ---------------------- ---------------------- ----------------------
1998 1997 1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
$ 1,447 $ -- $ -- $ 996 $ 691 $ 678 $ 4,713 $ 3,185
- --------- ----------- --------- --------- --------- --------- --------- ---------
478 -- 1,171 138 100 102 557 475
212 -- 547 65 53 49 284 226
- --------- ----------- --------- --------- --------- --------- --------- ---------
757 -- (1,718) 793 538 527 3,872 2,484
- --------- ----------- --------- --------- --------- --------- --------- ---------
2,397 -- 17,339 335 20,792 377 28,673 1,627
2,513 -- 15,614 326 20,917 374 26,763 1,597
- --------- ----------- --------- --------- --------- --------- --------- ---------
(116) -- 1,725 9 (125) 3 1,910 30
- --------- ----------- --------- --------- --------- --------- --------- ---------
-- -- (1,417) -- (154) (208) 175 (550)
255 -- 43,018 (1,417) -- (154) (1,241) 175
- --------- ----------- --------- --------- --------- --------- --------- ---------
255 -- 44,435 (1,417) 154 54 (1,416) 725
- --------- ----------- --------- --------- --------- --------- --------- ---------
896 -- 44,442 (615) 567 584 4,366 3,239
- --------- ----------- --------- --------- --------- --------- --------- ---------
-- -- (6) -- (1) -- -- --
80,558 -- 131,117 63,844 7,632 114 51,629 113
-- -- 35,580 -- -- 12,340 -- 51,482
(2,131) -- (1,939) (225) (208) (205) (1,105) (927)
-- -- (3,568) -- (20,560) (102) (26,889) (103)
-- -- (35,580) -- -- (12,340) -- (51,482)
- --------- ----------- --------- --------- --------- --------- --------- ---------
78,427 -- 125,604 63,619 (13,137) (193) 23,635 (917)
- --------- ----------- --------- --------- --------- --------- --------- ---------
79,323 -- 170,046 63,004 (12,570) 391 28,001 2,322
-- -- 63,004 -- 12,570 12,179 58,044 55,722
- --------- ----------- --------- --------- --------- --------- --------- ---------
$ 79,323 $ -- $ 233,050 $ 63,004 $ -- $ 12,570 $ 86,045 $ 58,044
========= =========== ========= ========= ========= ========= ========= =========
</TABLE>
-9-
<PAGE> 11
NOTES TO FINANCIAL STATEMENTS - CONTINUED
6. SCHEDULE OF SEPARATE ACCOUNT THREE OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (CONTINUED)
<TABLE>
<CAPTION>
ZERO COUPON BOND FUND AIM CAPITAL APPRECIATION
PORTFOLIO SERIES 2005 PORTFOLIO ALLIANCE GROWTH PORTFOLIO
----------------------- ------------------------ -------------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
INVESTMENT INCOME:
<S> <C> <C> <C> <C> <C> <C>
Dividends ........................................... $ 25,289 $ 16,030 $ 3,292 $ -- $ 249,920 $ --
--------- --------- ---------- ---------- ---------- ----------
EXPENSES:
Insurance charges ................................... 2,772 2,445 18,687 11,337 31,952 16,480
Administrative fees ................................. 1,358 1,201 9,139 5,298 15,842 7,761
--------- --------- ---------- ---------- ---------- ----------
Net investment income (loss) .................... 21,159 12,384 (24,534) (16,635) 202,126 (24,241)
--------- --------- ---------- ---------- ---------- ----------
REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) from investment transactions:
Proceeds from investments sold .................... 95,085 171,777 214,797 152,823 292,809 167,105
Cost of investments sold .......................... 85,483 166,155 179,624 126,355 194,004 123,729
--------- --------- ---------- ---------- ---------- ----------
Net realized gain (loss) ........................ 9,602 5,622 35,173 26,468 98,805 43,376
--------- --------- ---------- ---------- ---------- ----------
Change in unrealized gain (loss) on investments:
Unrealized gain (loss) beginning of year .......... 16,260 7,598 135,886 32,420 600,476 97,659
Unrealized gain (loss) end of year ................ 23,173 16,260 445,648 135,886 1,315,933 600,476
--------- --------- ---------- ---------- ---------- ----------
Net change in unrealized gain (loss) for the
year ........................................... 6,913 8,662 309,762 103,466 715,457 502,817
--------- --------- ---------- ---------- ---------- ----------
Net increase (decrease) in net assets
resulting from operations ....................... 37,674 26,668 320,401 113,299 1,016,388 521,952
--------- --------- ---------- ---------- ---------- ----------
UNIT TRANSACTIONS:
Participant premium payments ........................ 124 -- 771 -- 543 --
Participant transfers from other Travelers
accounts.......................................... 280,507 61,005 836,358 1,033,135 1,794,668 1,184,783
Growth rate intra-fund transfers in ................. 100,613 275,670 948,245 946,825 1,689,982 1,453,046
Contract surrenders ................................. (11,827) (9,282) (50,394) (30,224) (60,954) (56,159)
Participant transfers to other Travelers accounts ... (80,001) (159,336) (139,143) (102,441) (84,269) (77,184)
Growth rate intra-fund transfers out ................ (100,613) (275,670) (948,245) (946,825) (1,689,982) (1,453,046)
--------- --------- ---------- ---------- ---------- ----------
Net increase (decrease) in net assets
resulting from unit transactions ................ 188,803 (107,613) 647,592 900,470 1,649,988 1,051,440
--------- --------- ---------- ---------- ---------- ----------
Net increase (decrease) in net assets ........... 226,477 (80,945) 967,993 1,013,769 2,666,376 1,573,392
NET ASSETS:
Beginning of year ................................. 310,695 391,640 1,743,200 729,431 2,720,986 1,147,594
--------- --------- ---------- ---------- ---------- ----------
End of year ....................................... $ 537,172 $ 310,695 $2,711,193 $1,743,200 $5,387,362 $2,720,986
========= ========= ========== ========== ========== ==========
</TABLE>
-10-
<PAGE> 12
NOTES TO FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
MFS TOTAL RETURN PUTNAM DIVERSIFIED INCOME SMITH BARNEY INTERNATIONAL SMITH BARNEY MONEY MARKET
PORTFOLIO PORTFOLIO EQUITY PORTFOLIO PORTFOLIO
- ---------------------------- ---------------------------- ---------------------------- -----------------------------
1998 1997 1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
$ 165,472 $ -- $ 41,663 $ -- $ -- $ -- $ 148,941 $ 131,787
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
28,375 13,067 7,292 3,698 15,310 8,704 26,457 23,575
13,706 6,121 3,500 1,770 7,480 4,126 12,046 10,566
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
123,391 (19,188) 30,871 (5,468) (22,790) (12,830) 110,438 97,646
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
333,398 231,197 90,468 92,623 153,789 61,621 7,856,592 6,865,826
251,109 187,699 84,683 87,094 135,230 52,457 7,856,592 6,865,826
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
82,289 43,498 5,785 5,529 18,559 9,164 -- --
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
263,423 20,902 30,551 1,048 23,396 31,701 -- --
352,731 263,423 (19,824) 30,551 50,445 23,396 -- --
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
89,308 242,521 (50,375) 29,503 27,049 (8,305) -- --
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
294,988 266,831 (13,719) 29,564 22,818 (11,971) 110,438 97,646
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
2,973 -- 2,087 -- (215) -- 8,913,404 10,072,788
1,783,561 1,268,160 580,962 328,642 1,019,843 649,033 118,916 311,243
1,127,953 1,019,454 198,574 279,734 742,861 749,616 404,229 372,612
(169,372) (61,816) (22,723) (11,482) (46,704) (16,824) (112,053) (76,120)
(128,473) (124,119) (54,333) (80,188) (92,664) (49,881) (9,504,606) (8,507,335)
(1,127,953) (1,019,454) (198,574) (279,734) (742,861) (749,616) (404,229) (372,612)
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
1,488,689 1,082,225 505,993 236,972 880,260 582,328 (584,339) 1,800,576
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
1,783,677 1,349,056 492,274 266,536 903,078 570,357 (473,901) 1,898,222
2,232,787 883,731 530,950 264,414 1,261,274 690,917 2,976,180 1,077,958
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
$ 4,016,464 $ 2,232,787 $ 1,023,224 $ 530,950 $ 2,164,352 $ 1,261,274 $ 2,502,279 $ 2,976,180
============ ============ ============ ============ ============ ============ ============ ============
</TABLE>
-11-
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS - CONTINUED
6. SCHEDULE OF SEPARATE ACCOUNT THREE OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (CONTINUED)
<TABLE>
<CAPTION>
SMITH BARNEY HIGH SMITH BARNEY LARGE CAP TBC MANAGED INCOME
INCOME PORTFOLIO VALUE PORTFOLIO PORTFOLIO
----------------------- ------------------------- ---------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
INVESTMENT INCOME:
<S> <C> <C> <C> <C> <C> <C>
Dividends ........................................... $ 54,547 $ -- $ 50,219 $ -- $ 9,960 $ --
----------- --------- ----------- ----------- --------- ---------
EXPENSES:
Insurance charges ................................... 6,803 3,496 11,521 5,358 1,928 850
Administrative fees ................................. 3,317 1,661 5,613 2,498 933 385
----------- --------- ----------- ----------- --------- ---------
Net investment income (loss) .................... 44,427 (5,157) 33,085 (7,856) 7,099 (1,235)
----------- --------- ----------- ----------- --------- ---------
REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) from investment
transactions:
Proceeds from investments sold .................... 74,472 104,254 52,020 40,643 11,249 2,924
Cost of investments sold .......................... 67,931 92,849 36,116 30,277 9,986 2,705
----------- --------- ----------- ----------- --------- ---------
Net realized gain (loss) ........................ 6,541 11,405 15,904 10,366 1,263 219
----------- --------- ----------- ----------- --------- ---------
Change in unrealized gain (loss) on investments:
Unrealized gain (loss) beginning of year .......... 46,096 2,719 144,375 15,061 10,636 102
Unrealized gain (loss) end of year ................ (24,910) 46,096 185,704 144,375 9,524 10,636
----------- --------- ----------- ----------- --------- ---------
Net change in unrealized gain (loss) for the year (71,006) 43,377 41,329 129,314 (1,112) 10,534
----------- --------- ----------- ----------- --------- ---------
Net increase (decrease) in net assets
resulting from operations ....................... (20,038) 49,625 90,318 131,824 7,250 9,518
----------- --------- ----------- ----------- --------- ---------
UNIT TRANSACTIONS:
Participant premium payments ........................ (2) -- 116 -- (10) --
Participant transfers from other Travelers accounts . 576,743 228,242 610,611 571,914 135,653 139,944
Growth rate intra-fund transfers in ................. 450,457 265,878 471,489 456,117 156,618 29,923
Contract surrenders ................................. (15,430) (49,839) (27,556) (11,287) (5,797) (2,468)
Participant transfers to other Travelers accounts ... (24,203) (5,695) (19,755) (26,937) (5,219) (88)
Growth rate intra-fund transfers out ................ (450,457) (265,878) (471,489) (456,117) (156,618) (29,923)
----------- --------- ----------- ----------- --------- ---------
Net increase (decrease) in net assets
resulting from unit transactions ................ 537,108 172,708 563,416 533,690 124,627 137,388
----------- --------- ----------- ----------- --------- ---------
Net increase (decrease) in net assets ........... 517,070 222,333 653,734 665,514 131,877 146,906
NET ASSETS:
Beginning of year ................................. 523,014 300,681 1,034,694 369,180 163,813 16,907
----------- --------- ----------- ----------- --------- ---------
End of year ....................................... $ 1,040,084 $ 523,014 $ 1,688,428 $ 1,034,694 $ 295,690 $ 163,813
=========== ========= =========== =========== ========= =========
</TABLE>
-12-
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
VAN KAMPEN ENTERPRISE
PORTFOLIO COMBINED
- -------------------------- ----------------------------
1998 1997 1998 1997
- ----------- ----------- ------------ ------------
<S> <C> <C> <C>
$ 114,834 $ -- $ 983,611 $ 214,149
- ----------- ----------- ------------ ------------
16,695 7,676 187,268 106,546
8,149 3,734 90,563 49,748
- ----------- ----------- ------------ ------------
89,990 (11,410) 705,780 57,855
- ----------- ----------- ------------ ------------
160,719 52,140 9,513,348 8,085,682
108,139 37,595 9,159,876 7,887,191
- ----------- ----------- ------------ ------------
52,580 14,545 353,472 198,491
- ----------- ----------- ------------ ------------
223,985 29,111 1,623,358 284,211
481,312 223,985 2,927,381 1,623,358
- ----------- ----------- ------------ ------------
257,327 194,874 1,304,023 1,339,147
- ----------- ----------- ------------ ------------
399,897 198,009 2,363,275 1,595,493
- ----------- ----------- ------------ ------------
(1,538) -- 8,920,352 10,072,788
959,261 725,595 9,841,235 7,483,363
880,295 585,637 8,383,600 7,198,001
(49,010) (14,390) (627,508) (403,189)
(60,954) (31,476) (10,278,808) (9,195,127)
(880,295) (585,637) (8,383,600) (7,198,001)
- ----------- ----------- ------------ ------------
847,759 679,729 7,855,271 7,957,835
- ----------- ----------- ------------ ------------
1,247,656 877,738 10,218,546 9,553,328
1,347,388 469,650 16,523,844 6,970,516
- ----------- ----------- ------------ ------------
$ 2,595,044 $ 1,347,388 $ 26,742,390 $ 16,523,844
=========== =========== ============ ============
</TABLE>
-13-
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS - CONTINUED
7. SCHEDULE OF UNITS FOR SEPARATE ACCOUNT THREE FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
TOTAL RETURN SELECT BALANCED SELECT CONSERVATIVE
PORTFOLIO PORTFOLIO PORTFOLIO
--------------------------- ----------------------- ------------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Units beginning of year ............ 1,034,630 433,485 -- -- -- --
Units purchased and transferred from
other Travelers accounts ......... 1,245,502 1,160,463 106,603 -- 22,606 --
Units redeemed and transferred to
other Travelers accounts ......... (817,190) (559,318) (1,206) -- (16,862) --
---------- ---------- ---------- ---- ---------- ----
Units end of year .................. 1,462,942 1,034,630 105,397 -- 5,744 --
========== ========== ========== ==== ========== ====
</TABLE>
<TABLE>
<CAPTION>
SELECT GROWTH MFS EMERGING GROWTH ZERO COUPON BOND FUND
PORTFOLIO PORTFOLIO PORTFOLIO SERIES 1998
-------------------- ------------------------ ------------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Units beginning of year ............ -- -- 55,109 -- 11,669 11,880
Units purchased and transferred from
other Travelers accounts ......... 71,853 -- 128,504 55,304 7,058 11,905
Units redeemed and transferred to
other Travelers accounts ......... (1,999) -- (29,987) (195) (18,727) (12,116)
-------- ---- -------- -------- -------- --------
Units end of year .................. 69,854 -- 153,626 55,109 -- 11,669
======== ==== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
ZERO COUPON BOND FUND ZERO COUPON BOND FUND AIM CAPITAL APPRECIATION
PORTFOLIO SERIES 2000 PORTFOLIO SERIES 2005 PORTFOLIO
------------------------- -------------------------- --------------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Units beginning of year ............ 53,978 54,981 283,022 393,923 1,357,987 630,046
Units purchased and transferred from
other Travelers accounts ......... 45,981 49,538 325,899 329,678 1,314,827 1,570,818
Units redeemed and transferred to
other Travelers accounts ......... (24,620) (50,541) (167,750) (440,579) (848,325) (842,877)
---------- ---------- ---------- ---------- ---------- ----------
Units end of year .................. 75,339 53,978 441,171 283,022 1,824,489 1,357,987
========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
ALLIANCE GROWTH MFS TOTAL RETURN PUTNAM DIVERSIFIED INCOME
PORTFOLIO PORTFOLIO PORTFOLIO
------------------------- ------------------------ -------------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Units beginning of year ............ 1,617,464 870,543 1,637,053 776,168 467,539 247,942
Units purchased and transferred from
other Travelers accounts ......... 1,905,431 1,810,650 2,024,601 1,788,362 681,582 560,998
Units redeemed and transferred to
other Travelers accounts ......... (1,009,964) (1,063,729) (992,292) (927,477) (242,272) (341,401)
---------- ---------- ---------- ---------- ---------- ----------
Units end of year .................. 2,512,931 1,617,464 2,669,362 1,637,053 906,849 467,539
========== ========== ========== ========== ========== ==========
</TABLE>
-14-
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS - CONTINUED
7. SCHEDULE OF UNITS FOR SEPARATE ACCOUNT THREE FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997 (CONTINUED)
<TABLE>
<CAPTION>
SMITH BARNEY INTERNATIONAL SMITH BARNEY MONEY MARKET SMITH BARNEY HIGH INCOME
EQUITY PORTFOLIO PORTFOLIO PORTFOLIO
--------------------------- -------------------------- ---------------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Units beginning of year ............ 1,039,227 578,127 2,744,995 1,031,783 404,740 261,976
Units purchased and transferred from
other Travelers accounts ........... 1,338,927 1,116,707 8,597,506 10,137,452 783,618 406,299
Units redeemed and transferred to
other Travelers accounts ........... (682,738) (655,607) (9,117,305) (8,424,240) (376,415) (263,535)
----------- ----------- ----------- ----------- ----------- -----------
Units end of year .................. 1,695,416 1,039,227 2,225,196 2,744,995 811,943 404,740
=========== =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
SMITH BARNEY LARGE CAP TBC MANAGED INCOME VAN KAMPEN ENTERPRISE
VALUE PORTFOLIO PORTFOLIO PORTFOLIO
-------------------------- -------------------------- -------------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Units beginning of year ............ 701,302 313,239 149,666 16,739 862,199 382,114
Units purchased and transferred from
other Travelers accounts ......... 685,385 750,039 259,943 163,714 1,065,867 909,322
Units redeemed and transferred to
other Travelers accounts ......... (331,606) (361,976) (149,552) (30,787) (584,359) (429,237)
---------- ---------- ---------- ---------- ---------- ----------
Units end of year .................. 1,055,081 701,302 260,057 149,666 1,343,707 862,199
========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
COMBINED
--------------------------
1998 1997
---- ----
<S> <C> <C>
Units beginning of year ............ 12,420,580 6,002,946
Units purchased and transferred from
other Travelers accounts ......... 20,611,693 20,821,249
Units redeemed and transferred to
other Travelers accounts ......... (15,413,169) (14,403,615)
----------- -----------
Units end of year .................. 17,619,104 12,420,580
=========== ===========
</TABLE>
-15-
<PAGE> 17
INDEPENDENT AUDITORS' REPORT
To the Owners of Variable Life Insurance Contracts of The Travelers Variable
Life Insurance Separate Account Three:
We have audited the accompanying statement of assets and liabilities of The
Travelers Variable Life Insurance Separate Account Three as of December 31,
1998, and the related statement of operations for the year then ended and the
statement of changes in net assets for each of the two years in the period then
ended. These financial statements are the responsibility of management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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. Our procedures included
confirmation of shares owned as of December 31, 1998, by correspondence with the
underlying funds. 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 referred to above present fairly, in
all material respects, the financial position of The Travelers Variable Life
Insurance Separate Account Three as of December 31, 1998, the results of its
operations for the year then ended and the changes in its net assets for each of
the two years in the period then ended, in conformity with generally accepted
accounting principles.
KPMG LLP
Hartford, Connecticut
February 17, 1999
<PAGE> 18
Independent Auditors
KPMG LLP
Hartford, Connecticut
This report is prepared for the general information of contract owners and is
not an offer of shares of The Travelers Variable Life Insurance Separate Account
Three or Separate Account Three's underlying funds. It should not be used in
connection with any offer except in conjunction with the Prospectus for The
Travelers Variable Life Insurance Separate Account Three product(s) offered by
The Travelers Insurance Company and the Prospectuses for the underlying funds,
which collectively contain all pertinent information, including the applicable
sales commissions.
VG-SEP3 (Annual) (12-98) Printed in U.S.A.
