<PAGE> 1
Registration Statement No. 2-53757
811-2571
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 45
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 45
THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES
---------------------------------------------------------
(Exact name of Registrant)
THE TRAVELERS INSURANCE COMPANY
-------------------------------
(Name of Insurance Company)
ONE TOWER SQUARE, HARTFORD, CONNECTICUT 06183
----------------------------------------------
(Address of Insurance Company's Principal Executive Offices)
Insurance Company's Telephone Number, including Area Code (860) 277-0111
--------------
ERNEST J. WRIGHT
Secretary to the Board of Managers
The Travelers Quality Bond Account for Variable Annuities
One Tower Square
Hartford, Connecticut 06183
----------------------------
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering:
--------------------
It is proposed that this filing will become effective (check appropriate box):
immediately upon filing pursuant to paragraph (b) of Rule 485.
- ----
X on May 1, 1998 pursuant to paragraph (b) of Rule 485.
- ----
60 days after filing pursuant to paragraph (a)(1) of Rule 485.
- ----
on __________ pursuant to paragraph (a)(1) of Rule 485.
- ----
75 days after filing pursuant to paragraph (a)(2).
- ----
on __________ pursuant to paragraph (a)(2) of Rule 485.
- ----
If appropriate check the following box:
this post-effective amendment designates a new effective date for a
- ---- previously filed post-effective amendment.
<PAGE> 2
THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES
Form N-3 Cross-Reference Sheet
<TABLE>
<CAPTION>
ITEM
NO. CAPTION IN PROSPECTUS
- --- ---------------------
<S> <C> <C>
1. Cover Page The Travelers Quality Bond Account
for Variable Annuities
2. Definitions Glossary of Special Terms
3. Synopsis Prospectus Summary
4. Condensed Financial Information Condensed Financial Information
5. General Description of Registrant The Insurance Company and the Separate
and Insurance Company Accounts; The Travelers Quality Bond
Account for Variable Annuities
6. Management Managed Separate Accounts: Management
and Advisory Services
7. Deductions and Expenses Charges and Deductions; Fee Table
8. General Description of Variable The Variable Annuity Contract; Miscellaneous
Annuity Contracts
9. Annuity Period The Annuity Period
10. Death Benefit Death Benefit; Payout Options
11. Purchases and Contract Value The Variable Annuity Contract
12. Redemptions Surrenders and Redemptions; Right to Return
13. Taxes Premium Tax; Federal Tax Considerations
14. Legal Proceedings Legal Proceedings and Opinions
15. Table of Contents of Statement Appendix A
of Additional Information
CAPTION IN STATEMENT OF ADDITIONAL
INFORMATION
----------------------------------
16. Cover Page The Travelers Quality Bond Account
for Variable Annuities
17. Table of Contents Table of Contents
18. General Information and History Description of The Travelers and the
Separate Accounts
19. Investment Objectives and Investment Restrictions
Policies
20. Management The Board of Managers
21. Investment Advisory and Other Services Investment Management and Advisory Services;
Securities Custodian; Independent Accountants
22. Brokerage Allocation Investment Management and Advisory Services
23. Purchase and Pricing of Securities Valuation of Separate Account Assets
Being Offered
24. Underwriters Distribution and Management Services
25. Calculation of Performance Data Performance Data
26. Annuity Payments Inapplicable
27. Financial Statements Financial Statements
</TABLE>
<PAGE> 3
PART A
INFORMATION REQUIRED IN A PROSPECTUS
<PAGE> 4
TRAVELERS UNIVERSAL ANNUITY VARIABLE CONTRACT PROFILE
MAY 1, 1998
THIS PROFILE IS A SUMMARY OF SOME OF THE MORE IMPORTANT POINTS THAT YOU SHOULD
KNOW AND CONSIDER BEFORE PURCHASING THE CONTRACT. THE CONTRACT IS MORE FULLY
DESCRIBED IN THE FULL PROSPECTUS WHICH IS ATTACHED TO THIS PROFILE. PLEASE READ
THE PROSPECTUS CAREFULLY. THE TERMS "WE," "US," "OUR" AND "THE COMPANY" REFER TO
TRAVELERS INSURANCE COMPANY. "YOU" AND "YOUR" REFER TO THE CONTRACT OWNER.
1. THE VARIABLE ANNUITY CONTRACT. The Contract offered by Travelers Insurance
Company is a variable annuity that is intended for retirement savings or other
long-term investment purposes. The Contract provides a death benefit as well as
guaranteed income options. Under a qualified Contract, you can make one or more
payments, as you choose, on a tax-deferred basis. Under a non-qualified
Contract, you can make one or more payments with after-tax dollars. You direct
your payment(s) to one or more of the variable funding options listed in Section
4 and/or to the Fixed (Flexible Annuity) Account. The variable funding options
are designed to produce a higher rate of return than the Fixed Account; however,
this is not guaranteed. You may gain or lose money in the funding options.
The Contract, like all deferred variable annuity contracts has two phases: the
accumulation phase and the income phase. During the accumulation phase, under a
qualified contract, your pre-tax contributions accumulate on a tax-deferred
basis and are taxed as income when you make a withdrawal, presumably when you
are in a lower tax bracket. During the accumulation phase, under a nonqualified
Contract, earnings on your after-tax contributions accumulate on a tax-deferred
basis and are taxed as income when you make a withdrawal. The income phase
occurs when you begin receiving regular payments (annuity payments) from your
Contract. The amount of money you accumulate in your Contract determines the
amount of income (annuity payments) you receive during the income phase.
2. ANNUITY PAYMENTS (THE INCOME PHASE). You may choose to receive income
payments from the Fixed Account or the variable funding options. If you want to
receive regular payments from your annuity, you can choose one of the following
annuity options: Option 1 -- payments for your life (life annuity) assuming that
you are the annuitant; Option 2 -- payments for your life with an added
guarantee that payments will continue to your beneficiary for a certain number
of months (120, 180 or 240, as you select) if you should die during that period;
Option 3 -- payments for your life with a cash refund with the guarantee that,
upon your death, your beneficiary will receive the balance as a lump sum
payment; Option 4 -- Joint and Last Survivor Life Annuity in which payments are
made for your life and the life of another person (usually your spouse). This
option can also be elected with payments continuing at a reduced rate after the
death of one payee. There are also Income Options available: Income Option
1 -- Fixed Amount -- the Cash Surrender Value of your Contract will be paid to
you in equal payments for a fixed period; or Option 2 -- Fixed Period -- the
Cash Surrender Value will be used to make payments for a fixed time period. If
you should die prior to the end of the Fixed Period, the remaining amount will
go to your beneficiary.
Once you make an election of an annuity option or an income option and income
payments begin, it cannot be changed. During the income phase, you have the same
investment choices you had during the accumulation phase. If amounts are
directed to the variable funding options, the dollar amount of your payments may
increase or decrease. Once the annuity or income payments begin, the selection
of funding options may be changed only with the permission of the Company.
3. PURCHASE. You may purchase a tax-qualified Contract with an initial payment
of at least $20, except in the case of an individual retirement annuity (IRA)
where the minimum initial payment is $1,000. Additional payments to
tax-qualified Contract of at least $20 may be made. For nonqualified Contracts,
the minimum initial purchase payment is $1,000, and $100 thereafter.
<PAGE> 5
WHO MAY PURCHASE THIS CONTRACT?
The Contract is currently available for use in connection with (1) individual
nonqualified purchases; (2) Individual Retirement Annuities (IRA) or IRA
Rollover pursuant to Section 408 of the Internal Revenue Code of 1986, as
amended; and (3) qualified retirement plans (which include contracts qualifying
under Section 401(a), 403(b), 408(b) or 457 of the Internal Revenue Code.
4. INVESTMENT OPTIONS. You can direct your money into the Fixed (Flexible
Annuity) Account and/or to any or all of the following variable funding options.
The funding options are described in the prospectuses for the funds. Depending
on market conditions, you may make or lose money in any of these options.
MANAGED SEPARATE ACCOUNTS
Travelers Growth and Income Stock Account
("Account GIS")
Travelers Money Market Account
("Account MM")
Travelers Quality Bond Account
("Account QB")
Travelers Timed Aggressive Stock Account
("Account TAS")
Travelers Timed Growth and Income Stock
Account ("Account TGIS")
Travelers Timed Short-Term Bond Account
("Account TSB")
TRAVELERS FUND U FOR VARIABLE ANNUITIES
Capital Appreciation Fund
Dreyfus Stock Index Fund
High Yield Bond Trust
Managed Assets Trust
AMERICAN ODYSSEY FUNDS, INC.
Core Equity Fund
Emerging Opportunities Fund
Global High-Yield Bond Fund
Intermediate-Term Bond Fund
International Equity Fund
Long-Term Bond Fund
DREYFUS VARIABLE INVESTMENT FUND
Small Cap Portfolio
FIDELITY'S VARIABLE INSURANCE PRODUCTS FUND
VIP Equity Income Portfolio
VIP Growth Portfolio
VIP High Income Portfolio
FIDELITY'S VARIABLE INSURANCE PRODUCTS FUND II
VIP II Asset Manager Portfolio
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Templeton Asset Allocation Fund
(Class 1)
Templeton Bond Fund (Class 1)
Templeton Stock Fund (Class 1)
TRAVELERS SERIES FUND, INC.
Alliance Growth Portfolio
MFS Total Return Portfolio
Putnam Diversified Income Portfolio
Smith Barney High Income Portfolio
Smith Barney International Equity Portfolio
Smith Barney Large Cap Value Portfolio
THE TRAVELERS SERIES TRUST
Disciplined Mid Cap Stock Portfolio
Social Awareness Stock Portfolio
U.S. Government Securities Portfolio
Utilities Portfolio
5. EXPENSES. The Contract has insurance features and investment features, and
there are costs related to each.
For each contract we deduct a semi-annual administrative charge of $15. There is
also an annual insurance charge of 1.25% of the amounts you direct to the
variable Funding Options.
Each Funding Option has an investment charge (total fund charge), which includes
the management fee, any applicable asset allocation fee and other expenses (and
which reflects any expense reimbursements or fee waivers). The charge ranges
from .32% to 2.11% annually, of the average daily net asset balance of the
Funding Option, depending on the Funding Option selected.
If you withdraw amounts from the Contract, we may deduct a withdrawal charge (of
5% for five years) of the purchase payments you made to the Contract. If you
withdraw all amounts under the Contract, or if you begin receiving
annuity/income payments, the Company may be required by your state to deduct a
premium tax of 0% - 5%.
The following table is designed to help you understand the Contract charges. The
column "Total Annual Insurance Charge" shows the total of the $15 semi-annual
contract charge (which is
ii
<PAGE> 6
represented as 0.167% below) and the insurance charge of 1.25%. The investment
charges for each portfolio are also shown. Each of the American Odyssey
Portfolios is listed twice, once with the optional CHART asset allocation fee of
1.25% reflected, and once without the optional asset allocation fee. The columns
under the heading "Examples" show you how much you would pay under the Contract
for a one-year period and for a 10-year period. The examples assume that you
invested $1,000 in a Contract that earns 5% annually and that you withdraw your
money (a) at the end of year one and (b) at the end of year 10. For year 1, the
Total Annual Charges are assessed as well as the withdrawal charges. For year
10, the examples shows the aggregate of all the annual charges assessed during
that time, but no withdrawal charge is shown. For these examples, the premium
tax is assumed to be 0%. Please refer to the Fee Table in the prospectus for
more details.
<TABLE>
<CAPTION>
TOTAL EXAMPLES: TOTAL
TOTAL ANNUAL ANNUAL EXPENSES
ANNUAL FUNDING TOTAL AT END OF:
INSURANCE OPTION ANNUAL -----------------
PORTFOLIO NAME CHARGES EXPENSES CHARGES 1 YEAR 10 YEARS
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MANAGED SEPARATE ACCOUNTS
Account GIS........................................ 1.40% 0.62% 2.02% $70 $234
Account MM......................................... 1.40% 0.32% 1.72% 67 203
Account QB......................................... 1.40% 0.32% 1.72% 67 203
Account TAS........................................ 1.40% 1.60% 3.00% 80 331
Account TB* (Travelers Timed Bond Account)......... 1.40% 1.75% 3.15% 82 345
Account TGIS....................................... 1.40% 1.57% 2.97% 80 329
Account TSB........................................ 1.40% 1.57% 2.97% 80 329
UNDERLYING FUNDING OPTIONS
Capital Appreciation Fund.............................. 1.40% 0.84% 2.24% 73 257
Dreyfus Stock Index Fund............................... 1.40% 0.28% 1.68% 67 198
High Yield Bond Trust.................................. 1.40% 0.84% 2.24% 73 257
Managed Assets Trust................................... 1.40% 0.63% 2.03% 71 235
AMERICAN ODYSSEY FUNDS, INC.(1)
Core Equity Fund................................... 1.40% 0.65% 2.05% 71 238
Emerging Opportunities Fund........................ 1.40% 0.86% 2.26% 73 259
Global High-Yield Bond Fund........................ 1.40% 0.68% 2.08% 71 241
Intermediate-Term Bond Fund........................ 1.40% 0.63% 2.03% 71 235
International Equity Fund.......................... 1.40% 0.77% 2.17% 72 250
Long-Term Bond Fund................................ 1.40% 0.62% 2.02% 70 234
AMERICAN ODYSSEY FUNDS, INC.(2)
Core Equity Fund................................... 1.40% 1.90% 3.30% 83 359
Emerging Opportunities Fund........................ 1.40% 2.11% 3.51% 85 378
Global High-Yield Bond Fund........................ 1.40% 1.93% 3.33% 84 362
Intermediate-Term Bond Fund........................ 1.40% 1.88% 3.28% 83 357
International Equity Fund.......................... 1.40% 2.02% 3.42% 84 370
Long-Term Bond Fund................................ 1.40% 1.87% 3.27% 83 356
DREYFUS VARIABLE INVESTMENT FUND
Small Cap Portfolio................................ 1.40% 0.78% 2.18% 72 251
FIDELITY'S VARIABLE INSURANCE PRODUCTS FUND
Equity Income Portfolio............................ 1.40% 0.58% 1.98% 70 230
Growth Portfolio................................... 1.40% 0.69% 2.09% 71 242
High Income Portfolio.............................. 1.40% 0.71% 2.11% 71 244
FIDELITY'S VARIABLE INSURANCE PRODUCTS FUND II
Asset Manager Portfolio............................ 1.40% 0.65% 2.05% 71 238
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Templeton Asset Allocation Fund.................... 1.40% 0.78% 2.18% 72 251
Templeton Bond Fund................................ 1.40% 0.68% 2.08% 71 241
Templeton Stock Fund............................... 1.40% 0.88% 2.28% 73 261
TRAVELERS SERIES FUND, INC.
Alliance Growth Portfolio.......................... 1.40% 0.82% 2.22% 72 255
G.T. Global Strategic Income Portfolio*............ 1.40% 1.07% 2.47% 75 280
MFS Total Return Portfolio......................... 1.40% 0.86% 2.26% 73 259
Putnam Diversified Income Portfolio................ 1.40% 0.88% 2.28% 73 261
Smith Barney High Income Portfolio................. 1.40% 0.70% 2.10% 71 243
</TABLE>
* Not currently available to new Contract Owners in most states.
(1) Reflects expenses that would be incurred for those Contract Owners who DO
NOT participate in the CHART Asset Allocation Program.
(2) Reflects expenses that would be incurred for those Contract Owners who DO
participate in the CHART Asset Allocation Program.
iii
<PAGE> 7
<TABLE>
<CAPTION>
TOTAL EXAMPLES: TOTAL
TOTAL ANNUAL ANNUAL EXPENSES
ANNUAL FUNDING TOTAL AT END OF:
INSURANCE OPTION ANNUAL -----------------
PORTFOLIO NAME CHARGES EXPENSES CHARGES 1 YEAR 10 YEARS
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TRAVELERS SERIES FUND, INC., CONTINUED
Smith Barney International Equity Portfolio........ 1.40% 1.01% 2.41% 74 274
Smith Barney Large Cap Value Portfolio
(formerly Smith Barney Income and Growth
Portfolio)....................................... 1.40% 0.69% 2.09% 71 242
THE TRAVELERS SERIES TRUST
Disciplined Mid Cap Stock Portfolio................ 1.40% 0.95% 2.35% 74 268
Social Awareness Stock Portfolio................... 1.40% 0.98% 2.38% 74 271
U.S. Government Securities Portfolio............... 1.40% 0.58% 1.98% 70 231
Utilities Portfolio................................ 1.40% 1.06% 2.46% 75 279
</TABLE>
6. TAXES. The payments you make to the Contract during the accumulation phase
are made with before-tax dollars or after-tax dollars. You may be taxed on your
purchase payments and will be taxed on any earnings when you make a withdrawal
or begin receiving payments. If you are younger than 59 1/2 when you take money
out, you may be charged a 10% federal penalty tax on the amount withdrawn.
For owners of qualified Contracts, if you reach a certain age, you may be
required by federal tax laws to begin receiving payments from your annuity or
risk paying a penalty tax. In those cases, the Company can calculate and pay you
the minimum distribution amount required by federal law.
7. ACCESS TO YOUR MONEY. You can take withdrawals at any time during the
accumulation phase. A withdrawal charge (a deferred sales charge) may apply. The
amount of the charge depends on a number of factors, including the length of
time since the purchase payment was made. After the first contract year, you may
withdraw up to 10% of the cash value (as of the end of the previous contract
year) without a deferred sales charge. You may also have to pay income taxes, a
federal tax penalty or premium taxes on any money you take out.
You may choose to receive monthly, quarterly, semi-annual or annual
("systematic") withdrawals of at least $50 if your Contract's cash value is
$5,000 or more. All applicable sales charges and premium taxes will be deducted.
8. PERFORMANCE. The value of the Contract will vary depending upon the
investment performance of the Funding Options you choose. The following chart
shows total returns for each Funding Option for the time periods shown. The rate
of return reflects the insurance charges, administrative charge, investment
charges and all other expenses of the Funding Option. The rate of return does
not reflect any withdrawal charge, which, if applied, would reduce such
performance. Past performance is not a guarantee of future results.
LAST TEN CALENDAR YEARS (OR FULL YEARS SINCE INCEPTION):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME 1997 1996 1995 1994 1993 1992 1991 1990 1989
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MANAGED SEPARATE ACCOUNTS:
Account GIS............... 31.38% 21.20% 35.26% -1.56% 7.34% 0.57% 27.41% -4.99% 26.13%
Account MM................ 3.96% 3.77% 4.25% 2.46% 1.36% 1.98% 4.42% 6.64% 7.70%
Account QB................ 6.43% 3.22% 14.31% -2.71% 7.77% 6.32% 12.86% 7.01% 9.43%
Account TAS............... 29.04% 16.26% 31.89% -7.45% 12.83% 8.27% 31.31% -4.72% 11.99%
Account TGIS.............. 29.65% 19.87% 33.37% -4.90% 4.65% 2.58% 17.78% -4.09% 30.34%
Account TSB............... 2.67% 1.91% 2.98% 1.04% 5.28% -4.33% 2.96% 5.74% 7.68%
UNDERLYING FUNDING OPTIONS:
Capital Appreciation Fund..... 24.43% 26.44% 34.49% -6.25% 13.30% 15.81% 33.09% -7.42% 13.77%
Dreyfus Stock Index Fund...... 31.17% 20.83% 34.90% -0.66% 7.63% -- -- -- --
High Yield Bond Trust......... 14.97% 14.43% 13.90% -2.78% 12.24% 11.38% 24.31% -10.17% -0.14%
Managed Assets Trust.......... 19.66% 12.19% 25.35% -3.76% 7.67% 3.47% 19.95% 0.94% 25.29%
AMERICAN ODYSSEY FUNDS, INC.*
Core Equity Fund.......... 28.56% 19.95% 35.01% -3.72% -- -- -- -- --
Emerging Opportunities
Fund.................... 4.24% -5.76% 28.81% 6.70% -- -- -- -- --
<CAPTION>
- ------------------------------ --------
PORTFOLIO NAME 1988
<S> <C>
MANAGED SEPARATE ACCOUNTS:
Account GIS............... 16.10%
Account MM................ 5.96%
Account QB................ 5.42%
Account TAS............... 4.23%
Account TGIS.............. 10.49%
Account TSB............... 5.83%
UNDERLYING FUNDING OPTIONS:
Capital Appreciation Fund..... 8.37%
Dreyfus Stock Index Fund...... --
High Yield Bond Trust......... 12.88%
Managed Assets Trust.......... 7.56%
AMERICAN ODYSSEY FUNDS, INC.*
Core Equity Fund.......... --
Emerging Opportunities
Fund.................... --
</TABLE>
iv
<PAGE> 8
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME 1997 1996 1995 1994 1993 1992 1991 1990 1989
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AMERICAN ODYSSEY FUNDS, INC. CONTINUED
Global High-Yield Bond
Fund**.................. 3.36% 1.06% 7.95% -2.90% -- -- -- -- --
Intermediate-Term Bond
Fund.................... 4.72% 1.20% 12.01% -5.54% -- -- -- -- --
International Equity
Fund.................... 2.28% 18.71% 15.89% -9.54% -- -- -- -- --
Long-Term Bond Fund....... 9.16% -1.36% 19.27% -8.38% -- -- -- -- --
AMERICAN ODYSSEY FUNDS, INC.
Core Equity Fund.......... 29.94% 21.44% 36.66% -2.53% -- -- -- -- --
Emerging Opportunities
Fund.................... 5.44% -4.52% 30.42% 8.02% -- -- -- -- --
Global High-Yield Bond
Fund**.................. 4.66% 2.33% 9.30% -1.67% -- -- -- -- --
Intermediate-Term Bond
Fund.................... 6.03% 2.47% 13.41% -4.34% -- -- -- -- --
International Equity
Fund.................... 3.62% 20.19% 17.34% -8.42% -- -- -- -- --
Long-Term Bond Fund....... 10.51% -0.13% 20.75% -7.22% -- -- -- -- --
FIDELITY'S VARIABLE INSURANCE
PRODUCTS FUND:
Equity Income Portfolio... 26.38% 12.68% 33.23% 5.45% 16.46% -- -- -- --
Growth Portfolio.......... 21.80% 13.10% 33.51% -1.55% 17.54% -- -- -- --
High Income Portfolio..... 16.06% 12.44% 18.93% -3.06% 18.67% -- -- -- --
FIDELITY'S VARIABLE INSURANCE
PRODUCTS FUND II:
Asset Manager Portfolio... 19.01% 13.01% 15.33% -7.55% 19.19% -- -- -- --
TEMPLETON VARIABLE PRODUCTS
SERIES FUND
Templeton Asset Allocation
Fund.................... 13.94% 17.21% 20.84% -4.46% 24.21% -- -- -- --
Templeton Bond Fund....... 1.09% 7.91% 13.31% -6.35% 9.74% -- -- -- --
Templeton Stock Fund...... 10.35% 20.73% 23.51% -3.71% 31.99% -- -- -- --
TRAVELERS SERIES FUND, INC.:
Alliance Growth
Portfolio............... 27.32% 27.60% -- -- -- -- -- -- --
MFS Total Return
Portfolio............... 19.54% 12.86% -- -- -- -- -- -- --
Putnam Diversified Income
Portfolio............... 6.21% 6.72% -- -- -- -- -- -- --
Smith Barney High Income
Portfolio............... 12.29% 11.58% -- -- -- -- -- -- --
Smith Barney International
Equity Portfolio........ 1.20% 16.02% -- -- -- -- -- -- --
Smith Barney Large Cap
Value Portfolio
(formerly Smith Barney
Income and Growth
Portfolio).............. 24.92% 18.14% -- -- -- -- -- -- --
THE TRAVELERS SERIES TRUST:
Social Awareness Stock
Portfolio............... 25.56% 18.31% 31.56% -4.12% 5.84% -- -- -- --
U.S. Government Securities
Portfolio............... 11.09% 0.01% 22.75% -7.11% 7.80% -- -- -- --
Utilities Portfolio....... 23.59% 5.95% 27.51% -- -- -- -- -- --
<CAPTION>
- ------------------------------ --------
PORTFOLIO NAME 1988
- -------------------------------------------------
<S> <C>
AMERICAN ODYSSEY FUNDS, INC. C
Global High-Yield Bond
Fund**.................. --
Intermediate-Term Bond
Fund.................... --
International Equity
Fund.................... --
Long-Term Bond Fund....... --
AMERICAN ODYSSEY FUNDS, INC.
Core Equity Fund.......... --
Emerging Opportunities
Fund.................... --
Global High-Yield Bond
Fund**.................. --
Intermediate-Term Bond
Fund.................... --
International Equity
Fund.................... --
Long-Term Bond Fund....... --
FIDELITY'S VARIABLE INSURANCE
PRODUCTS FUND:
Equity Income Portfolio... --
Growth Portfolio.......... --
High Income Portfolio..... --
FIDELITY'S VARIABLE INSURANCE
PRODUCTS FUND II:
Asset Manager Portfolio... --
TEMPLETON VARIABLE PRODUCTS
SERIES FUND
Templeton Asset Allocation
Fund.................... --
Templeton Bond Fund....... --
Templeton Stock Fund...... --
TRAVELERS SERIES FUND, INC.:
Alliance Growth
Portfolio............... --
MFS Total Return
Portfolio............... --
Putnam Diversified 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).............. --
THE TRAVELERS SERIES TRUST:
Social Awareness Stock
Portfolio............... --
U.S. Government Securities
Portfolio............... --
Utilities Portfolio....... --
</TABLE>
* Includes CHART fee of 1.25% annually.
** Formerly the American Odyssey Short-Term Bond Fund. The name, investment
objectives and investment subadviser of this fund were changed pursuant to a
shareholder vote effective May 1, 1998.
Those funding options not illustrated above do not yet have one full year of
performance history.
9. DEATH BENEFIT. The death benefit applies upon the first death of the owner,
joint owner or annuitant. Assuming you are the Annuitant, if you die before you
move to the income phase, the person you have chosen as your beneficiary will
receive a death benefit. The death benefit paid depends on your age at the time
of your death. If you die before you reach age 75, the death benefit equals the
greatest of (1), (2) or (3) below:
(1) the Cash Value; or
(2) the total Purchase Payments made under the Contract; or
(3) the Cash Value on the most recent fifth multiple of the contract year
anniversary immediately preceding the date on which the Company
receives due proof of death.
v
<PAGE> 9
If you die on or after age 75 and prior to the maturity date, the death benefit
is equal to the Cash Value determined as of the date the Company receives due
proof of death.
In all cases described above, any amount paid will be reduced by any applicable
premium tax, outstanding loans or surrenders not previously deducted. Certain
states may have varying age requirements. Please refer to the Contract
Prospectus.
10. OTHER INFORMATION
RIGHT TO RETURN
If you cancel the Contract within ten days after you receive it, you receive a
full refund of the Cash Value (including charges). Where state law requires a
longer right to return (free look), or the return of the purchase payments, we
will comply. You bear the investment risk during the free look period;
therefore, the Cash Value returned to you may be greater or less than your
purchase payment. If the Contract is purchased as an Individual Retirement
Annuity (IRA), and is returned within the first seven days after Contract
delivery, your full purchase payment will be refunded. During the remainder of
the IRA free look period, the Cash Value (including charges) will be refunded.
The Cash Value will be determined as of the close of business on the day we
receive a written request for a refund.
You can transfer between the funding options as frequently as you wish without
any current tax implications. Currently there is no charge for transfers, nor a
limit to the number of transfers allowed. We may, in the future, charge a fee
for any transfer request, or limit the number of transfers allowed. At the
minimum, we would always allow at least one transfer every six months.
ADDITIONAL FEATURES
This Contract has other features you may be interested in. These include:
DOLLAR COST AVERAGING. This is a program that allows you to invest a fixed
amount of money in Funding Options each month, theoretically giving you a lower
average cost per unit over time as compared to a single one-time purchase.
Dollar cost averaging requires regular investments regardless of fluctuating
price levels, and does not guarantee a profit nor prevent loss in a declining
market. Potential investors should consider their financial ability to continue
purchases through periods of low price levels.
MARKET TIMING PROGRAM. If allowed, you may elect to enter into a separate
market timing services agreement with registered investment advisers who provide
market timing services. These agreements permit the registered investment
advisers to act on your behalf by transferring all or a portion of the Cash
Value from one Market Timed Account to another. The registered investment
advisers can transfer funds only from one Market Timed Account to another Market
Timed Account. Purchase Payments are allocated to the following Funding Options
when you participate in the Market Timing Program: Travelers Timed Growth and
Income Stock Account; Travelers Timed Short-Term Bond Account and Travelers
Timed Aggressive Stock Account. The Market Timing Program and applicable fees
are fully disclosed in a separate Disclosure Statement.
ASSET ALLOCATION ADVICE. If allowed, you may elect to enter into a separate
advisory agreement with Copeland Financial Services, Inc. ("Copeland"), an
affiliate of the Company, for the purpose of receiving asset allocation advice
under Copeland's CHART Program. The CHART Program allocates all Purchase
Payments among the American Odyssey Funds. The CHART Program and applicable fees
are fully disclosed in a separate Disclosure Statement.
11. INQUIRIES. If you need more information, please contact us at (800)
842-9368 or:
Travelers Insurance Company
Annuity Services
One Tower Square
Hartford, CT 06183-5030
vi
<PAGE> 10
UNIVERSAL ANNUITY
PROSPECTUS
- --------------------------------------------------------------------------------
This prospectus describes the individual and group variable annuity Contracts
(the "Contracts") to which purchase payments may be made as either a single
payment or on a flexible basis. The Contracts are issued by The Travelers
Insurance Company. Purchase payments may be allocated to one or more of the
following funding options:
MANAGED SEPARATE ACCOUNTS
Travelers Growth and Income Stock Account ("Account GIS")
Travelers Money Market Account
("Account MM")
Travelers Quality Bond Account
("Account QB")
Travelers Timed Aggressive Stock Account ("Account TAS")
Travelers Timed Growth and Income Stock
Account ("Account TGIS")
Travelers Timed Short-Term Bond Account ("Account TSB")
TRAVELERS FUND U FOR VARIABLE ANNUITIES
Capital Appreciation Fund
Dreyfus Stock Index Fund
High Yield Bond Trust
Managed Assets Trust
AMERICAN ODYSSEY FUNDS, INC.
Core Equity Fund
Emerging Opportunities Fund
Global High-Yield Bond Fund
Intermediate-Term Bond Fund
International Equity Fund
Long-Term Bond Fund
DREYFUS VARIABLE INVESTMENT FUND
Small Cap Portfolio
FIDELITY'S VARIABLE INSURANCE PRODUCTS FUND
VIP Equity Income Portfolio
VIP Growth Portfolio
VIP High Income Portfolio
FIDELITY'S VARIABLE INSURANCE PRODUCTS FUND II
VIP II Asset Manager Portfolio
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Templeton Asset Allocation Fund
(Class 1)
Templeton Bond Fund (Class 1)
Templeton Stock Fund (Class 1)
TRAVELERS SERIES FUND, INC.
Alliance Growth Portfolio
MFS Total Return Portfolio
Putnam Diversified Income Portfolio
Smith Barney High Income Portfolio
Smith Barney International Equity Portfolio
Smith Barney Large Cap Value Portfolio
TRAVELERS SERIES TRUST
Disciplined Mid Cap Stock Portfolio
Social Awareness Stock Portfolio
U.S. Government Securities Portfolio
Utilities Portfolio
This prospectus sets forth the information that you should know before
investing. Please read it and retain it for future reference. Additional
information is contained in a Statement of Additional Information ("SAI") dated
May 1, 1998, which has been filed with the Securities and Exchange Commission
("SEC") and is incorporated by reference into this prospectus. A copy may be
obtained, without charge, by writing to The Travelers Insurance Company, Annuity
Services, One Tower Square, Hartford, Connecticut 06183-5030, by calling
1-800-842-9368, or by accessing the SEC's website (http://www.sec.gov). The
Table of Contents of the SAI appears in Appendix B of this prospectus.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUSES OF
FUND U'S UNDERLYING FUNDS. BOTH THIS PROSPECTUS AND EACH OF THE UNDERLYING FUND
PROSPECTUSES SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
VARIABLE ANNUITY CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR ENDORSED OR
GUARANTEED BY ANY BANK, NOR ARE THEY FEDERALLY INSURED OR OTHERWISE PROTECTED BY
THE FDIC, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY; THEY ARE SUBJECT TO
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL INVESTMENT.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1998
<PAGE> 11
TABLE OF CONTENTS
<TABLE>
<S> <C>
FEE TABLE....................................... 3
CONDENSED FINANICAL INFORMATION................. 5
THE VARIABLE ANNUITY CONTRACT................... 6
PURCHASE PAYMENTS............................. 6
Application of Purchase Payments............ 6
Accumulation Units.......................... 7
THE FUNDING OPTIONS........................... 7
Fund U:..................................... 7
Managed Separate Accounts................... 7
TRANSFERS..................................... 7
Dollar-Cost Averaging (Automated
Transfers)................................ 7
Asset Allocation Advice..................... 8
MARKET TIMING SERVICES........................ 8
Market Timing Risks......................... 9
WITHDRAWALS AND REDEMPTIONS................... 9
Systematic Withdrawals...................... 10
DEATH BENEFIT................................. 10
CHARGES AND DEDUCTIONS........................ 10
Withdrawal Charge........................... 10
Free Withdrawal Allowance................... 12
Premium Tax................................. 12
Administrative Charge....................... 12
Mortality and Expense Risk Charge........... 12
Reduction or Elimination of Contract
Charges................................... 13
Investment Advisory and Subadvisory Fees.... 13
Market Timing Services Fees................. 14
THE ANNUITY PERIOD.............................. 14
Maturity Date............................... 14
Allocation of Annuity....................... 14
Determination of First Annuity Payment...... 15
Determination of Second and Subsequent
Annuity Payments.......................... 15
PAYOUT OPTIONS................................ 15
Election of Options......................... 15
Annuity Options............................. 16
Income Options.............................. 17
MISCELLANEOUS CONTRACT PROVISIONS............... 17
Termination of Individual Contract.......... 17
Termination of Group Contract or Account.... 17
Distribution from One Account to Another
Account................................... 19
Required Reports............................ 19
Right to Return............................. 19
Change of Contract.......................... 19
Assignment.................................. 20
Suspension of Payments...................... 20
Voting Rights............................... 20
Fund U.................................... 20
Accounts GIS, QB, MM, TGIS, TSB, TAS and
TB...................................... 20
OTHER INFORMATION............................... 21
Distribution of Variable Annuity
Contracts................................. 21
Conformity with State and Federal Laws...... 21
Legal Proceedings and Opinions.............. 21
THE INSURANCE COMPANY AND SEPARATE ACCOUNTS..... 22
THE INSURANCE COMPANY......................... 22
IMSA........................................ 22
Year 2000 Compliance........................ 22
The Separate Accounts....................... 22
Substitution of Investments................. 23
The Funding Options......................... 23
Managed Separate Accounts: Management and
Investment Advisory Services.............. 26
Performance Information..................... 26
FEDERAL TAX CONSIDERATIONS...................... 27
General Taxation of Annuities............... 27
Types of Contracts: Qualified or
Nonqualified.............................. 27
Investor Control............................ 28
Mandatory Distributions for Qualified
Plans..................................... 28
Nonqualified Annuity Contracts.............. 28
Qualified Annuity Contracts................. 29
Penalty Tax for Premature Distributions..... 29
Diversification Requirements................ 29
THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT
FOR VARIABLE ANNUITIES (ACCOUNT GIS).......... 30
THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE
ANNUITIES
(ACCOUNT QB).................................. 31
THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE
ANNUITIES
(ACCOUNT MM).................................. 33
THE TRAVELERS TIMED GROWTH AND INCOME STOCK
ACCOUNT FOR VARIABLE ANNUITIES (ACCOUNT
TGIS)......................................... 35
THE TRAVELERS TIMED SHORT-TERM BOND ACCOUNT FOR
VARIABLE ANNUITIES (ACCOUNT TSB).............. 37
THE TRAVELERS TIMED AGGRESSIVE STOCK ACCOUNT FOR
VARIABLE ANNUITIES (ACCOUNT TAS).............. 39
THE TRAVELERS TIMED BOND ACCOUNT FOR VARIABLE
ANNUITIES
(ACCOUNT TB).................................. 41
APPENDIX A...................................... A-1
APPENDIX B (CONDENSED FINANCIAL INFORMATION).... B-1
APPENDIX C...................................... C-1
</TABLE>
INDEX OF SPECIAL TERMS
The following terms are italicized throughout the prospectus. Refer to the page
listed for an explanation of each term.
<TABLE>
<S> <C>
Accumulation Units.............................. 7
Annuitant....................................... 14
Annuity Payments................................ 14
Annuity Unit.................................... 7
Cash Surrender Value............................ 9
Cash Value...................................... 6
Contract Date................................... 6
Contract Owner (You, Your or Owner)............. 6
Contract Year................................... 6
Funding Option(s)............................... 7
Income Payments................................. 17
Individual Account.............................. 6
Managed Separate Account........................ 7
Maturity Date................................... 14
Owner's Account................................. 6
Participant..................................... 6
Participant's Interest.......................... 6
Plan............................................ 6
Purchase Payment................................ 6
Underlying Funds................................ 7
Written Request................................. 6
</TABLE>
2
<PAGE> 12
FEE TABLE
- --------------------------------------------------------------------------------
ACCOUNTS GIS, QB, MM, TGIS, TSB, TAS AND TB
FUND U AND ITS UNDERLYING FUNDS
CONTRACT CHARGES AND EXPENSES
<TABLE>
<S> <C>
CONTINGENT DEFERRED SALES CHARGE (as a percentage of
purchase payments withdrawn)
If withdrawn within 5 years after the purchase
payment is made..................................... 5.00%
If withdrawn 5 or more years after the purchase
payment is made..................................... 0%
SEMIANNUAL CONTRACT ADMINISTRATIVE CHARGE.............. $15
ANNUAL SEPARATE ACCOUNT EXPENSES
MORTALITY AND EXPENSE RISK CHARGE (as a percentage of
average net assets of
Managed Separate Accounts and Fund U)............... 1.25%
FUNDING OPTION EXPENSES:
(as a percentage of average daily net assets of the funding
option as of December 31, 1997, unless otherwise noted.)
</TABLE>
<TABLE>
<CAPTION>
MARKET ANNUAL
INVESTMENT ALTERNATIVE MANAGEMENT FEE TIMING FEE(1) EXPENSES(2)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MANAGED SEPARATE ACCOUNTS
Account GIS......................................... 0.62% n/a 0.62%
Account MM.......................................... 0.32% n/a 0.32%
Account QB.......................................... 0.32% n/a 0.32%
Account TAS......................................... 0.35% 1.25% 1.60%
Account TB*......................................... 0.50% 1.25% 1.75%
Account TGIS........................................ 0.32% 1.25% 1.57%
Account TSB......................................... 0.32% 1.25% 1.57%
</TABLE>
* Travelers Timed Bond Account. Not currently available to new Contract Owners
in most states.
<TABLE>
<CAPTION>
MANAGEMENT FEE OTHER EXPENSES TOTAL
(AFTER EXPENSE (AFTER EXPENSE UNDERLYING
REIMBURSEMENT) REIMBURSEMENT) FUND EXPENSES
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
UNDERLYING FUNDING OPTIONS
Capital Appreciation Fund............................... 0.75% 0.09% 0.84%
Dreyfus Stock Index Fund................................ 0.25% 0.03% 0.28%
High Yield Bond Trust................................... 0.50% 0.34% 0.84%
Managed Assets Trust.................................... 0.50% 0.13% 0.63%
AMERICAN ODYSSEY FUNDS, INC.
Core Equity Fund.................................... 0.57% 0.08%(3) 0.65%
Emerging Opportunities Fund......................... 0.60% 0.26%(3) 0.86%
Global High-Yield Bond Fund......................... 0.43% 0.25%(4) 0.68%
Intermediate-Term Bond Fund......................... 0.50% 0.13%(3) 0.63%
International Equity Fund........................... 0.65% 0.12%(3) 0.77%
Long-Term Bond Fund................................. 0.50% 0.12%(3) 0.62%
AMERICAN ODYSSEY FUNDS, INC.**
Core Equity Fund.................................... 0.57% 1.33%(3) 1.90%
Emerging Opportunities Fund......................... 0.60% 1.51%(3) 2.11%
Global High-Yield Bond Fund......................... 0.43% 1.50%(4) 1.93%
Intermediate-Term Bond Fund......................... 0.50% 1.38%(3) 1.88%
International Equity Fund........................... 0.65% 1.37%(3) 2.02%
Long-Term Bond Fund................................. 0.50% 1.37%(3) 1.87%
DREYFUS VARIABLE INVESTMENT FUND
Small Cap Portfolio................................. 0.75% 0.03% 0.78%
FIDELITY'S VARIABLE INSURANCE PRODUCTS FUND
Equity Income Portfolio............................. 0.50% 0.08%(5) 0.58%
Growth Portfolio.................................... 0.60% 0.09%(5) 0.69%
High Income Portfolio............................... 0.59% 0.12%(5) 0.71%
</TABLE>
3
<PAGE> 13
<TABLE>
<CAPTION>
MANAGEMENT FEE OTHER EXPENSES TOTAL
(AFTER EXPENSE (AFTER EXPENSE UNDERLYING
REIMBURSEMENT) REIMBURSEMENT) FUND EXPENSES
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FIDELITY'S VARIABLE INSURANCE PRODUCTS FUND II
Asset Manager Portfolio............................. 0.55% 0.10%(5) 0.65%
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Templeton Asset Allocation Fund..................... 0.60% 0.18%(6) 0.78%
Templeton Bond Fund................................. 0.50% 0.18% 0.68%
Templeton Stock Fund................................ 0.69% 0.19%(6) 0.88%
TRAVELERS SERIES FUND, INC.
Alliance Growth Portfolio........................... 0.80% 0.02%(8) 0.82%
G.T. Global Strategic Income Portfolio*............. 0.80% 0.27%(9) 1.07%
MFS Total Return Portfolio.......................... 0.80% 0.06%(8) 0.86%
Putnam Diversified Income Portfolio................. 0.75% 0.13%(8) 0.88%
Smith Barney High Income Portfolio.................. 0.60% 0.10%(8) 0.70%
Smith Barney International Equity Portfolio......... 0.90% 0.11%(8) 1.01%
Smith Barney Large Cap Value Portfolio
(formerly Smith Barney Income and Growth
Portfolio)........................................ 0.65% 0.04%(8) 0.69%
THE TRAVELERS SERIES TRUST
Disciplined Mid Cap Stock Portfolio................. 0.70% 0.25%(7) 0.95%
Social Awareness Stock Portfolio.................... 0.65% 0.33% 0.98%
U.S. Government Securities Portfolio................ 0.32% 0.26% 0.58%
Utilities Portfolio................................. 0.65% 0.41% 1.06%
</TABLE>
NOTES:
The purpose of this Fee Table is to help individuals understand the various
costs and expenses that a contract owner or a participant will bear, directly or
indirectly, under the Contract. The information, except as noted, reflects
expenses of the managed separate accounts as well as Fund U and its underlying
funds for the fiscal year ending December 31, 1997. For additional information,
including possible waivers or reductions of these expenses, see "Charges and
Deductions." Expenses shown do not include premium taxes, which may be
applicable. "Other Expenses" include operating costs of the Separate Account or
fund. These expenses are reflected in each funding option's net asset value and
are not deducted from the account value under the Contract.
* Not currently available to new Contract Owners in most states.
** Includes 1.25% CHART asset allocation fee.
(1) Contract Owners may discontinue market timing services at any time and
thereby avoid any subsequent fees for those services by transferring to a
non-timed account.
(2) This figure does not include the mortality and expense risk charge which is
deducted from the daily unit value of each of the managed separate accounts.
(3) These fees reflect an expense reimbursement arrangement with the Funds'
investment adviser. Without reimbursement, Total Underlying Fund Expenses
would have been 0.79% for the INTERNATIONAL EQUITY FUND and 0.67% for the
CORE EQUITY FUND. The figures After Expense Reimbursement may be greater
than the figures Before Expense Reimbursement because of repayments by the
Fund to the Manager once the Fund is operating below the expense limitation.
(4) The Management Fees and Other Expenses for the GLOBAL HIGH-YIELD BOND FUND
are estimates and are not based on actual 1997 Fund expenses. Prior to May
1, 1998, the Global High-Yield Bond Fund was named the "Short-Term Bond
Fund" and had a substantially different investment objective and investment
program. Information about the Short-Term Bond Fund is unlikely to be
helpful to investors in the Global High-Yield Bond Fund.
(5) A portion of the brokerage commissions that certain funds pay was used to
reduce funds' expenses. In addition, certain funds have entered into
arrangements with their custodian whereby credits realized, as a result of
uninvested cash balances were used to reduce custodian expenses. Without
these reductions, the Total underlying Fund Expenses presented in this table
would have been 0.64% for ASSET MANAGER PORTFOLIO, 0.57% for EQUITY INCOME
PORTFOLIO, 0.67% for GROWTH PORTFOLIO, and 0.71% for HIGH INCOME PORTFOLIO.
(6) Management Fees and Total Fund Operating Expenses have been restated to
reflect the management fee schedule approved by shareholders and effective
May 1, 1997. Actual Management Fees and Total Expenses during 1997 were
lower.
(7) Other expenses reflect the current expense reimbursement management with
Travelers where Travelers has agreed to reimburse the Portfolios for the
amount by which their aggregate expenses (including management fees, but
excluding brokerage commissions, interest charges and taxes) exceeds 0.95%.
Without such arrangements, the Total Funding Option Expenses for the
Disciplined Mid Cap Stock Portfolio would have been 1.82%.
(8) Other expenses are as of October 31, 1997 (the Fund's fiscal year end).
There were no fees waived or expenses reimbursed for these funds in 1997.
(9) Other expenses are as of October 31, 1997 and take into account the current
expense limitations agreed to by the Portfolio's investment manager (the
"Manager"). The Manager waived all of its fees for the period and reimbursed
the Portfolios for their expenses. Without such arrangements, the Total
Expenses for the G.T. GLOBAL STRATEGIC INCOME PORTFOLIO would have been
1.38%.
4
<PAGE> 14
EXAMPLE*
Assuming a 5% annual return on assets, a $1,000 investment would be subject to
the following expenses:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
IF CONTRACT IS SURRENDERED AT THE IF CONTRACT IS NOT SURRENDERED OR
END OF PERIOD SHOWN ANNUITIZED AT END OF PERIOD SHOWN:
------------------------------------- -------------------------------------
INVESTMENT ALTERNATIVE 1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MANAGED SEPARATE ACCOUNTS
Account GIS.......................... $70 $113 $159 $234 $20 $63 $109 $234
Account MM........................... 67 104 143 203 17 54 93 203
Account QB........................... 67 104 143 203 17 54 93 203
Account TAS.......................... 80 143 208 331 30 93 158 331
Account TB**......................... 82 147 215 345 32 97 165 345
Account TGIS......................... 80 142 206 329 30 92 156 329
Account TSB.......................... 80 142 206 329 30 92 156 329
UNDERLYING FUNDING OPTIONS
Capital Appreciation Fund............... 73 120 170 257 23 70 120 257
Dreyfus Stock Index Fund................ 67 103 141 198 17 53 91 198
High Yield Bond Trust................... 73 120 170 257 23 70 120 257
Managed Assets Trust.................... 71 114 159 235 21 64 109 235
AMERICAN ODYSSEY FUNDS, INC.(1)
Core Equity Fund..................... 71 114 160 238 21 64 110 238
Emerging Opportunities Fund.......... 73 121 171 259 23 71 121 259
Global High-Yield Bond Fund.......... 71 115 162 241 21 65 112 241
Intermediate-Term Bond Fund.......... 71 114 159 235 21 64 109 235
International Equity Fund............ 72 118 166 250 22 68 116 250
Long-Term Bond Fund.................. 70 113 159 234 20 63 109 234
AMERICAN ODYSSEY FUNDS, INC.(2)
Core Equity Fund..................... 83 151 222 359 33 101 172 359
Emerging Opportunities Fund.......... 85 158 232 378 35 108 182 378
Global High-Yield Bond Fund.......... 84 152 223 362 34 102 173 362
Intermediate-Term Bond Fund.......... 83 151 221 357 33 101 171 357
International Equity Fund............ 84 155 228 370 34 105 178 370
Long-Term Bond Fund.................. 83 151 221 356 33 101 171 356
DREYFUS VARIABLE INVESTMENT FUND
Small Cap Portfolio.................. 72 118 167 251 22 68 117 251
FIDELITY'S VARIABLE INSURANCE PRODUCTS FUND
Equity Income Portfolio.............. 70 112 157 230 20 62 107 230
Growth Portfolio..................... 71 115 162 242 21 65 112 242
High Income Portfolio................ 71 116 163 244 21 66 113 244
FIDELITY'S VARIABLE INSURANCE PRODUCTS FUND II
Asset Manager Portfolio.............. 71 114 160 238 21 64 110 238
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Templeton Asset Allocation Fund...... 72 118 167 251 22 68 117 251
Templeton Bond Fund.................. 71 115 162 241 21 65 112 241
Templeton Stock Fund................. 73 121 172 261 23 71 122 261
TRAVELERS SERIES FUND, INC.
Alliance Growth Portfolio............ 72 119 169 255 22 69 119 255
G.T. Global Strategic Income Portfolio** 75 127 181 280 25 77 131 280
MFS Total Return Portfolio........... 73 121 171 259 23 71 121 259
Putnam Diversified Income
Portfolio.......................... 73 121 172 261 23 71 122 261
Smith Barney High Income Portfolio... 71 116 163 243 21 66 113 243
Smith Barney International Equity
Portfolio.......................... 74 125 178 274 24 75 128 274
Smith Barney Large Cap Value
Portfolio
(formerly Smith Barney Income and
Growth Portfolio).................. 71 115 162 242 21 65 112 242
THE TRAVELERS SERIES TRUST
Disciplined Mid Cap Stock
Portfolio.......................... 74 123 175 268 24 73 125 268
Social Awareness Stock Portfolio..... 74 124 177 271 24 74 127 271
U.S. Government Securities
Portfolio.......................... 70 112 157 231 20 62 107 231
Utilities Portfolio.................. 75 127 181 279 25 77 131 279
</TABLE>
* THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THE
EXAMPLE REFLECTS THE $15 SEMIANNUAL CONTRACT FEE AS AN ANNUAL CHARGE OF .146%
OF ASSETS.
** Not currently available to new Contract Owners in most states.
(1) Reflects expenses that would be incurred for those Contract Owners who DO
NOT participate in the CHART Asset Allocation Program.
(2) Reflects expenses that would be incurred for those Contract Owners who DO
participate in the CHART Asset Allocation Program.
CONDENSED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
See Appendix B, page B-1.
5
<PAGE> 15
THE VARIABLE ANNUITY CONTRACT
- --------------------------------------------------------------------------------
Travelers Universal Annuity is a variable annuity designed to help contract
owners and participants accumulate money for retirement. Certificates are issued
to individual participants under a group contract. Under the Contract, you (the
contract owner or participant, as applicable) make purchase payments to us and
we credit them to your account. The Company promises to pay the owner or the
participant, as provided in an employer's plan, an income, in the form of
annuity or income payments, beginning on the maturity date (a future date chosen
on which annuity payments begin). The purchase payments accumulate tax deferred
in the funding options of your choice, or as provided in the plan under which
the Contract is issued. You assume the risk of gain or loss according to the
performance of the funding options. The cash value is the amount of purchase
payments, plus or minus any investment experience. The cash value also reflects
all withdrawals made and charges deducted. There is generally no guarantee that
at the maturity date the cash value will equal or exceed the total purchase
payments made under the Contract, except as specified or elected under the death
benefit provisions described in this prospectus. The date the Contract and its
benefits became effective is referred to as the contract date. Each 12-month
period following this contract date is called a contract year. The record of
accumulation units credited to an owner is called the owner's account. The
record of accumulation units credited to a participant is called the individual
account.
Certain changes and elections must be made in writing to the Company. Where the
term "written request" is used, it means that written information must be sent
to the Company's Home Office in a form and content satisfactory to us. The
following brief description of the key features of the Contract is subject to
the specific terms of the Contract itself.
PURCHASE PAYMENTS
Purchase payments under tax-qualified retirement plans (except IRAs), that is,
tax-sheltered annuities (i.e., 403(b)), corporate pension and profit-sharing,
governmental and deferred compensation plans for governmental and tax-exempt
organization employees, may be made under the Contract in amounts of $20 or more
per participant, subject to the terms of the plan under which the contract is
issued. The initial minimum purchase payment for IRAs is $1,000; for
nonqualified Contracts, the initial minimum purchase payment is $1,000 and $100
thereafter. The initial purchase payment is due and payable before the Contract
becomes effective.
Under a group Contract, if the participant dies before a payout begins, the
Company will pay to the owner or beneficiary, as provided in the plan, the
participant's interest. The participant's interest will be considered the cash
value of that participant's individual account unless the Company is otherwise
instructed by the owner. Under an individual Contract, if the owner dies before
a payout begins, the amount due will be paid to the beneficiary.
APPLICATION OF PURCHASE PAYMENTS
Each purchase payment will be applied to the Contract to provide accumulation
units of the funding options, as selected by the contract owner. A funding
option is a fixed interest account, a managed separate account or available
underlying fund to which assets under a variable annuity contract may be
allocated. Such accumulation units will be credited to an owner's account or
individual account, as directed or as provided in the plan. If the Contract
application is in good order, the Company will apply the initial purchase
payment within two business days of receipt of the purchase payment at the
Company's Home Office. If the application is not in good order, the Company will
attempt to secure the missing information within five business days. If the
application is not complete at the end of this period, the Company will inform
the applicant of the reason for the delay. The purchase payment will be returned
immediately unless the applicant specifically consents to the Company keeping
the purchase payment until the application is complete. Once it is complete, the
purchase payment will be applied within two business days. Our business day ends
when the New York Stock Exchange closes, usually 4:00 p.m. Eastern time.
6
<PAGE> 16
ACCUMULATION UNITS
An accumulation unit is used to calculate the value of a Contract. An
accumulation unit works like a share of a mutual fund. Each funding option has a
corresponding accumulation unit value. The accumulation units are valued each
business day and may increase or decrease from day to day. The number of
accumulation units we will credit to the Contract once we receive a purchase
payment is determined by dividing the amount directed to each funding option by
the value of the accumulation unit. We calculate the value of an accumulation
unit for each funding option each day after the New York Stock Exchange closes.
After the value is calculated, your account is credited. During the annuity
period (i.e., after the maturity date), you are credited with annuity units.
THE FUNDING OPTIONS
FUND U
Fund U invests in a number of underlying funds as described in the chart on page
23. Each underlying fund has risks associated with it. Please read the
accompanying prospectus for each carefully. Underlying funds may be added or
withdrawn as permitted by applicable law. Additionally, some of the underlying
funds may not be available in every state due to various insurance regulations
or in every plan, due to plan restrictions.
MANAGED SEPARATE ACCOUNTS
For each managed separate account, neither the investment objective nor the
fundamental investment restrictions, as described in the SAI, can be changed
without a vote of the majority of the outstanding voting securities of the
Accounts, as defined by the 1940 Act. See "The Insurance Company and The
Separate Account" for more information regarding the investment objectives and
policies and risk factors of these options.
Certain investment options are available through a market timing program, for
which there is a fee. Certain risks may apply to those who allocate funds to
these options outside of the market timing program. See "Market Timing Services
Fees" for more information.
TRANSFERS
Up to 30 days before annuity or income payments begin, the owner or participant,
if permitted, may transfer all or part of the contract value among available
variable funding options without fee, penalty or charge. There are currently no
restrictions on frequency of such transfers, but the Company reserves the right
to limit transfers to one in any six-month period. Such restrictions do not
apply to transfers by third party market timing services among timed funding
options. During the annuity period, transfers are allowed, only with our
consent. Please refer to Appendix A for information regarding transfers between
the Fixed Account and the variable funding options.
Since the available funding options have different investment advisory fees, a
transfer from one funding option to another could result in higher or lower
investment advisory fees. (See "Investment Advisory Fees.")
We reserve the right to modify transfer privileges at any time and to assess a
processing fee for this service upon 30 days' notice to the contract owner
(where permitted by law).
DOLLAR COST AVERAGING (AUTOMATED TRANSFERS)
By written request, the owner or participant, if permitted, may elect automated
transfers of contract values on a monthly or quarterly basis from specific
funding options to other funding options. Certain minimums may apply to enroll
in the program. He or she may stop or change participation in the Dollar Cost
Averaging program at any time, provided the Company receives at least 30 days'
written notice.
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Automated transfers are subject to all Contract provisions, including those
relating to the transfer of money between funding options. Certain minimums may
apply to amounts transferred.
ASSET ALLOCATION ADVICE
Some contract owners or participants, if permitted, may elect to enter into a
separate advisory agreement with Copeland Financial Services, Inc. ("Copeland"),
an affiliate of the Company. Copeland provides asset allocation advice under its
CHART Program(R), which is fully described in a separate Disclosure Statement.
Under the CHART Program, purchase payments and cash values are allocated among
the six American Odyssey Funds. Copeland's charge for this advisory service is
equal to a maximum of 1.50% of the assets subject to the CHART Program. This fee
is currently reduced by 0.25%, the amount of the fee paid to the investment
manager of American Odyssey Funds, and it is further reduced for assets over
$25,000. Another reduction is made for participants in plans subject to ERISA
with respect to amounts allocated to the American Odyssey Intermediate-Term Bond
Fund because that Fund has as its subadviser an affiliate of Copeland. A $30
initial fee is also charged. The CHART Program fee will be paid by quarterly
withdrawals from the cash values allocated to the American Odyssey Funds. The
Company will not treat these withdrawals as taxable distributions. The CHART
Program may not be available in all marketing programs through which the
Universal Annuity Contract is sold.
MARKET TIMING SERVICES
Accounts TGIS, TSB, TAS and TB ("Market Timed Accounts") are funding options
available to individuals who have entered into market timing services agreements
("market timing agreements") with registered investment advisers who provide
market timing services ("registered investment advisers"). Such agreements
permit the registered investment advisers to act on behalf of the contract owner
or participant by transferring all or a portion of the contract owner's units
from one Market Timed Account to another. The registered investment advisers can
transfer funds only from one Market Timed Account to another Market Timed
Account.
A contract owner or participant, if permitted, may transfer account values from
any of the Market Timed Accounts to any of the other funding options available
under the Contract. However, if an individual in a Market Timed Account
transfers all current account values and directs all future allocations to a
non-timed investment alternative, the market timing agreements with the
registered investment advisers automatically terminate. If this occurs, the
registered investment advisers no longer have the right to transfer funds on
behalf of that individual. Partial withdrawals from the Market Timed Accounts do
not affect the market timing agreements.
Copeland, a registered investment adviser and an affiliate of the Company,
provides market timing services for a fee equivalent to 1.25% of the current
value of the assets subject to timing. Copeland also charges a $30 market timing
application fee. If a person who has terminated his or her market timing
agreement wishes to reenter a market timing agreement, the market timing fees
will be reassessed, and a new $30 application fee will be charged by Copeland.
The market timing fee is deducted from the assets of the Market Timed Accounts
pursuant to a payment method for which the Company, Accounts TGIS, TSB, TAS and
TB, Tower Square Securities, Inc., the principal underwriter of the Contracts,
and Copeland obtained an exemptive order from the SEC on February 7, 1990
("asset charge payment method"). Pursuant to the asset charge payment method,
the market timing agreements are between the contract owner or participant, as
applicable and Copeland; however, the Company is a signatory to the agreements
and is solely responsible for payment of the fee to Copeland. On each Valuation
Date, the Company deducts the amount necessary to pay the fee from each of the
Market Timed Accounts and, in turn, pays that amount to Copeland. This is the
sole payment method available to those who enter into market timing agreements.
Individuals in the Market Timed Accounts may use the services of unaffiliated
market timing investment advisers if such advisers are acceptable to the
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Company, and if such advisers agree to an arrangement substantially identical to
the asset charge payment method.
Distribution and Management Agreements between each of the Market Timed Accounts
and the Company authorize the Company to deduct the market timing fees in
accordance with the asset charge payment method. Contract owners are asked to
approve annually the terms of the Distribution and Management Agreement in order
to continue the asset charge payment method. Because the market timing services
are provided pursuant to individual agreements between contract owners or
participants and the registered investment advisers, the Boards of Managers of
the Market Timed Accounts do not exercise any supervisory or oversight role with
respect to these services or the fees charged therefor.
Under the asset charge payment method, the daily deductions for market timing
fees are not treated by the Company as taxable distributions. (See "Federal Tax
Considerations".)
MARKET TIMING RISKS
Those who allocate amounts to the Market Timed Accounts without a market timing
agreement do so at their own risk and may bear a disproportionate amount of the
expenses associated with Separate Account portfolio turnover. In addition, since
the market timing fee is deducted by the Company as an asset charge from the
Market Timed Accounts, those who allocate amounts to these Accounts without a
market timing agreement will nevertheless have the fees deducted on a daily
basis. Although the Company intends to identify such non-timed contract owners
or participants and to restore to the non-timed contract owner's account, no
less frequently than monthly, an amount equal to the deductions for the market
timing fees, this restored amount will not reflect any investment experience
that would have been attributable to such deductions.
Those who elect to participate in a market timing agreement may be subject to
the following additional risks: (1) higher transaction costs; (2) higher
portfolio turnover rate; (3) investment return goals not being achieved by the
registered investment advisers which provide market timing services; and (4)
higher account expenses for depleting and, then, starting up the account.
Actions by the registered investment advisers which provide market timing
services may also increase risks generally found in any investment, i.e., the
failure to achieve an investment objective, and possible lower yield. In
addition, if there is more than one market timing strategy utilizing a Market
Timed Account, those who invest in the Market Timed Account when others are
transferred into or out of that Account by the registered investment advisers
may bear part of the direct costs incurred by those individuals who were
transferred. For example, if 90% of a Market Timed Account is under one market
timing strategy, and those funds are transferred either into or out of that
Account, those constituting the other 10% of the Market Timed Account may bear a
disproportionate amount of the expense for the transfer.
WITHDRAWALS AND REDEMPTIONS
Under a group Contract, before a participant's maturity date, the Company will
pay all or any portion of that participant's cash surrender value to the owner
or participant, as provided in the plan. Under an Individual Contract, the
contract owner may redeem all or any portion of the cash surrender value (that
is, the cash value minus any withdrawal change) any time before the maturity
date. The owner or participant must submit a written request for withdrawal.
Withdrawals will be made pro rata from all the funding options unless he or she
specifies the funding option(s) from which surrender is to be made. The cash
surrender value will be determined as of the business day next following receipt
of the owner's surrender request at the Company's Home Office. A Group contract
owners' Account may be surrendered for cash as provided in the plan without the
consent of any participant.
The Company may defer payment of any cash surrender value for a period of not
more than seven days after the request is received in good order. The cash
surrender value of an owner's account or
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individual account on any date will be equal to the cash value of the applicable
Contract or account less any applicable withdrawal charge, outstanding cash
loans, and any premium tax not previously deducted. The cash surrender value may
be more or less than the purchase payments made depending on the value of the
Contract or account at the time of surrender.
For those participating in the Texas Optional Retirement Program, a withdrawal
is available only upon termination of employment, retirement or death as
provided in the Texas Optional Retirement Program.
Participants in Section 403(b) tax deferred annuity plans may not make
withdrawals from certain salary reduction amounts prior to reaching age 59 1/2,
unless due to separation from service, death, disability or hardship. (See
"Federal Tax Considerations.")
SYSTEMATIC WITHDRAWALS
Each contract year, contract owners or participants, as applicable, may elect to
take monthly, quarterly, semiannual or annual systematic withdrawals of a
specified dollar amount. Any applicable premium taxes will be deducted. To elect
this option, an election form provided by the Company must be completed.
Systematic withdrawals may be stopped at any time, provided the Company receives
at least 30 days' written notice.
We reserve the right to discontinue offering systematic withdrawals or to assess
a processing fee for this service upon 30 days' written notice to contract
owners (where permitted by law).
Each systematic withdrawal is subject to federal income tax on the taxable
portion. In addition, a 10% federal penalty tax may be assessed on systematic
withdrawals if the contract owner is under age 59 1/2. You should consult with
your tax adviser regarding the tax consequences of systematic withdrawal.
DEATH BENEFIT
The following death benefit applies to all Contracts which include a death
benefit.
If the participant or, for an individual Contract, the annuitant dies on or
after age 75 and before annuity or income payments begin, the Company will pay
to the beneficiary the participant's interest or cash value, for individual
Contracts, as of the date it receives at its Home Office proof of death, less
any premium tax incurred. If the participant or annuitant dies before age 75 and
before annuity or income payments begin, after receipt of due proof of death,
the Company will pay the greatest of (1), (2) or (3) below:
1. the participant's interest or, for an individual Contract, the cash
value, less any premium tax incurred or outstanding cash loans; or
2. the total purchase payments allocated for that participant or contract
owner, less any prior withdrawal or cash loans; or
3. the participant's interest or, for an individual Contract, the cash
value, on the fifth Certificate or contract year anniversary immediately
preceding the date the Company receives due proof of death, less any
applicable premium tax, outstanding cash loans or withdrawals made since
such fifth year anniversary.
CHARGES AND DEDUCTIONS
WITHDRAWAL CHARGE
No sales charges are deducted at the time a purchase payment is applied under
the Contract. A withdrawal charge (deferred sales charge) of 5% will be assessed
if an amount is withdrawn within five years of its payment date. This deferred
sales charge is deducted only from purchase payments withdrawn (not on growth).
(For this calculation, the five years is measured from the first day of the
calendar month of the payment date.)
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<PAGE> 20
In the case of a partial withdrawal, payments made first will be considered to
be withdrawn first ("first in, first out"). In no event may the withdrawal
charge exceed 5% of premiums paid in the five years immediately preceding the
withdrawal date, nor may the charge exceed 5% of the amount withdrawn. Unless
the Company receives instructions to the contrary, the withdrawal charge will be
deducted from the amount requested.
For purposes of the withdrawal charge calculation, withdrawals will be deemed to
be taken in the following order:
(a) from any purchase payments to which no withdrawal charge is
applicable;
(b) from any remaining free withdrawal allowance (as described below) after
reduction by the amount of (a);
(c) from any purchase payments to which withdrawal charges are applicable
(on a first-in, first-out basis); and, finally
(d) from any Contract earnings.
NOTE: Any free withdrawals taken will not reduce purchase payments still subject
to a withdrawal charge.
We will not deduct a withdrawal charge (1) from payments we make due to the
death of the contract owner or the death of the annuitant with no contingent
annuitant surviving; or (2) upon election of an annuity payout (based upon life
expectancy); or (3) due to a minimum distribution under our minimum distribution
rules then in effect.
The withdrawal charge will be waived if:
- - an annuity payout is begun;
- - an income option of at least three years' duration (without right of
withdrawal) is begun after the first contract year;
- - the participant under a group Contract or annuitant under an individual
Contract dies;
- - the participant under a group Contract or annuitant under an individual
Contract becomes disabled (as defined by the Internal Revenue Service)
subsequent to purchase of the Contract;
- - the participant under a group Contract, or annuitant under an individual
Contract, under a tax-deferred annuity plan (403(b) plan) retires after age
55, provided the Contract has been in effect five years or more and provided
the payment is made to the contract owner or participant, as provided in the
plan;
- - the participant under a group Contract, or annuitant under an individual
Contract, under an IRA plan reaches age 70 1/2, provided the certificate, has
been in effect five years or more;
- - the participant under a group Contract, or annuitant under an individual
Contract, under a qualified pension or profit-sharing plan (including a 401(k)
plan) retires at or after age 59 1/2, provided the certificate or Contract, as
applicable has been in effect five years or more; or if refunds are made to
satisfy the anti-discrimination test. (For those under Certificates issued
before May 1, 1992, the withdrawal charge will also be waived if the
participant or annuitant retires at normal retirement age (as defined by the
Plan), provided the Certificate or Contract, as applicable has been in effect
one year or more);
- - the participant under a Section 457 deferred compensation plan retires and the
Certificate has been in effect five years or more, or if a financial hardship
or disability withdrawal has been allowed by the Plan administrator under
applicable Internal Revenue Service ("IRS") rules;
- - for group Contracts, the participant under a Section 457 deferred compensation
plan established by the Deferred Compensation Board of the state of New York
or a "public employer" in that state (as defined in Section 5 of the New York
State Finance Laws) terminates employment. The
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withdrawal charge will also be waived for such a plan at the termination date
specified in the Contract; or
- - for group Contracts, the participant under a pension or profit-sharing plan,
including a 401(k) plan, Section 457 deferred compensation plan, or a tax
deferred annuity plan (403(b) plan) that is subject to the Employee Retirement
Income Security Act of 1974 ("ERISA") retires at normal retirement age (as
defined by the plan) or terminates employment, provided that the contract
owner purchases this Contract in conjunction with a group unallocated flexible
annuity contract issued by the Company.
FREE WITHDRAWAL ALLOWANCE
There is a 10% free withdrawal allowance available for partial withdrawals taken
during any Certificate year or Contract year, as applicable after the first.
Such withdrawals will be free of charge until the annual free withdrawal amount
is exceeded. Participants under IRA plans with Certificates or Contracts, as
applicable, issued prior to May 1, 1994, are entitled to a 20% free withdrawal
allowance annually after the first Certificate or Contract year. Free
withdrawals from IRA plans are only available after the Participant has attained
age 59 1/2. The free withdrawal amount that is available will be calculated as
of the Contract anniversary date immediately preceding the surrender date. The
free withdrawal allowance does not apply to full surrenders. For 403(b) plan
participants, partial and full withdrawals (surrenders) may be subject to
restrictions. (See "Federal Tax Considerations.")
Any withdrawal deemed to be taken from purchase payments to which no withdrawal
charge applies will reduce any free withdrawal allowance available in that
contract year. Any withdrawal deemed to be taken from the free withdrawal
allowance will not reduce the amount of purchase payments to which withdrawal
charges are applicable.
PREMIUM TAX
Certain state and local governments impose premium taxes. These taxes currently
range from 0% to 5% depending upon jurisdiction. The Company, in its sole
discretion and in compliance with any applicable state law, will determine the
method used to recover premium tax expenses incurred. The Company will deduct
any applicable premium taxes from the contract value either upon death,
surrender, annuitization, or at the time purchase payments are made to the
Contract, but no earlier than when the Company has a tax liability under state
law.
ADMINISTRATIVE CHARGE
On all Contracts there will be a semiannual administrative charge of $15 for
each participant or owner for which an account is maintained. The administrative
charge will be deducted from the account in June and December of each year. This
charge will be prorated from the date of purchase to the next date of assessment
of charge. A prorated charge will also be assessed upon withdrawal or
termination of the Contract. This charge will not be assessed after an annuity
payout has begun. The administrative charge will be deducted from the Contract
value by canceling accumulation units in each funding option on a pro rata
basis. The administrative charge will offset the actual expenses of the Company
in administering the Contract. The charge is set at a level which does not
exceed the average expected cost of the administrative services to be provided
while the Contract is in force.
MORTALITY AND EXPENSE RISK CHARGE
There is an insurance charge against the assets of each separate account to
cover the mortality and expense risks associated with guarantees which the
Company provides under these variable annuity Contracts. This charge, on an
annual basis, is 1.25% of the Separate Account value and is deducted on each
business day at the rate of 0.003425% for each day in the period.
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The mortality risk charge compensates the Company for guaranteeing to provide
annuity payments according to the terms of the Contract regardless of how long
the annuitant lives and for guaranteeing to provide the death benefit if the
annuitant dies prior to the maturity date. The expense risk charge compensates
the Company for the risk that the charges under the Contract, which cannot be
increased during the duration of the Contract, will be insufficient to cover
actual costs.
REDUCTION OR ELIMINATION OF CONTRACT CHARGES
The amount of the withdrawal charge, mortality and expense risk charge, and the
administrative charge assessed under the Contract may be reduced or eliminated
when sales or administration of the Contract result in savings or reduction of
administrative or sales expenses and/or mortality and expense risks. Any such
reduction will be based on the following: (1) the size and type of group to
which sales are to be made (the sales expenses for a larger group are generally
less than for a smaller group because of the ability to implement large numbers
of contracts with fewer sales contacts); (2) the total amount of purchase
payments to be received (per Contract sales expenses are likely to be less on
larger purchase payments than on smaller ones); and (3) any prior or existing
relationship with the Company (per contract sales expenses are likely to be less
when there is a prior or existing relationship because of the likelihood of
implementing the Contract with fewer sales contacts). For certain trusts, the
Company may change the order in which purchase payments and earnings are
withdrawn in order to determine the withdrawal charge.
There may be other circumstances, of which the Company is not presently aware,
which could result in fewer sales or administrative expenses. In no event will
reduction or elimination of the withdrawal charge, mortality and expense risk
charge or the administrative charge be permitted where such reduction or
elimination will be unfairly discriminatory to any person.
INVESTMENT ADVISORY AND SUBADVISORY FEES
The Travelers Investment Management Company ("TIMCO") furnishes investment
management and advisory services to Accounts, TGIS, TSB and TAS according to the
terms of written agreements between TIMCO and each managed separate account. The
fees are as follows:
<TABLE>
<CAPTION>
ACCOUNT ANNUAL MANAGEMENT FEE
------- ---------------------
<S> <C>
Account TAS.......................... 0.35% of average daily net assets
Account TGIS......................... 0.3233% of average daily net assets
Account TSB.......................... 0.3233% of average daily net assets
</TABLE>
Travelers Asset Management International Corporation ("TAMIC") furnishes
investment management and advisory services to Accounts, GIS, QB, MM and TB
according to the terms of written agreements between TAMIC and each Account. The
fees are as follows:
<TABLE>
<CAPTION>
ACCOUNT ANNUAL MANAGEMENT FEE
------- ---------------------
<S> <C>
0.65% of the first $500,000,000,
Account GIS.......................... plus
0.55% of the next $500,000,000,
plus
0.50% of the next $500,000,000,
plus
0.45% of the next $500,000,000,
plus
0.40% of amounts over
$2,000,000,000
(of Account GIS's aggregate net
asset value)
0.50% of the first $50,000,000,
Account TB........................... plus
0.40% of the next $100,000,000,
plus
0.30% of the next $100,000,000,
plus
0.25% of amounts over $250,000,000
(of Account TB's aggregate net
asset value)
Account QB........................... 0.3233% of average daily net assets
Account MM........................... 0.3233% of average daily net assets
</TABLE>
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TAMIC also supervises the subadvisor of Account GIS, TIMCO. According to the
terms of this written subadvisory agreement, TAMIC will pay TIMCO a fee
equivalent on an annual basis to the following:
<TABLE>
<CAPTION>
AGGREGATE
ANNUAL NET ASSET
SUBADVISORY VALUE OF
FEE THE ACCOUNT
- ----------- -----------
<C> <S> <C>
0.45% of the first $ 700,000,000 plus
0.275% of the next $ 300,000,000 plus
0.25% of the next $ 500,000,000 plus
0.225% of the next $ 500,000,000 plus
0.20% of amounts over $ 2,000,000,000
</TABLE>
For information on the investment advisory fees of Fund U's underlying funds
refer to the Fee Table and to the prospectuses for those funds.
MARKET TIMING SERVICES FEES
In connection with the market timing services provided to participants in
Accounts TGIS, TSB, TAS and TB, Copeland receives a fee equivalent on an annual
basis to 1.25% of the current value of the assets subject to timing. The Company
deducts this fee daily from the assets of the Market Timed Accounts. Copeland
also charges a $30 market timing application fee. Participants may discontinue
market timing services at any time and thereby avoid any subsequent fees for
those services by transferring to a non-timed account. (See "Market Timing
Services.")
THE ANNUITY PERIOD
MATURITY DATE
The annuitant is designated in an individual Contract, and is the individual on
whose life the maturity date and the amount of the monthly payments depend.
Under a group Contract, annuity payments, that is, a series of payments, for a
particular participant will ordinarily begin on that participant's maturity date
as stated in that participant's certificate. For individual Contracts, it is the
date stated in the Contract. However, a later maturity date may be elected. For
qualified contracts, the maturity date must be before the individual's 70th
birthday, unless the Company consents to a later date. For nonqualified
contracts, unless otherwise elected, the maturity date will be the later of the
annuitant's 75th birthday or 10 years after the contract date. The maturity date
may be extended to any time prior to the annuitant's 85th birthday, or a later
date when permitted by state law and only with our consent. Federal income tax
law requires that certain minimum distribution payments be taken from pension,
profit-sharing, Section 403(b), Section 457 and IRA plans after the individual
reaches the age of 70 1/2. A number of payout options are available (see "Payout
Options"). No withdrawal charge will be assessed if an annuity option is
elected, or an income option of at least three years' duration (without right of
withdrawal) is elected after the first certificate or contract year. Federal
income tax law also requires that certain minimum distribution payments be taken
upon the death of the contract owner of a nonqualified annuity contract and upon
the death of the annuitant of a pension, profit-sharing, Section 403(b), Section
457, or IRA plan.
ALLOCATION OF ANNUITY
When annuity payments begin, the accumulated value in each funding option will
be applied to provide an Annuity with the amount of annuity payments varying
with the investment experience of that same funding option. If the owner or
participant, as provided in the plan, wishes to have annuity payments which vary
with the investment experience of a different funding option, transfers among
accounts must be made at least 30 days before the date annuity payments begin.
If the owner or participant wishes to have a fixed dollar annuity whose payments
do not vary, the Company will exchange that participant's interest for a
different contract or provide such other settlement agreements as are
appropriate to effect the payment of such an Annuity.
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<PAGE> 24
Variable payout may not be available in all states; refer to your Contract. If a
variable payout is not available, these contract owners or participants, as
provided in the plan will automatically receive a fixed dollar annuity whose
payments do not vary with the investment experience of variable funding option.
DETERMINATION OF FIRST ANNUITY PAYMENT
The Contract contains tables used to determine the first monthly annuity
payment. The amount applied to effect an Annuity will be the cash value of the
Contract as of 14 days before the date annuity payments begin less any
applicable premium taxes not previously deducted.
The amount of the first monthly payment depends on the annuity option elected
(see "Annuity Options -- Automatic Option,") and the adjusted age of the
participant. A formula for determining the adjusted age is contained in the
Contract. The tables are determined from the Progressive Annuity Table assuming
births in the year 1900 and an assumed annual net investment rate of 3.5%. The
total first monthly annuity payment is determined by multiplying the benefit per
$1,000 of value shown in the tables of the Contract by the number of thousands
of dollars of value of the Contract applied to that annuity option. The Company
reserves the right to require proof of age before annuity payments begin.
DETERMINATION OF SECOND AND SUBSEQUENT ANNUITY PAYMENTS
The dollar amount of the second and subsequent annuity payments is not
predetermined and may change from month to month based on the investment
experience of the applicable funding option(s). The actual amounts of these
payments are determined by multiplying the number of annuity units credited to
the Contract in each funding option by the corresponding annuity unit value as
of the date on which payment is due. The interest rate assumed in the annuity
tables would produce a level annuity unit value and, therefore, level annuity
payments if the net investment rate remained constant at the assumed rate. In
fact, payments will vary up or down as the net investment rate varies up or down
from the assumed rate, and there can be no assurance that a net investment rate
will be as high as the assumed rate.
PAYOUT OPTIONS
ELECTION OF OPTIONS
On the maturity date, or other agreed-upon date, the Company will pay an amount
payable under the Contract in one lump sum, or in accordance with the payment
option selected by the contract owner. Election of an annuity option or an
income option must be made in writing in a form satisfactory to the Company. Any
election made during the lifetime of the group Contract participant, or the
annuitant under an individual Contract, must be made by the participant, as
provided in the plan or the contract owner, as applicable. The terms of options
elected may be restricted to meet the contract qualification requirements of
Section 401(a)(9) of the Internal Revenue Code. If, at the death of a
participant, or annuitant under an individual Contract, there is no election in
effect for that participant or annuitant, the beneficiary may elect an annuity
option or income option in place of the Death Benefit. Income options differ
from annuity options in that the amount of the payments made under income
options are unrelated to the length of life of any person. Although the Company
continues to deduct the charge for mortality and expense risks, it assumes no
mortality risks for amounts applied under any income option. Moreover, except
with respect to lifetime payments of investment income under Income Option 3,
payments are unrelated to the actual life span of any person. Thus, the
participant may outlive the payment period.
The minimum amount that can be placed under an annuity option or income option,
as described below, is $2,000 unless the Company consents to a lesser amount. If
any monthly periodic payment due any payee is less than $20, the Company
reserves the right to make payments at less
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<PAGE> 25
frequent intervals. Annuity options and income options may be elected on a
monthly, quarterly, semiannual or annual basis.
ANNUITY OPTIONS
AUTOMATIC OPTION -- Unless the Company is directed otherwise by the owner, if
the participant is living and has a spouse and no election has been made, the
Company will, on that participant's maturity date, pay to the participant the
first of a series of annuity payments based on the life of the participant as
the primary payee and the participant's spouse in accordance with Option 5
below.
Unless the plan provides otherwise, if the participant is living and no election
has been made and the participant has no spouse, the Company will, on the
maturity date, pay to the participant the first of a series of annuity payments
based on the life of the participant, in accordance with Option 2 with 120
monthly payments assured.
OPTION 1 -- LIFE ANNUITY -- NO REFUND: The Company will make annuity payments
during the lifetime of the person on whose life the payments are based,
terminating with the last payment preceding death. While this option offers the
maximum periodic payment, THERE IS NO ASSURANCE OF A MINIMUM NUMBER OF PAYMENTS,
NOR IS THERE A PROVISION FOR A DEATH BENEFIT FOR BENEFICIARIES.
OPTION 2 -- LIFE ANNUITY WITH 120, 180 OR 240 MONTHLY PAYMENTS ASSURED: The
Company will make monthly annuity payments during the lifetime of the person on
whose life payments are based, with the agreement that if, at the death of that
person, payments have been made for less than 120, 180 or 240 months, as
elected, payments will be continued during the remainder of the period to the
beneficiary designated. The beneficiary may instead receive a single sum
settlement equal to the discounted value of the future payments with the
interest rate equivalent to the assumption originally used when the annuity
began.
OPTION 3 -- UNIT REFUND LIFE ANNUITY: The Company will make annuity payments
during the lifetime of the person on whose life payments are based, terminating
with the last payment due before the death of that person, provided that, at
death, the beneficiary will receive in one sum the current dollar value of the
number of annuity units equal to (a) minus (b) (if that difference is positive)
where: (a) is the total amount applied under the option divided by the annuity
unit value on the due date of the first annuity payment, and (b) is the product
of the number of the annuity units represented by each payment and the number of
payments made.
OPTION 4 -- JOINT AND LAST SURVIVOR LIFE ANNUITY -- NO REFUND: The Company will
make annuity payments during the joint lifetime of the two persons on whose
lives payments are based, and during the lifetime of the survivor. No further
payments will be made following the death of the survivor. THERE IS NO ASSURANCE
OF A MINIMUM NUMBER OF PAYMENTS, NOR IS THERE A PROVISION FOR A DEATH BENEFIT
UPON THE SURVIVOR'S DEATH.
OPTION 5 -- JOINT AND LAST SURVIVOR LIFE ANNUITY -- ANNUITY REDUCES ON DEATH OF
PRIMARY PAYEE: The Company will make annuity payments during the lifetime of the
two persons on whose lives payments are based. One of the two persons will be
designated as the primary payee. The other will be designated as the secondary
payee. On the death of the secondary payee, if survived by the primary payee,
the Company will continue to make monthly annuity payments to the primary payee
in the same amount that would have been payable during the joint lifetime of the
two persons. On the death of the primary payee, if survived by the secondary
payee, the Company will continue to make annuity payments to the secondary payee
in an amount equal to 50% of the payments which would have been made during the
lifetime of the primary payee. No further payments will be made following the
death of the survivor.
OPTION 6 -- OTHER ANNUITY OPTIONS: The Company will make any other arrangements
for annuity payments as may be mutually agreed upon.
16
<PAGE> 26
INCOME OPTIONS
Income payments are optional forms of periodic payments made by the Company
which are not based on the life of the participant.
OPTION 1 -- PAYMENTS OF A FIXED AMOUNT: The Company will make equal payments of
the amount elected until the cash value applied under this option has been
exhausted. The final payment will include any amount insufficient to make
another full payment.
OPTION 2 -- PAYMENTS FOR A FIXED PERIOD: The Company will make payments for the
number of years selected. The amount of each payment will be equal to the
remaining cash value applied under this option divided by the number of
remaining payments.
OPTION 3 -- INVESTMENT INCOME: The Company will make payments for the period
agreed on. The amount payable will be equal to the excess, if any, of the cash
value under this option over the amount applied under this option. No payment
will be made if the cash value is less than the amount applied, and it is
possible that no payments would be made for a period of time. Payments under
this option are not considered to be annuity payments and are taxable in full as
ordinary income. (See "Federal Tax Considerations.") This option will generally
be inappropriate under federal tax law for periods that exceed the Participant's
attainment of age 70 1/2.
The cash value used to determine the amount of any income payment will be
calculated as of 14 days before the date an income payment is due and will be
determined on the same basis as the cash value of the Contract, including the
deduction for mortality and expense risks.
While income options do not directly involve mortality risks for the Company, an
individual may elect to apply the remaining cash value to provide an annuity at
the guaranteed rates even though income payments have been received under an
income option. Before an owner or participant makes any income option election,
he or she should consult a tax adviser as to any adverse tax consequences the
election might have.
MISCELLANEOUS CONTRACT PROVISIONS
- --------------------------------------------------------------------------------
TERMINATION OF INDIVIDUAL CONTRACT
You do not need to make any purchase payments after the first to keep the
Contract in effect. However, we reserve the right to terminate the Contract on
any business day if the contract value as of that date is less than $1,000 and
no purchase payments have been made for at least two years, unless otherwise
specified by state law. Termination will not occur until 31 days after the
Company has mailed notice of termination to the contract owner's last known
address and to any assignee of record. If the Contract is terminated, we will
pay you the contract value less any applicable premium tax, and less any
applicable administrative charge.
TERMINATION OF GROUP CONTRACT OR ACCOUNT
TERMINATION BY OWNER -- If an owner or a participant terminates an account, in
whole or in part, while the contract remains in effect; and the value of the
terminated account is to be either paid in cash to you or to a participant; or
transferred to any other funding vehicle, the Company will pay or transfer the
cash surrender value of the terminated account.
If this Contract is terminated, whether or not the plan is terminated; and the
owner or the participant, as provided in the plan, elect that values are not to
be paid out in cash or transferred, the Company reserves the right to agree to
apply a participant's interest either as instructed by the owner or the
participant, or under one of the options described under "Options in the Event
of Termination of a Participant."
17
<PAGE> 27
TERMINATION BY PARTICIPANT -- If a participant terminates an individual account,
in whole or in part, while the contract remains in effect; and the value of the
terminated individual account is to be either paid in cash to the participant,
or transferred to any other funding vehicle, the Company will pay or transfer
the cash surrender value of the terminated account.
TERMINATION BY THE COMPANY AND TERMINATION AMOUNT -- If the cash value in a
participant's individual account is less than the termination amount stated in
the Contract, and no premium has been applied to the account for at least three
years, the Company reserves the right to terminate that account, and to move the
cash value of that participant's individual account to the owner's account.
If the plan does not allow for this movement to the owner's account, the cash
value, less any applicable premium tax not previously deducted, will be paid to
that participant or to the owner, as provided in the plan.
We reserve the right to terminate this Contract on any valuation date if:
1. there is no cash value in any participant's individual account, and
2. the cash value of the owner's account, if any, is less than $500, and
3. premium has not been paid for at least three years.
If this Contract is terminated, the cash value of the owner's account, if any,
less any applicable premium tax not previously deducted will be paid to you.
Termination will not occur until 31 days after the Company has mailed notice of
termination to the group contract owner or the participant, as provided in the
plan, at the last known address; and to any assignee of record.
OPTIONS IN THE EVENT OF TERMINATION OF A PARTICIPANT -- In the event that,
before a participant's maturity date, that participant terminates participation
in the plan, the owner or that participant, as provided in the plan, with
respect to that participant's interest may elect:
1. If that participant is at least 50 years of age, to have that
participant's interest applied to provide an annuity option or an income
option.
2. If the Contract is continued, to have that participant's interest
applied to continue as a paid-up deferred annuity for that participant,
(i.e., the cash value remains in the Contract and the annuity becomes
payable under the same terms and conditions as the annuity that would
have otherwise been payable at the maturity date).
3. To have the owner or that participant, as provided in the plan, receive
that participant's interest in cash.
4. If that participant becomes a participant under another group contract
of this same type which is in effect with us, to transfer that
participant's interest to that group contract.
5. To make any other arrangements as may be mutually agreed on.
If this Contract is continued, any cash value to which a terminating participant
is not entitled under the plan, will be moved to the owner's account.
AUTOMATIC BENEFIT -- In the event of termination, unless otherwise provided in
the Plan, a participant's interest will continue as a paid-up deferred annuity
in accordance with option 2. above, if this Contract is continued. Or, if this
Contract is terminated, will be paid in cash to the Owner or to that
participant, as provided in the plan.
ANNUITY PAYMENTS -- Termination of this contract or the plan will not affect
payments being made under any annuity option which began before the date of
termination.
18
<PAGE> 28
DISTRIBUTION FROM ONE ACCOUNT TO ANOTHER ACCOUNT
Under a group Contract, the owner may, as provided for in the plan, distribute
the cash value from the owner's account to one or more individual accounts. No
distribution will be allowed between individual accounts.
The owner may, as required by and provided for in the plan, move the cash value
from any or all individual accounts to the owner's account without a charge.
REQUIRED REPORTS
As often as required by law, but at least once in each contract year before the
due date of the first annuity payment, the Company will furnish a report showing
the number of accumulation units credited to the Contract in each funding option
and the corresponding accumulation unit values as of the date of the report. The
Company will keep all records required under federal or state laws.
RIGHT TO RETURN
For group Contracts issued in the state of New York, during the 20 days
following the participant's receipt of a certificate, the participant may return
the certificate to the Company, by mail or in person, if for any reason the
participant has changed his or her mind. Upon return of the certificate, the
Company will refund to the contract owner the sum of all purchase payments made
under the Contract, and will make the separate accounts whole if the
accumulation value has declined.
For all individual Contracts, the Contract may be returned for a full refund of
the Contract's cash value (including charges) within ten days after the delivery
of the Contract to the contract owner, unless state law requires a longer
period. The contract owner bears the investment risk during the right to return
period; therefore, the cash value returned may be greater or less than the
purchase payment made under the Contract. However, if applicable state law so
requires, or if the Contract was purchased in an Individual Retirement Annuity,
the purchase payment will be returned in full. All cash values will be
determined as of the valuation date next following the Company's receipt of the
contract owner's written request for refund.
The right to return is not available to participants of the Texas Optional
Retirement Program.
CHANGE OF CONTRACT
For group Contracts, the Company may, at any time, make any changes, including
retroactive changes, in the Contract to the extent that the change is required
to meet the requirements of any federal law or regulation to which the Company
is subject.
Except as provided in the paragraph immediately above, no change may be made in
the Contract before the fifth anniversary of the contract date, and in no event
will changes be made with respect to payments being made by the Company under
any annuity option which has commenced prior to the date of change. On and after
the fifth anniversary of the contract date, the Company reserves the right to
change the termination amount (see "Termination of Contract or Account"), the
calculation of the net investment rate and the unit values, and the annuity
tables. Any change in the annuity tables will be applicable only to premiums
received under the Contract after the change. The ability to make such change
lessens the value of mortality and expense guarantees. Other changes (including
changes to the administrative charge) may be applicable to all owners' accounts
and individual accounts under the Contract, to only the owners' accounts and
individual accounts established after the change, or to only premiums received
under the Contract after the date of change as the Company declares at the time
of change. The Company will give notice to the owner at least 90 days before the
date the change is to take effect.
19
<PAGE> 29
ASSIGNMENT
The participant may not assign his or her rights under a group Contract. The
owner may assign his or her rights under an individual or a group Contract if
allowed by the plan.
SUSPENSION OF PAYMENTS
If a national stock exchange is closed (except for holidays or weekends), or
trading is restricted due to an existing emergency as defined by the SEC so that
disposal of the separate account's investments or determination of its net asset
value is not reasonably practicable, or the Commission has ordered that the
right of redemption (surrender) be suspended for the protection of contract
owners, the Company may postpone all procedures (including making annuity
payments) which require valuation of separate accounts until the stock exchange
is reopened and trading is no longer restricted.
VOTING RIGHTS
The contract owner or participant, as applicable, has certain voting rights in
the funding options. The number of votes which an owner or participant, as
provided in the plan, may cast in the accumulation period is equal to the number
of accumulation units credited to the account under the Contract. During the
annuity period, the group participant or the individual contract owner may cast
the number of votes equal to (i) the reserve related to the Contract divided by
(ii) the value of an accumulation unit. During the annuity period, the voting
rights of a participant or, under an individual Contract, an annuitant, will
decline as the reserve for the Contract declines.
Upon the death of the person authorized to vote under the Contract, all voting
rights will vest in the beneficiary of the Contract, except in the case of
nonqualified individual Contracts, where the surviving spouse may succeed to the
ownership.
FUND U. In accordance with its view of present applicable law, the Company will
vote shares of the underlying funds at regular and special meetings of the
shareholders of the funds in accordance with instructions received from persons
having a voting interest in Fund U. The Company will vote shares for which it
has not received instructions in the same proportion as it votes shares for
which it has received instructions. However, if the 1940 Act or any regulation
thereunder should be amended, or if the present interpretation thereof should
change, and as a result the Company determines that it is permitted to vote
shares of the mutual funds in its own right, it may elect to do so.
The number of shares which a person has a right to vote will be determined as of
the date concurrent with the date established by the respective mutual fund for
determining shareholders eligible to vote at the meeting of the fund, and voting
instructions will be solicited by written communication before the meeting in
accordance with the procedures established by the mutual fund.
Each person having a voting interest in Fund U will receive periodic reports
relating to the fund(s) in which he or she has an interest, proxy material and a
form with which to give such instructions with respect to the proportion of the
fund shares held in Fund U corresponding to his or her interest in Fund U.
ACCOUNTS GIS, QB, MM, TGIS, TSB, TAS AND TB. Contract owners participating in
Accounts GIS, QB, MM, TGIS, TSB, TAS or TB will be entitled to vote at their
meetings on (i) any change in the fundamental investment policies of or other
policies related to the accounts requiring the owners' approval; (ii) amendment
of the investment advisory agreements; (iii) election of the members of the
Board of Managers of the accounts; (iv) ratification of the selection of an
independent public accountant for the accounts; (v) any other matters which, in
the future, under the 1940 Act require the owners' approval; and (vi) any other
business which may properly come before the meeting.
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<PAGE> 30
The number of votes which each contract owner or a participant may cast,
including fractional votes, shall be determined as of the date to be chosen by
the Board of Managers within 75 days of the date of the meeting, and at least 20
days' written notice of the meeting will be given.
Votes for which participants under a group Contract are entitled to instruct the
owner, but for which the owner has received no instructions, will be cast by the
owner for or against each proposal to be voted on only in the same proportion as
votes for which instructions have been received.
OTHER INFORMATION
- --------------------------------------------------------------------------------
DISTRIBUTION OF VARIABLE ANNUITY CONTRACTS
The Company intends to sell the Contract in all jurisdictions where the Company
is licensed to do business, except the Bahamas. The Contract may be purchased
from agents who are licensed by state insurance authorities to sell variable
annuity contracts issued by the Company, and who are also registered
representatives of Tower Square Securities, Inc. ("Tower Square") and broker-
dealers which have Selling Agreements with Tower Square. Tower Square, whose
principal business address is One Tower Square, Hartford, Connecticut, serves as
the principal underwriter for the variable annuity contracts described herein.
The offering is continuous. Tower Square is a registered broker-dealer with the
SEC under the Securities Exchange Act of 1934 and is a member of the National
Association of Securities Dealers, Inc. ("NASD"). Tower Square is an affiliate
of the Company and an indirect wholly owned subsidiary of Travelers Group Inc.,
and serves as principal underwriter pursuant to a Distribution and Management
Agreement to which the Separate Accounts, the Company and Tower Square are
parties. No amounts have been or will be retained by Tower Square for acting as
principal underwriter for the Contracts. It is currently anticipated that
Travelers Distribution Company, an affiliated broker-dealer, may become the
principal underwriter for the Contracts during 1998.
Agents will be compensated for sales of the Contracts on a commission and
service fee basis. The compensation paid to sales agents will not exceed 7.0% of
the payments made under the Contract. In addition, certain production,
persistency and managerial bonuses may be paid.
From time to time the Company may pay or permit other promotional incentives, in
cash, credit or other compensation.
CONFORMITY WITH STATE AND FEDERAL LAWS
The Contract is governed by the laws of the state in which it is delivered. Any
paid-up annuity, cash surrender value or death benefits that are available under
the Contract are not less than the minimum benefits required by the statutes of
the state in which the Contract is delivered. We reserve the right to make any
changes, including retroactive changes, in the Contract to the extent that the
change is required to meet the requirements of any law or regulation issued by
any governmental agency to which the Company, the Contract or the contract owner
is subject.
LEGAL PROCEEDINGS AND OPINIONS
There are no pending material legal proceedings affecting the separate accounts.
There is one material pending legal proceeding, other than ordinary routine
litigation incidental to the business, to which the Company is a party. In March
1997, a purported class action entitled Patterman v. The Travelers, Inc. was
commenced in the Superior Court of Richmond County, Georgia, alleging, among
other things, violations of the Georgia RICO statute and other state laws by an
affiliate of the Company, Primerica Financial Services, Inc. and certain of its
affiliates. Plaintiffs seek unspecified compensatory and punitive damages and
other relief. In April 1997, the lawsuit was removed to the U.S. District Court
for the Southern District of Georgia, and in October, 1997, the
21
<PAGE> 31
lawsuit was remanded to the Superior Court of Richmond County. Later in October
1997, the defendants, including the Company, answered the complaint, denied
liability and asserted numerous affirmative defenses. In February 1998, the
Superior Court of Richmond County transferred the lawsuit to the Superior Court
of Gwinnett County, Georgia, and certified the transfer order for immediate
appellate review. Also in February 1998, plaintiffs served an application for
appellate review of the transfer order; defendants subsequently opposed that
application; and later in February 1998, the Court of Appeals of the State of
Georgia granted plaintiffs' application for appellate review. Pending appeal
proceedings in the trial court have been stayed. The Company intends to
vigorously contest the litigation.
Legal matters in connection with federal laws and regulations affecting the
issue and sale of the Contract described in this Prospectus as well as the
organization of the Company, its authority to issue variable annuity contracts
under Connecticut law and the validity of the forms of the variable annuity
contracts under Connecticut law have been passed on by the General Counsel of
the Company.
THE INSURANCE COMPANY AND SEPARATE ACCOUNTS
- --------------------------------------------------------------------------------
THE INSURANCE COMPANY
The Travelers Insurance Company (the "Company") is a stock insurance company
chartered in 1864 in Connecticut and continuously engaged in the insurance
business since that time. It is licensed to conduct a life insurance business in
all states of the United States, the District of Columbia, Puerto Rico, Guam,
the U.S. and British Virgin Islands and the Bahamas. The Company is an indirect
wholly owned subsidiary of Travelers Group Inc. The Company's Home Office is
located at One Tower Square, Hartford, Connecticut 06183.
IMSA
The Company is a member of the Insurance Marketplace Standards Association
("IMSA"), and as such may use the IMSA logo and IMSA membership in its
advertisements. Companies that belong to IMSA subscribe to a set of ethical
standards covering the various aspects of sales and service for individually
sold life insurance and annuities. IMSA members have adopted policies and
procedures that demonstrate a commitment to honesty, fairness and integrity in
all customer contacts involving the sale and service of individual life
insurance and annuity products.
YEAR 2000 COMPLIANCE
Generally, computer programs were designed without considering the impact of the
upcoming change in the century. As a result, software and computer systems may
need to be upgraded or replaced in order to comply with "Year 2000"
requirements. If not corrected, these computer applications could fail or create
erroneous results by or at the Year 2000. The business, financial condition, and
results of operations of a company could be materially and adversely affected by
the failure of its systems and applications (or those either provided or
operated by third-parties) to properly operate or manage dates beyond the year
1999.
The Company has investigated the nature and extent of the work required for our
computer systems to process beyond the turn of the century, and has made
progress toward achieving this goal, including upgrading and/or replacing
existing systems. We are confirming with our service providers that they are
also in the process of replacing or modifying their systems with the same goal.
We expect that our principal systems will be Year 2000 compliant by early 1999.
While these efforts involve substantial costs, we closely monitor associated
costs and continue to evaluate associated risks based on actual expenses. While
it is likely that these efforts will be successful, if
22
<PAGE> 32
necessary modifications and conversions are not completed in a timely manner,
the Year 2000 requirements could have a material adverse effect on certain
operations of the Company.
THE SEPARATE ACCOUNTS
Two different types of separate accounts serve as the funding vehicles for the
Contracts described in this prospectus. The first type, Fund U, is a unit
investment trust registered with the SEC under the 1940 Act, which means that
Fund U's assets are invested exclusively in the shares of the underlying funds.
The second type of separate account available under the Contract (the "managed
separate accounts" -- Accounts GIS, QB, MM, TGIS, TSB, TAS and TB) are
diversified, open-end management investment companies registered with the SEC
under the 1940 Act. The assets of the managed separate accounts are invested
directly in securities such as stocks, bonds or money market instruments which
are compatible with the stated investment policies of each separate account.
Each of the separate accounts available in connection with the Contract has
different investment objectives and fundamental investment policies, as
described beginning on page 29.
The separate accounts were established on the following dates: Fund U -- May 16,
1983; Account GIS -- September 22, 1967; Account QB -- July 29, 1974; Account
MM -- December 29, 1981; Accounts TGIS and TSB -- October 30, 1986; and Accounts
TAS and TB -- January 2, 1987.
Under Connecticut law, the assets of the separate accounts will be held for the
exclusive benefit of its owners. Income, gains and losses, whether or not
realized, for assets allocated to the separate accounts, are in accordance with
the applicable annuity contracts, credited to or charged against the separate
accounts without regard to other income, gains or losses of the Company. The
assets in the separate accounts are not chargeable with liabilities arising out
of any other business which the Company may conduct. The obligations arising
under the variable annuity contracts are obligations of the Company.
SUBSTITUTION OF INVESTMENTS
If any of the separate accounts or underlying funds become unavailable, or in
the judgment of the Company become inappropriate for the purposes of the
Contract, the Company may substitute another investment alternative without
consent of contract owners. Substitution may be made with respect to both
existing investments and the investment of future purchase payments. However, no
such substitution will be made without notice to contract owners and without
prior approval of the SEC, to the extent required by the 1940 Act, or other
applicable law.
THE FUNDING OPTIONS
You choose which of the following variable funding options to have your purchase
payments allocated to. You will find detailed information about the options and
their inherent risks in the current prospectuses for the funding options which
must accompany this prospectus. Since each option has varying degrees of risk,
please read the prospectuses carefully before investing. Additional copies of
the prospectuses may be obtained by contacting your registered representative or
by calling 1-800-842-8573.
The current funding options are listed below, along with their investment
advisors and any subadviser:
23
<PAGE> 33
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
INVESTMENT INVESTMENT INVESTMENT
OPTIONS OBJECTIVE ADVISER/SUBADVISER
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Capital Appreciation Fund Seeks growth of capital through the use of common Travelers Asset Management
stocks. Income is not an objective. The Fund invests International Corporation
principally in common stocks of small to large companies ("TAMIC")
which are expected to experience wide fluctuations in Subadviser: Janus Capital
price in both rising and declining markets. Corp.
Dreyfus Stock Index Fund Seeks to provide investment results that correspond to Mellon Equity Securities
the price and yield performance of publicly traded
common stocks in the aggregate, as represented by the
Standard & Poor's 500 Composite Stock Price Index.
High Yield Bond Trust Seeks generous income. The assets of the High Yield Bond TAMIC
Trust will be invested in bonds which, as a class, sell
at discounts from par value and are typically high risk
securities.
Managed Assets Trust Seeks high total investment return through a fully TAMIC
managed investment policy in a portfolio of equity, debt Subadviser: Travelers
and convertible securities. Investment Management
Company ("TIMCO")
MANAGED SEPARATE ACCOUNTS
Travelers Growth and Seeks long-term accumulation of principal through TAMIC
Income Stock Account capital appreciation and retention of net investment Subadviser: (TIMCO)
income
Travelers Money Market Seeks preservation of capital, a high degree of TAMIC
Account liquidity and the highest possible current income
available from certain short-term money market
securities
Travelers Quality Bond Seeks current income, moderate capital volatility and TAMIC
Account total return
Travelers Timed Seeks growth of capital by investing primarily in a TIMCO
Aggressive Stock Account broadly diversified portfolio of common stocks
Travelers Timed Growth Seeks long-term accumulation of principal through TIMCO
and Income Stock capital appreciation and retention of net investment
income
Travelers Timed Short- Seeks high current income with limited price volatility TIMCO
Term Bond Account
AMERICAN ODYSSEY FUNDS,
INC.
Core Equity Fund Seeks maximum long-term total return by investing American Odyssey Funds
primarily in common stocks of well-established Management, Inc.
companies. Subadviser: Equinox
Capital Management, Inc.
Emerging Opportunities Seeks maximum long-term total return by investing American Odyssey Funds
Fund primarily in common stocks of small, rapidly growing Management, Inc.
companies. Subadviser: Cowen Asset
Management and Chartwell
Investment Partners
Global High-Yield Bond Seeks maximum long-term total return (capital American Odyssey Funds
Fund* appreciation and income) by investing primarily in Management, Inc.
high-yield debt securities from the United States and Subadviser: BEA Associates
abroad.
Intermediate-Term Bond Seeks maximum long-term total return by investing American Odyssey Funds
Fund primarily in intermediate-term corporate debt Management, Inc.
securities, U.S. government securities, mortgage-related Subadviser: TAMIC
securities and asset-backed securities, as well as money
market instruments.
International Equity Fund Seeks maximum long-term total return by investing American Odyssey Funds
primarily in common stocks of established non-U.S. Management, Inc.
companies. Subadviser: Bank of
Ireland Asset Management
(U.S.) Limited
Long-Term Bond Fund Seeks maximum long-term total return by investing American Odyssey Funds
primarily in long-term corporate debt securities, U.S. Management, Inc.
government securities, mortgage-related securities, and Subadviser: Western Asset
asset-backed securities, as well as money market Management Company
instruments.
</TABLE>
* Formerly American Odyssey Short-Term Bond Fund. The name, investment
objectives and investment subadviser of this fund were changed pursuant to a
shareholder vote effective May 1, 1998.
24
<PAGE> 34
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
INVESTMENT INVESTMENT INVESTMENT
OPTIONS OBJECTIVE ADVISER/SUBADVISER
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
DREYFUS VARIABLE INVESTMENT FUND
Small Cap Portfolio Seeks to maximize capital appreciation. The Dreyfus Corporation
FIDELITY'S VARIABLE
INSURANCE PRODUCTS FUND
VIP Equity Income Seeks reasonable income by investing primarily in Fidelity Management &
Portfolio income- producing equity securities, in choosing these Research Company
securities, the portfolio manager will also consider the
potential for capital appreciation.
VIP Growth Portfolio Seeks capital appreciation by purchasing common stocks Fidelity Management &
of well-known, established companies, and small emerging Research Company
growth companies, although its investments are not
restricted to any one type of security. Capital
appreciation may also be found in other types of
securities, including bonds and preferred stocks.
VIP High Income Portfolio Seeks to obtain a high level of current income by Fidelity Management &
investing primarily in high yielding, lower-rated, Research Company
fixed-income securities, while also considering growth
of capital.
FIDELITY'S VARIABLE
INSURANCE PRODUCTS FUND II
VIP II Asset Manager Seeks high total return with reduced risk over the Fidelity Management &
Portfolio long-term by allocating its assets among stocks, bonds Research Company
and short-term fixed-income instruments.
TEMPLETON VARIABLE PRODUCTS
SERIES FUND
Templeton Asset Seeks a high level of total return with reduced risk Templeton Investment
Allocation Fund (Class 1) over the long term through a flexible policy of Counsel, Inc.
investing in stocks of companies in any nation and debt
obligations of companies and governments of any nation.
Templeton Bond Fund Seeks high current income by investing primarily in debt Templeton Global Bond
(Class 1) securities of companies, governments and government Managers
agencies of various nations throughout the world.
Templeton Stock Fund Seeks capital growth by investing primarily in common Templeton Investment
(Class 1) stocks issued by companies, large and small, in various Counsel, Inc.
nations throughout the world.
TRAVELERS SERIES FUND, INC.
Alliance Growth Portfolio Seeks long-term growth of capital by investing Travelers Investment
predominantly in equity securities of companies with a Adviser ("TIA")
favorable outlook for earnings and whose rate of growth Subadviser: Alliance
is expected to exceed that of the U.S. economy over Capital Management L.P.
time. Current income is only an incidental
consideration.
MFS Total Return Seeks to obtain above-average income (compared to a TIA
Portfolio portfolio entirely invested in equity securities) Subadviser: Massachusetts
consistent with the prudent employment of capital. Financial Services Company
Generally, at least 40% of the Portfolio's assets will ("MFS")
be invested in equity securities.
Putman Diversified Income Seeks high current income consistent with preservation TIA
Portfolio of capital. The Portfolio will allocate its investments Subadviser: Putnam
among the U.S. Government Sector, the High Yield Sector, Investment Management,
and the International Sector of the fixed income Inc.
securities markets.
Smith Barney High Income Seeks high current income. Capital appreciation is a Mutual Management
Portfolio secondary objective. The Portfolio will invest at least Corporation ("MMC")
65% of its assets in high-yielding corporate debt
obligations and preferred stock.
Smith Barney Seeks total return on assets from growth of capital and MMC
International Equity income by investing at least 65% of its assets in a
Portfolio diversified portfolio of equity securities of
established non-U.S. issuers.
Smith Barney Large Cap Seeks current income and long-term growth of income and MMC
Value Portfolio (formerly capital by investing primarily, but not exclusively, in
"Smith Barney Income and common stocks.
Growth Portfolio")
</TABLE>
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<PAGE> 35
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
INVESTMENT INVESTMENT INVESTMENT
OPTIONS OBJECTIVE ADVISER/SUBADVISER
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
THE TRAVELERS SERIES TRUST
Disciplined Mid Cap Stock Seeks growth of capital by investing primarily in a TAMIC
Portfolio broadly diversified portfolio of common stocks. Subadvisor: TIMCO
Social Awareness Stock Seeks long-term capital appreciation and retention of MMC
Portfolio net investment income by selecting investments,
primarily common stocks, which meet the social criteria
established for the Portfolio. Social criteria currently
excludes companies that derive a significant portion of
their revenues from the production of tobacco, tobacco
products, alcohol, or military defense systems, or in
the provision of military defense related services or
gambling services.
U.S. Government Seeks to select investments from the point of view of an TAMIC
Securities Portfolio investor concerned primarily with highest credit
quality, current income and total return. The assets of
the U.S. Government Securities Portfolio will be
invested in direct obligations of the United States, its
agencies and instrumentalities.
Utilities Portfolio Seeks to provide current income by investing in equity MMC
and debt securities of companies in the utility
industries.
</TABLE>
MANAGED SEPARATE ACCOUNTS: MANAGEMENT AND INVESTMENT ADVISORY SERVICES
The investments and administration of each managed separate account are under
the direction of a Board of Managers. Subject to the authority of each Board of
Managers, TIMCO and TAMIC furnish investment management and advisory services as
indicated in the Investment Option Chart. Additionally, the Board of Managers
for each managed separate account annually selects an independent public
accountant, reviews the terms of the management and investment advisory
agreements, recommends any changes in the fundamental investment policies (and
submits any such changes to contract owners at the annual meeting), and takes
any other actions necessary in connection with the operation and management of
the managed separate accounts.
The Travelers Investment Management Company ("TIMCO") is a registered investment
adviser that has provided investment advisory services since its incorporation
in 1967. Its principal offices are located at One Tower Square, Hartford,
Connecticut, and it is a wholly owned subsidiary of Smith Barney Holdings Inc.,
which is a wholly owned subsidiary of Travelers Group Inc., a financial services
holding company. TIMCO also acts as investment adviser or subadviser for other
investment companies used to fund variable products, as well as for individual
and pooled pension and profit-sharing accounts, and for affiliated companies of
The Travelers Insurance Company.
Travelers Asset Management International Corporation ("TAMIC") is a registered
investment adviser that has provided investment advisory services since its
incorporation in 1978. Its principal offices are located at One Tower Square,
Hartford, Connecticut, and it is an indirect wholly owned subsidiary of
Travelers Group Inc., a financial services holding company. TAMIC also acts as
investment adviser or subadviser for other investment companies used to fund
variable products, as well as for individual and pooled pension and
profit-sharing accounts, and for domestic insurance companies affiliated with
The Travelers Insurance Company and nonaffiliated insurance companies.
PERFORMANCE INFORMATION
From time to time, the Company may advertise several types of historical
performance for the managed separate accounts and the underlying funds of Fund
U. The yield and effective yield may be advertised for Account MM, a money
market fund. Yield is a measure of the net dividend and interest income earned
over a specific seven-day period, expressed as a percentage of the offering
price of Account MM's accumulation units. Yield is an annualized figure, which
means that it is assumed that Account MM generates the same level of net income
over a 52-week period. Effective yield is calculated similarly but includes the
effect of assumed compounding calculated under rules prescribed by the SEC. The
effective yield will be slightly higher than yield due to this
26
<PAGE> 36
compounding effect. Neither yield quotation reflects a deduction for the
contingent deferred sales charge, which if included, would reduce yield and
effective yield. The Company may also advertise the standardized average annual
total returns of Accounts GIS, QB, MM, TGIS, TSB, TAS, TB and Fund U, calculated
in a manner prescribed by the SEC, as well as the non-standardized total return
and adjusted historical performance, as described below.
STANDARDIZED METHOD. Quotations of average annual total returns are computed
according to a formula in which a hypothetical initial investment of $1,000 is
applied to the funding option, and then related to ending redeemable values over
one-, five-, and ten-year periods, or for a period covering the time during
which the funding option has been in existence, if less. These quotations
reflect the deduction of all recurring charges during each period (on a pro rata
basis in the case of fractional periods). The deduction for the annual
administrative charge ($30) is converted to a percentage of assets based on the
actual fee collected (or anticipated to be collected, if a new product), divided
by the average net assets for Contracts sold (or anticipated to be sold). Each
quotation assumes a total redemption at the end of each period with the
applicable withdrawal charge deducted at that time.
NONSTANDARDIZED METHOD. Nonstandardized "total returns" will be calculated in a
similar manner based on the performance of the funding options over a period of
time, usually for the calender year-to-date, and for the past one-, three-,
five- and ten-year periods. Nonstandardized total returns will not reflect the
deduction of the $30 annual contract administrative charge, which, if reflected,
would decrease the level of performance shown. The withdrawal charge is not
reflected because the Contract is designed for long-term investment.
For funding options that were in existence prior to the date they became
available under the Separate Account, the standardized average annual total
returns may be accompanied by returns showing the investment performance that
such funding options would have achieved (reduced by the applicable charges) had
they been held under the Contract for the period quoted. The total return
quotations are based upon historical earnings and are not necessarily
representative of future performance.
GENERAL. Within the guidelines prescribed by the SEC and the National
Association of Securities Dealers, Inc. ("NASD"), performance information may be
quoted numerically or may be presented in a table, graph or other illustration.
Advertisements may include data comparing performance to well-known indices of
market performance (including but not limited to, the Dow Jones Industrial
Average, the Standard & Poor's (S&P) 500 Index and the S&P 400 Index, the Lehman
Brothers Long T-Bond Index, the Russell 1000, 2000, and 3000 Indices, the Value
Line Index, and the Morgan Stanley Capital International's EAFE Index).
Advertisements may also include published editorial comments and performance
rankings compiled by independent organizations (including, but not limited to,
Lipper Analytical Services, Inc. and Morningstar, Inc.) and publications that
monitor the performance of the Separate Account and the variable funding
options.
FEDERAL TAX CONSIDERATIONS
- --------------------------------------------------------------------------------
The following description of the federal income tax consequences under this
Contract is not exhaustive and is not intended to cover all situations and is
not meant to provide tax advice. Because of the complexity of the law and the
fact that the tax results will vary depending on many factors, you should
consult your tax advisor regarding your personal situation. For your
information, a more detailed discussion is contained in the SAI.
GENERAL TAXATION OF ANNUITIES
Congress has recognized the value of saving for retirement by providing certain
tax benefits, in the form of tax deferral, for money put into an annuity. The
Internal Revenue Code (Code) governs
27
<PAGE> 37
how this money is ultimately taxed, depending upon the type of contract,
qualified or non-qualified, and the manner in which the money is distributed, as
briefly described below.
TYPES OF CONTRACTS: QUALIFIED OR NONQUALIFIED
If you purchase an annuity contract with proceeds of an eligible rollover
distribution from any pension plan, specially sponsored program, or individual
retirement annuity (IRA) with pre-tax dollars, your contract is referred to as a
qualified contract. Some examples of qualified contracts are: IRAs, 403(b)
annuities, pension and profit-sharing plans (including 401(k) plans), Keogh
Plans and certain other qualified deferred compensation plans. If you purchase
the contract on an individual basis and with after-tax dollars and not under one
of the programs described above, your contract is referred to as nonqualified.
INVESTOR CONTROL
In certain circumstances, owners of variable annuity contracts may be considered
the owners, for federal income tax purposes, of the assets of the separate
accounts used to support their contract. In those circumstances, income and
gains from the separate account assets would be includable in the variable
contract owner's gross income.
The IRS has stated in published rulings that a variable contract owner will be
considered the owner of separate account assets if the contract owner possesses
incidents of ownership in those assets, such as the ability to exercise
investment control over the assets. The U.S. Treasury Department has also
announced, in connection with the issuance of regulations concerning
diversification, that those regulations "do not provide guidance concerning the
circumstances in which investor control of the investments of a segregated asset
account may cause the investor (i.e., the contract owner), rather than the
insurance company, to be treated as the owner of the assets in the account."
This announcement also stated that guidance would be issued by way of
regulations or rulings on the "extent to which policyholders may direct their
investments to particular sub-accounts without being treated as owners of the
underlying assets." As of the date of this prospectus, no such guidance has been
issued.
The ownership rights under the Contract are similar to, but different in certain
respects from, those described by the IRS in rulings in which it determined that
the owners were not owners of separate account assets. For example, a contract
owner or participant of this Contract has additional flexibility in allocating
payments and cash values. These differences could result in the contract owner
being treated as the owner of the assets of Fund U. In addition, the Company
does not know what standard will be set forth in the regulations or rulings
which the Treasury is expected to issue, nor does the Company know if such
guidance will be issued. The Company therefore reserves the right to modify the
Contract as necessary to attempt to prevent the contract owner from being
considered the owner of a pro rata share of the assets of Fund U.
The remaining tax discussion assumes that the Contract qualifies as an annuity
contract for federal income tax purposes.
MANDATORY DISTRIBUTIONS FOR QUALIFIED PLANS
Federal tax law generally requires that minimum annual distributions begin by
April 1st of the calendar year following the calendar year in which an IRA owner
attains age 70 1/2. Participants in qualified plans and 403(b) annuities may
defer minimum distributions until the later of April 1st of the calendar year
following the calendar year in which they attain age 70 1/2 or the year of
retirement. Distributions must begin or be continued according to required
patterns following the death of the contract owner or annuitant of both
qualified and nonqualified annuities.
NONQUALIFIED ANNUITY CONTRACTS
As the owner of a nonqualified annuity, you do not receive any tax benefit
(deduction or deferral of income) on purchase payments, but you will not be
taxed on increases in the value of your contract until a distribution
occurs -- either as a withdrawal (distribution made prior to the
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<PAGE> 38
maturity date), or as annuity payments. When a withdrawal is made, you are taxed
on the amount of the withdrawal that is considered earnings. Similarly, when you
receive an annuity payment, part of each payment is considered a return of your
purchase payments and will not be taxed. The remaining portion of the annuity
payment (i.e., any earnings) will be considered ordinary income for tax
purposes.
If a nonqualified annuity is owned by other than an individual, however, (e.g.,
by a corporation), increases in the value of the contract attributable to
purchase payments made after February 28, 1986 are includable in income
annually. Furthermore, for contracts issued after April 22, 1987, if you
transfer the contract without adequate consideration all deferred increases in
value will be includable in your income at the time of the transfer.
If you make a partial withdrawal, this money will generally be taxed as first
coming from earnings, (income in the contract), and then from your purchase
payments. These withdrawn earnings are includable in your income. (See "Penalty
Tax for Premature Distributions" below). There is income in the contract to the
extent the cash value exceeds your investment in the contract. The investment in
the contract equals the total purchase payments you paid less any amount
received previously which was excludable from gross income. Any direct or
indirect borrowing against the value of the contract or pledging of the contract
as security for a loan will be treated as a cash distribution under the tax law.
Federal tax law requires that nonqualified annuity contracts meet minimum
mandatory distribution requirements upon the death of the contract owner,
including the first of joint owners. If these requirements are not met, the
surviving joint owner, or the beneficiary, will have to pay taxes prior to
distribution. The distribution required depends, among other things, upon
whether an annuity option is elected or whether the new contract owner is the
surviving spouse. We will administer Contracts in accordance with these rules
and we will notify you when you should begin receiving payments.
QUALIFIED ANNUITY CONTRACTS
Under a qualified annuity, since amounts paid into the contract have not yet
been taxed, the full amount of all distributions, including lump-sum withdrawals
and annuity payments are taxed at the ordinary income tax rate unless the
distribution is transferred to an eligible rollover account or contract. The
Contract is available as a vehicle for IRA rollovers and for other qualified
contracts. There are special rules which govern the taxation of qualified
contracts, including withdrawal restrictions, requirements for mandatory
distributions, and contribution limits. We have provided a more complete
discussion in the SAI.
PENALTY TAX FOR PREMATURE DISTRIBUTIONS
Taxable distributions taken before the contract owner has reached the age of
59 1/2 will be subject to a 10% additional tax penalty unless the distribution
is taken in a series of periodic distributions, for life or life expectancy, or
unless the distribution follows the death or disability of the Contract Owner.
Other exceptions may be available in certain tax-qualified plans.
DIVERSIFICATION REQUIREMENTS
The Code states that in order to qualify for the tax benefits described above,
investments made in the separate account of any nonqualified variable annuity
contract must satisfy certain diversification requirements. Tax regulations
define how separate accounts must be diversified. We monitor the investments
constantly and believe that our accounts are adequately diversified. We intend
to administer all contracts subject to this provision of law in a manner that
will maintain adequate diversification.
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<PAGE> 39
THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT
FOR VARIABLE ANNUITIES (ACCOUNT GIS)
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The basic investment objective of Account GIS is to seek long-term accumulation
of principal through capital appreciation and retention of net investment
income. In seeking its objective, short-term gains may also be realized. The
assets of Account GIS generally will be fully invested in a portfolio of equity
securities, mainly common stocks, spread over industries and companies. However,
investments may be made in bonds, notes or other evidence of indebtedness,
issued publicly or placed privately, of a type customarily purchased for
investment by institutional investors, including United States government
securities. These investments in other than equity securities generally would
not have a prospect of long-term appreciation, and are temporary for defensive
purposes and are chosen on the basis of combined considerations of risk, income
and appreciation. Such investments may or may not be convertible into stock or
be accompanied by stock purchase options or warrants for the purchase of stock.
Account GIS will use exchange-traded stock index futures contracts as a hedge to
protect against changes in stock prices. A stock index futures contract is a
contractual obligation to buy or sell a specified index of stocks at a future
date for a fixed price. Stock index futures may also be used to hedge cash
inflows to gain market exposure until the cash is invested in specific common
stocks. Account GIS will not purchase or sell futures contracts for which the
aggregate initial margin exceeds 5% of the fair market value of its assets,
after taking into account unrealized profits and losses on any such contracts
which it has entered into. When a futures contract is purchased, Account GIS
will set aside, an amount of cash and cash equivalents equal to the total market
value of the futures contract, less the amount of the initial margin.
All stock index futures will be traded on exchanges that are licensed and
regulated by the Commodity Futures Trading Commission ("CFTC"). To ensure that
its futures transactions meet CFTC standards, Account GIS will enter into
futures contracts for hedging purposes only (i.e., for the purposes or with the
intent specified in CFTC regulations and interpretations, subject to the
requirements of the SEC). Account GIS expects that risk management transactions
involving futures contracts will not impact more than 30% of its assets at any
one time. For a more detailed discussion of financial futures contracts and
associated risks, please see the Statement of Additional Information.
Account GIS may write covered call options on portfolio securities for which
call options are available and which are listed on a national securities
exchange. It may also purchase index or individual equity call options as an
alternative to holding stocks or stock index futures, or purchase index or
individual equity put options as a defensive measure. For a detailed discussion
of options contracts and associated risks, please see the Statement of
Additional Information.
Changes in investments may be made from time to time to take into account
changes in the outlook for particular industries or companies. The investments
of Account GIS will not, however, be concentrated in any one industry; that is,
no more than 25% of the value of Account GIS's assets will be invested in any
one industry. While Account GIS may occasionally invest in foreign securities,
it is not anticipated that such foreign securities will, at any time, account
for more than 10% of the investment portfolio.
The assets of Account GIS will be kept fully invested, except that (a)
sufficient cash may be kept on hand reasonably to provide for variable annuity
contract obligations, and (b) reasonable amounts of cash, United States
government or other liquid securities, such as short-term bills and notes, may
be held for limited periods, pending investment in accordance with Account GIS's
investment policies.
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<PAGE> 40
RISK FACTORS
It must be recognized that there are risks inherent in the ownership of any
security. The investment experience on equity investments over time will tend to
reflect levels of stock market prices and dividend payouts. Both are affected by
diverse factors, including not only business conditions and investor confidence
in the economy, but current conditions in a particular industry or company. The
yield on a common stock is not contractually determined. Equity securities are
subject to financial risks relating to the earning stability and overall
financial soundness of an issue. They are also subject to market risks relating
to the effect of general changes in the securities market on the price of a
security.
FUNDAMENTAL INVESTMENT POLICIES
The fundamental investment policies of Account GIS permit it to:
1. invest up to 5% of its assets in the securities of any one issuer
(exclusive of securities issued or guaranteed by the United States
government, its agencies or instrumentalities);
2. borrow from banks in amounts of up to 5% of its assets, but only for
emergency purposes;
3. purchase interests in real estate represented by securities for which
there is an established market;
4. make loans through the acquisition of a portion of a privately placed
issue of bonds, debentures or other evidences of indebtedness of a type
customarily purchased by institutional investors;
5. acquire up to 10% of the voting securities of any one issuer (it is the
present practice of Account GIS not to exceed 5% of the voting
securities of any one issuer);
6. make purchases on margin in the form of short-term credits which are
necessary for the clearance of transactions; and place up to 5% of its
net asset value in total margin deposits for positions in futures
contracts; and
7. invest up to 5% of its assets in restricted securities (securities which
may not be publicly offered without registration under the Securities
Act of 1933).
THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES
(ACCOUNT QB)
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The basic investment objective of Account QB is to seek current income, moderate
capital volatility and total return.
The assets of Account QB will be primarily invested in money market obligations,
including, but not limited to, Treasury bills, repurchase agreements, commercial
paper, bank certificates of deposit and bankers' acceptances, and in publicly
traded debt securities, including bonds, notes, debentures, equipment trust
certificates and short-term instruments. These securities may carry certain
equity features such as conversion or exchange rights or warrants for the
acquisition of stocks of the same or different issuer, or participation based on
revenues, sales or profits. It is currently anticipated that the market
value-weighted average maturity of the portfolio will not exceed five years. (In
the case of mortgage-backed securities, the estimated average life of cash flows
will be used instead of average maturity.) Investment in longer term obligations
may be made if the Board of Managers concludes that the investment yields
justify a longer term commitment. No more than 25% of the value of Account QB's
assets will be invested in any one industry.
The portfolio will be actively managed and investments may be sold prior to
maturity if deemed advantageous in light of factors such as market conditions or
brokerage costs. While the
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<PAGE> 41
investments of Account QB are generally not listed securities, there are firms
which make markets in the type of debt instruments that Account QB holds. No
problems of liquidity are anticipated with regard to the investments of Account
QB.
From time to time, Account QB may commit to purchase new-issue government or
agency securities on a "when-issued" or "to be announced" ("TBA") basis
("when-issued securities"). The prices of such securities will be fixed at the
time the commitment to purchase is made, and may be expressed in either dollar
price or yield maintenance terms. Such commitment to purchase may be viewed as a
senior security, and will be marked to market and reflected in Account QB's
Accumulation Unit Value daily from the commitment date. Delivery and payment may
be at a future date beyond customary settlement time. It is the customary
practice of Account QB to make when-issued or TBA purchases for settlement no
more than 90 days beyond the commitment date.
While it is TAMIC's intention to take physical delivery of these securities,
offsetting transactions may be made prior to settlement, if it is advantageous
to do so. Account QB does not make payment or begin to accrue interest on these
securities until settlement date. In order to invest its assets pending
settlement, Account QB will normally invest in short-term money market
instruments and other securities maturing no later than the scheduled settlement
date.
Account QB does not intend to purchase when-issued securities for speculative or
"leverage" purposes. When Account QB commits to purchase a when-issued security,
it will set aside liquid securities equal in value to the purchase cost of the
when-issued securities.
TAMIC believes that purchasing securities in this manner will be advantageous to
Account QB. However, this practice does entail certain risks, namely the default
of the counterparty on its obligation to deliver the security as scheduled. In
this event, Account QB would endure a loss (or gain) equal to the price
appreciation (or depreciation) in value from the commitment date. TAMIC employs
a rigorous credit quality procedure in determining the counterparties with which
it will deal in when-issued securities and, in some circumstances, will require
the counterparty to post cash or some other form of security as margin to
protect the value of its delivery obligation pending settlement.
Account QB may also purchase and sell interest rate futures contracts to hedge
against changes in interest rates that might otherwise have an adverse effect
upon the value of Account QB's securities. Hedging by use of interest rate
futures seeks to establish, with more certainty than would otherwise be
possible, the effective rate of return on portfolio securities. When hedging is
successful, any depreciation in the value of portfolio securities will
substantially be offset by appreciation in the value of the futures position.
Conversely, any appreciation in the value of the portfolio securities will
substantially be offset by depreciation in the value of the futures position.
Account QB will not purchase or sell futures contracts for which the aggregate
initial margin exceeds 5% of the fair market value of its assets, after taking
into account unrealized profits and losses on any such contracts which it has
entered into. At no time will Account QB's transactions in futures contracts be
employed for speculative purposes. When a futures contract is purchased, Account
QB will set aside liquid securities equal to the total market value of the
futures contract, less the amount of the initial margin.
All interest rate futures contracts will be traded on exchanges that are
licensed and regulated by the Commodity Futures Trading Commission ("CFTC"). To
ensure that its futures transactions meet FTC standards, Account QB will enter
into futures contracts for hedging purposes only (i.e., for the purposes or with
the intent specified in CFTC regulations and interpretations, subject to the
requirements of the SEC). For a more detailed discussion of financial futures
contracts and associated risks, please see the Statement of Additional
Information.
RISK FACTORS
The Board of Managers will weigh considerations of risks, yield and ratings in
implementing Account QB's fundamental investment policies. There are no specific
criteria with regard to quality or ratings of the investments of Account QB, but
it is anticipated that they will be of investment
32
<PAGE> 42
grade or its equivalent. There may or may not be more risk in investing in debt
instruments where there are no specific criteria with regard to quality or
ratings of the investments.
The yield on debt instruments over a period of time should reflect prevailing
interest rates, which depend on a number of factors, including government action
in the capital markets, government fiscal and monetary policy, needs of
businesses for capital goods for expansion, and investor expectations as to
future inflation. The yield on a particular debt instrument is also affected by
the risk that the issuer will be unable to pay principal and interest.
FUNDAMENTAL INVESTMENT POLICIES
The fundamental investment policies of Account QB permit it to:
1. invest up to 15% of the value of its assets in the securities of any one
issuer (exclusive of obligations of the United States government and its
instrumentalities, for which there is no limit);
2. borrow from banks in amounts of up to 5% of its assets, but only for
emergency purposes;
3. purchase interests in real estate represented by securities for which
there is an established market;
4. make loans through the acquisition of a portion of a privately placed
issue of bonds, debentures or other evidences of indebtedness of a type
customarily purchased by institutional investors;
5. acquire up to 10% of the voting securities of any one issuer (it is the
present practice of Account QB not to exceed 5% of the voting securities
of any one issuer); and
6. make purchases on margin in the form of short-term credits which are
necessary for the clearance of transactions; and place up to 5% of its
net asset value in total margin deposits for positions in futures
contracts.
THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES
(ACCOUNT MM)
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The basic investment objective of Account MM is preservation of capital, a high
degree of liquidity and the highest possible current income available from
certain short-term money market securities. Account MM restricts its investment
portfolio to only the securities listed below. As is true with all investment
companies, there can be no assurance that Account MM's objectives will be
achieved. An investment in Account MM is neither insured nor guaranteed by the
U.S. Government. Account MM's assets will be invested in the following types of
securities.
1. Marketable obligations issued or guaranteed by the United States government,
its agencies, authorities or instrumentalities. These include issues of the
United States Treasury, such as bills, certificates of indebtedness, notes and
bonds, and issues of agencies, authorities and instrumentalities established
under the authority of an act of Congress. The latter issues include, but are
not limited to, obligations of the Tennessee Valley Authority, the Bank for
Cooperatives, the Federal Intermediate Credit Banks, Federal Land Banks and the
Federal National Mortgage Association. Obligations issued or guaranteed by the
United States government, its agencies, authorities or instrumentalities may be
supported by the full faith and credit of the United States Treasury; by the
right of the issuer to borrow from the United States Treasury; by discretionary
authority of the United States government to purchase an agency's, authority's
or instrumentalities' obligations and in some instances, solely by the credit of
the United States government agency, authority or instrumentality. No assurance
can be given that the United States government will provide financial support to
such United States government sponsored agencies, authorities or
instrumentalities in the future, since it is not obligated to do so by law.
Account MM will invest in such securities only
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<PAGE> 43
when satisfied that the credit risk with respect to the issuer (or guarantor) is
minimal. Interest or discount rates on agency securities are closely related to
rates on Treasury bills.
2. Certificates of Deposit and Banker's Acceptances of banks having total assets
of more than $1 billion which are members of the Federal Deposit Insurance
Corporation. Certificates of Deposit are receipts issued by a bank in exchange
for the deposit of funds. The issuer agrees to pay the amount deposited plus
interest to the bearer of the receipt on the date specified on the certificate.
The certificate usually can be traded in the secondary market before maturity.
The Federal Deposit Insurance Corporation does not insure Certificates of
Deposit to the extent they are in excess of $100,000 per customer. Banker's
Acceptances usually arise from short-term credit arrangements drawn on a bank by
an exporter or importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by a bank which, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturity for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
Account MM may invest in securities of foreign branches of United States banks,
payable in United States dollars, which meet the foregoing requirements.
Obligations of foreign branches of United States banks are subject to additional
risks beyond those of domestic branches of United States banks. These additional
risks include foreign economic and political developments, foreign governmental
restrictions which may adversely affect payment of principal and interest on
obligations, foreign withholding and other taxes on interest income, and
difficulties in obtaining and enforcing a judgment against a foreign branch of a
domestic bank. In addition, different risks may result from the fact that
foreign branches of United States banks are not necessarily subject to the types
of requirements that apply to domestic branches of United States banks with
respect to mandatory reserves, loan limitations, examinations, accounting,
auditing, recordkeeping and the public availability of information.
3. Commercial Paper rated A-1 by Standard and Poor's Corporation or Prime-1 by
Moody's Investor Services, Inc. For a more detailed discussion of the
characteristics of commercial paper ratings, please see the Statement of
Additional Information.
4. Repurchase agreements with national banks or reporting broker dealers
involving marketable obligations of or guaranteed by the United States
government, its agencies, authorities or instrumentalities. A repurchase
agreement is an agreement in which the seller of a security agrees to repurchase
the security sold at a mutually agreed upon time and price. It may also be
viewed as the loan of money by Account MM to the seller. The resale price is in
excess of the purchase price, reflecting an agreed upon interest rate. The rate
is effective for the period of time Account MM is invested in the agreement and
is not related to the coupon rate on the underlying security. The period of
these repurchase agreements will usually be short, from overnight to one week,
and at no time will Account MM invest in repurchase agreements for more than one
year. The securities which are subject to repurchase agreements may, however,
have maturity dates in excess of one year from the effective date of the
repurchase agreement. Account MM will always receive, as collateral, securities
whose market value, including accrued interest, will be at least equal to 102%
of the dollar amount invested by Account MM in each agreement and will make
payment for such securities only upon physical delivery or evidence of book
entry transfer to the account of the Custodian. If the seller defaults, Account
MM might incur a loss if the value of the collateral securing the repurchase
agreement declines, and Account MM might incur disposition costs in connection
with liquidating the collateral. In addition, if bankruptcy proceedings are
commenced with respect to the seller of the security, realization upon the
collateral by Account MM may be delayed or limited. Account MM's Board of
Managers will evaluate the creditworthiness of any banks or broker dealers with
which Account MM engages in repurchase agreements by setting guidelines and
standards of review for Account MM's investment adviser and monitoring the
adviser's actions with regard to repurchase agreements for Account MM.
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RISK FACTORS
The market value of Account MM's investments tends to decrease during periods of
rising interest rates and to increase during intervals of falling interest
rates, with corresponding fluctuations in Account MM's net income. In order to
minimize the fluctuations in market values to which interest-paying obligations
are subject, Account MM concentrates its investments in relatively short-term
securities, and in no event does the maturity date of an obligation exceed one
year from the date of Account MM's purchase.
Return is aided both by Account MM's ability to make investments in large
denominations and by its efficiencies of scale. Also, Account MM may seek to
improve portfolio income by selling certain portfolio securities before maturity
date in order to take advantage of yield disparities that occur in money
markets. Account MM may purchase and sell marketable obligations of or
guaranteed by the United States government, its agencies, authorities or
instrumentalities on a when-issued or delayed delivery basis, with such
purchases possibly occurring as much as a month before actual delivery and
payment.
FUNDAMENTAL INVESTMENT POLICIES
The fundamental investment policies of Account MM permit it to:
1. invest up to 25% of its assets in the securities of issuers in any
single industry (exclusive of securities issued by domestic banks and
savings and loan associations, or securities issued or guaranteed by the
United States government, its agencies, authorities or
instrumentalities); neither all finance companies, as a group, nor all
utility companies, as a group, are considered a single industry for the
purpose of this restriction;
2. invest up to 5% of its assets in the securities of any one issuer, other
than securities issued or guaranteed by the United States Government.
However, Account MM may invest up to 25% of its total assets in first
tier securities, as defined in Rule 2a-7, of a single issuer for a
period of up to three business days after the purchase thereof;
3. acquire up to 10% of the outstanding securities of any one issuer
(exclusive of securities issued or guaranteed by the United States
government, its agencies or instrumentalities);
4. borrow money from banks on a temporary basis in an aggregate amount not
to exceed one third of Account MM's assets (including the amount
borrowed); and
5. pledge, hypothecate or transfer, as security for indebtedness, any
securities owned or held by Account MM as may be necessary in connection
with any borrowing mentioned above and in an aggregate amount of up to
5% of Account MM's assets.
THE TRAVELERS TIMED GROWTH AND INCOME STOCK ACCOUNT
FOR VARIABLE ANNUITIES (ACCOUNT TGIS)
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The basic investment objective of Account TGIS is to seek long-term accumulation
of principal through capital appreciation and retention of net investment
income. In selecting its objective, short-term gains may also be realized. The
assets of Account TGIS generally will be fully invested in a portfolio of equity
securities, mainly common stocks, spread over industries and companies. However,
when it is determined that investments of other types may be advantageous on the
basis of combined considerations of risk, income and appreciation, investments
may be made in bonds, notes or other evidence of indebtedness, issued publicly
or placed privately, of a type customarily purchased for investment by
institutional investors, including United States government securities. These
investments in other than equity securities generally would not have a prospect
of long-term appreciation, and are temporary for defensive purposes. Such
investments may or may not be
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<PAGE> 45
convertible into stock or be accompanied by stock purchase options or warrants
for the purchase of stock.
Account TGIS will use exchange-traded financial futures contracts consisting of
stock index futures contracts and futures contracts on debt securities
("interest rate futures") to facilitate market timed moves, and as a hedge to
protect against changes in stock prices or interest rates. A stock index futures
contract is a contractual obligation to buy or sell a specified index of stocks
at a future date for a fixed price. An interest rate futures contract is a
contract to buy or sell specified debt securities at a future time for a fixed
price. These contracts would obligate Account TGIS, at maturity of the
contracts, to purchase or sell certain securities at specified prices or to make
cash settlements. In general, moves in a market-timed investment strategy may
require the purchase or sale of large amounts of securities in a short period of
time. This purchase or sale could result in substantial transaction costs and
perhaps higher borrowing in Account TGIS to provide funds needed for transfer to
the other timed accounts prior to the five-day settlement period for stock
sales. Alternatively, common stock exposure can be increased or decreased in a
more timely, cost-effective fashion by buying or selling stock index futures. By
transacting in such futures when a market timing move is called, the investment
adviser can create the ability to buy or sell actual common stocks with less
haste and at lower transaction costs. As the actual stocks are bought or sold,
the futures positions would simply be eliminated.
Account TGIS may also purchase and sell interest rate futures to hedge against
changes in interest rates that might otherwise have an adverse effect upon the
value of Account TGIS's securities. Hedging by use of interest rate futures
seeks to establish, with more certainty than would otherwise be possible, the
effective rate of return on portfolio securities. When hedging is successful,
any depreciation in the value of portfolio securities will substantially be
offset by appreciation in the value of the futures position. Conversely, any
appreciation in the value of portfolio securities will substantially be offset
by depreciation in the value of the futures position.
Account TGIS will not purchase or sell futures contracts for which the aggregate
initial margin exceeds 5% of the fair market value of its assets, after taking
into account unrealized profits and losses on any such contracts it has entered
into. At no time will Account TGIS's transactions in such financial futures be
used for speculative purposes. When a futures contract is purchased, Account
TGIS will set aside liquid securities equal to the total market value of the
futures contract, less the amount of the initial margin.
All financial futures contracts will be traded on exchanges that are licensed
and regulated by the Commodity Futures Trading Commission ("CFTC"). To ensure
that its futures transactions meet CFTC standards, Account TGIS will enter into
futures contracts for hedging purposes only (i.e., for the purposes or with the
intent specified in CFTC regulations and interpretations, subject to the
requirements of the SEC). For a more detailed discussion of financial futures
contracts and associated risks, please see the Statement of Additional
Information.
Account TGIS may write covered call options on portfolio securities for which
call options are available and which are listed on a national securities
exchange. It may also purchase index or individual equity call options as an
alternative to holding stocks or stock index futures, or purchase index or
individual equity put options as a defensive measure. For a detailed discussion
of options contracts and associated risks, please see the Statement of
Additional Information.
RISK FACTORS
It must be recognized that there are risks inherent in the ownership of any
security. The investment experience on equity investments over time will tend to
reflect levels of stock market prices and dividend payouts. Both are affected by
diverse factors including not only business conditions and investor confidence
in the economy, but current conditions in a particular industry or company.
Equity securities are subject to financial risks relating to the earning
stability and overall financial soundness of an issue. They are also subject to
market risks relating to the effect of general changes in the securities market
on the price of a security. In addition, there are risks
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<PAGE> 46
inherent in Account TGIS as an investment alternative used by Market Timing
Services. (See "Market Timing Risks.")
FUNDAMENTAL INVESTMENT POLICIES
The fundamental investment policies of Account TGIS are the same as Account GIS.
(See "Account GIS -- Fundamental Investment Policies.")
THE TRAVELERS TIMED SHORT-TERM BOND ACCOUNT
FOR VARIABLE ANNUITIES (ACCOUNT TSB)
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of Account TSB is to generate high current income with
limited price volatility while maintaining a high degree of liquidity. As is
true with all investment companies, there can be no assurance that Account TSB's
objectives will be achieved. Account TSB's assets will be invested in the
following types of securities. The final maturity of any asset will not exceed
three years and the average maturity of the total portfolio is expected to be
nine months.
1. Marketable obligations issued or guaranteed by the United States government,
its agencies, authorities or instrumentalities. These include issues of the
United States Treasury, such as bills, certificates of indebtedness, notes and
bonds, and issues of agencies, authorities and instrumentalities established
under the authority of an act of Congress. The latter issues include, but are
not limited to, obligations of the Tennessee Valley Authority, the Bank for
Cooperatives, the Federal Intermediate Credit Banks, Federal Land Banks and the
Federal National Mortgage Association. Obligations issued or guaranteed by the
United States government, its agencies, authorities or instrumentalities may be
supported by the full faith and credit of the United States Treasury; by the
right of the issuer to borrow from the United States Treasury; by discretionary
authority of the United States government to purchase an agency's, authority's
or instrumentalities' obligations and in some instances, solely by the credit of
the United States government agency, authority or instrumentality. No assurance
can be given that the United States government will provide financial support to
such United States government sponsored agencies, authorities or
instrumentalities in the future, since it is not obligated to do so by law.
Account TSB will invest in such securities only when satisfied that the credit
risk with respect to the issuer (or guarantor) is minimal. Interest or discount
rates on agency securities are closely related to rates on Treasury bills.
2. Certificates of Deposit and Banker's Acceptances of banks having total assets
of more than $1 billion which are members of the Federal Deposit Insurance
Corporation. Certificates of Deposit are receipts issued by a bank in exchange
for the deposit of funds. The issuer agrees to pay the amount deposited plus
interest to the bearer of the receipt on the date specified on the certificate.
The certificate usually can be traded in the secondary market before maturity.
The Federal Deposit Insurance Corporation does not insure Certificates of
Deposit to the extent they are in excess of $100,000 per customer. Banker's
Acceptances usually arise from short-term credit arrangements drawn on a bank by
an exporter or importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by a bank which, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturity for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
Account TSB may invest in securities payable in United States dollars of foreign
branches of United States banks which meet the foregoing requirements and in
Euro Certificates of Deposit, which are certificates of deposit issued by banks
outside of the United States, with interest and principal paid in U.S. dollars.
Obligations of foreign banks and foreign branches of United States banks are
subject to additional risks than those of domestic branches of United States
banks. These additional risks include foreign economic and political
developments, foreign governmental
37
<PAGE> 47
restrictions which may adversely affect payment of principal and interest on
obligations, foreign withholding and other taxes on interest income, and
difficulties in obtaining and enforcing a judgment against a foreign bank or a
foreign branch of a domestic bank. In addition, different risks may result from
the fact that foreign banks or foreign branches of United States banks are not
necessarily subject to the types of requirements that apply to domestic branches
of United States banks with respect to mandatory reserves, loan limitations,
examinations, accounting, auditing, recordkeeping and the public availability of
information.
3. Commercial Paper rated A-1 by Standard and Poor's Corporation or Prime-1 by
Moody's Investor Services, Inc. For a more detailed discussion of the
characteristics of commercial paper ratings, please see the Statement of
Additional Information.
4. Repurchase agreements with national banks and reporting broker dealers
involving marketable obligations of or guaranteed by the United States
government, its agencies, authorities or instrumentalities. A repurchase
agreement is an agreement in which the seller of a security agrees to repurchase
the security sold at a mutually agreed upon time and price. It may also be
viewed as the loan of money by Account TSB to the seller. The resale price is in
excess of the purchase price, reflecting an agreed upon interest rate. The rate
is effective for the period of time Account TSB is invested in the agreement and
is not related to the coupon rate on the underlying security. The period of
these repurchase agreements will usually be short, from overnight to one week,
and at no time will Account TSB invest in repurchase agreements for more than
one year. The securities which are subject to repurchase agreements may,
however, have maturity dates in excess of one year from the effective date of
the repurchase agreement. Account TSB will always receive, as collateral,
securities whose market value, including accrued interest, will be at least
equal to 102% of the dollar amount invested by Account TSB in each agreement and
will make payment for such securities only upon physical delivery or evidence of
book entry transfer to the account of the Custodian. If the seller defaults,
Account TSB might incur a loss if the value of the collateral securing the
repurchase agreement declines, and Account TSB might incur disposition costs in
connection with liquidating the collateral.
In addition, if bankruptcy proceedings are commenced with respect to the seller
of the security, realization upon the collateral by Account TSB may be delayed
or limited. Account TSB's Board of Managers will evaluate the creditworthiness
of any banks or broker dealers with which Account TSB engages in repurchase
agreements by setting guidelines and standards of review for Account TSB's
investment adviser and monitoring the adviser's actions with regard to
repurchase agreements for Account TSB.
5. Short-term notes, bonds, debentures and other debt instruments issued or
guaranteed by an entity with a bond rating of at least AA by S&P or Aa by
Moody's, and with final maturities of such short-term instruments normally
limited to eighteen months at the time of purchase.
RISK FACTORS
The market value of Account TSB's investments tends to decrease during periods
of rising interest rates and to increase during intervals of falling interest
rates, with corresponding fluctuations in Account TSB's net income. In order to
minimize the fluctuations in market values to which interest-paying obligations
are subject, Account TSB concentrates its investments in relatively short-term
securities, and in no event does the maturity date of an obligation exceed three
years from the date of Account TSB's purchase. There can be no assurance that,
upon redemption, Account TSB's net asset value will be equal to or greater than
the net asset value at the time of purchase.
Return is aided both by Account TSB's ability to make investments in large
denominations and by its efficiencies of scale. Also, Account TSB may seek to
improve portfolio income by selling certain portfolio securities before the
maturity date in order to take advantage of yield disparities that occur in
money markets. Account TSB may purchase and sell marketable obligations of or
guaranteed by the United States government, its agencies, authorities or
instrumentalities on a when-issued or delayed delivery basis, with such
purchases possibly occurring as much as a month
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<PAGE> 48
before actual delivery and payment. In addition, there are risks inherent in
Account TSB as an investment alternative used by market timing services. (See
"Market Timing Risks.")
FUNDAMENTAL INVESTMENT POLICIES
The fundamental investment policies of Account TSB permit it to:
1. invest up to 25% of its assets in the securities of issuers in any
single industry (exclusive of securities issued by domestic banks and
savings and loan associations, or securities issued or guaranteed by the
United States government, its agencies, authorities or
instrumentalities); neither all finance companies, as a group, nor all
utility companies, as a group, are considered a single industry for the
purpose of this restriction;
2. invest up to 10% of its assets in the securities of any one issuer,
including repurchase agreements with any one bank or dealer (exclusive
of securities issued or guaranteed by the United States government, its
agencies or instrumentalities);
3. acquire up to 10% of the outstanding securities of any one issuer
(exclusive of securities issued or guaranteed by the United States
government, its agencies or instrumentalities);
4. borrow money from banks on a temporary basis in an aggregate amount not
to exceed one third of Account TSB's assets (including the amount
borrowed); and
5. pledge, hypothecate or transfer, as security for indebtedness, any
securities owned or held by Account TSB as may be necessary in
connection with any borrowing mentioned above and in an aggregate amount
of up to 5% of Account TSB's assets.
THE TRAVELERS TIMED AGGRESSIVE STOCK ACCOUNT
FOR VARIABLE ANNUITIES (ACCOUNT TAS)
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of Account TAS is to seek growth of capital by
investing primarily in a broadly diversified portfolio of common stocks.
In selecting investments for the portfolio, TIMCO identifies stocks which appear
to be undervalued. A proprietary computer model reviews over one-thousand stocks
using fundamental and technical criteria such as price relative to book value,
earnings growth and momentum, and the change in price relative to a broad
composite stock index.
Computer-aided analysis may also be utilized to match certain characteristics of
the portfolio, such as industry sector representation, to the characteristics of
a market index, or to impose a tilt toward certain attributes. Although Account
TAS currently focuses on mid-sized domestic companies with market
capitalizations that fall between $500 million and $10 billion, Account TAS may
invest in smaller or larger companies without limitation. The prices of
mid-sized company stocks and smaller company stocks may fluctuate more than
those of larger company stocks.
It is the policy of Account TAS to invest its assets as fully as practicable in
common stocks, securities convertible into common stocks and securities having
common stock characteristics, including rights and warrants selected primarily
for prospective capital growth. Account TAS may invest in domestic, foreign and
restricted securities.
When market conditions warrant, Account TAS may adopt a defensive position to
preserve shareholders' capital by investing in money market instruments. Such
instruments, which must mature within one year of their purchase, consist of
U.S. government securities; instruments of banks which are members of the
Federal Deposit Insurance Corporation and have assets of at least $1 billion,
such as certificates of deposit, demand and time deposits and bankers'
acceptances; prime commercial paper, including master demand notes; and
repurchase agreements secured by U.S. government securities.
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<PAGE> 49
Account TAS will use exchange-traded financial futures contracts consisting of
stock index futures contracts and futures contracts on debt securities
("interest rate futures") to facilitate market timed moves, and as a hedge to
protect against changes in stock prices or interest rates. A stock index futures
contract is a contractual obligation to buy or sell a specified index of stocks
at a future date for a fixed price. An interest rate futures contract is a
contract to buy or sell specified debt securities at a future time for a fixed
price.
In general, moves in a market-timed investment strategy may require the purchase
or sale of large amounts of securities in a short period of time. This purchase
or sale could result in substantial transaction costs and perhaps higher
borrowing in Account TAS to provide funds needed for transfer to other timed
accounts prior to the five-day settlement period for stock sales. Alternatively,
common stock exposure can be increased or decreased in a more timely, cost-
effective fashion by buying or selling stock index futures. By transacting in
such futures when a market timing move is called, TIMCO can create the ability
to buy or sell actual common stocks with less haste and at lower transaction
costs. As the actual stocks are bought or sold, the futures positions would
simply be eliminated.
Account TAS may also purchase and sell interest rate futures to hedge against
changes in interest rates that might otherwise have an adverse effect upon the
value of Account TAS's securities. Hedging by use of interest rate futures seeks
to establish, with more certainty than would otherwise be possible, the
effective rate of return on portfolio securities. When hedging is successful,
any depreciation in the value of portfolio securities will substantially be
offset by appreciation in the value of the futures position. Conversely, any
appreciation in the value of portfolio securities will substantially be offset
by depreciation in the value of the futures position.
Account TAS will not purchase or sell futures contracts for which the aggregate
initial margin exceeds 5% of the fair market value of its assets, after taking
into account unrealized profits and losses on any such contracts which it has
entered into. When a futures contract is purchased, Account TAS will set aside
liquid securities equal to the total market value of the futures contract, less
the amount of the initial margin. At no time will Account TAS's transactions in
such futures be used for speculative purposes.
All financial futures contracts will be traded on exchanges that are licensed
and regulated by the Commodity Futures Trading Commission ("CFTC"). To ensure
that its futures transactions meet CFTC standards, Account TAS will enter into
futures contracts for hedging purposes only (i.e., for the purposes or with the
intent specified in CFTC regulations and interpretations, subject to the
requirements of the SEC). For a more detailed discussion of financial futures
contracts and associated risks, please see the Statement of Additional
Information.
Account TAS may write covered call options on portfolio securities for which
call options are available and which are listed on a national securities
exchange. It may also purchase index or individual equity call options as an
alternative to holding stocks or stock index futures, or purchase index or
individual equity put options as a defensive measure. For a detailed discussion
of options contracts and associated risks, please see the Statement of
Additional Information.
RISK FACTORS
There can, of course, be no assurance that Account TAS will achieve its
investment objective since there is uncertainty in every investment. Equity
securities are subject to financial risks relating to the earning stability and
overall financial soundness of an issue. They are also subject to market risks
relating to the effect of general changes in the securities market on the price
of a security. In addition, there may be more risk associated with Account TAS
to the extent that it invests in small or mid-sized companies. More risk is
associated with investment in small or mid-sized companies than with larger
companies because such companies may be dependent on only one or two products
and may be more vulnerable to competition from larger companies with greater
resources and to economic conditions affecting their market sector. Small or
mid-sized companies may be new, without long business or management histories,
and perceived by the market as unproven. Their securities may be held primarily
by insiders or institutional investors, which may affect
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<PAGE> 50
marketability. The prices of these stocks often fluctuate more than the overall
stock market. In addition, there are risks inherent in Account TAS as an
investment alternative used by Market Timing Services. (See "Market Timing
Risks.")
FUNDAMENTAL INVESTMENT POLICIES
The fundamental investment policies of Account TAS permit it to:
1. invest up to 5% of its assets in the securities of any one issuer;
2. borrow money from banks in amounts of up to 10% of its assets, but only
as a temporary measure for emergency or extraordinary purposes;
3. pledge up to 10% of its assets to secure borrowings;
4. invest up to 25% of its assets in the securities of issuers in the same
industry; and
5. invest up to 10% of its assets in repurchase agreements maturing in more
than seven days and securities for which market quotations are not
readily available.
THE TRAVELERS TIMED BOND ACCOUNT FOR VARIABLE ANNUITIES
(ACCOUNT TB)
- --------------------------------------------------------------------------------
NOTE: The Travelers Timed Bond Account is not currently available to new
contract owners in most states.
INVESTMENT OBJECTIVE
The investment objective of Account TB is to seek current income and total
return. To achieve this objective, Account TB invests primarily in direct
obligations of highest credit quality: obligations of the United States, and its
instrumentalities, and in obligations issued or guaranteed by Federal Agencies
which are independent corporations sponsored by the United States and which are
subject to its general supervision, but which do not carry the full faith and
credit obligations of the United States.
Direct obligations of the United States include Treasury bills which are issued
on a discount basis with a maturity of one year or less, Treasury Notes which
have maturities at issuance between one and ten years, and Treasury Bonds which
have maturities at issuance greater than ten years. Instrumentalities of the
United States whose debt obligations are backed by its full faith and credit,
include: Government National Mortgage Association, Federal Housing
Administration, Farmers Homes Administration, Export-Import Bank of the United
States, Small Business Administration, General Services Administration, Maritime
Administration, District of Columbia Armory Board, Farm Credit System Financial
Assistance Corporation, Federal Financing Bank and Washington Metropolitan Area
Transit Authority Bonds. Federal Agencies include: Farm Credit System, Federal
Home Loan Banks, Federal Home Loan Mortgage Corporation, Federal National
Mortgage Association and Student Loan Marketing Association.
Account TB intends to be fully invested at all times; however, when market
conditions warrant, Account TB may invest temporarily in money market
instruments. Such instruments, which must mature within one year of their
purchase, consist of U.S. government securities; instruments of banks which are
members of the Federal Deposit Insurance Corporation and have assets of at least
$1 billion, such as certificates of deposit, demand and time deposits and
bankers' acceptances; prime commercial paper, including master demand notes; and
repurchase agreements secured by U.S. government securities.
Account TB may from time to time commit to purchase new-issue government or
agency securities on a "when-issued" or "to be announced" ("TBA") basis
("when-issued securities"). The prices of such securities will be fixed at the
time the commitment to purchase is made, and may be expressed in either dollar
price or yield maintenance terms. Such commitment may be viewed as a senior
security, and will be marked to market and reflected in Account TB's
Accumulation Unit
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<PAGE> 51
Value daily from the commitment date. Delivery and payment may be at a future
date beyond customary settlement time. It is the customary practice of Account
TB to make when-issued or TBA purchases for settlement no more than 90 days
beyond the commitment date.
While it is TAMIC's intention to take physical delivery of these securities,
offsetting transactions may be made prior to settlement, if it is advantageous
to do so. Account TB does not make payment or begin to accrue interest on these
securities until settlement date. In order to invest its assets pending
settlement, Account TB will normally invest in short-term money market
instruments and other securities maturing no later than the scheduled settlement
date.
Account TB does not intend to purchase when-issued securities for speculative or
"leverage" purposes. Consistent with Section 18 of the 1940 Act and the General
Policy Statement of the SEC thereunder, when Account TB commits to purchase a
when-issued security, it will identify and place in a segregated account
high-grade money market instruments and other liquid securities equal in value
to the purchase cost of the when-issued securities.
TAMIC believes that purchasing securities in this manner will be advantageous to
Account TB. However, this practice does entail certain risks, namely the default
of the counterparty on its obligation to deliver the security as scheduled. In
this event, Account TB would endure a loss (gain) equal to the price
appreciation (depreciation) in value from the commitment date. TAMIC employs a
rigorous credit quality procedure in determining the counterparties with which
it will deal in when-issued securities and, in some circumstances, will require
the counterparty to post cash or some other form of security as margin to
protect the value of its delivery obligation pending settlement.
Account TB may seek to preserve capital by writing covered call options on
securities which it owns. Such an option on an underlying security would
obligate Account TB to sell, and give the purchaser of the option the right to
buy, that security at a stated exercise price at any time until the stated
expiration date of the option.
Account TB will use exchange-traded financial futures contracts consisting of
futures contracts on debt securities ("interest rate futures") to facilitate
market timed moves, and as a hedge to protect against changes in interest rates.
An interest rate futures contract is a contract to buy or sell specified debt
securities at a future time for a fixed price. These contracts would obligate
Account TB, at maturity of the contracts, to purchase or sell certain securities
at specified prices or to make cash settlements.
In general, moves in a market timed investment strategy may require the purchase
or sale of large amounts of securities in a short period of time. This purchase
or sale could result in substantial transaction costs and perhaps higher
borrowing in Account TB to provide funds needed for transfer to Account TSB.
Alternatively, debt security exposure can be increased or decreased in a more
timely, cost-effective fashion by buying or selling interest rate futures. By
transacting in such futures when a market timing move is called, TAMIC can
create the ability to buy or sell actual debt securities with less haste and at
lower transaction costs. As the actual debt securities are bought or sold, the
futures positions would simply be eliminated.
Account TB may also purchase and sell interest rate futures to hedge against
changes in interest rates that might otherwise have an adverse effect upon the
value of Account TB's securities. Hedging by use of interest rate futures seeks
to establish, with more certainty than would otherwise be possible, the
effective rate of return on portfolio securities. When hedging is successful,
any depreciation in the value of portfolio securities will substantially be
offset by appreciation in the value of the futures position. Conversely, any
appreciation in the value of the portfolio securities will substantially be
offset by depreciation in the value of the futures position.
Account TB will not purchase or sell futures contracts for which the aggregate
initial margin exceeds 5% of the fair market value of its assets, after taking
into account unrealized profits and losses on any such contracts which it has
entered into. At no time will Account TB's transactions in futures contracts be
employed for speculative purposes. When a futures contract is purchased,
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<PAGE> 52
Account TB will set aside liquid securities equal to the total market value of
the futures contract, less the amount of the initial margin.
All interest rate futures contracts will be traded on exchanges that are
licensed and regulated by the Commodity Futures Trading Commission ("CFTC"). To
ensure that its futures transactions meet CFTC standards, Account TB will enter
into futures contracts for hedging purposes only (i.e., for the purposes or with
the intent specified in CFTC regulations and interpretations, subject to the
requirements of the SEC). For a more detailed discussion of financial futures
contracts and associated risks, please see the Statement of Additional
Information.
RISK FACTORS
There can, of course, be no assurance that Account TB will achieve its
investment objective since there is uncertainty in every investment. U.S.
Government securities are considered among the safest of fixed-income
investments. As a result, however, their yields are generally lower than the
yields available from corporate debt securities. The value of the portfolio
securities of Account TB will fluctuate based on market conditions and interest
rates. Interest rates depend on a number of factors, including government action
in the capital markets, government fiscal and monetary policy, needs of
businesses for capital goods for expansion, and investor expectations as to
future inflation. An increase in interest rates will generally reduce the value
of debt securities, and conversely a decline in interest rates will generally
increase the value of debt securities. In addition, there are risks inherent in
Account TB as an investment alternative used by Market Timing Services. (See
"Market Timing Risks.")
FUNDAMENTAL INVESTMENT POLICIES
The fundamental investment policies of Account TB permit it to:
1. invest up to 5% of its assets in the securities of any one issuer
(exclusive of securities of the United States government, its agencies
or instrumentalities, for which there is no limit);
2. borrow money from banks in amounts of up to 10% of its assets, but only
as a temporary measure for emergency or extraordinary purposes;
3. pledge up to 10% of its assets to secure borrowings;
4. invest up to 25% of its assets in the securities of issuers in the same
industry (exclusive of securities of the U.S. government, its agencies
or instrumentalities, for which there is no limit); and
5. invest up to 10% of its assets in repurchase agreements maturing in more
than seven days.
43
<PAGE> 53
APPENDIX A
- --------------------------------------------------------------------------------
THE FIXED ACCOUNT
The Fixed Account is secured by part of the general assets of the Company. The
general assets of the Company include all assets of the Company other than those
held in the Separate Account or any other separate account sponsored by the
Company or its affiliates.
The staff of the SEC does not generally review the disclosure in the prospectus
relating to the Fixed Account. Disclosure regarding the Fixed Account and the
general account may, however, be subject to certain provisions of the federal
securities laws relating to the accuracy and completeness of statements made in
the prospectus.
Under the Fixed Account, the Company assumes the risk of investment gain or
loss, guarantees a specified interest rate, and guarantees a specified periodic
annuity payment. The investment gain or loss of the Separate Account or any of
the funding options does not affect the Fixed Account portion of the contract
owner's contract value, or the dollar amount of fixed annuity payments made
under any payout option.
We guarantee that, at any time, the Fixed Account contract value will not be
less than the amount of the purchase payments allocated to the Fixed Account,
plus interest credited as described above, less any applicable premium taxes or
prior surrenders. If the contract owner effects a surrender, the amount
available from the Fixed Account will be reduced by any applicable withdrawal
charge as described under "Charges and Deductions" in this prospectus.
Purchase payments allocated to the Fixed Account and any transfers made to the
Fixed Account become part of the Company's general account which supports
insurance and annuity obligations. Neither the general account nor any interest
therein is registered under, nor subject to the provisions of the Securities Act
of 1933 or Investment Company Act of 1940. We will invest the assets of the
Fixed Account at our discretion. Investment income from such Fixed Account
assets will be allocated to us and to the Contracts participating in the Fixed
Account.
Investment income from the Fixed Account allocated to us includes compensation
for mortality and expense risks borne by us in connection with Fixed Account
Contracts. The amount of such investment income allocated to the Contracts will
vary from year to year in our sole discretion at such rate or rates as the
Company prospectively declares from time to time.
The initial rate for any allocations into the Fixed Account is guaranteed for
one year from the date of such allocation. Subsequent renewal rates will be
guaranteed for the calendar quarter. We also guarantee that for the life of the
Contract we will credit interest at not less than 3% per year. Any interest
credited to amounts allocated to the Fixed Account in excess of 3% per year will
be determined in our sole discretion. You assume the risk that interest credit
to the Fixed Account may not exceed the minimum guarantee of 3.5% for any given
year.
TRANSFERS
You may make transfers from the Fixed Account to any other available funding
option(s) twice a year during the 30 days following the semiannual anniversary
of the Contract effective date. The transfers are limited to an amount of up to
15% of the Fixed Account Value on the semiannual Contract effective date
anniversary. (This restriction does not apply to transfers from the Dollar Cost
Averaging Program.) Amounts previously transferred from the Fixed Account to
other funding options may not be transferred back to the Fixed Account for a
period of at least 6 months from the date of transfer. We reserve the right to
waive either of these restrictions.
Automated transfers from the Fixed Account to any of the funding options may
begin at any time. Automated transfers from the Fixed Account may not deplete
your Fixed Account value in a period of less than twelve months from your
enrollment in the Dollar Cost Averaging program.
A-1
<PAGE> 54
APPENDIX
B
CONDENSED FINANCIAL INFORMATION
- -------------------------------------------------------------------------
THE TRAVELERS FUND U FOR VARIABLE ANNUITIES
ACCUMULATION UNIT VALUES
<TABLE>
<CAPTION>
1997 1996 1995 1994
------------------- ------------------- ------------------- -------------------
Q NQ Q NQ Q NQ Q NQ
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CAPITAL APPRECIATION FUND*
Unit Value at beginning of year... $ 3.034 $ 3.146 $ 2.396 $ 2.485 $ 1.779 $ 1.845 $ 1.892 $ 1.962
Unit Value at end of year......... 3.779 3.920 3.034 3.146 2.396 2.485 1.779 1.845
Number of units outstanding at end
of year (thousands)............. 84,250 9,791 64,294 7,828 45,979 4,415 40,160 3,605
HIGH YIELD BOND TRUST
Unit Value at beginning of year... $ 2.833 $ 2.863 $ 2.472 $ 2.498 $ 2.167 $ 2.189 $ 2.222 $ 2.245
Unit Value at end of year......... 3.261 3.295 2.833 2.863 2.472 2.498 2.167 2.189
Number of units outstanding at end
of year (thousands)............. 6,673 973 5,312 657 4,592 498 4,708 585
MANAGED ASSETS TRUST
Unit Value at beginning of year... $ 3.105 $ 3.342 $ 2.763 $ 2.975 $ 2.201 $ 2.369 $ 2.281 $ 2.455
Unit Value at end of year......... 3.720 4.004 3.105 3.342 2.763 2.975 2.201 2.369
Number of units outstanding at end
of year (thousands)............. 53,841 5,164 55,055 4,632 57,020 4,114 58,355 4,813
<CAPTION>
<S> <C> <C>
- ----------------------------------------------------------
CAPITAL APPRECIATION FUND*
Unit Value at beginning of year... $ 1.665 $ 1.727
Unit Value at end of year......... 1.892 1.962
Number of units outstanding at end
of year (thousands)............. 30,003 2,825
HIGH YIELD BOND TRUST
Unit Value at beginning of year... $ 1.974 $ 1.994
Unit Value at end of year......... 2.222 2.245
Number of units outstanding at end
of year (thousands)............. 5,066 603
MANAGED ASSETS TRUST
Unit Value at beginning of year... $ 2.111 $ 2.273
Unit Value at end of year......... 2.281 2.455
Number of units outstanding at end
of year (thousands)............. 63,538 4,490
</TABLE>
<TABLE>
<CAPTION>
1992 1991 1990 1989
------------------- ------------------- ------------------- -------------------
Q NQ Q NQ Q NQ Q NQ
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CAPITAL APPRECIATION FUND*
Unit Value at beginning of year... $ 1.433 $ 1.487 $ 1.075 $ 1.114 $ 1.157 $ 1.200 $ 1.015 $ 1.052
Unit Value at end of year......... 1.665 1.727 1.433 1.487 1.075 1.114 1.157 1.200
Number of units outstanding at end
of year (thousands)............. 16,453 1,020 12,703 887 11,356 553 12,038 495
HIGH YIELD BOND TRUST
Unit Value at beginning of year... $ 1.767 $ 1.785 $ 1.418 $ 1.433 $ 1.573 $ 1.590 $ 1.571 $ 1.588
Unit Value at end of year......... 1.976 1.994 1.767 1.785 1.418 1.433 1.573 1.590
Number of units outstanding at end
of year (thousands)............. 4,730 428 4,018 344 4,045 341 6,074 573
MANAGED ASSETS TRUST
Unit Value at beginning of year... $ 2.034 $ 2.189 $ 1.691 $ 1.821 $ 1.671 $ 1.799 $ 1.331 $ 1.433
Unit Value at end of year......... 2.111 2.273 2.034 2.189 1.691 1.821 1.671 1.799
Number of units outstanding at end
of year (thousands)............. 65,926 4,120 58,106 3,359 51,489 2.744 47,104 2,836
<CAPTION>
<S> <C> <C>
- ----------------------------------------------------------------------------
CAPITAL APPRECIATION FUND*
Unit Value at beginning of year... $ 0.934 $ 0.968
Unit Value at end of year......... 1.015 1.052
Number of units outstanding at end
of year (thousands)............. 13,040 423
HIGH YIELD BOND TRUST
Unit Value at beginning of year... $ 1.388 $ 1.403
Unit Value at end of year......... 1.571 1.588
Number of units outstanding at end
of year (thousands)............. 5,783 676
MANAGED ASSETS TRUST
Unit Value at beginning of year... $ 1.234 $ 1.328
Unit Value at end of year......... 1.331 1.433
Number of units outstanding at end
of year (thousands)............. 46,809 3,316
</TABLE>
Q = Qualified
NQ = NonQualified
The financial statements of Fund U are contained in the Annual Report
which should be read along with this information and which is
incorporated by reference into the SAI. The consolidated financial
statements of The Travelers Insurance Company and Subsidiaries are
contained in the SAI.
* Prior to May 1, 1994, the Capital Appreciation Fund was known as the
Aggressive Stock Trust.
B-1
<PAGE> 55
CONDENSED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
THE TRAVELERS FUND U FOR VARIABLE ANNUITIES
ACCUMULATION UNIT VALUES
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT SECURITIES PORTFOLIO (1/92)*
Unit Value at beginning of period......................... $ 1.323 $ 1.321 $ 1.074 $ 1.153 $ 1.066 $ 1.000
Unit Value at end of period............................... 1.472 1.323 1.321 1.074 1.153 1.066
Number of units outstanding at end of period
(thousands)............................................. 22,809 19,054 21,339 22,709 22,142 8,566
SOCIAL AWARENESS STOCK PORTFOLIO (5/92)*
Unit Value at beginning of period......................... $ 1.731 $ 1.461 $ 1.109 $ 1.153 $ 1.086 $ 1.000
Unit Value at end of period............................... 2.176 1.731 1.461 1.109 1.153 1.086
Number of units outstanding at end of year (thousands).... 9,539 6,355 4,841 3,499 2,920 1,332
UTILITIES PORTFOLIO (2/94)*
Unit Value at beginning of period......................... $ 1.363 $ 1.284 $ 1.005 $ 1.000 -- --
Unit Value at end of period............................... 1.686 1.363 1.284 1.005 -- --
Number of units outstanding at end of period
(thousands)............................................. 12,539 13,258 11,918 5,740 -- --
TEMPLETON BOND FUND (1/92)* (CLASS 1)
Unit Value at beginning of year........................... $ 1.351 $ 1.250 $ 1.101 $ 1.172 $ 1.065 $ 1.000
Unit Value at end of year................................. 1.367 1.351 1.250 1.101 1.172 1.065
Number of units outstanding at end of year (thousands).... 10,502 10,260 10,527 10,186 8,014 3,477
TEMPLETON STOCK FUND (1/92)* (CLASS 1)
Unit Value at beginning of year........................... $ 2.001 $ 1.655 $ 1.338 $ 1.385 $ 1.047 $ 1.000
Unit Value at end of year................................. 2.211 2.001 1.655 1.338 1.385 1.047
Number of units outstanding at end of year (thousands).... 180,876 154,614 122,937 101,462 43,847 10,433
TEMPLETON ASSET ALLOCATION FUND (1/92)* (CLASS 1)
Unit Value at beginning of year........................... $ 1.815 $ 1.546 $ 1.277 $ 1.333 $ 1.070 $ 1.000
Unit Value at end of year................................. 2.070 1.815 1.546 1.277 1.333 1.070
Number of units outstanding at end of year (thousands).... 124,603 113,809 107,460 103,407 51,893 13,888
FIDELITY VIP HIGH INCOME PORTFOLIO (2/92)*
Unit Value at beginning of year........................... $ 1.766 $ 1.568 $ 1.316 $ 1.354 $ 1.138 $ 1.000
Unit Value at end of year................................. 2.052 1.766 1.568 1.316 1.354 1.138
Number of units outstanding at end of year (thousands).... 48,895 40,309 32,601 25,813 17,381 4,875
FIDELITY VIP GROWTH PORTFOLIO (1/92)*
Unit Value at beginning of year........................... $ 1.805 $ 1.594 $ 1.192 $ 1.207 $ 1.024 $ 1.000
Unit Value at end of year................................. 2.201 1.805 1.594 1.192 1.207 1.024
Number of units outstanding at end of year (thousands).... 289,002 274,892 229,299 176,304 101,260 30,240
FIDELITY VIP EQUITY-INCOME PORTFOLIO (7/93)*
Unit Value at beginning of period......................... $ 1.674 $ 1.484 $ 1.112 $ 1.052 $ 1.000 --
Unit Value at end of period............................... 2.118 1.674 1.484 1.112 1.052 --
Number of units outstanding at end of period
(thousands)............................................. 237,050 205,636 153,463 78,856 13,414 --
FIDELITY VIP II ASSET MANAGER PORTFOLIO (1/92)*
Unit Value at beginning of year........................... $ 1.577 $ 1.394 $ 1.207 $ 1.301 $ 1.088 $ 1.000
Unit Value at end of year................................. 1.879 1.577 1.394 1.207 1.301 1.088
Number of units outstanding at end of year (thousands).... 240,064 249,050 270,795 282,474 162,413 30,207
DREYFUS STOCK INDEX FUND (1/92)*
Unit Value at beginning of year........................... $ 1.870 $ 1.546 $ 1.144 $ 1.148 $ 1.064 $ 1.000
Unit Value at end of year................................. 2.456 1.870 1.546 1.144 1.148 1.064
Number of units outstanding at end of year (thousands).... 109,317 66,098 43,247 31,600 26,789 12,089
AMERICAN ODYSSEY INTERNATIONAL EQUITY FUND (5/93)*
Unit Value at beginning of period......................... $ 1.534 $ 1.274 $ 1.084 $ 1.180 $ 1.000 --
Unit Value at end of period............................... 1.592 1.534 1.274 1.084 1.180 --
Number of units outstanding at end of period
(thousands)............................................. 143,959 121,896 70,364 47,096 16,944 --
AMERICAN ODYSSEY EMERGING OPPORTUNITIES FUND (5/93)*
Unit Value at beginning of period......................... $ 1.460 $ 1.526 $ 1.168 $ 1.079 $ 1.000 --
Unit Value at end of period............................... 1.541 1.460 1.526 1.168 1.079 --
Number of units outstanding at end of period
(thousands)............................................. 162,146 122,877 103,815 73,838 27,011 --
</TABLE>
B-2
<PAGE> 56
CONDENSED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
THE TRAVELERS FUND U FOR VARIABLE ANNUITIES
ACCUMULATION UNIT VALUES (CONTINUED)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AMERICAN ODYSSEY CORE EQUITY FUND (6/93)*
Unit Value at beginning of period......................... $ 1.647 $ 1.354 $ .990 $ 1.012 $ 1.000 --
Unit Value at end of period............................... 2.143 1.647 1.354 .990 1.012 --
Number of units outstanding at end of period
(thousands)............................................. 185,895 170,552 137,330 100,082 37,136 --
AMERICAN ODYSSEY LONG-TERM BOND FUND (6/93)*
Unit Value at beginning of period......................... $ 1.221 $ 1.221 $ .990 $ 1.085 $ 1.000 --
Unit Value at end of period............................... 1.352 1.221 1.221 .990 1.085 --
Number of units outstanding at end of period
(thousands)............................................. 159,728 137,075 101,376 70,928 25,467 --
AMERICAN ODYSSEY INTERMEDIATE-TERM BOND FUND (6/93)*
Unit Value at beginning of period......................... $ 1.157 $ 1.128 $ .993 $ 1.035 $ 1.000 --
Unit Value at end of period............................... 1.229 1.157 1.128 .993 1.035 --
Number of units outstanding at end of period
(thousands)............................................. 86,914 78,211 68,878 50,403 19,564 --
AMERICAN ODYSSEY GLOBAL HIGH-YIELD BOND FUND** (5/93)*
Unit Value at beginning of period......................... $ 1.129 $ 1.102 $ 1.006 $ 1.020 $ 1.000 --
Unit Value at end of period............................... 1.183 1.129 1.102 1.006 1.020 --
Number of units outstanding at end of period
(thousands)............................................. 48,929 44,077 24,416 17,611 8,201 --
SMITH BARNEY LARGE CAP VALUE PORTFOLIO (2/95)*
(formerly Smith Barney Income and Growth Portfolio)
Unit Value at beginning of period......................... $ 1.474 $ 1.246 $ 1.000 -- -- --
Unit Value at end of period............................... 1.843 1.474 1.246 -- -- --
Number of units outstanding at end of period
(thousands)............................................. 10,871 6,133 1,747 -- -- --
ALLIANCE GROWTH PORTFOLIO (2/95)*
Unit Value at beginning of period......................... $ 1.640 $ 1.284 $ 1.000 -- -- --
Unit Value at end of period............................... 2.091 1.640 1.284 -- -- --
Number of units outstanding at end of period
(thousands)............................................. 19,535 10,809 2,498 -- -- --
SMITH BARNEY INTERNATIONAL EQUITY PORTFOLIO (2/95)*
Unit Value at beginning of period......................... $ 1.321 $ 1.137 $ 1.000 -- -- --
Unit Value at end of period............................... 1.339 1.321 1.137 -- -- --
Number of units outstanding at end of period
(thousands)............................................. 7,634 5,777 593 -- -- --
PUTNAM DIVERSIFIED INCOME PORTFOLIO (3/95)*
Unit Value at beginning of period......................... $ 1.206 $ 1.128 $ 1.000 -- -- --
Unit Value at end of period............................... 1.282 1.206 1.128 -- -- --
Number of units outstanding at end of period
(thousands)............................................. 5,171 2,375 774 -- -- --
SMITH BARNEY HIGH INCOME PORTFOLIO (3/95)*
Unit Value at beginning of period......................... $ 1.256 $ 1.124 $ 1.000 -- -- --
Unit Value at end of period............................... 1.412 1.256 1.124 -- -- --
Number of units outstanding at end of period
(thousands)............................................. 1,307 553 138 -- -- --
MFS TOTAL RETURN PORTFOLIO (2/95)*
Unit Value at beginning of period......................... $ 1.362 $ 1.205 $ 1.000 -- -- --
Unit Value at end of period............................... 1.630 1.362 1.205 -- -- --
Number of units outstanding at end of period
(thousands)............................................. 14,655 7,302 2,734 -- -- --
G.T. GLOBAL STRATEGIC INCOME PORTFOLIO*** (3/95)*
Unit Value at beginning of period......................... $ 1.402 $ 1.195 $ 1.000 -- -- --
Unit Value at end of period............................... 1.487 1.402 1.195 -- -- --
Number of units outstanding at end of period
(thousands)............................................. 222 242 162 -- -- --
</TABLE>
* Represents date money was first applied to funding option through Separate
Account.
** Formerly American Odyssey Short-Term Bond Fund. The name, investment
objectives and investment subadviser were changed pursuant to a shareholder
vote effective May 1, 1998.
*** Not currently available to new Contract Owners in most states.
The financial statements of Fund U are contained in the Annual Report which
should be read along with this information and which is incorporated by
reference into the SAI. The consolidated financial statements of The Travelers
Insurance Company and Subsidiaries are contained in the SAI.
B-3
<PAGE> 57
CONDENSED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES
PER UNIT DATA FOR AN ACCUMULATION AND ANNUITY UNIT OUTSTANDING THROUGHOUT EACH
YEAR
The following information on per unit data has been audited by Coopers & Lybrand
L.L.P., independent accountants. Their reports on the per unit data for each of
the five years in the period ended December 31, 1997 is contained in the Account
GIS Annual Report which should be read along with this information and which is
incorporated by reference into the SAI. The consolidated financial statements of
The Travelers Insurance Company and Subsidiaries are contained in the SAI.
<TABLE>
<CAPTION>
CONTRACTS ISSUED ON OR AFTER TO MAY 16, 1983 1997 1996 1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SELECTED PER UNIT DATA
Total investment income................ $ .228 $ .212 $ .205 $ .189 $ .184 $ .188 $ .198 $ .192
Operating expenses..................... .228 .175 .140 .115 .106 .098 .091 .079
-------- -------- ------- ------- ------- ------- ------- -------
Net investment income.................. .000 .037 .065 .074 .078 .090 .107 .113
Unit Value at beginning of year........ 11.371 9.369 6.917 7.007 6.507 6.447 5.048 5.295
Net realized and change in unrealized gains
(losses)............................. 3.584 1.965 2.387 (.164) .422 (.030) 1.292 (.360)
-------- -------- ------- ------- ------- ------- ------- -------
Unit Value at end of year.............. $ 14.955 $ 11.371 $ 9.369 $ 6.917 $ 7.007 $ 6.507 $ 6.447 $ 5.048
======== ======== ======= ======= ======= ======= ======= =======
SIGNIFICANT RATIOS AND ADDITIONAL DATA
Net increase (decrease) in unit value... $ 3.58 $ 2.00 $ 2.45 $ (.09) $ .50 $ .06 $ 1.40 $ (.25)
Ratio of operating expenses to average net
assets............................... 1.70% 1.70% 1.70% 1.65% 1.57% 1.58% 1.58% 1.57%
Ratio of net investment income to average
net assets........................... .00% .36% .79% 1.05% 1.15% 1.43% 1.86% 2.25%
Number of units outstanding at end of year
(thousands).......................... 29,545 27,578 26,688 26,692 28,497 29,661 26,235 19,634
Portfolio turnover rate................ 64% 85% 96% 103% 81% 189% 319% 54%
Average Commission Rate Paid*.......... $ .051 $ .047 -- -- -- -- -- --
CONTRACTS ISSUED PRIOR TO MAY 16, 1983 1997 1996 1995 1994 1993 1992 1991 1990
- -----------------------------------------------------------------------------------------------------------------------------------
SELECTED PER UNIT DATA
Total investment income................ $ .233 $ .216 $ .208 $ .192 $ .189 $ .192 $ .201 $ .199
Operating expenses..................... .201 .154 .123 .100 .092 .085 .077 .069
-------- -------- ------- ------- ------- ------- ------- -------
Net investment income.................. .032 .062 .085 .092 .097 .107 .124 .130
Unit Value at beginning of year........ 11.763 9.668 7.120 7.194 6.664 6.587 5.145 5.383
Net realized and change in unrealized gains
(losses)............................. 3.715 2.033 2.463 (.166) .433 (.030) 1.318 (.368)
-------- -------- ------- ------- ------- ------- ------- -------
Unit Value at end of year.............. $ 15.510 $ 11.763 $ 9.668 $ 7.120 $ 7.194 $ 6.664 $ 6.587 $ 5.145
======== ======== ======= ======= ======= ======= ======= =======
SIGNIFICANT RATIOS AND ADDITIONAL DATA
Net increase (decrease) in unit value... $ 3.75 $ 2.10 $ 2.55 $ (.07) $ .53 $ .08 $ 1.44 $ (.24)
Ratio of operating expenses to average net
assets............................... 1.45% 1.45% 1.45% 1.41% 1.33% 1.33% 1.33% 1.33%
Ratio of net investment income to average
net assets........................... .24% .60% 1.02% 1.30% 1.40% 1.67% 2.11% 2.50%
Number of units outstanding at end of year
(thousands).......................... 15,194 16,554 17,896 19,557 21,841 22,516 24,868 28,053
Portfolio turnover rate................ 64% 85% 96% 103% 81% 189% 319% 54%
Average commission rate paid*.......... $ 0.51 $ .047 -- -- -- -- -- --
<CAPTION>
<S> <C> <C>
SELECTED PER UNIT DATA
Total investment income................ $ .191 $ .168
Operating expenses..................... .095 .071
------- -------
Net investment income.................. .096 .097
Unit Value at beginning of year........ 4.191 3.601
Net realized and change in unrealized gains
(losses)............................. 1.008 .493
------- -------
Unit Value at end of year.............. $ 5.295 $ 4.191
======= =======
SIGNIFICANT RATIOS AND ADDITIONAL DATA
Net increase (decrease) in unit value... $ 1.10 $ .59
Ratio of operating expenses to average net
assets............................... 1.58% 1.58%
Ratio of net investment income to average
net assets........................... 2.33% 2.60%
Number of units outstanding at end of year
(thousands).......................... 15,707 12,173
Portfolio turnover rate................ 27% 38%
Average Commission Rate Paid*.......... -- --
CONTRACTS ISSUED PRIOR TO MAY 16, 1983 1989 1988
- ----------------------------------------------------------------------------
SELECTED PER UNIT DATA
Total investment income................ $ .191 $ .168
Operating expenses..................... .066 .053
------- -------
Net investment income.................. .125 .115
Unit Value at beginning of year........ 4.250 3.642
Net realized and change in unrealized gains
(losses)............................. 1.008 .493
------- -------
Unit Value at end of year.............. $ 5.383 $ 4.250
======= =======
SIGNIFICANT RATIOS AND ADDITIONAL DATA
Net increase (decrease) in unit value... $ 1.13 $ .61
Ratio of operating expenses to average net
assets............................... 1.33% 1.33%
Ratio of net investment income to average
net assets........................... 2.56% 2.85%
Number of units outstanding at end of year
(thousands).......................... 31,326 35,633
Portfolio turnover rate................ 27% 38%
Average commission rate paid*.......... -- --
</TABLE>
* The average commission rate paid is required for funds that have over 10% in
equities for which commissions are paid. This information is required for
funds with fiscal year ends on or after September 30, 1996.
B-4
<PAGE> 58
CONDENSED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES
PER UNIT DATA FOR AN ACCUMULATION AND ANNUITY UNIT OUTSTANDING THROUGHOUT EACH
YEAR
The following information on per unit data has been audited by Coopers & Lybrand
L.L.P., independent accountants. Their reports on the per unit data for each of
the five years in the period ended December 31, 1997 is contained in the Account
QB Annual Report which should be read along with this information and which is
incorporated by reference into the SAI. The consolidated financial statements of
The Travelers Insurance Company and Subsidiaries are contained in the SAI.
<TABLE>
<CAPTION>
CONTRACTS ISSUED ON OR AFTER MAY 16, 1983 1997 1996 1995 1994 1993 1992 1991 1990*
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SELECTED PER UNIT DATA
Total investment income............... $ .342 $ .368 $ .319 $ .310 $ .299 $ .311 $ .299 $ .277
Operating expenses.................... .082 .078 .073 .069 .067 .061 .056 .048
------- ------- ------- ------- ------- ------- ------- -------
Net investment income................. .260 .290 .246 .241 .232 .250 .243 .229
Unit Value at beginning of year....... 5.060 4.894 4.274 4.381 4.052 3.799 3.357 3.129
Net realized and change in unrealized
gains (losses)...................... .073 (.124) .374 (.348) .097 .003 .199 (.001)
------- ------- ------- ------- ------- ------- ------- -------
Unit Value at end of year............. $ 5.393 $ 5.060 $ 4.894 $ 4.274 $ 4.381 $ 4.052 $ 3.799 $ 3.357
======= ======= ======= ======= ======= ======= ======= =======
SIGNIFICANT RATIOS AND ADDITIONAL DATA
Net increase (decrease) in unit value... $ .33 $ .17 $ .62 $ (.11) $ .33 $ .25 $ .44 $ .23
Ratio of operating expenses to average
net assets.......................... 1.57% 1.57% 1.57% 1.57% 1.57% 1.58% 1.57% 1.57%
Ratio of net investment income to
average net assets.................. 5.00% 5.87% 5.29% 5.62% 5.41% 6.38% 6.84% 7.06%
Number of units outstanding at end of
year (thousands).................... 21,521 24,804 27,066 27,033 28,472 20,250 17,211 14,245
Portfolio turnover rate............... 196% 176% 138% 27% 24% 23% 21% 41%
CONTRACTS ISSUED PRIOR TO MAY 16, 1983 1997 1996 1995 1994 1993 1992 1991 1990*
- --------------------------------------------------------------------------------------------------------------------------------
SELECTED PER UNIT DATA
Total investment income............... $ .353 $ .379 $ .328 $ .318 $ .306 $ .317 $ .304 $ .281
Operating expenses.................... .071 .067 .063 .059 .058 .050 .048 .040
------- ------- ------- ------- ------- ------- ------- -------
Net investment income................. .282 .312 .265 .259 .248 .267 .256 .241
Unit Value at beginning of year....... 5.234 5.050 4.400 4.498 4.150 3.880 3.421 3.181
Net realized and change in unrealized
gains (losses)...................... .077 (.128) .385 (.357) .100 .003 .203 (.001)
------- ------- ------- ------- ------- ------- ------- -------
Unit Value at end of year............. $ 5.593 $ 5.234 $ 5.050 $ 4.400 $ 4.498 $ 4.150 $ 3.880 $ 3.421
======= ======= ======= ======= ======= ======= ======= =======
SIGNIFICANT RATIOS AND ADDITIONAL DATA
Net increase (decrease) in unit value... $ .36 $ .18 $ .65 $ (.10) $ .35 $ .27 $ .46 $ .24
Ratio of operating expenses to average
net assets.......................... 1.33% 1.33% 1.33% 1.33% 1.33% 1.33% 1.33% 1.33%
Ratio of net investment income to
average net assets.................. 5.25% 6.12% 5.54% 5.87% 5.66% 6.61% 7.09% 7.31%
Number of units outstanding at end of
year (thousands).................... 7,683 8,549 9,325 10,694 12,489 13,416 14,629 16,341
Portfolio turnover rate............... 196% 176% 138% 27% 24% 23% 21% 41%
<CAPTION>
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
SELECTED PER UNIT DATA
Total investment income............... $ .270 $ .259
Operating expenses.................... .047 .046
------- -------
Net investment income................. .223 .213
Unit Value at beginning of year....... 2.852 2.697
Net realized and change in unrealized
gains (losses)...................... .054 (.058)
------- -------
Unit Value at end of year............. $ 3.129 $ 2.852
======= =======
SIGNIFICANT RATIOS AND ADDITIONAL DATA
Net increase (decrease) in unit value... $ .28 $ .16
Ratio of operating expenses to average
net assets.......................... 1.57% 1.58%
Ratio of net investment income to
average net assets.................. 7.44% 7.67%
Number of units outstanding at end of
year (thousands).................... 13,135 9,457
Portfolio turnover rate............... 33% 17%
CONTRACTS ISSUED PRIOR TO MAY 16, 1983 1989 1988
- ----------------------------------------------------------------------------------------------------------------
SELECTED PER UNIT DATA
Total investment income............... $ .270 $ .259
Operating expenses.................... .035 .037
------- -------
Net investment income................. .235 .222
Unit Value at beginning of year....... 2.892 2.728
Net realized and change in unrealized
gains (losses)...................... .054 (.058)
------- -------
Unit Value at end of year............. $ 3.181 $ 2.892
======= =======
SIGNIFICANT RATIOS AND ADDITIONAL DATA
Net increase (decrease) in unit value... $ .29 $ .16
Ratio of operating expenses to average
net assets.......................... 1.33% 1.33%
Ratio of net investment income to
average net assets.................. 7.60% 7.82%
Number of units outstanding at end of
year (thousands).................... 18,248 21,124
Portfolio turnover rate............... 33% 17%
</TABLE>
* On May 1, 1990, TAMIC replaced TIMCO as the investment adviser for Account QB.
B-5
<PAGE> 59
CONDENSED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES
PER UNIT DATA FOR AN ACCUMULATION AND ANNUITY UNIT OUTSTANDING THROUGHOUT EACH
YEAR
The following information on per unit data has been audited by Coopers & Lybrand
L.L.P., independent accountants. Their reports on the per unit data for each of
the five years in the period ended December 31, 1997 is contained in the Account
MM Annual Report which should be read along with this information and which is
incorporated by reference into the SAI. The consolidated financial statements of
The Travelers Insurance Company and Subsidiaries are contained in the SAI.
<TABLE>
<CAPTION>
CONTRACTS ISSUED ON OR AFTER MAY 16, 1983 1997 1996 1995 1994 1993 1992 1991 1990*
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SELECTED PER UNIT DATA
Total investment income............... $ .128 $ .121 $ .127 $ .087 $ .065 $ .077 $ .118 $ .149
Operating expenses.................... .036 .035 .034 .032 .031 .031 .030 .029
-------- -------- ------- ------- ------- ------- ------- -------
Net investment income................. .092 .086 .093 .055 .034 .046 .088 .120
Unit Value at beginning of year....... 2.263 2.177 2.084 2.029 1.995 1.949 1.861 1.741
-------- -------- ------- ------- ------- ------- ------- -------
Unit Value at end of year............. $ 2.355 $ 2.263 $ 2.177 $ 2.084 $ 2.029 $ 1.995 $ 1.949 $ 1.861
======== ======== ======= ======= ======= ======= ======= =======
SIGNIFICANT RATIOS AND ADDITIONAL DATA
Net increase in unit value............ $ .09 $ .09 $ .09 $ .06 $ .03 $ .05 $ .09 $ .12
Ratio of operating expenses to average
net assets.......................... 1.57% 1.57% 1.57% 1.57% 1.57% 1.57% 1.57% 1.57%
Ratio of net investment income to
average net assets.................. 4.02% 3.84% 4.36% 2.72% 1.68% 2.33% 4.66% 6.68%
Number of units outstanding at end of
year (thousands).................... 36,134 38,044 35,721 39,675 34,227 42,115 55,013 67,343
CONTRACTS ISSUED PRIOR TO MAY 16, 1983 1997 1996 1995 1994 1993 1992 1991 1990*
- --------------------------------------------------------------------------------------------------------------------------------
SELECTED PER UNIT DATA
Total investment income............... $ .134 $ .125 $ .130 $ .091 $ .067 $ .079 $ .120 $ .151
Operating expenses.................... .032 .030 .030 .028 .027 .027 .026 .024
-------- -------- ------- ------- ------- ------- ------- -------
Net investment income................. .102 .095 .100 .063 .040 .052 .094 .127
Unit Value at beginning of year....... 2.341 2.246 2.146 2.083 2.043 1.991 1.897 1.770
-------- -------- ------- ------- ------- ------- ------- -------
Unit Value at end of year............. $ 2.443 $ 2.341 $ 2.246 $ 2.146 $ 2.083 $ 2.043 $ 1.191 $ 1.897
======== ======== ======= ======= ======= ======= ======= =======
SIGNIFICANT RATIOS AND ADDITIONAL DATA
Net increase in unit value............ $ .10 $ .10 $ .10 $ .06 $ .04 $ .05 $ .09 $ .13
Ratio of operating expenses to average
net assets.......................... 1.33% 1.33% 1.33% 1.33% 1.33% 1.33% 1.33% 1.33%
Ratio of net investment income to
average net assets.................. 4.27% 4.10% 4.61% 2.98% 1.93% 2.58% 4.90% 6.93%
Number of units outstanding at end of
year (thousands).................... 105 112 206 206 218 227 262 326
<CAPTION>
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
SELECTED PER UNIT DATA
Total investment income............... $ .156 $ .118
Operating expenses.................... .027 .023
------- -------
Net investment income................. .129 .095
Unit Value at beginning of year....... 1.612 1.517
------- -------
Unit Value at end of year............. $ 1.741 $ 1.612
======= =======
SIGNIFICANT RATIOS AND ADDITIONAL DATA
Net increase in unit value............ $ .13 $ .10
Ratio of operating expenses to average
net assets.......................... 1.57% 1.56%
Ratio of net investment income to
average net assets.................. 7.65% 6.02%
Number of units outstanding at end of
year (thousands).................... 57,916 41,449
CONTRACTS ISSUED PRIOR TO MAY 16, 1983 1989 1988
- --------------------------------------------------------------------------------------------------------------------------------
SELECTED PER UNIT DATA
Total investment income............... $ .156 $ .118
Operating expenses.................... .021 .018
------- -------
Net investment income................. .135 .100
Unit Value at beginning of year....... 1.635 1.535
------- -------
Unit Value at end of year............. $ 1.770 $ 1.635
======= =======
SIGNIFICANT RATIOS AND ADDITIONAL DATA
Net increase in unit value............ $ .14 $ .10
Ratio of operating expenses to average
net assets.......................... 1.33% 1.31%
Ratio of net investment income to
average net assets.................. 7.81% 6.19%
Number of units outstanding at end of
year (thousands).................... 367 497
</TABLE>
* On May 1, 1990, TAMIC replaced TIMCO as the investment adviser for Account MM.
B-6
<PAGE> 60
CONDENSED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
THE TRAVELERS TIMED GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES
PER UNIT DATA FOR AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
The following information on per unit data has been audited by Coopers & Lybrand
L.L.P., independent accountants. Their reports on the per unit data for each of
the five years in the period ended December 31, 1997 is contained in the Account
TGIS Annual Report which should be read along with this information and which is
incorporated by reference into the SAI. The consolidated financial statements of
The Travelers Insurance Company and Subsidiaries are contained in the SAI.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SELECTED PER UNIT DATA
Total investment income........... $ .075 $ .061 $ .083 $ .064 $ .043 $ .046 $ .045 $ .099
Operating expenses................ .090 .069** .057** .041** .042** .045** .045** .034**
------- ------- ------- ------- ------- ------- ------- -------
Net investment income............. (.015) (.008) .026 .023 .001 .001 -- .065
Unit Value at beginning of year... $ 2.717 $ 2.263 $ 1.695 $ 1.776 $ 1.689 $ 1.643 $ 1.391 $ 1.447
Net realized and change in
unrealized gains (losses)....... .824 .462 .542 (.104) 0.086 0.045 0.252 (.121)
------- ------- ------- ------- ------- ------- ------- -------
Unit Value at end of year......... $ 3,526 $ 2.717 $ 2.263 $ 1.695 $ 1.776 $ 1.689 $ 1.643 $ 1.391
======= ======= ======= ======= ======= ======= ======= =======
SIGNIFICANT RATIOS AND ADDITIONAL
DATA
Net increase (decrease) in unit
value........................... $ .81 $ .45 $ .57 $ (.08) $ .09 $ .05 $ .25 $ (.06)
Ratio of operating expenses to
average net assets*............. 2.82%** 2.82%** 2.82%** 2.82%** 2.82%** 2.82%** 2.82%** 2.41%**
Ratio of net investment income to
average net assets*............. (.45)% (.34)% 1.37% 1.58% 0.08% 0.78% 1.33% 1.86%
Number of units outstanding at end
of year (thousands)............. 60,312 68,111 105,044 29,692 -- 217,428 -- 5,708
Portfolio turnover rate........... 63% 81% 79% 19% 70% 119% 489% 653%
Average commission rate paid***... $ .053 $ .046 -- -- -- -- -- --
<CAPTION>
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
SELECTED PER UNIT DATA
Total investment income........... $ .161 $ .044
Operating expenses................ .023 .017
------- -------
Net investment income............. .138 .027
Unit Value at beginning of year... $ 1.108 $ 1.000
Net realized and change in
unrealized gains (losses)....... .201 .081
------- -------
Unit Value at end of year......... $ 1.447 $ 1.108
======= =======
SIGNIFICANT RATIOS AND ADDITIONAL
DATA
Net increase (decrease) in unit
value........................... $ .34 $ .11
Ratio of operating expenses to
average net assets*............. 1.57% 1.57%
Ratio of net investment income to
average net assets*............. 2.81% 2.55%
Number of units outstanding at end
of year (thousands)............. -- 3,829
Portfolio turnover rate........... 149% 268%
Average commission rate paid***... -- --
</TABLE>
* Annualized
** Effective May 1, 1990, market timing fees are included in operating
expenses. Prior to May 1, 1990, market timing fee payments were made by
separate check from a contract owner, and were not recorded in the financial
statements of Account TGIS, or by contractual surrender to the extent
allowed under federal tax law.
*** The average commission rate paid is required for funds that have over 10% in
equities for which commissions are paid. This information is required for
funds with fiscal year ends on or after September 30, 1996.
B-7
<PAGE> 61
CONDENSED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
THE TRAVELERS TIMED SHORT-TERM BOND ACCOUNT FOR VARIABLE ANNUITIES*
PER UNIT DATA FOR AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH YEAR
The following information on per unit data has been audited by Coopers & Lybrand
L.L.P., independent accountants. Their reports on the per unit data for each of
the five years in the period ended December 31, 1997 is contained in the Account
TSB Annual Report which should be read along with this information and which is
incorporated by reference into the SAI. The consolidated financial statements of
The Travelers Insurance Company and Subsidiaries are contained in the SAI.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SELECTED PER UNIT DATA
Total investment income........... $ .077 $ .057 $ .074 $ .055 $ .041 $ .054 $ .076 $ .099
Operating expenses................ .039** .030** .035** .036** .037** .041** .036** .030**
------- ------- ------- ------- ------- ------- ------- -------
Net investment income............. 0.38 .027 .039 .019 .004 .013 .040 .069
Unit value at beginning of year... 1.361 1.333 1.292 1.275 1.271 1.258 1.218 1.149
Net realized and change in
unrealized gains (losses)***.... .000 .001 .002 (.002) -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Unit value at end of year......... $ 1.399 $ 1.361 $ 1.333 $ 1.292 $ 1.275 $ 1.271 $ 1.258 $ 1.218
======= ======= ======= ======= ======= ======= ======= =======
SIGNIFICANT RATIOS AND ADDITIONAL
DATA
Net increase in unit value........ $ .04 $ .03 $ .04 $ .02 $ -- $ .01 $ .04 $ .07
Ratio of operating expenses to
average net assets****.......... 2.82%** 2.82%** 2.82%** 2.82%** 2.82%** 2.82%** 2.82%** 2.41%**
Ratio of net investment income to
average net assets****.......... 2.77% 2.47% 3.17% 1.45% .39% 1.12% 3.07% 5.89%
Number of units outstanding at end
of year (thousands)............. 47,262 54,565 -- 216,713 353,374 173,359 439,527 369,769
<CAPTION>
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
SELECTED PER UNIT DATA
Total investment income........... $ .102 $ .078
Operating expenses................ .017 .016
------- -------
Net investment income............. .085 .062
Unit value at beginning of year... 1.064 1.002
Net realized and change in
unrealized gains (losses)***.... -- --
------- -------
Unit value at end of year......... $ 1.149 $ 1.064
======= =======
SIGNIFICANT RATIOS AND ADDITIONAL
DATA
Net increase in unit value........ $ .09 $ .06
Ratio of operating expenses to
average net assets****.......... 1.57% 1.57%
Ratio of net investment income to
average net assets****.......... 7.63% 6.51%
Number of units outstanding at end
of year (thousands)............. 360,074 356,969
</TABLE>
* Prior to May 1, 1994, the Account was known as The Travelers Timed Money
Market Account for Variable Annuities.
** Effective May 1, 1990, market timing fees are included in operating
expenses. Prior to May 1, 1990, market timing fee payments were made by
separate check from a contract owner, and were not recorded in the financial
statements of Account TSB, or by contractual surrender to the extent allowed
under federal tax law.
*** Effective May 2, 1994, Account TSB was authorized to invest in securities
with a maturity of greater than one year. As a result, net realized and
change in unrealized gains (losses) are no longer included in total
investment income.
**** Annualized.
B-8
<PAGE> 62
CONDENSED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
THE TRAVELERS TIMED AGGRESSIVE STOCK ACCOUNT FOR VARIABLE ANNUITIES
PER UNIT DATA FOR AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH YEAR
The following information on per unit data has been audited by Coopers & Lybrand
L.L.P., independent accountants. Their reports on the per unit data for each of
the five years in the period ended December 31, 1997 is contained in the Account
TAS Annual Report which should be read along with this information and which is
incorporated by reference into the SAI. The consolidated financial statements of
The Travelers Insurance Company and Subsidiaries are contained in the SAI.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990+
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SELECTED PER UNIT DATA
Total investment income........... $ .063 $ .041 $ .042 $ .036 $ .037 $ .041 $ .044 $ .045
Operating expenses................ .085 .069** .057** .049** .048** .043** .039** .073**
-------- -------- ------- ------- ------- ------- ------- -------
Net investment income (loss)...... (.022) (.028) (.015) (.013) (.011) (.002) .005 (.028)
Unit Value at beginning of year... 2.623 2.253 1.706 1.838 1.624 1.495 1.136 1.189
Net realized and unrealized gains
(losses)........................ .788 .398 .562 (.119) .225 .131 .354 (.025)
-------- -------- ------- ------- ------- ------- ------- -------
Unit Value at end of year......... $ 3.389 $ 2.623 $ 2.253 $ 1.706 $ 1.838 $ 1.624 $ 1.495 $ 1.136
======== ======== ======= ======= ======= ======= ======= =======
SIGNIFICANT RATIOS AND ADDITIONAL
DATA
Net increase (decrease) in unit
value........................... $ .77 $ .37 $ .55 $ (.13) $ .21 $ (.13) $ .36 $ (.05)
Ratio of operating expenses to
average net assets*............. 2.85%** 2.84%** 2.83%** 2.80%** 2.82%** 2.93%** 2.99%** 2.64%**
Ratio of net investment income to
average net assets*............. (.76)% (1.13)% (.74)% (.72)% (.80)% (.12)% .37% (3.73)%
Number of units outstanding at end
of year (thousands)............. 25,865 30,167 45,575 25,109 43,059 20,225 19,565 5,585
Portfolio turnover rate........... 92% 98% 113% 142% 71% 269% 261% 0%
Average commission rate paid ++... $ .052 $ .047 -- -- -- -- -- --
<CAPTION>
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
SELECTED PER UNIT DATA
Total investment income........... $ .052 $ .008
Operating expenses................ .051 .015
------- -------
Net investment income (loss)...... .001 (.007)
Unit Value at beginning of year... 1.059 1.001
Net realized and unrealized gains
(losses)........................ .129 .065
------- -------
Unit Value at end of year......... $ 1.189 $ 1.059
======= =======
SIGNIFICANT RATIOS AND ADDITIONAL
DATA
Net increase (decrease) in unit
value........................... $ .13 $ .06
Ratio of operating expenses to
average net assets*............. 1.95% 1.95%
Ratio of net investment income to
average net assets*............. .91% (.88)%
Number of units outstanding at end
of year (thousands)............. -- --
Portfolio turnover rate........... 77% 127%
Average commission rate paid ++... -- --
</TABLE>
* Annualized
** Effective May 1, 1990, market timing fees are included in operating expenses.
Prior to May 1, 1990, market timing fee payments were made by separate check
from a contract owner and were not recorded in the financial statements of
Account TAS, or by contractual surrender to the extent allowed under federal
tax law.
+ On May 1, 1990, TIMCO replaced Keystone Custodian Funds, Inc. as the
investment adviser for Account TAS.
++ The average commission rate paid is required for funds that have over 10% in
equities for which commissions are paid. This information is required for
Funds with fiscal year ends on or after September 30, 1996.
B-9
<PAGE> 63
CONDENSED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
THE TRAVELERS TIMED BOND ACCOUNT FOR VARIABLE ANNUITIES
PER UNIT DATA FOR AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH YEAR
The following information on per unit data has been audited by Coopers & Lybrand
L.L.P., independent accountants. Their reports on the per unit data for each of
the five years in the period ended December 31, 1997 is contained in the Account
TB Annual Report which should be read along with this information and which is
incorporated by reference into the SAI. The consolidated financial statements of
The Travelers Insurance Company and Subsidiaries are contained in the SAI.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990+
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SELECTED PER UNIT DATA
Total investment income........... $ .025 $ .033 $ .071 $ .007 $ .054 $ .051 $ .052 $ .072
Operating expenses................ .011 .015** .031** .006** .036** .032** .031** .018**
------- ------- ------- ------- ------- ------- ------- -------
Net investment income............. .014 .018 .040 .001 .018 .019 .021 .054
Unit Value at beginning of year... 1.232 1.383 1.215 1.234 1.132 1.087 .994 1.036
Net realized and change in
unrealized gains (losses)....... .027 (.169) .128 (.020) .084 .026 .072 (.096)
------- ------- ------- ------- ------- ------- ------- -------
Unit Value at end of year......... $ 1.273 $ 1.232 $ 1.383 $ 1.215 $ 1.234 $ 1.132 $ 1.087 $ .994
======= ======= ======= ======= ======= ======= ======= =======
SIGNIFICANT RATIOS AND ADDITIONAL
DATA
Net increase (decrease) in unit
value........................... $ .04 $ (.15) $ .17 $ (.02) $ .10 $ .05 $ .09 $ (.04)
Ratio of operating expenses to
average net assets*............. 3.00%** 3.00%** 3.00%** 3.00%** 3.00%** 2.99%** 3.00%** 2.58%**
Ratio of net investment income to
average net assets*............. 3.64% 3.48% 3.98% 1.02% 1.48% 1.71% 3.07% 3.88%
Number of units outstanding at end
of year (thousands)............. -- -- 11,466 -- 20,207 21,868 19,521 14,115
Portfolio turnover rate........... 129% 153% 117% -- 190% 505% 627% 370%
<CAPTION>
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
SELECTED PER UNIT DATA
Total investment income........... $ .147 $ .141
Operating expenses................ .023 .022
------- -------
Net investment income............. .124 .119
Unit Value at beginning of year... 1.114 1.000
Net realized and change in
unrealized gains (losses)....... (.202) (.005)
------- -------
Unit Value at end of year......... $ 1.036 $ 1.114
======= =======
SIGNIFICANT RATIOS AND ADDITIONAL
DATA
Net increase (decrease) in unit
value........................... $ (.08) $ .11
Ratio of operating expenses to
average net assets*............. 2.02% 2.04%
Ratio of net investment income to
average net assets*............. 11.15% 11.12%
Number of units outstanding at end
of year (thousands)............. 660 830
Portfolio turnover rate........... 10% 26%
</TABLE>
* Annualized
** Effective May 1, 1990, market timing fees are included in operating expenses.
Prior to May 1, 1990, market timing fee payments were made by separate check
from a contract owner, and were not recorded in the financial statements of
Account TB, or by contractual surrender to the extent allowed under federal
tax law.
+ On May 1, 1990, TAMIC replaced Keystone Custodian Funds, Inc. as the
investment adviser for Account TB.
B-10
<PAGE> 64
APPENDIX C
- --------------------------------------------------------------------------------
CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
The Statement of Additional Information contains more specific information and
financial statements relating to The Travelers Insurance Company. A list of the
contents of the Statement of Additional Information is set forth below:
Description of The Travelers Insurance Company and The Separate Accounts
The Insurance Company
The Separate Accounts
Investment Restrictions
The Travelers Growth and Income Stock Account For Variable Annuities
The Travelers Timed Growth and Income Stock Account for Variable
Annuities
The Travelers Timed Aggressive Stock Account for Variable Annuities
The Travelers Quality Bond Account for Variable Annuities
The Travelers Timed Bond Account for Variable Annuities
The Travelers Money Market Account for Variable Annuities
The Travelers Timed Short-Term Bond Account for Variable Annuities
Description of Certain Types of Investments and Investment Techniques
Available to the Separate Accounts
Writing Covered Call Options
Buying Put and Call Options
Futures Contracts
Money Market Instruments
Investment Management and Advisory Services
Advisory and Subadvisory Fees
TIMCO
TAMIC
Valuation of Assets
Net Investment Factor
Federal Tax Considerations
Performance Data
Yield Quotations of Account MM
Average Annual Total Return Quotations of Accounts GIS, QB, MM, TGIS,
TSB, TAS, TB and Fund U
The Board of Managers
Distribution and Management Services
Securities Custodian
Independent Accountants
Financial Statements
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
COPIES OF THE STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 1998 (FORM NO.
L-11165S) ARE AVAILABLE WITHOUT CHARGE. TO REQUEST A COPY, PLEASE CLIP THIS
COUPON ON THE DOTTED LINE, ENTER YOUR NAME AND ADDRESS IN THE SPACES PROVIDED
BELOW, AND MAIL TO: THE TRAVELERS INSURANCE COMPANY, ANNUITY SERVICES, ONE TOWER
SQUARE, HARTFORD, CONNECTICUT 06183-5030.
Name:
Address:
C-1
<PAGE> 65
THE TRAVELERS UNIVERSAL ANNUITY
INDIVIDUAL AND GROUP
VARIABLE ANNUITY CONTRACTS
ISSUED BY
THE TRAVELERS INSURANCE COMPANY
L-11165 Printed in U.S.A.
TIC Ed. 5-98
<PAGE> 66
- -------------------------------------------------------------------------------
TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES
THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES
- -------------------------------------------------------------------------------
GROUP VARIABLE ANNUITY CONTRACTS
issued by
THE TRAVELERS INSURANCE COMPANY
One Tower Square, Hartford, Connecticut 06183
Telephone: 860-277-0111
The group Variable Annuities described in this Prospectus are
available only for use in connection with pension and profit-sharing plans
qualified under Section 401(a) or 403(a) of the Internal Revenue Code of 1986,
as amended (the "Code"). The basic purpose of the Variable Annuity contract is
to provide lifetime Annuity Payments which will vary with the investment
performance of one or more Separate Accounts.
The Separate Accounts available for funding the Variable Annuities
described in this Prospectus have different investment objectives. The basic
investment objective of The Travelers Growth and Income Stock Account for
Variable Annuities ("Account GIS") is long-term accumulation of principal
through capital appreciation and retention of net investment income. Account
GIS proposes to achieve this objective by investing in a portfolio of equity
securities, mainly common stocks. The basic investment objective of The
Travelers Quality Bond Account for Variable Annuities ("Account QB") is the
selection of investments from the point of view of an investor concerned
primarily with current income, moderate capital volatility and total return.
Account QB proposes to achieve this objective by investing in money market
obligations and in publicly traded debt securities.
This Prospectus sets forth concisely the information about Account GIS
and Account QB (the "Separate Accounts") that you should know before investing.
Please read it and retain it for future reference. Additional information
about the Separate Accounts is contained in a Statement of Additional
Information ("SAI") dated May 1, 1998 which has been filed with the Securities
and Exchange Commission ("SEC") and is incorporated by reference into this
Prospectus. A copy may be obtained, without charge, by writing to The
Travelers Insurance Company, Annuity Services, One Tower Square, Hartford,
Connecticut 06183-5030, Attention: Manager, or by calling 800-842-9368. The
Table of Contents of the SAI appears in Appendix A of this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1998.
<PAGE> 67
TABLE OF CONTENTS
<TABLE>
<S> <C>
GLOSSARY OF SPECIAL TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v
FEE TABLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii
CONDENSED FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-1
DESCRIPTION OF THE TRAVELERS AND THE SEPARATE ACCOUNTS . . . . . . . . . . . . . . . . . . . 1
The Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Separate Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
INVESTMENT ALTERNATIVES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT
FOR VARIABLE ANNUITIES (ACCOUNT GIS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Investment Objective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Fundamental Investment Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
THE TRAVELERS QUALITY BOND ACCOUNT FOR
VARIABLE ANNUITIES (ACCOUNT QB) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Investment Objective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Fundamental Investment Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
VOTING RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
CHARGES AND DEDUCTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Deductions from Purchase Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Premium Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Annual Contract Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Investment Advisory and Sub-Advisory Fees . . . . . . . . . . . . . . . . . . . . . . . 6
Mortality and Expense Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Change of Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
THE VARIABLE ANNUITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
General Benefit Description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Termination by the Company and Termination Amount . . . . . . . . . . . . . . . . . . . 8
Benefit in the Event of Termination of a Participant, the Plan or the Contract . . . . . 9
Suspension of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Required Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Federal and State Income Tax Withholding . . . . . . . . . . . . . . . . . . . . . . . . 10
ACCUMULATION PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Application of Purchase Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Number of Accumulation Units. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Accumulation Unit Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Net Investment Rate and Net Investment Factor . . . . . . . . . . . . . . . . . . . . . . 10
Cash Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Cash Surrender (Redemption) or Withdrawal Value . . . . . . . . . . . . . . . . . . . . . 11
Surrender Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
</TABLE>
i
<PAGE> 68
<TABLE>
<S> <C>
Reinvestment Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Transfer Between Separate Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Distribution from One Account to Another Account . . . . . . . . . . . . . . . . . . . . . 12
PAYOUT PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Separate Account Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Determination of First Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Annuity Unit Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Number of Annuity Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Determination of Second and Subsequent Payments . . . . . . . . . . . . . . . . . . . . . 13
Annuity Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Income Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Election of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
FEDERAL TAX CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Qualified Pension and Profit-Sharing Plans . . . . . . . . . . . . . . . . . . . . . . . 15
Federal Income Tax Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Tax Advice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
DISTRIBUTION OF VARIABLE ANNUITY CONTRACTS . . . . . . . . . . . . . . . . . . . . . . . . . . 17
STATE REGULATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
YEAR 2000 REQUIREMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
LEGAL PROCEEDINGS AND OPINIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
APPENDIX A - Contents of the Statement of Additional Information . . . . . . . . . . . . . . . 19
</TABLE>
ii
<PAGE> 69
GLOSSARY OF SPECIAL TERMS
As used in this Prospectus, the following terms have the indicated meanings:
ACCUMULATION UNIT: the basic measure used to determine the value of a contract
before Annuity Payments begin.
ANNUITANT: the person on whose life the Variable Annuity contract is issued.
ANNUITY COMMENCEMENT DATE: the date on which a Participant's Annuity Payments
are to begin under the terms of the plan.
ANNUITY PAYMENTS: a series of periodic payments for life; for life with either
a minimum number of payments of a determinable sum assured; or for the joint
lifetime of the Annuitant and another person and thereafter during the lifetime
of the survivor.
ANNUITY UNIT: the basic measure used to determine the dollar amount of Annuity
Payments.
BOARD OF MANAGERS: the persons directing the investment and administration of a
managed Separate Account.
CASH SURRENDER VALUE: the amount payable to the Owner or other payee upon
termination of the contract during the lifetime of the Annuitant.
CASH VALUE: the current value of Accumulation Units credited to the contract
less any administrative charges.
COMPANY: The Travelers Insurance Company.
COMPANY'S HOME OFFICE: the principal executive offices of The Travelers
Insurance Company located at One Tower Square, Hartford, Connecticut.
CONTRACT DATE: the date on which the contract, benefits and provisions of the
contract become effective.
CONTRACT YEARS: annual periods computed from the Contract Date.
INCOME PAYMENTS: optional forms of periodic payments made by the Company which
are not based on the life of the Annuitant.
INDIVIDUAL ACCOUNT: Accumulation Units credited to a Participant or
beneficiary.
MAJORITY VOTE: a "majority vote of the outstanding voting securities" is
defined in the Investment Company Act of 1940 as the lesser of (i) 67% or more
of the votes present at a meeting, if Contract Owners holding more than 50% of
the total voting power of all Contract Owners in the Separate Account are
present or represented by proxy, or (ii) more than 50% of the total voting
power of all Contract Owners in the Separate Account.
NET PURCHASE PAYMENT (NET PREMIUM PAYMENT): the amount applied to the purchase
of Accumulation Units, which is equal to the Purchase Payment less deductions
for sales expenses, any applicable annual contract charge and any applicable
premium taxes.
OWNER: the entity to which the master group contract is issued, usually the
employer.
OWNER'S ACCOUNT: Accumulation Units credited to the Owner.
PARTICIPANT: an eligible person who participates in the plan.
PARTICIPANT'S INTEREST: the Cash Value to which the Participant is entitled
under the Plan.
iii
<PAGE> 70
PLAN: the plan under which the contract is issued.
PURCHASE PAYMENT (PREMIUM PAYMENT): a gross amount paid to the Company under
the contract during the accumulation period.
SEPARATE ACCOUNT: assets set aside by the Company, the investment experience of
which is kept separate from that of other assets of the Company; for example,
The Travelers Growth and Income Stock Account for Variable Annuities.
VALUATION DATE: generally, a day on which the Separate Account is valued. A
valuation date is any day on which the New York Stock Exchange is open for
trading. The value of the Accumulation Units and Annuity Units will be
determined as of the close of trading on the New York Stock Exchange.
VALUATION PERIOD: the period between the close of business on successive
Valuation Dates.
VARIABLE ANNUITY: an annuity contract which provides for accumulation and for
Annuity Payments which vary in amount in accordance with the investment
experience of a Separate Account.
THERE ARE ELIGIBILITY REQUIREMENTS FOR PURCHASERS DESCRIBED ELSEWHERE IN THIS
PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE A SOLICITATION OF AN OFFER TO
ACQUIRE ANY INTEREST OR PARTICIPATION IN THE VARIABLE ANNUITY DESCRIBED IN THIS
PROSPECTUS TO ANY PERSON WHO IS INELIGIBLE FOR PURCHASE.
iv
<PAGE> 71
SUMMARY
INTRODUCTION
There are two Separate Accounts currently available for funding the
Variable Annuity contracts described herein. The Travelers Growth and Income
Stock Account for Variable Annuities (Account GIS) and The Travelers Quality
Bond Account for Variable Annuities (Account QB) are registered with the SEC as
diversified, open-end management investment companies under the Investment
Company Act of 1940, as amended (the "1940 Act").
The basic investment objectives of the Separate Accounts are as
follows: Account GIS--long-term accumulation of principal through capital
appreciation and retention of net investment income; Account QB--current
income, moderate capital volatility and total return. As is true with all
investment companies, there can be no assurance that the objectives of the
Separate Accounts will be achieved.
RISK FACTORS
The investment experience on equity investments over a period of time
will tend to reflect levels of stock market prices and dividend payouts. Both
are affected by diverse factors, including not only business conditions and
investors' confidence in the economy, but current conditions in a particular
industry or company. The yield on a common stock is not contractually
determined. Equity securities are subject to financial risks relating to the
earning stability and overall financial soundness of an issue. They are also
subject to market risks relating to the effect of general changes in the
securities market on the price of a security.
The yield on debt instruments over a period of time should reflect
prevailing interest rates, which depend on a number of factors, including
government action in the capital markets, government fiscal and monetary
policy, needs of businesses for capital goods for expansion, and investor
expectations as to future inflation. The yield on a particular debt instrument
is also affected by the risk that the issuer will be unable to apply principal
and interest.
INVESTMENT ADVISORY SERVICES
The Travelers Asset Management International Corporation ("TAMIC")
furnishes investment management and advisory services to Accounts QB and GIS
according to the terms of written agreements. TAMIC receives an amount
equivalent on an annual basis to 0.3233% of the average daily net assets of
Account QB. TAMIC receives an amount equivalent on an annual basis to a
maximum of 0.65% of the aggregate average daily net assets of Account GIS,
scaling down to 0.40%.
In addition, Travelers Investment Management Company ("TIMCO")
provides sub-advisory services in connection with the day to day operations of
Account GIS. For furnishing investment sub-advisory services to Account GIS,
TIMCO is paid by TAMIC an amount equivalent on an annual basis to a maximum of
0.45% of the aggregate average daily net assets of Account GIS, scaling down to
0.20%. (See "Management," and "Investment Advisory Fees.")
CHARGES AND DEDUCTIONS
A sales charge equal to 2% (2.04% of the amount invested) of the gross
Premium Payment is deducted from the Purchase Payments. The sales charge will
be reduced by 2% of any applicable annual contract charge. (See "Deductions
from Purchase Payments" and "Annual Contract Charge.")
There is a $50 annual contract charge assessed against each group
contract. (See "Annual Contract Charge.")
A deduction of 1.0017% on an annual basis will be made on each
Valuation Date for mortality and expense risks assumed by the Company. (See
"Charges and Deductions.")
A contract may be surrendered (redeemed) for cash, in whole or in
part, prior to the commencement of Annuity Payments. There is a surrender
charge of 2% of any Cash Value surrendered during the first five contract
years. (See "Cash Surrender (Redemption) or Withdrawal Value.")
Premium taxes may apply to annuities in a few states. These taxes
currently range from 0.5% to 5.0%, depending upon jurisdiction. The Company
will deduct any applicable premium tax from the Contract Value, either upon
death, surrender, or annuitization, or at the time Purchase Payments are made
to the Contract, but no earlier than when the Company has a tax liability under
state law. (See "Premium Tax.")
v
<PAGE> 72
ANNUITY PAYMENTS
At a Participant's Annuity Commencement Date (usually at retirement),
the contract provides lifetime Annuity Payments, as well as other types of
payout plans. (See "Annuity Options" and "Income Options.") If a variable
payout is selected, the payments will continue to vary with the investment
performance of the selected Investment Alternatives.
TRANSFERS AND WITHDRAWALS
In the event that a Participant in the plan is terminated prior to
that Participant's Annuity Commencement Date, the Participant's interest may be
paid in cash or in other forms of payout. (See "Benefit in the Event of
Termination of a Participant, the Plan or the Contract.")
Before Annuity or Income Payments begin, transfers may be made among
available Investment Alternatives without fee, penalty or charge. (See
"Transfer Between Separate Accounts.")
VOTING RIGHTS
Owners have certain voting rights under the contracts. (See "Voting Rights.")
OTHER PROVISIONS
The Company reserves the right to terminate inactive contracts under
certain circumstances. (See "Termination by the Company and Termination
Amount.")
The contracts will be sold by life insurance sales representatives
representing the Company or certain other registered broker-dealers. (See
"Distribution of Variable Annuity Contracts.")
For investment advisory services rendered to Account GIS, TAMIC will
receive an amount equivalent on an annual basis to the following:
For furnishing investment Sub-Advisory Services to Account GIS, TIMCO
is paid by TAMIC an amount equivalent on an annual basis to a maximum of 0.45%
of the aggregate average daily net assets of Account GIS, scaling down to
0.40%.
vi
<PAGE> 73
FEE TABLE
THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES (GIS)
THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES (QB)
<TABLE>
<CAPTION>
GIS QB
--- --
<S> <C> <C>
CONTRACT OWNER TRANSACTION EXPENSES
Sales Load Imposed on Purchases (as a percentage of purchase payments) . . . . . . . . . 2.00% 2.00%
Surrender Charge (as a percentage of cash value surrendered) . . . . . . . . . . . . . . 2.00% 2.00%
ANNUAL CONTRACT FEE (per group Contract) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50.00 $ 50.00
ANNUAL EXPENSES (as a percentage of average net assets)
Mortality and Expense Risk Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.00% 1.00%
Management Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.62%* 0.32%
TOTAL ANNUAL EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.62% 1.32%
</TABLE>
* Based upon Management Fee Scale approved by Shareholders on April 27, 1998.
EXAMPLE
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
If you surrender your contract at the end of the applicable period,
you would have paid the following expenses on a $1,000 investment, assuming a
5% annual return on assets, after:
<TABLE>
<CAPTION>
GIS QB
--- --
<S> <C> <C>
1 year $ 57 $ 54
3 years $ 93 $ 84
5 years $ 131 $ 116
10 years $ 212 $ 179
</TABLE>
If you do not surrender your contract at the end of the applicable
period, you would have paid the following expenses on a $1,000 investment,
assuming a 5% annual return on assets, after:
<TABLE>
<CAPTION>
GIS QB
--- --
<S> <C> <C>
1 year $ 36 $ 34
3 years $ 71 $ 62
5 years $ 108 $ 93
10 years $ 212 $ 179
</TABLE>
The purpose of the Fee Table is to assist Contract Owners in understanding
the various costs and expenses that a Contract Owner will bear directly or
indirectly. For more complete descriptions of the various costs and expenses,
including possible waivers or reductions of these expenses, see "Charges and
Deductions," and "Surrender Charge." Expenses shown do not include premium
taxes which may be applicable.
vii
<PAGE> 74
CONDENSED FINANCIAL INFORMATION
THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES
Per Unit Data for an Accumulation and Annuity Unit
outstanding throughout each year
The following information on per unit data has been audited by Coopers &
Lybrand L.L.P., independent accountants. Their report on the per unit data for
each of the five years in the period ended December 31, 1997 is contained in
the Separate Account's Annual Report which should be read along with this
information and which is incorporated by refeence into the SAI. The
consolidated financial statements of The Travelers Insurance Company and
Subsidiaries are contained in the SAI.
<TABLE>
<CAPTION>
CONTRACTS ISSUED ON OR AFTER MAY 16, 1983.
SELECTED PER UNIT DATA 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total investment income . . . . . . . . . . . . . . . . . . . $ .228 $ .212 $ .205 $ .189 $ .184
Operating expenses . . . . . . . . . . . . . . . . . . . . . . .228 .175 .140 .115 .106
------- ------- ------- ------- -------
Net investment income . . . . . . . . . . . . . . . . . . . . .000 .037 .065 .074 .078
Unit Value at beginning of year . . . . . . . . . . . . . . . 11.371 9.369 6.917 7.007 6.507
Net realized and change in unrealized gains (losses) . . . . 3.584 1.965 2.387 (.164) .422
------- ------- ------- ------- -------
Unit Value at end of year . . . . . . . . . . . . . . . . . . $14.955 $11.371 $ 9.369 $ 6.917 $ 7.007
======= ======= ======= ======= =======
SIGNIFICANT RATIOS AND ADDITIONAL DATA
Net increase (decrease) in unit value . . . . . . . . . . . . $ 3.58 $ 2.00 2.45 (.09) .50
Ratio of operating expenses to average net assets . . . . . . 1.70% 1.70% 1.70% 1.65% 1.57%
Ratio of net investment income to average net assets . . . . .00% .36% .79% 1.05% 1.15%
Number of units outstanding at end of year (thousands) . . . 29,545 27,578 26,688 26,692 28,497
Portfolio turnover rate . . . . . . . . . . . . . . . . . . . 64% 85% 96% 103% 81%
Average Commission Rate Paid* . . . . . . . . . . . . . . . . $ .051 $ .047 --- -- --
CONTRACTS ISSUED PRIOR TO MAY 16, 1983.
SELECTED PER UNIT DATA 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Total investment income . . . . . . . . . . . . . . . . . . . $ .233 .216 .208 $ .192 $ .189
Operating expenses . . . . . . . . . . . . . . . . . . . . . . .201 .154 .123 .100 .092
------- ------- ------- ------- -------
Net investment income . . . . . . . . . . . . . . . . . . . . .032 .062 .085 .092 .097
Unit Value at beginning of year . . . . . . . . . . . . . . . 11.763 9.668 7.120 7.194 6.664
Net realized and change in unrealized gains (losses) . . . . 3.715 2.033 2.463 (.166) .433
------- ------- ------- ------- -------
Unit Value at end of year . . . . . . . . . . . . . . . . . . $15.510 $11.763 $ 9.668 $ 7.120 $ 7.194
======= ======= ======= ======= =======
SIGNIFICANT RATIOS AND ADDITIONAL DATA
Net increase (decrease) in unit value . . . . . . . . . . . . $ 3.75 $ 2.10 2.55 (.07) .53
Ratio of operating expenses to average net assets . . . . . . 1.45% 1.45% 1.45% 1.41% 1.33%
Ratio of net investment income to average net assets . . . . .24% .60% 1.02% 1.30% 1.40%
Number of units outstanding at end of year (thousands) . . . 15,194 16,554 17,896 19,557 21,841
Portfolio turnover rate . . . . . . . . . . . . . . . . . . . 64% 85% 96% 103% 81%
Average Commission Rate Paid* . . . . . . . . . . . . . . . . $ .051 $ .047 -- -- --
<CAPTION>
CONTRACTS ISSUED ON OR AFTER MAY 16, 1983.
SELECTED PER UNIT DATA 1992 1991 1990 1989 1988
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total investment income . . . . . . . . . . . . . . . . . . . $ .188 $ .198 $ .192 $ .191 $ .168
Operating expenses . . . . . . . . . . . . . . . . . . . . . . .098 .091 .079 .095 .071
------- ------- ------- ------- -------
Net investment income . . . . . . . . . . . . . . . . . . . . .090 .107 .113 .096 .097
Unit Value at beginning of year . . . . . . . . . . . . . . . 6.447 5.048 5.295 4.191 3.601
Net realized and change in unrealized gains (losses) . . . . (.030) 1.292 (.360) 1.008 .493
------- ------- ------- ------- -------
Unit Value at end of year . . . . . . . . . . . . . . . . . . $ 6.507 $ 6.447 $ 5.048 $ 5.295 $ 4.191
======= ======= ======= ======= =======
SIGNIFICANT RATIOS AND ADDITIONAL DATA
Net increase (decrease) in unit value . . . . . . . . . . . . .06 1.40 (.25) 1.10 .59
Ratio of operating expenses to average net assets . . . . . . 1.58% 1.58% 1.57% 1.58% 1.58%
Ratio of net investment income to average net assets . . . . 1.43% 1.86% 2.25% 2.33% 2.60%
Number of units outstanding at end of year (thousands) . . . 29,661 26,235 19,634 15,707 12,173
Portfolio turnover rate . . . . . . . . . . . . . . . . . . . 189% 319% 54% 27% 38%
Average Commission Rate Paid* . . . . . . . . . . . . . . . . -- -- -- -- --
<CAPTION>
CONTRACTS ISSUED PRIOR TO MAY 16, 1983.
SELECTED PER UNIT DATA 1992 1991 1990 1989 1988
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total investment income . . . . . . . . . . . . . . . . . . . $ .192 $ .201 $ .199 $ .191 $ .168
Operating expenses . . . . . . . . . . . . . . . . . . . . . . .085 .077 .069 .066 .053
------- ------- ------- ------- -------
Net investment income . . . . . . . . . . . . . . . . . . . . .107 .124 .130 .125 .115
Unit Value at beginning of year . . . . . . . . . . . . . . . 6.587 5.145 5.383 4.250 3.642
Net realized and change in unrealized gains (losses) . . . . (.030) 1.318 (.368) 1.008 .493
------- ------- ------- ------- -------
Unit Value at end of year . . . . . . . . . . . . . . . . . . $ 6.664 $ 6.587 $ 5.145 $ 5.383 $ 4.250
======= ======= ======= ======= =======
SIGNIFICANT RATIOS AND ADDITIONAL DATA
Net increase (decrease) in unit value . . . . . . . . . . . . .08 1.44 (.24) 1.13 .61
Ratio of operating expenses to average net assets . . . . . . 1.33% 1.33% 1.33% 1.33% 1.33%
Ratio of net investment income to average net assets . . . . 1.67% 2.11% 2.50% 2.56% 2.85%
Number of units outstanding at end of year (thousands) . . . 22,516 24,868 28,053 31,326 35,633
Portfolio turnover rate . . . . . . . . . . . . . . . . . . . 189% 319% 54% 27% 38%
Average Commission Rate Paid* . . . . . . . . . . . . . . . . -- -- -- -- --
</TABLE>
* The Average Commission Rate Paid is required for funds that have over 10%
in equities for which commissions are paid. This information is required
for funds with fiscal year ends on or after September 30, 1996; earlier
compliance is allowed.
C-1
<PAGE> 75
CONDENSED FINANCIAL INFORMATION
THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES
Per Unit Data for an Accumulation and Annuity
Unit outstanding throughout each year
The following information on per unit data has been audited by Coopers &
Lybrand L.L.P., independent accountants. Their report on the per unit data for
each of the five years in the period ended December 31, 1997 is contained in
the Separate Account's Annual Report which should be read along with this
information and which is incorporated by reference into the SAI. The
consolidated financial statements of The Travelers Insurance Company and
Subsidiaries are contained in the SAI.
<TABLE>
<CAPTION>
CONTRACTS ISSUED ON OR AFTER MAY 16, 1983.
SELECTED PER UNIT DATA 1997 1996 1995 1994 1993
-------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total investment income . . . . . . . . . . . . . . . . . $ .342 $ .368 $ .319 $ .310 $ .299
Operating expenses . . . . . . . . . . . . . . . . . . . . .082 .078 .073 .069 .067
--------- --------- --------- --------- --------- -
Net investment income . . . . . . . . . . . . . . . . . . .260 .290 .246 .241 .232
Unit Value at beginning of year . . . . . . . . . . . . . 5.060 4.894 4.274 4.381 4.052
Net realized and change in unrealized gains (losses) . .073 (.124) .374 (.348) .097
--------- -------- --------- -------- --------- -
Unit Value at end of year . . . . . . . . . . . . . . . . . $ 5.393 $ 5.060 $ 4.894 $ 4.274 $ 4.381
====== ====== ====== ====== ======
SIGNIFICANT RATIOS AND ADDITIONAL DATA
Net increase (decrease) in unit value . . . . . . . . . . $ .33 $ .17 .62 (.11) .33
Ratio of operating expenses to average net assets . . . . 1.57% 1.57% 1.57% 1.57% 1.57%
Ratio of net investment income to average net assets . . 5.00% 5.87% 5.29% 5.62% 5.41%
Number of units outstanding at end of year (thousands) . 21,521 24,804 27,066 27,033 28,472
Portfolio turnover rate . . . . . . . . . . . . . . . . . 196% 176% 138% 27% 24%
<CAPTION>
CONTRACTS ISSUED ON OR AFTER MAY 16, 1983.
SELECTED PER UNIT DATA 1992 * 1991 1990 1989 1988
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total investment income . . . . . . . . . . . . . . . . . $ .311 $ .299 $ .277 $ .270 $ .259
Operating expenses . . . . . . . . . . . . . . . . . . . . .061 .056 .048 .047 .046
-------- --------- --------- --------- ---------
Net investment income . . . . . . . . . . . . . . . . . . .250 .243 .229 .223 .213
Unit Value at beginning of year . . . . . . . . . . . . . 3.799 3.357 3.129 2.852 2.697
Net realized and change in unrealized gains (losses) . .003 .199 (.001) .054 (.058)
-------- --------- -------- --------- ---------
Unit Value at end of year . . . . . . . . . . . . . . . . . $ 4.052 $ 3.799 $ 3.357 $ 3.129 $ 2.852
====== ====== ====== ====== ======
SIGNIFICANT RATIOS AND ADDITIONAL DATA
Net increase (decrease) in unit value . . . . . . . . . . .25 .44 .23 .28 .16
Ratio of operating expenses to average net assets . . . . 1.58% 1.57% 1.57% 1.57% 1.58%
Ratio of net investment income to average net assets . . 6.38% 6.84% 7.06% 7.44% 7.67%
Number of units outstanding at end of year (thousands) . 20,250 17,211 14,245 13,135 9,457
Portfolio turnover rate . . . . . . . . . . . . . . . . . 23% 21% 41% 33% 17%
<CAPTION>
CONTRACTS ISSUED PRIOR TO MAY 16, 1983.
SELECTED PER UNIT DATA 1997 1996 1995 1994 1993
------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total investment income . . . . . . . . . . . . . . . . . $ .353 $ .379 $ .328 $ .318 $ .306
Operating expenses . . . . . . . . . . . . . . . . . . . . .071 .067 .063 .059 .058
--------- --------- --------- --------- ---------
Net investment income . . . . . . . . . . . . . . . . . . .282 .312 .265 .259 .248
Unit Value at beginning of year . . . . . . . . . . . . . 5.234 5.050 4.400 4.498 4.150
Net realized and change in unrealized gains (losses) . . . .077 (.128) .385 (.357) .100
--------- --------- --------- --------- ---------
Unit Value at end of year . . . . . . . . . . . . . . . . $ 5.593 $5.234 $ 5.050 $ 4.400 $ 4.498
====== ===== ====== ====== ======
SIGNIFICANT RATIOS AND ADDITIONAL DATA
Net increase (decrease) in unit value . . . . . . . . . . $ .36 $ .18 .65 (.10) .35
Ratio of operating expenses to average net assets . . . . 1.33% 1.33% 1.33% 1.33% 1.33%
Ratio of net investment income to average net assets . . . 5.25% 6.12% 5.54% 5.87% 5.66%
Number of units outstanding at end of year (thousands) . 7,683 8,549 9,325 10,694 12,489
Portfolio turnover rate . . . . . . . . . . . . . . . . . 196% 176% 138% 27% 24%
<CAPTION>
CONTRACTS ISSUED PRIOR TO MAY 16, 1983.
SELECTED PER UNIT DATA 1992 * 1991 1990 1989 1988
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total investment income . . . . . . . . . . . . . . . . . $ .317 $ .304 $ .281 $ .270 $ .259
Operating expenses . . . . . . . . . . . . . . . . . . . . .050 .048 .040 .035 .037
-------- --------- --------- --------- ---------
Net investment income . . . . . . . . . . . . . . . . . . .267 .256 .241 .235 .222
Unit Value at beginning of year . . . . . . . . . . . . . 3.880 3.421 3.181 2.892 2.728
Net realized and change in unrealized gains (losses) . . . .003 .203 (.001) .054 (.058)
-------- -------- -------- --------- ---------
Unit Value at end of year . . . . . . . . . . . . . . . . $ 4.150 $ 3.880 $ 3.421 $ 3.181 $ 2.892
====== ====== ====== ====== ======
SIGNIFICANT RATIOS AND ADDITIONAL DATA
Net increase (decrease) in unit value . . . . . . . . . . .27 .46 .24 29 .16
Ratio of operating expenses to average net assets . . . . 1.33% 1.33% 1.33% 1.33% 1.33%
Ratio of net investment income to average net assets . . . 6.61% 7.09% 7.31% 7.60% 7.82%
Number of units outstanding at end of year (thousands) . 13,416 14,629 16,341 18,248 21,124
Portfolio turnover rate . . . . . . . . . . . . . . . . . 23% 21% 41% 33% 17%
</TABLE>
* On May 1, 1990, TAMIC replaced TIMCO as the investment adviser for Account
QB.
C-2
<PAGE> 76
DESCRIPTION OF THE TRAVELERS AND THE SEPARATE ACCOUNTS
THE INSURANCE COMPANY
The Travelers Insurance Company (the "Company" or "The Travelers") is
a stock insurance company chartered in 1864 in Connecticut and continuously
engaged in the insurance business since that time. It is licensed to conduct
life insurance business in all states of the United States, the District of
Columbia, Puerto Rico, Guam, the U.S. and British Virgin Islands, and the
Bahamas. The Company is an indirect wholly owned subsidiary of Travelers Group
Inc., a financial services holding company. The Company's Home Office is
located at One Tower Square, Hartford, Connecticut 06183.
THE SEPARATE ACCOUNTS
Each of the Separate Accounts available under the Variable Annuity
contracts described in this Prospectus meets the definition of a separate
account under the federal securities laws, and will comply with the provisions
of the 1940 Act. Additionally, the operations of each of the Separate Accounts
are subject to the provisions of Section 38a-433 of the Connecticut General
Statutes which authorizes the Connecticut Insurance Commissioner to adopt
regulations under it. Section 38a-433 contains no restrictions on investments
of the Separate Accounts, and the Commissioner has adopted no regulations under
the Section that affect the Separate Accounts.
Account GIS was established on September 22, 1967, and Account QB was
established on July 29, 1974. Each of these Separate Accounts, although an
integral part of the Company, is registered with the SEC as a diversified,
open-end management investment company under the 1940 Act. The assets of
Accounts GIS and QB are invested directly in securities (such as stocks, bonds
or money market instruments) which are compatible with the stated investment
policies of each account.
GENERAL
Under Connecticut law, the assets of the Separate Accounts will be
held for the exclusive benefit of the owners of, and the persons entitled to
payment under, the Variable Annuity contracts offered by this Prospectus and
under all other contracts which provide for accumulated values or dollar amount
payments to reflect investment results of the Separate Accounts. The assets in
the Separate Accounts are not chargeable with liabilities arising out of any
other business which the Company may conduct. The obligations arising under
the Variable Annuity contracts are obligations of the Company.
INVESTMENT ALTERNATIVES
The Investment Alternatives available in connection with the Variable
Annuity Contracts described herein each have different investment objectives
and fundamental investment policies, as are set forth below. Neither the
investment objectives nor the fundamental investment policies of the Separate
Account can be changed without a vote of a majority of the outstanding voting
securities of the Separate Account, as defined in the 1940 Act.
THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT
FOR VARIABLE ANNUITIES (ACCOUNT GIS)
INVESTMENT OBJECTIVE
The basic investment objective of Account GIS is the selection of
investments from the point of view of an investor concerned primarily with
long-term accumulation of principal through capital appreciation and retention
of net investment income. This principal objective does not preclude the
realization of short-term gains when conditions would suggest the long-term
goal is accomplished by such short-term transactions. The assets of Account
GIS generally will be fully invested in a portfolio of equity securities,
mainly common stocks, spread over industries and companies. However, when it
is determined that investments of other types may be advantageous on
1
<PAGE> 77
the basis of combined considerations of risk, income and appreciation,
investments may be made in bonds, notes or other evidence of indebtedness,
issued publicly or placed privately, of a type customarily purchased for
investment by institutional investors, including United States government
securities. These investments in other-than-equity securities generally would
not have a prospect of long-term appreciation, and are temporary for defensive
purposes. Such investments may or may not be convertible into stock or be
accompanied by stock purchase options or warrants for the purchase of stock.
Account GIS will use exchange-traded stock index futures contracts as
a hedge to protect against changes in stock prices. A stock index futures
contract is a contractual obligation to buy or sell a specified index of stocks
at a future date for a fixed price. Stock index futures may also be used to
hedge cash inflows to gain market exposure until the cash is invested in
specific common stocks. Account GIS will not purchase or sell futures
contracts for which the aggregate initial margin exceeds five percent (5%) of
the fair market value of its assets, after taking into account unrealized
profits and losses on any such contracts which it has entered into. When a
futures contract is purchased, Account GIS will set aside, in an identifiable
manner, an amount of cash and cash equivalents equal to the total market value
of the futures contract, less the amount of the initial margin.
All stock index futures will be traded on exchanges that are licensed
and regulated by the Commodity Futures Trading Commission ("CFTC"). To ensure
that its futures transactions meet CFTC standards, Account GIS will enter into
futures contracts for hedging purposes only (i.e., for the purposes or with the
intent specified in CFTC regulations and interpretations, subject to the
requirements of the SEC). Account GIS expects that risk management
transactions involving futures contracts will not impact more than thirty
percent (30%) of its assets at any one time. For a more detailed discussion of
financial futures contracts and associated risks, please see the SAI.
Account GIS may write covered call options on portfolio securities for
which call options are available and which are listed on a national securities
exchange. It may also purchase index or individual equity call options as an
alternative to holding stocks or stock index futures, or purchase index or
individual equity put options as a defensive measure. For a detailed
discussion of options contracts and associated risks, please see the SAI.
Changes in investments may be made from time to time to take into
account changes in the outlook for particular industries or companies. The
investments of Account GIS will not, however, be concentrated in any one
industry; that is, no more than twenty-five percent (25%) of the value of
Account GIS's assets will be invested in any one industry. While Account GIS
may occasionally invest in foreign securities, it is not anticipated that such
foreign securities will, at any time, account for more than ten percent (10%)
of the investment portfolio.
The assets of Account GIS will be kept fully invested, except that (a)
sufficient cash may be kept on hand reasonably to provide for variable annuity
contract obligations, and (b) reasonable amounts of cash, United States
government or other liquid securities, such as short-term bills and notes, may
be held for limited periods, pending investment in accordance with Account
GIS's investment policies.
It must be recognized that there are risks inherent in the ownership
of any security. The investment experience on equity investments over time
will tend to reflect levels of stock market prices and dividend payouts. Both
are affected by diverse factors, including not only business conditions and
investor confidence in the economy, but current conditions in a particular
industry or company. The yield on a common stock is not contractually
determined. Equity securities are subject to financial risks relating to the
earning stability and overall financial soundness of an issue. They are also
subject to market risks relating to the effect of general changes in the
securities market on the price of a security.
FUNDAMENTAL INVESTMENT POLICIES
The fundamental investment policies of Account GIS permit it to:
1. invest up to 5% of its assets in the securities of any one issuer
(exclusive of securities issued or guaranteed by the United States
government, its agencies or instrumentalities);
2. borrow from banks in amounts of up to 5% of its assets, but only
for emergency purposes;
2
<PAGE> 78
3. purchase interests in real estate represented by securities for
which there is an established market;
4. make loans through the acquisition of a portion of a privately
placed issue of bonds, debentures or other evidences of
indebtedness of a type customarily purchased by institutional
investors;
5. acquire up to 10% of the voting securities of any one issuer (it
is the present practice of Account GIS not to exceed 5% of the
voting securities of any one issuer);
6. make purchases on margin in the form of short-term credits which
are necessary for the clearance of transactions; and place up to
5% of its net asset value in total margin deposits for positions
in futures contracts; and
7. invest up to 5% of its assets in restricted securities (securities
which may not be publicly offered without registration under the
Securities Act of 1933).
THE TRAVELERS QUALITY BOND ACCOUNT
FOR VARIABLE ANNUITIES (ACCOUNT QB)
INVESTMENT OBJECTIVE
The basic investment objective of Account QB is the selection of
investments from the point of view of an investor concerned primarily with
current income, moderate capital volatility and total return.
It is contemplated that the assets of Account QB will be invested in
money market obligations, including, but not limited to, Treasury bills,
repurchase agreements, commercial paper, bank certificates of deposit and
bankers' acceptances, and in publicly traded debt securities, including bonds,
notes, debentures, equipment trust certificates and short-term instruments.
These securities may carry certain equity features such as conversion or
exchange rights or warrants for the acquisition of stocks of the same or
different issuer, or participations based on revenues, sales or profits. It is
currently anticipated that the market value-weighted average maturity of the
portfolio will not exceed five years. (In the case of mortgage-backed
securities, the estimated average life of cash flows will be used instead of
average maturity.) Investment in longer term obligations may be made if the
Board of Managers concludes that the investment yields justify a longer term
commitment. The investments of Account QB will not be concentrated in any one
industry; that is, no more than twenty-five percent (25%) of the value of
Account QB's assets will be invested in any one industry.
The portfolio will be actively managed and investments may be sold
prior to maturity to the extent that this action is considered advantageous in
light of factors such as market conditions or brokerage costs. While the
investments of Account QB are generally not listed securities, there are firms
which make markets in the type of debt instruments that Account QB holds. No
problems of salability are anticipated with regard to the investments of
Account QB.
Account QB may from time to time purchase new-issue government or
agency securities on a "when-issued" or "to-be-announced" ("TBA") basis
("when-issued securities"). The prices of such securities will be fixed at the
time the commitment to purchase is made, and may be expressed in either dollar
price or yield maintenance terms. Delivery and payment may be at a future date
beyond customary settlement time. It is the customary practice of Account QB
to make when-issued or TBA purchases for settlement no more than 90 days beyond
the commitment date.
The commitment to purchase when-issued securities may be viewed as a
senior security, and will be marked to market and reflected in Account QB's
Accumulation Unit Value daily from the commitment date. While it is TAMIC's
intention to take physical delivery of these securities, offsetting
transactions may be made prior to settlement, if it is advantageous to do so.
Account QB does not make payment or begin to accrue interest on these
securities until settlement date. In order to invest its assets pending
settlement, Account QB will normally invest in short-term money market
instruments and other securities maturing no later than the scheduled
settlement date.
3
<PAGE> 79
Account QB does not intend to purchase when-issued securities for
speculative or "leverage" purposes. Consistent with Section 18 of the 1940 Act
and the General Policy Statement of the SEC thereunder, when Account QB commits
to purchase a when-issued security, it will identify and place in a segregated
account high grade money market instruments and other liquid securities equal
in value to the purchase cost of the when-issued securities.
TAMIC believes that purchasing securities in this manner will be
advantageous to Account QB. However, this practice does entail certain risks,
namely the default of the counterparty on its obligation to deliver the
security as scheduled. In this event, Account QB would endure a loss (gain)
equal to the price appreciation (depreciation) in value from the commitment
date. TAMIC employs a rigorous credit quality procedure in determining the
counterparties with which it will deal in when-issued securities and, in some
circumstances, will require the counterparty to post cash or some other form of
security as margin to protect the value of its delivery obligation pending
settlement.
Account QB may also purchase and sell interest rate futures contracts
to hedge against changes in interest rates that might otherwise have an adverse
effect upon the value of Account QB's securities. Hedging by use of interest
rate futures seeks to establish, with more certainty than would otherwise be
possible, the effective rate of return on portfolio securities. When hedging
is successful, any depreciation in the value of portfolio securities will
substantially be offset by appreciation in the value of the futures position.
Conversely, any appreciation in the value of the portfolio securities will
substantially be offset by depreciation in the value of the futures position.
Account QB will not purchase or sell futures contracts for which the
aggregate initial margin exceeds five percent (5%) of the fair market value of
its assets, after taking into account unrealized profits and losses on any such
contracts which it has entered into. At no time will Account QB's transactions
in futures contracts be employed for speculative purposes. When a futures
contract is purchased, Account QB will set aside, in an identifiable manner, an
amount of cash and cash equivalents equal to the total market value of the
futures contract, less the amount of the initial margin.
All interest rate futures contracts will be traded on exchanges that
are licensed and regulated by the Commodity Futures Trading Commission
("CFTC"). To ensure that its futures transactions meet CFTC standards, Account
QB will enter into futures contracts for hedging purposes only (i.e., for the
purposes or with the intent specified in CFTC regulations and interpretations,
subject to the requirements of the SEC). For a more detailed discussion of
financial futures contracts and associated risks, please see the SAI.
The Board of Managers will weigh considerations of risks, yield and
ratings in implementing Account QB's fundamental investment policies. There
are no specific criteria with regard to quality or ratings of the investments
of Account QB, but it is anticipated that they will be of investment grade or
its equivalent as determined in good faith by the Board of Managers. There may
or may not be more risk in investing in debt instruments where there are no
specific criteria with regard to quality or ratings of the investments.
The yield on debt instruments over a period of time should reflect
prevailing interest rates, which depend on a number of factors, including
government action in the capital markets, government fiscal and monetary
policy, needs of businesses for capital goods for expansion, and investor
expectations as to future inflation. The yield on a particular debt instrument
is also affected by the risk that the issuer will be unable to pay principal
and interest.
FUNDAMENTAL INVESTMENT POLICIES
The fundamental investment policies of Account QB permit it to:
1. invest up to 15% of the value of its assets in the securities of
any one issuer (exclusive of obligations of the United States
government and its instrumentalities, for which there is no
limit);
2. borrow from banks in amounts of up to 5% of its assets, but only
for emergency purposes;
3. purchase interests in real estate represented by securities for
which there is an established market;
4
<PAGE> 80
4. make loans through the acquisition of a portion of a privately
placed issue of bonds, debentures or other evidences of
indebtedness of a type customarily purchased by institutional
investors;
5. acquire up to 10% of the voting securities of any one issuer (it
is the present practice of Account QB not to exceed 5% of the
voting securities of any one issuer); and
6. make purchases on margin in the form of short-term credits which
are necessary for the clearance of transactions; and place up to
5% of its net asset value in total margin deposits for positions
in futures contracts.
VOTING RIGHTS
Owners of the Variable Annuity contracts participating in Accounts GIS
and QB will be entitled to vote at their meetings on (i) any change in the
fundamental investment policies of or other policies related to the accounts
requiring the Owners' approval; (ii) amendment of the investment advisory
agreements; (iii) election of the members of the Board of Managers of the
accounts; (iv) ratification of the selection of an independent public
accountant for the accounts; (v) any other matters which, in the future, under
the 1940 Act require the Owners' approval; and (vi) any other business which
may properly come before the meeting.
The number of votes which an Owner or a Participant may cast,
including fractional votes, shall be determined as of the date to be chosen by
the Board of Managers within 75 days of the date of the meeting, and at least
20 days' written notice of the meeting will be given.
The number of votes which an Owner may cast in the accumulation period
is equal to the number of Accumulation Units credited to the account under the
contract. During the annuity period, the Owner may cast the number of votes
equal to (i) the reserve related to the contract divided by (ii) the value of
an Accumulation Unit. During the annuity period, a Participant's voting rights
will decline as the reserve for the contract declines. Accounts GIS and QB are
also used to fund certain other Variable Annuity contracts; votes attributable
to such other annuities are computed in an analogous manner.
The Participant's voting rights are set forth in the plan and the
plans are qualified under Section 401(a) or 403(b) of the Code (Pension and
Profit-Sharing). The Company will provide proxy materials to the Owner or will
mail such materials directly to the Participants if requested by the Owner.
Upon the death of the Participant, all voting rights will vest in the
beneficiary of the Variable Annuity contract.
MANAGEMENT
The investments and administration of Accounts GIS and QB are under
the direction of the Board of Managers. Subject to the authority of the Board
of Managers, Travelers Asset Management International Corporation ("TAMIC")
furnishes investment management and advisory services to Account GIS and
Account QB. The Travelers Investment Management Company ("TIMCO") provides
sub-advisory services in connection with the day-to-day operations of Account
GIS, pursuant to a written agreement with TAMIC. Additionally, the Board of
Managers for each managed Separate Account annually selects an independent
public accountant, reviews the terms of the management and investment advisory
agreements, recommends any changes in the fundamental investment policies (and
submits any such changes to Contract Owners at the annual meeting), and takes
any other actions necessary in connection with the operation and management of
the managed Separate Accounts.
TAMIC, an indirect wholly owned subsidiary of Travelers Group Inc., is
a registered investment adviser which has provided investment advisory services
since its incorporation in 1978. TAMIC's principal offices are located at One
Tower Square, Hartford, Connecticut 06183. In addition to providing investment
advice to Account QB, TAMIC acts as investment adviser for other investment
companies used to fund variable annuity and variable life insurance products
offered by the Company and its affiliates, as well as for individual and pooled
pension and profit-sharing accounts, and domestic investment companies
affiliated with The Travelers, and nonaffiliated companies.
5
<PAGE> 81
TIMCO is a registered investment adviser which has provided investment
advisory services since its incorporation in 1967. TIMCO, a subsidiary of
Smith Barney Holdings Inc., which is a wholly owned subsidiary of Travelers
Group Inc., is located at One Tower Square, Hartford, Connecticut 06183. In
addition to providing investment advice to Account GIS, TIMCO acts as
investment adviser and subadviser for other investment companies used to fund
variable annuity and variable life insurance products, as well as for
individual and pooled pension and profit-sharing accounts, and affiliated
companies of the Company.
CHARGES AND DEDUCTIONS
DEDUCTIONS FROM PURCHASE PAYMENTS
Prior to the sales charge deduction from the first Purchase Payments
in a Contract Year, an annual administrative charge is deducted. (See "Annual
Contract Charge,") A sales charge equal to 2% (2.04% of the amount invested)
of the gross Purchase Payment is deducted from the Purchase Payments. The
sales charge will be reduced by 2% (a maximum dollar amount of $1.00) of any
applicable annual contract charge. Maximum and minimum payments which may be
made on behalf of any Participant are set forth under the terms of each plan,
and in accordance with the administrative rules of the Company.
An Owner of a group Variable Annuity issued prior to the date of this
Prospectus, and any Owner of an individual Variable Annuity funded in either
Account GIS or Account QB, may exchange their old Variable Annuity for a
Variable Annuity described in this Prospectus, provided the Owner is otherwise
eligible for the purchase. The exchange will be executed at net asset value
(i.e., with no sales or transfer charges).
An Owner of a Flexible Premium Annuity Contract issued by the Company
may transfer the Cash Surrender Value accumulated and available to the Owner
under that contract to a Variable Annuity contract described in this
Prospectus, provided the Owner is otherwise eligible.
If a surrender charge under the Flexible Premium Annuity Contract is
applicable to the Cash Value transferred, neither the sales charge normally
applicable under the contract described in this Prospectus nor any transfer
charge will be applied. If no surrender charge is applicable under the
Flexible Premium Annuity Contract, there will be no transfer charge, but the
sales charge normally applicable under the contract described in this
Prospectus will be applied.
PREMIUM TAX
Certain state and local governments impose premium taxes. These taxes
currently range from 0.5% to 5.0% depending upon jurisdiction. The Company, in
its sole discretion and in compliance with any applicable state law, will
determine the method used to recover premium tax expenses incurred. The
Company will deduct any applicable premium taxes from the Contract Value either
upon death, surrender, annuitization, or at the time Purchase Payments are made
to the Contract, but no earlier than when the Company has a tax liability under
state law.
ANNUAL CONTRACT CHARGE
There is a $50 annual contract charge assessed against each group
contract. The annual contract charge will be deducted from the first gross
Purchase Payment made in each Contract Year. If no gross Purchase Payment is
made in a Contract Year, there is no annual contract charge for that year. The
annual contract charge is set at a level no higher than the actual cost of
administrative expenses.
INVESTMENT ADVISORY AND SUB-ADVISORY FEES
TAMIC furnishes investment management and advisory services to Account
GIS and Account QB, respectively, according to the terms of written agreements.
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TAMIC receives an amount equivalent on an annual basis to 0.3233% of
the average daily net assets of Account QB. For investment advisory services
rendered to Account GIS, TAMIC receives an amount equivalent to the following:
<TABLE>
<CAPTION>
Annual Aggregate Net Asset
------ -------------------
Management Fee Value of the Account
--------------- --------------------
<S> <C> <C>
0.65% of the first $ 500,000,000, plus
0.55% of the next $ 500,000,000, plus
0.50% of the next $ 500,000,000, plus
0.45% of the next $ 500,000,000, plus
0.40% of amounts over $2,000,000,000
</TABLE>
The advisory fees will be deducted on each valuation date.
TIMCO furnishes sub-advisory services to Account GIS pursuant to a
written agreement with TAMIC.
For furnishing investment Sub-Advisory Services to Account GIS, TIMCO
is paid by TAMIC an amount equivalent on an annual basis to the following:
<TABLE>
<CAPTION>
Annual Aggregate Net Asset
------ -------------------
Sub-Advisory Fee Value of the Account
---------------- --------------------
<S> <C> <C>
0.45% of the first $ 700,000,000, plus
0.275% of the next $ 300,000,000, plus
0.25% of the next $ 500,000,000, plus
0.225% of the next $ 500,000,000, plus
0.20% of amounts over $2,000,000,000
</TABLE>
These fees are calculated daily and paid monthly.
MORTALITY AND EXPENSE RISKS
While Annuity Payments will reflect the investment performance of the
Separate Accounts, they will not be affected by changes in actual mortality
experience nor will they be affected by any excess in the Company expenses over
expense deductions provided for in the contract.
The Company is assuming the risk that deductions provided for in the
Variable Annuity contract for sales and administrative expenses and the minimum
death benefit prior to retirement may be insufficient to cover the actual cost
of such items.
The mortality risk assumed by the Company under the Variable Annuity
contract arises from the Company's obligation to continue to make monthly
Annuity Payments, determined in accordance with the annuity tables and other
provisions contained in the contract, to each Annuitant regardless of how long
he or she lives and regardless of how long all Annuitants as a group live.
This assures an Annuitant that neither his own longevity nor an improvement in
life expectancy generally will have any adverse effect on the monthly Annuity
Payments he or she will receive under the contract, and relieves the Annuitant
from the risk that he or she will outlive the funds which have been accumulated
for retirement.
For assuming these risks, the Company makes a charge of 1.0017% on an
annual basis of the value of the Separate Account, which charge consists of
0.8500% for mortality risks and 0.1517% for expense risks. If this charge is
insufficient to cover the actual cost of these mortality and expense risks, the
loss will fall on the Company. Conversely, if the charge proves more than
sufficient, any excess will be profit to the Company. All deductions and
annuity rates are subject to modification with respect to Contributions made on
behalf of a Participant in any one year in excess of double the first year's
Contribution, and, in the case of deductions for investment advisory
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<PAGE> 83
services, subject to approval of a modification of the investment advisory
agreement by Owners casting a majority of the votes entitled to be cast.
CHANGE OF CONTRACT
The Company may, at any time, make any changes in the contract,
including retroactive changes, to the extent that the change is required to
meet the requirements of any federal law or regulation to which the Company is
subject.
Except as provided in the paragraph immediately above, no change may
be made in the contract before the fifth anniversary of the Contract Date, and
in no event will changes be made with respect to payments being made by the
Company under any Annuity Option which has commenced prior to the date of
change. On and after the fifth anniversary of the Contract Date, the Company
reserves the right to change the deductions from Premium Payments, the
Termination Amount (see "Termination by the Company and Termination Amount."),
the calculation of the net investment rate and the Unit Value, and the Annuity
Tables. Any change in the annuity tables will be applicable only to premiums
received under the contract after the change. The ability to make such change
lessens the value of mortality and expense guarantees. Other changes
(including changes to the annual contract charge) may be applicable either to
all Owner's Accounts and Individual Accounts under the contract, to only the
Owner's Accounts and Individual Accounts established after the change, or to
only premiums received under the contract after the date of change as the
Company declares at the time of change. The Company will give notice to the
Owner at least 90 days before the date the change is to take effect.
THE VARIABLE ANNUITIES
The group Variable Annuities described in this Prospectus are both
insurance products and securities. As insurance products, they are subject to
the insurance laws and regulations of each state. The underlying product is an
annuity under which Purchase Payments are paid to the Company and credited to
the Owner's contract to accumulate until retirement.
The following brief description of the key features of the Variable
Annuity is subject to the specific terms of the contract itself. Reference
should also be made to the Special Terms.
GENERAL BENEFIT DESCRIPTION
Under the Automatic Option, the Company will automatically begin
paying Annuity Payments to the Owner or Participant, as provided in the plan,
on the Participant's Annuity Commencement Date, if the Participant is then
living. (See "Automatic Option.") The Owner or the Participant, as provided in
the plan, may choose instead a number of alternative arrangements for benefit
payments. If the Participant dies before a payout begins, the Company will pay
to the Owner or beneficiary, as provided in the plan, the Participant's
Interest. The Participant's Interest will be considered the Cash Value of the
Participant's Individual Account unless the Company is otherwise instructed by
the Owner.
TERMINATION BY THE COMPANY AND TERMINATION AMOUNT
No Purchase Payments after the first are required to keep the contract
in effect. However, if the Cash Value in a Participant's Individual Account is
less than $500 and no payment has been applied to the Participant's Individual
Account for at least three years, the Company reserves the right to terminate
the Participant's Individual Account and move the Cash Value of that
Participant's Individual Account to the Owner's Account. If the plan does not
allow for this movement to the Owner's Account, the Company will pay the Cash
Value, adjusted for any applicable premium tax, to the Owner, or to that
Participant at the direction of the Owner.
The Company reserves the right to terminate the contract on any Valuation Date
if there is no Cash Value in any Participant's Individual Account and if the
Cash Value of the Owner's Account, if any, is less than $500 and no
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<PAGE> 84
payment has been made for at least three years. If the contract is terminated,
the Company will pay to the Owner the Cash Value of the Owner's Account, if
any, adjusted for any applicable premium tax.
Termination will not occur until 31 days after the Company has mailed notice of
termination to the Owner or the Participant, as provided in the plan, at the
last known address and to any assignee of record.
BENEFIT IN THE EVENT OF TERMINATION OF A PARTICIPANT, THE PLAN OR THE CONTRACT
In the event that, prior to the Annuity Commencement Date, the
Participant terminates participation in the plan, the plan is terminated, or
the contract is terminated, the Owner or that Participant, as provided in the
plan with respect to that Participant's Interest, may elect:
(a) if that Participant is at least 50 years of age, to have that
Participant's Interest applied to provide an Annuity or Income
Payment;
(b) if the contract is continued, to have that Participant's Interest
applied to continue as a paid-up deferred annuity for that
Participant;
(c) to have the Owner or that Participant, as provided in the plan,
receive that Participant's Interest in cash;
(d) to apply that Participant's Interest under the group contract, on
the basis set forth by the Company at the time of the exchange
with the same Separate Accounts as are available under the group
contract; or
(e) if that Participant becomes a Participant under another group
contract of the same type which is in force with the Company, to
transfer that Participant's Interest to that group contract.
If the contract is continued, any Cash Value to which a terminating
Participant is not entitled under the plan will be moved to the Owner's
Account. If the contract is terminated, the Owner will receive the Cash Value
of the Owner's Account.
AUTOMATIC BENEFIT--In the event of termination, unless otherwise
provided in the plan, a Participant's Interest will (1) if the contract is
continued, be applied to continue as a paid-up deferred annuity in accordance
with option (b), or (2) if the contract is terminated, be paid in cash to the
Owner or that Participant as provided in the plan, in accordance with option
(c).
ANNUITY PAYMENTS--Termination of this contract or the plan will not
affect payments being made under any Annuity Option which has commenced prior
to the date of termination.
SUSPENSION OF PAYMENTS
If a national stock exchange is closed (except for holidays or
weekends), or trading is restricted due to an existing emergency as defined by
the SEC so that disposal of the Separate Account's investments or determination
of its net asset value is not reasonably practicable, or the SEC has ordered
that the right of redemption (surrender) be suspended for the protection of
Contract Owners, the Company may postpone all procedures (including making
Annuity Payments) which require valuation of Separate Accounts until the stock
exchange is reopened and trading is no longer restricted.
REQUIRED REPORTS
As often as required by law, but at least once in each Contract Year
before the due date of the first Annuity Payment, the Company will furnish a
report which will show the number of Accumulation Units credited to the
contract in each Investment Alternative and the corresponding Accumulation Unit
Value as of the date of the report. The Company will keep all records required
under federal or state laws.
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<PAGE> 85
FEDERAL AND STATE INCOME TAX WITHHOLDING
The federal tax law requires income tax withholding on distributions
from pension plans and annuity contracts, unless the Owner, Participant or
beneficiary elects not to have withholding apply. Some states also require
withholding from pension and annuity payments unless the Owner, Participant or
beneficiary elects not to have withholding apply. (For further information on
federal withholding, see "Federal Income Tax Withholding.")
ACCUMULATION PROVISIONS
APPLICATION OF PURCHASE PAYMENTS
The initial Purchase Payment is due and payable before the contract becomes
effective. Each Purchase Payment is payable at the Company's Home Office.
Each Purchase Payment will be applied by the Company to provide Accumulation
Units to the credit of an Owner's Account or an Individual Account, as directed
by or provided for in the plan. If the application for the contract is in good
order, the Company will apply the initial Purchase Payment within two business
days of receipt of the Purchase Payment in the mail at the Company's Home
Office. If the application is not in good order, the Company will attempt to
get it in good order within five business days. If it is not complete at the
end of this period, the Company will inform the applicant of the reason for the
delay and that the Purchase Payment will be returned immediately unless the
applicant specifically consents to the Company keeping the Purchase Payment
until the application is complete. Once the application is complete, the
Purchase Payment will be applied within two business days. All Purchase
Payments will initially be applied to the Owner's Account. Distributions to
Individual Accounts will be allowed in accordance with the terms of
"Distribution from One Account to Another Account."
NUMBER OF ACCUMULATION UNITS
The number of Accumulation Units to be credited to an Owner's Account
or an Individual Account in each Investment Alternative upon payment of a
Purchase Payment will be determined by dividing the Purchase Payment applied to
the Investment Alternative by the current Accumulation Unit Value of that
Investment Alternative.
ACCUMULATION UNIT VALUE
The dollar value of an Accumulation Unit for each Investment
Alternative was established at $1.00 at its inception. The value of an
Accumulation Unit on any Valuation Date is determined by multiplying the value
on the immediately preceding Valuation Date by the net investment factor for
the Valuation Period just ended. The value of an Accumulation Unit on any date
other than a Valuation Date will be equal to its value as of the next
succeeding Valuation Date. The value of an Accumulation Unit may increase or
decrease.
NET INVESTMENT RATE AND NET INVESTMENT FACTOR
Each Separate Account's net investment rate for any Valuation Period
is equal to the gross investment rate for that Separate Account less a
deduction of 0.0000363 for Account QB, and 0.0000398 for Account GIS for each
day in the Valuation Period. The gross investment rate for the Valuation
Period is equal to (i) the investment income and capital gains and losses,
whether realized or unrealized, on the assets of the Separate Account less a
deduction for any applicable taxes, including income taxes arising from income
and realized and unrealized capital gains of the Separate Account, divided by
(ii) the amount of the assets at the beginning of the Valuation Period.
At the present time, no federal taxes are deducted from the Separate
Accounts. (See "Federal Tax Considerations.") The gross investment rate for a
Separate Account may be either positive or negative.
The net investment factor for a Separate Account for any Valuation
Period is the sum of 1.000000 plus the net investment rate.
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<PAGE> 86
CASH VALUE
The Cash Value of an Owner's Account or an Individual Account on any
date will be equal to the sum of the accumulated values in the Separate
Accounts credited to that Owner's Account or Individual Account. The
accumulated value in a Separate Account is equal to the number of Accumulation
Units credited to an Owner's Account or an Individual Account in that Separate
Account, multiplied by the Accumulation Unit Value for that Separate Account.
CASH SURRENDER (REDEMPTION) OR WITHDRAWAL VALUE
Before the due date of a Participant's first Annuity Payment, upon
receipt of a written request in proper form (including the appropriate
countersignature of a Travelers agent), the Company will pay all or any portion
of that Participant's Interest, adjusted for any applicable premium tax, to the
Owner or the Participant, as provided in the plan. The Owner's Account may be
surrendered for cash as provided in the plan without the consent of any
Participant. The Company may defer payment of any Cash Surrender Value for a
period of not more than seven days after the request in proper form is received
in the mail at the Company's Home Office, but it is its intent to pay as soon
as possible.
The Cash Value may be more or less than the Purchase Payments paid
depending on the value of the contract at the time of surrender. (For the
federal income tax consequences of surrenders, see "Federal Tax
Considerations.")
The Cash Surrender Value of an Account is equal to the Cash Value less
any applicable surrender charge or premium taxes incurred. (See "Surrender
Charge.")
SURRENDER CHARGE
If the Owner terminates an account, in whole or in part, while the
contract remains in force, and the Cash Value of the terminated account is
either to be paid in cash to the Owner or a Participant or to be transferred to
any other funding vehicle, a surrender charge of 2% of any Cash Value
surrendered during the first five contract years will be deducted from the
terminating account. There is no surrender charge after the fifth contract
year. A surrender charge will not be assessed if the Cash Value is payable
under the terms of the Plan as a retirement benefit effected no earlier than
five years prior to the Participant's normal retirement date, or as a death or
disability benefit. The surrender charge will reimburse the Company only for
its actual administrative costs in establishing group contracts.
The use of a percentage surrender charge weighs disproportionately
upon Participants with large dollar amounts in their accounts, and who
surrender Cash Value during the first five contract years.
REINVESTMENT PRIVILEGE
If an Owner or a Participant has surrendered his or her account, in
whole or in part, in anticipation of investing in another tax-qualified
investment medium, and has not previously exercised a reinvestment privilege as
to any Separate Accounts described in this Prospectus, he or she may, if the
proceeds have not lost their tax-qualified status under the Code, reinvest the
proceeds in the Separate Accounts. Amounts will be reinvested at the
Accumulation Unit Value (without a sales charge) next calculated after the
payment is received in the mail by the Company. The reinvestment must be made
within 30 days after the date of the redemption. Before an Owner or a
Participant surrenders his or her account, in whole or in part, he or she
should consult his or her tax adviser to be sure that the proceeds will retain
their tax-qualified status.
TRANSFER BETWEEN SEPARATE ACCOUNTS
At any time up to 30 days before the due date of a Participant's first
Annuity Payment, upon written request to the Company by the Owner or the
Participant, as provided in the plan, all or any part of the Cash Value in an
Individual Account may be transferred from one Separate Account to any other
Separate Account described in this
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<PAGE> 87
Prospectus. The Company reserves the right to limit the number of transfers
between Separate Accounts, but will not limit transfers in an Owner's Account
or an Individual Account to less than one in any six-month period. The number
of Accumulation Units credited to the Separate Account from which the transfer
is made will be reduced. The reduction will be determined by dividing the
amount transferred by the Accumulation Unit Value for that Separate Account as
of the next valuation after the Company receives the request in the mail at its
Home Office. The number of Accumulation Units credited to the Separate Account
from which the transfer is made will be increased. The increase will be
determined by dividing the amount transferred, less the Separate Account
transfer charge, if any, by the Accumulation Unit Value for that Separate
Account as of the next valuation after the Company receives the written request
from the Owner or the Participant, as provided in the plan, at its Home Office.
There is currently no Separate Account transfer charge. Once a Participant's
Annuity Payments begin, no further transfers in the Participant's Individual
Account may be made between the Separate Accounts.
DISTRIBUTION FROM ONE ACCOUNT TO ANOTHER ACCOUNT
The Owner may, as provided in the plan, distribute Cash Value from the
Owner's Account to one or more Individual Accounts. There is currently no
account distribution charge.
No distribution will be allowed between Individual Accounts.
The Owner may, as required and provided in the plan, move Cash Value
from any or all Individual Accounts to the Owner's Account without a charge.
PAYOUT PROVISIONS
GENERAL
Annuity Payments for a particular Participant will ordinarily begin on
that Participant's Annuity Commencement Date as stated in the Participant's
Certificate. However, a later Annuity Commencement Date may be elected. This
Annuity Commencement Date must be before the Participant's 70th birthday,
unless the Company consents to a later date. Federal income tax law requires
that the Annuitant commence certain minimum distribution payments from pension
and profit-sharing plans after the Participant reaches the age of 70 1/2, and
that certain patterns of payment be commenced or continued after the death of
the Annuitant. A number of payout options are available (see "Annuity Options"
and "Income Options.").
SEPARATE ACCOUNT ALLOCATION
When Annuity Payments commence, the accumulated value in each Separate
Account will be applied to provide an Annuitant with the amount of Annuity
Payments varying with the investment experience of that same Separate Account.
As described in "Transfer Between Separate Accounts," Cash Value may be
transferred from one Separate Account to another in order to reallocate the
basis on which Annuity Payments will be determined.
DETERMINATION OF FIRST PAYMENT
The contract contains tables used to determine the first monthly
Annuity Payment. The amount applied to effect an annuity will be the Cash
Value of the contract as of 14 days before the date Annuity Payments commence
less any applicable premium taxes not previously deducted.
The amount of the first monthly payment depends on the Annuity Option
elected (see "Automatic Option") and the adjusted age of the Participant. A
formula for determining the adjusted age is contained in the contract. The
tables are determined from the Progressive Annuity Table assuming births in the
year 1900 and an assumed annual net investment rate of 3.5%. The total first
monthly Annuity Payment is determined by multiplying the benefit per $1,000 of
value shown in the tables of the contract by the number of thousands of dollars
of value of the contract applied to that Annuity Option. The Company reserves
the right to require proof of age before Annuity Payments begin.
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<PAGE> 88
ANNUITY UNIT VALUE
The dollar value of an Annuity Unit for each Investment Alternative
was established at $1.00 at inception. The value of an Annuity Unit as of any
Valuation Date is determined 14 days in advance in order to allow adequate time
for the required calculations and mailing of annuity checks in advance of their
due dates. (If the date 14 days in advance is not a Valuation Date, the
calculation is made on the next following Valuation Date, which would generally
be 13 or 12 days in advance.)
Specifically, the Annuity Unit Value for an Investment Alternative as
of a Valuation Date is equal to (a) the value of the Annuity Unit on the
immediately preceding Valuation Date multiplied by (b) the net investment
factor for the Valuation Period ending on or next following 14 days prior to
the current Valuation Date, divided by (c) the assumed net investment factor
for the Valuation Period. (For example, the assumed net investment factor
based on an annual assumed net investment rate of 3.5% for a Valuation Period
of one day is 1.0000942 and, for a period of two days, is 1.0000942 x
1.0000942.)
The value of an Annuity Unit as of any date other than a Valuation
Date is equal to its value on the next succeeding Valuation Date.
NUMBER OF ANNUITY UNITS
The number of Annuity Units credited to the contract is determined by
dividing the first monthly Annuity Payment attributable to each Investment
Alternative by the Investment Alternative's Annuity Unit Value as of the due
date of the first Annuity Payment. The number of Annuity Units remains fixed
during the annuity period.
DETERMINATION OF SECOND AND SUBSEQUENT PAYMENTS
The dollar amount of the second and subsequent Annuity Payments is not
predetermined and may change from month to month based on the investment
experience of the applicable Investment Alternative. The actual amounts of
these payments are determined by multiplying the number of Annuity Units
credited to the contract in each Investment Alternative by the corresponding
Annuity Unit Value as of the date on which payment is due. The interest rate
assumed in the annuity tables would produce a level Annuity Unit Value and,
therefore, level Annuity Payments if the net investment rate remained constant
at the assumed rate. In fact, payments will vary up or down as the net
investment rate varies up or down from the assumed rate, and there can be no
assurance that a net investment rate will be as high as the assumed rate.
ANNUITY OPTIONS
Subject to conditions described in "Election of Options" and the plan,
all or any part of a Participant's Interest otherwise payable in one sum to the
Owner or that Participant on that Participant's Annuity Commencement Date or
prior Cash Surrender of an Individual Account, or amounts payable in one sum to
the beneficiary upon the death of that Participant, may be paid under one or
more of the Annuity Options described below.
AUTOMATIC OPTION--Unless otherwise specified in the plan and if no
election has been made, and if the Participant is living and has a spouse, the
Company will, on that Participant's Annuity Commencement Date, pay to the
Participant the first of a series of Annuity Payments based on the life of the
Participant as the primary payee and the Participant's spouse in accordance
with Option 5. If the Participant is living and no election has been made and
the Participant has no spouse, the Company will, on the Annuity Commencement
Date, pay to the Participant the first of a series of Annuity Payments based on
the life of the Participant, in accordance with Option 2 with 120 monthly
payments assured.
OPTION 1--LIFE ANNUITY--NO REFUND: The Company will make monthly
Annuity Payments during the lifetime of the person on whose life the payments
are based, terminating with the last monthly payment preceding death. This
option offers the maximum monthly payment preceding death since there is no
assurance of a minimum number of payments or provision for a death benefit for
beneficiaries. It would be possible under this option to receive only one
Annuity Payment if the Annuitant died before the due date of the second Annuity
Payment, only two if the Annuitant died before the third Annuity Payment, etc.
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<PAGE> 89
OPTION 2--LIFE ANNUITY WITH 120, 180 OR 240 MONTHLY PAYMENTS ASSURED:
The Company will make monthly Annuity Payments during the lifetime of the
person on whose life payments are based, with the agreement that if, at the
death of that person, payments have been made for less than 120, 180 or 240
months, as elected, payments will be continued during the remainder of the
period to the beneficiary designated. The beneficiary may instead receive a
single sum settlement equal to the discounted value of the future payments with
the interest rate equivalent to the assumption originally used when the annuity
began.
OPTION 3--UNIT REFUND LIFE ANNUITY: The Company will make monthly
Annuity Payments during the lifetime of the person on whose life payments are
based, terminating with the last payment due before the death of that person,
provided that, at death, the beneficiary will receive in one sum the current
dollar value of the number of Annuity Units equal to (a) minus (b) (if that
difference is positive) where (a) is the total amount applied under the option
divided by the Annuity Unit Value on the due date of the first Annuity Payment,
and (b) is the product of the number of the Annuity Units represented by each
payment and the number of payments made.
OPTION 4--JOINT AND LAST SURVIVOR LIFE ANNUITY--NO REFUND: The
Company will make monthly Annuity Payments during the joint lifetime of the two
persons on whose lives payments are based, and during the lifetime of the
survivor. No further payments will be made following the death of the
survivor. It would be possible under this option to receive only one Annuity
Payment if both Annuitants died before the due date of the second Annuity
Payment, only two if they died before the third Annuity Payment, etc.
OPTION 5 -- JOINT AND LAST SURVIVOR LIFE ANNUITY--ANNUITY REDUCES ON
DEATH OF PRIMARY PAYEE: The Company will make monthly Annuity Payments during
the lifetime of the two persons on whose lives payments are based. One of the
two persons will be designated as the primary payee. The other will be
designated as the secondary payee. On the death of the secondary payee, if
survived by the primary payee, the Company will continue to make monthly
Annuity Payments to the primary payee in the same amount that would have been
payable during the joint lifetime of the two persons. On the death of the
primary payee, if survived by the secondary payee, the Company will continue to
make Annuity Payments to the secondary payee, in an amount equal to 50% of the
payments which would have been made during the lifetime of the primary payee.
No further payments will be made following the death of the survivor.
OPTION 6 -- OTHER ANNUITY OPTIONS: The Company will make any other
arrangements for Annuity Payments as may be mutually agreed upon.
INCOME OPTIONS
Instead of the Annuity Options described above, and subject to the
conditions described under "Election of Options," and the plan, all or any part
of a Participant's Interest otherwise payable in one sum to the Owner or that
Participant on the Participant's Annuity Commencement Date or prior Cash
Surrender of an Individual Account, or amounts payable in one sum to the
beneficiary upon the death of the Participant, may be paid under one or more of
the Income Options described below.
OPTION 1--PAYMENTS OF A FIXED AMOUNT: The Company will make equal
monthly payments of the amount elected until the Cash Value applied under this
option has been exhausted. The final payment will include any amount
insufficient to make another full payment.
OPTION 2--PAYMENTS FOR A FIXED PERIOD: The Company will make monthly
payments for the number of years selected. The amount of each payment will be
equal to the remaining Cash Value applied under this option divided by the
number of remaining payments.
OPTION 3--INVESTMENT INCOME: The Company will make monthly payments
during the lifetime of the primary payee, or for the period agreed on. The
amount payable will be equal to the excess, if any, of the Cash Value under
this option over the amount applied under this option. No payment will be made
if the Cash Value is less than the amount applied, and it is possible that no
payments would be made for a period of time. Payments under this option are
not considered to be Annuity Payments and are taxable in full as ordinary
income. This
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Option will generally be inappropriate under federal tax law for periods that
exceed the Participant's attainment of age 70 1/2.
The Cash Value used to determine the amount of any Income Payment will
be calculated as of 14 days before the date an Income Payment is due and will
be determined on the same basis as the Cash Value of the contract, including
the deduction for mortality risks. Income Options differ from Annuity Options
in that the amount of the payments made under Income Options are unrelated to
the length of life of any person. Although the Company continues to deduct the
charge for mortality and expense risks, it assumes no mortality risks for
amounts applied under any Income Option. Moreover, except with respect to
lifetime payments of investment income under Income Option 3, payments are
unrelated to the actual life span of any person. Thus, the Annuitant may
outlive the payment period.
While Income Options do not directly involve mortality risks for the
Company, a Contract Owner may elect to apply the remaining Cash Value to
provide an Annuity at the guaranteed rates even though Income Payments have
been received under an Income Option. Before an Owner or the Participant, as
provided in the plan, makes any Income Option election, he or she should
consult a tax adviser as to any adverse tax consequences the election might
have.
ELECTION OF OPTIONS
Election of an option must be made in writing in a form satisfactory
to the Company. Any election made during the lifetime of the Participant must
be made by the Owner or the Participant, as provided in the plan. The terms of
the options elected by some Participants or beneficiaries may be restricted to
meet the requirements of Section 401(a)(9) of the Internal Revenue Code. If,
at the death of a Participant, there is no election in effect for that
Participant, election of an option must be made by the beneficiary entitled to
any death benefit payable in one sum under the contract. The minimum amount
that can be placed under an Annuity or Income Option will be $2,000 unless the
Company consents to a lesser amount. If any monthly periodic payment due any
payee is less than $20, the Company reserves the right to make payments at less
frequent intervals.
FEDERAL TAX CONSIDERATIONS
GENERAL
The Company is taxed as a life insurance company under Subchapter L of
the Code. The Separate Accounts that form the investment alternatives
described herein are treated as part of the total operations of the Company and
are not taxed separately. Investment income and gains of a Separate Account
that are credited to a purchaser's contract of insurance incur no current
federal income tax. Generally, amounts credited to a contract are not taxable
until received by the Owner, participant or beneficiary, either in the form of
Annuity Payments or other distributions. Tax consequences and limits are
described further below for each annuity program.
QUALIFIED PENSION AND PROFIT-SHARING PLANS
Under a qualified pension or profit-sharing trust described in Section
401(a) of the Code and exempt from tax under Section 501(a) of the Code,
Purchase Payments made by an employer are not currently taxable to the
Participant and increases in the value of a contract are not subject to
taxation until received by a Participant or beneficiary.
Distributions in the form of Annuity or Income Payments are taxable to
the Participant or beneficiary as ordinary income in the year of receipt. Any
distribution that is considered the Participant's "investment in the contract"
is treated as a return of capital and is not taxable. Payments under Income
Option 3 are taxable in full. Certain lump-sum distributions described in
Section 402 of the Code may be eligible for special ten-year forward averaging
treatment for individuals born before January 1, 1936. All individuals may be
eligible for favorable five-year forward averaging of lump-sum distributions.
Certain eligible rollover distributions including most partial and
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full surrenders or term-for-years distributions of less than 10 years are
eligible for direct rollover to an eligible retirement plan or to an IRA
without federal income tax withholding.
An additional tax of 10% will apply to any taxable distribution
received by the Participant before the age of 59 1/2, except by reason of
death, disability or as part of a series of payments for life or life
expectancy, or at early retirement at or after the age of 55. There are other
statutory exceptions.
FEDERAL INCOME TAX WITHHOLDING
The portion of a distribution which is taxable income to the recipient
will be subject to federal income tax withholding, generally pursuant to
Section 3405 of the Code. The application of this provision is summarized
below.
1. ELIGIBLE ROLLOVER DISTRIBUTION FROM SECTION 403(b) PLANS OR
ARRANGEMENTS OR FROM QUALIFIED PENSION AND PROFIT-SHARING PLANS
There is a mandatory 20% tax withholding for plan distributions
that are eligible for rollover to an IRA or to another retirement
plan but that are not directly rolled over. A distribution made
directly to a Participant or beneficiary may avoid this result if:
(a) a periodic settlement distribution is elected based upon a
life or life expectancy calculation, or
(b) a complete term-for-years settlement distribution is elected
for a period of ten years or more, payable at least annually,
or
(c) a minimum required distribution as defined under the tax law
is taken after the attainment of the age of 70 1/2 or as
otherwise required by law.
A distribution including a rollover that is not a direct rollover
will require the 20% withholding, and a 10% additional tax penalty
may apply to any amount not added back in the rollover. The 20%
withholding may be recovered when the Participant or beneficiary
files a personal income tax return for the year if a rollover was
completed within 60 days of receipt of the funds, except to the
extent that the Participant or spousal beneficiary is otherwise
underwithheld or short on estimated taxes for that year.
2. OTHER NON-PERIODIC DISTRIBUTIONS (FULL OR PARTIAL REDEMPTIONS)
To the extent not described as requiring 20% withholding in 1
above, the portion of a non-periodic distribution which
constitutes taxable income will be subject to federal income tax
withholding, to the extent such aggregate distributions exceed
$200 for the year, unless the recipient elects not to have taxes
withheld. If an election out is not provided, 10% of the taxable
distribution will be withheld as federal income tax. Election
forms will be provided at the time distributions are requested.
This form of withholding applies to all annuity programs.
3. PERIODIC DISTRIBUTIONS (DISTRIBUTIONS PAYABLE OVER A PERIOD
GREATER THAN ONE YEAR)
The portion of a periodic distribution which constitutes taxable
income will be subject to federal income tax withholding under the
wage withholding tables as if the recipient were married claiming
three exemptions. A recipient may elect not to have income taxes
withheld or have income taxes withheld at a different rate by
providing a completed election form. Election forms will be
provided at the time distributions are requested. This form of
withholding applies to all annuity programs. As of January 1,
1998, a recipient receiving periodic payments (e.g., monthly or
annual payments under an Annuity Option) which total $15,200 or
less per year, will generally be exempt from the withholding
requirements.
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Recipients who elect not to have withholding made are liable for
payment of federal income tax on the taxable portion of the distribution. All
recipients may also be subject to penalties under the estimated tax payment
rules if withholding and estimated tax payments are not sufficient.
Recipients who do not provide a social security number or other
taxpayer identification number will not be permitted to elect out of
withholding. Additionally, United States citizens residing outside of the
country, or U.S. legal residents temporarily residing outside the country, are
not permitted to elect out of withholding.
TAX ADVICE
Because of the complexity of the law and the fact that the tax results
will vary according to the factual status of the individual involved, tax
advice may be needed by a person contemplating purchase of an annuity contract
and by an Owner, Participant or beneficiary who may make elections under a
contract. It should be understood that the foregoing description of the
federal income tax consequences under these contracts is not exhaustive and
that special rules are provided with respect to situations not discussed here.
It should be understood that if a tax-benefited plan loses its exempt status,
employees could lose some of the tax benefits described. For further
information, a qualified tax adviser should be consulted.
DISTRIBUTION OF VARIABLE ANNUITY CONTRACTS
The Company intends to sell the contracts in all jurisdictions where
the Company is licensed to do business, except Puerto Rico and the Bahamas. The
contracts may be purchased from agents who are licensed by state insurance
authorities to sell variable annuity contracts issued by the Company, and who
are also registered representatives of broker-dealers which have selling
Agreements with Tower Square Securities, Inc. ("Tower Square"). Tower Square,
whose principal business address is One Tower Square, Hartford, Connecticut,
serves as the principal underwriter for the variable annuity contracts
described herein. Tower Square is a registered broker-dealer with the SEC
under the Securities Exchange Act of 1934, and is a member of the National
Association of Securities Dealers, Inc. ("NASD"). Tower Square is an affiliate
of the Company and an indirect wholly owned subsidiary of Travelers Group Inc.,
and serves as principal underwriter pursuant to Distribution and Underwriting
Agreements to which Accounts GIS and Account QB, the Company and Tower Square
are parties. No amounts have been or will be retained by Tower Square for
acting as principal underwriter for the Contracts.
Agents will be compensated for sales of the Contracts on a commission
and service fee basis. The compensation paid to said agents will not exceed 7%
of the payments made under the Contract. In addition, certain production,
persistency and managerial bonuses may be paid.
Commissions paid to broker-dealers obtaining applications for
contracts accepted by the Company bear a reasonable relationship to, and in the
aggregate are less than, the deduction for sales expense. Although commissions
on payments made during the first year of the contract may exceed the deduction
for sales expenses, the charge to the Owner is not increased.
STATE REGULATION
The Company is subject to the laws of the state of Connecticut
governing insurance companies and to regulation by the Insurance Commissioner
of the state of Connecticut. An annual statement in a prescribed form must be
filed with that Commissioner on or before March 1 in each year covering the
operations of the Company for the preceding year and its financial condition on
December 31 of such year. Its books and assets are subject to review or
examination by the Commissioner or his agents at all times, and a full
examination of its operations is conducted by the National Association of
Insurance Commissioners ("NAIC") at least once in every four years.
In addition, the Company is subject to the insurance laws and
regulations of the other states in which it is licensed to operate. Generally,
the insurance departments of the states apply the laws of the jurisdiction of
domicile in determining the field of permissible investments.
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<PAGE> 93
YEAR 2000 REQUIREMENTS
Generally, computer programs were designed without considering the
impact of the upcoming change in the century. As a result, software and
computer systems may need to be upgraded or replaced in order to comply with
"Year 2000" requirements. If not corrected, these computer applications could
fail or create erroneous results by or at the Year 2000. The business,
financial condition, and results of operations of a company could be materially
and adversely affected by the failure of its systems and applications (or those
either provided or operated by third-parties) to properly operate or manage
dates beyond the year 1999.
The Company has investigated the nature and extent of the work
required for our computer systems to process beyond the turn of the century,
and has made progress toward achieving this goal, including upgrading and/or
replacing existing systems. We are confirming with our service providers that
they are also in the process of replacing or modifying their systems with the
same goal. We expect that our principal systems will be Year 2000 compliant by
early 1999. While these efforts involve substantial costs, we closely monitor
associated costs and continue to evaluate associated risks based on actual
expenses. While it is likely that these efforts will be successful, if
necessary modifications and conversions are not completed in a timely manner,
the Year 2000 requirements could have a material adverse effect on certain
operations of the Company.
LEGAL PROCEEDINGS AND OPINIONS
There are no pending material legal proceedings affecting the Separate
Accounts, the Principal Underwriter or the Company.
Legal matters in connection with federal laws and regulations
affecting the issue and sale of the Variable Annuity contracts described in
this Prospectus and the organization of the Company, its authority to issue
Variable Annuity contracts under Connecticut law and the validity of the forms
of the Variable Annuity contracts under Connecticut law have been passed on by
the General Counsel of the Company.
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APPENDIX A
CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
The SAI contains more specific information and financial statements relating to
the Separate Accounts and The Travelers Insurance Company. A list of the
contents of the SAI is set forth below:
Description of The Travelers and the Separate Accounts
The Insurance Company
The Separate Accounts
Investment Objectives and Policies
The Travelers Growth and Income Stock Accounts for Variable Annuities
The Travelers Quality Bond Account for Variable Annuities
Description of Certain Types of Investments and Investment Techniques
Available to the Separate Accounts
Writing Covered Call Options
Buying Put and Call Options
Futures Contracts
Money Market Instruments
Investment Management and Advisory Services
Advisory and Subadvisory Fees
TAMIC
TIMCO
Valuation of Assets
Management
The Board of Managers
Distribution and Management Services
Securities Custodian
Independent Accountants
Financial Statements
__ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __
Copies of the Statement of Additional Information dated May 1, 1998 (Form No.
L-11162S), are available without charge. To request a copy, please clip this
coupon on the dotted line above, enter your name and address in the spaces
provided below, and mail to: The Travelers Insurance Company, Annuity
Services, One Tower Square, Hartford, Connecticut 06183-5030.
Name:
----------------------------------------------------------------------
Address:
-------------------------------------------------------------------
-------------------------------------------------------------------
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THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT
FOR VARIABLE ANNUITIES
AND
THE TRAVELERS QUALITY BOND ACCOUNT
FOR VARIABLE ANNUITIES
GROUP VARIABLE ANNUITY CONTRACTS
Issued By
THE TRAVELERS INSURANCE COMPANY
Pension and Profit-Sharing Programs
L-11162 TIC Ed. 5-98
Printed in U.S.A.
<PAGE> 96
- --------------------------------------------------------------------------------
THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES
THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES
- -------------------------------------------------------------------------------
INDIVIDUAL VARIABLE ANNUITY CONTRACTS
issued by
THE TRAVELERS INSURANCE COMPANY
One Tower Square, Hartford, Connecticut 06183
Telephone: 860-277-0111
The basic purpose of the variable annuity contract described in this Prospectus
is to provide lifetime annuity payments which will vary with the investment
performance of one or more Separate Accounts. The contracts described in this
Prospectus are available for use by purchasers who previously held individual
nonqualified contracts issued by The Travelers Insurance Company ("Company")
and funded by The Travelers Fund B for Variable Contracts and/or The Travelers
Fund B-1 for Variable Contracts (Contract Numbers VG-30 and LVA-10FB) and who
exchanged such contracts in 1993 for the contracts offered by this Prospectus.
The Contracts described herein are not available for new sales, although
additional purchase payments may be made by purchasers who own existing
contracts.
The Separate Accounts available for funding the variable annuities described in
this Prospectus have different investment objectives. The basic investment
objective of The Travelers Growth and Income Stock Account for Variable
Annuities ("Account GIS") is long-term accumulation of principal through
capital appreciation and retention of net investment income. Account GIS
proposes to achieve this objective by investing in a portfolio of equity
securities, mainly common stocks. The basic investment objective of The
Travelers Quality Bond Account for Variable Annuities ("Account QB") is current
income, moderate capital volatility and total return. Account QB proposes to
achieve this objective by investing in money market instruments and publicly
traded debt securities. The Contract Owner bears the investment risk.
This Prospectus sets forth concisely the information about the Separate
Accounts that you should know before investing. Please read it and retain it
for future reference. Additional information about the Separate Accounts is
contained in a Statement of Additional Information ("SAI") dated May 1, 1998
which has been filed with the Securities and Exchange Commission ("SEC") and is
incorporated by reference into this Prospectus. A copy may be obtained,
without charge, by writing to The Travelers Insurance Company, Annuity
Services, One Tower Square, Hartford, Connecticut 06183-5030, Attention:
Manager, or by calling 800-842-9368. The Table of Contents of the SAI appears
in Appendix A of this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1998.
<PAGE> 97
TABLE OF CONTENTS
<TABLE>
<S> <C>
GLOSSARY OF SPECIAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv
FEE TABLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii
CONDENSED FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . C-1
DESCRIPTION OF THE TRAVELERS AND THE SEPARATE ACCOUNTS . . . . . . . . . . . . 1
The Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Separate Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
INVESTMENT ALTERNATIVES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT
FOR VARIABLE ANNUITIES (ACCOUNT GIS) . . . . . . . . . . . . . . . . . . . . . 1
Investment Objective . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Fundamental Investment Policies . . . . . . . . . . . . . . . . . . . . . . . 3
THE TRAVELERS QUALITY BOND ACCOUNT
FOR VARIABLE ANNUITIES (ACCOUNT QB) . . . . . . . . . . . . . . . . . . . . . . 3
Investment Objective . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Fundamental Investment Policies . . . . . . . . . . . . . . . . . . . . . . . 5
VOTING RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
CHARGES AND DEDUCTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Deductions from Purchase Payments . . . . . . . . . . . . . . . . . . . . . 6
Premium Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Minimum Death Benefit and Minimum Accumulated Value Benefit Charge . . . . 6
Insurance Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Investment Advisory and Sub-Advisory Fees . . . . . . . . . . . . . . . . . 7
THE VARIABLE ANNUITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
General Benefit Description . . . . . . . . . . . . . . . . . . . . . . . . 7
Termination by the Company and Termination Amount . . . . . . . . . . . . . 8
Deferred Maturity Option . . . . . . . . . . . . . . . . . . . . . . . . . 8
Suspension of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Required Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Federal and State Income Tax Withholding . . . . . . . . . . . . . . . . . 9
ACCUMULATION PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Application of Purchase Payments . . . . . . . . . . . . . . . . . . . . . 9
Number of Accumulation Units . . . . . . . . . . . . . . . . . . . . . . . 9
Accumulation Unit Value . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Net Investment Rate and Net Investment Factor . . . . . . . . . . . . . . . 9
Cash Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Cash Surrender (Redemption) or Withdrawal Value . . . . . . . . . . . . . . 10
Death Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Minimum Accumulated Value Benefit Upon Election of an Annuity-Account QB . 11
Right to Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Transfer Between Separate Accounts . . . . . . . . . . . . . . . . . . . . 11
PAYOUT PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Separate Account Allocation . . . . . . . . . . . . . . . . . . . . . . . . 11
</TABLE>
i
<PAGE> 98
<TABLE>
<S> <C>
Determination of First Payment . . . . . . . . . . . . . . . . . . . . . . 12
Annuity Unit Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Number of Annuity Units . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Determination of Second and Subsequent Payments . . . . . . . . . . . . . . 12
Annuity Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Income Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Election of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
FEDERAL TAX CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 15
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Nonqualified Annuities . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Federal Income Tax Withholding . . . . . . . . . . . . . . . . . . . . . . 15
Tax Advice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
DISTRIBUTION OF VARIABLE ANNUITY CONTRACTS . . . . . . . . . . . . . . . . . . 16
STATE REGULATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
YEAR 2000 REQUIREMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
LEGAL PROCEEDINGS AND OPINIONS . . . . . . . . . . . . . . . . . . . . . . . . 17
APPENDIX A - Contents of the Statement of Additional Information . . . . . . . 18
</TABLE>
ii
<PAGE> 99
GLOSSARY OF SPECIAL TERMS
As used in this Prospectus, the following terms have the indicated meanings:
ACCUMULATION UNIT: basic measure used to determine the value of a contract
before Annuity Payments begin.
ANNUITANT: the person on whose life the Variable Annuity contract is issued.
ANNUITY PAYMENTS: a series of periodic payments for life; for life with either
a minimum number of payments or a determinable sum assured; or for the joint
lifetime of the Annuitant and another person and thereafter during the lifetime
of the survivor.
ANNUITY UNIT: the basic measure used to determine the dollar amount of Annuity
Payments.
BOARD OF MANAGERS: the persons directing the investment and administration of a
managed Separate Account.
CASH SURRENDER VALUE (REDEMPTION VALUE): the amount payable to the Owner or
other payee upon termination of the contract during the lifetime of the
Annuitant.
CASH VALUE: the current value of Accumulation Units credited to the contract
less any administrative charges.
COMPANY: The Travelers Insurance Company.
COMPANY'S HOME OFFICE: the principal offices of The Travelers Insurance Company
located at One Tower Square, Hartford, Connecticut.
CONTRACT DATE: the date on which the contract, benefits, and the provisions of
the contract become effective.
CONTRACT YEARS: annual periods computed from the Contract Date.
INCOME PAYMENTS: optional forms of periodic payments made by the Company which
are not based on the life of the Annuitant.
MAJORITY VOTE: a "majority vote of the outstanding voting securities" is
defined in the Investment Company Act of 1940 as the lesser of (i) 67% or more
of the votes present at a meeting, if Contract Owners holding more than 50% of
the total voting power of all Contract Owners in the Separate Account are
present or represented by proxy, or (ii) more than 50% of the total voting
power of all Contract Owners in the Separate Account.
MATURITY DATE: the date on which the first Annuity Payment is to begin.
MINIMUM ACCUMULATED VALUE BENEFIT: the minimum amount applied to effect an
Annuity with respect to amounts allocated to Account QB.
MINIMUM DEATH BENEFIT: the minimum amount payable upon the death of an
Annuitant before Annuity or Income Payments begin.
NET PURCHASE PAYMENT: the amount applied to the purchase of Accumulation Units,
which is equal to the purchase payment less deductions for sales expenses and
any applicable premium taxes.
OWNER: a person having rights to benefits under the contract during the
lifetime of the Annuitant; the owner may or may not be the Annuitant.
iii
<PAGE> 100
PURCHASE PAYMENT: a gross amount paid to the Company under a variable annuity
contract during the accumulation period.
SEPARATE ACCOUNT: assets set aside by the Company, the investment experience of
which is kept separate from that of other assets of the Company; for example,
The Travelers Growth and Income Stock Account for Variable Annuities.
VALUATION DATE: generally, a day on which the Separate Account is valued. A
valuation date is any day on which the New York Stock Exchange is open for
trading. The value of Accumulation Units and Annuity Units will be determined
as of the close of trading on the New York Stock Exchange.
VALUATION PERIOD: the period between the close of business on successive
Valuation Dates.
VARIABLE ANNUITY: an annuity contract which provides for accumulation and for
Annuity Payments which vary in amount in accordance with the investment
experience of a Separate Account.
There are eligibility requirements for purchasers described elsewhere in this
Prospectus. This Prospectus does not constitute a solicitation of an offer to
acquire any interest or participation in the Variable Annuity described in this
Prospectus to any person who is ineligible for purchase.
iv
<PAGE> 101
SUMMARY
INTRODUCTION
This Prospectus describes an individual flexible premium variable annuity
Contract offered by The Travelers Insurance Company (the "Company"). The
Contract is available for use by individual non-qualified purchasers who
previously held individual contracts issued by the Company and funded by The
Travelers Fund B for Variable Contracts and/or The Travelers Fund B-1 for
Variable Contracts and who exchanged such contracts in 1993 for the Contracts
offered by this Prospectus. The Contracts described herein are not available
for new sales, although additional purchase payments may be made by purchasers
who own existing Contracts. A contract may be returned within ten days of
purchase. The applicant bears the investment risk during the period. (See
"Right to Return.")
INVESTMENT ALTERNATIVES
There are two Separate Accounts currently available for funding the Variable
Annuity contracts described herein: Account GIS and Account QB. Both Accounts
are registered with the SEC as diversified open-end management investment
companies under the Investment Company Act of 1940, as amended ("1940 Act").
The basic investment objectives of these separate accounts are as follows:
Account GIS--long-term accumulation of principal through capital appreciation
and retention of net investment income; and Account QB--current income,
moderate capital volatility and total return. As is true with all investment
companies, there can be no assurance that the objectives of the Investment
Alternatives will be achieved. (For a complete discussion of the investment
objectives and policies for these funds, please refer to the "Investment
Alternatives" section beginning on page 1.)
RISK FACTORS
The investment experience on equity investments over a period of time will tend
to reflect levels of stock market prices and dividend payouts. Both are
affected by diverse factors, including not only business conditions and
investor confidence in the economy, but current conditions in a particular
industry or company. The yield on a common stock is not contractually
determined. Equity securities are subject to financial risks relating to the
earning stability and overall financial soundness of an issuer. They are also
subject to market risks relating to the effect of general changes in the
securities market on the price of a security.
The yield on debt instruments over a period of time should reflect prevailing
interest rates, which depend on a number of factors, including government
action in the capital markets, government fiscal and monetary policy, needs of
businesses for capital goods for expansion, and investor expectations as to
future inflation. The yield on a particular debt instrument is also affected
by the risk that the issuer will be unable to pay principal and interest.
INVESTMENT ADVISORY SERVICES
Travelers Asset Management International Corporation ("TAMIC") furnishes such
services to Account QB and Account GIS, according to the terms of written
agreements. TAMIC receives an amount equivalent on an annual basis to 0.3233%
of the average daily net asset value of Account QB. TAMIC receives an amount
equivalent on an annual basis to a maximum of 0.65% of the aggregate average
daily net assets of Account GIS, scaling down to 0.40%. In addition, Travelers
Investment Management Company ("TIMCO") provides sub-advisory services in
connection with the day-to-day operations of Account GIS. For furnishing
investment sub-advisory services to Account GIS, TIMCO is paid by TAMIC an
amount equivalent on an annual basis to a maximum of 0.45% of the aggregate
average daily net assets of Account GIS, scaling down to 0.20%. (See
"Management," and "Investment Advisory Fees.")
SALES CHARGES
Prior to the Maturity Date, all or part of the contract value may be withdrawn.
(See "Cash Surrender (Redemption) or Withdrawal Value.") A federal tax penalty
may apply. This Contract is not available for new sales, although additional
purchase payments may be made by purchasers who own existing Contracts. The
sales charge for additional purchase payments is 4.00% of each additional
purchase payment (4.17% of the amount invested). There is no minimum purchase
payment under this contract.
v
<PAGE> 102
OTHER CHARGES
Premium taxes may apply to annuities in a few states. These taxes currently
range from 0.5% to 5.0%, depending upon jurisdiction. The Company will deduct
any applicable premium tax from the Contract Value, either upon death,
surrender or annuitization, or at the time Purchase Payments are made to the
Contract, but no earlier than when the Company has a tax liability under state
law. (See "Premium Tax.")
A deduction of 1.0017% on an annual basis will be made on each Valuation Date
for mortality and expense risks assumed by the Company. The 1.0017% insurance
charge is comprised of 0.8500% for mortality risks and 0.1517% for expense
risks. (See "Insurance Charge.")
ANNUITY PAYMENTS
At the Maturity Date, the contract provides lifetime Annuity Payments, as well
as other types of payout plans. (See "Annuity Options" and "Income Options.")
If a variable payout is selected, the payments will continue to vary with the
investment performance of the selected Investment Alternatives. Before Annuity
or Income Payments begin, transfers may be made among available Investment
Alternatives without fee, penalty or charge. (See "Transfer Between Separate
Accounts.")
OTHER PROVISIONS
If the Annuitant dies before Annuity or Income Payments begin, the death
benefit is the larger of the Cash Value less any premium tax, or Premium
Payments less prior surrenders. There is no charge for the Minimum Death
Benefit. (See "Death Benefit", and "Charges and Deductions.")
After the tenth Contract Year, a minimum amount is payable upon the election of
an Annuity Option with respect to amounts that were allocated to Account QB
during the accumulation period. There is no charge for the Minimum Accumulated
Value Benefit. (See "Minimum Accumulated Value Benefit" and "Charges and
Deductions.")
Purchasers have certain voting rights under the contracts. (See "Voting
Rights.") The Company reserves the right to terminate inactive contracts under
certain circumstances. (See "Termination by the Company and Termination
Amount.")
vi
<PAGE> 103
FEE TABLE
THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES (GIS)
THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES (QB)
<TABLE>
<CAPTION>
GIS QB
----- ----
<S> <C> <C>
CONTRACT OWNER TRANSACTION EXPENSES
Sales Charge for Additional Purchase Payments* 4.00% 4.00%
ANNUAL EXPENSES (as a percentage of average net assets)
Mortality and Expense Risk Fees 1.00% 1.00%
Management Fees 0.62%** 0.32%
TOTAL ANNUAL EXPENSES 1.62% 1.32%
</TABLE>
EXAMPLE
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
For additional purchase payments made into the Contract subsequent to the
Exchange Offer (4% Sales Charge applies), whether or not you surrender your
contract at the end of the applicable period, you would have paid the following
expenses on a $1,000 investment, assuming a 5% annual return on assets, after:
<TABLE>
<CAPTION>
GIS QB
----- ---
<S> <C> <C>
1 year $ 56 $ 53
3 years $ 89 $ 80
5 years $ 125 $ 110
10 years $ 224 $ 193
</TABLE>
The purpose of the Fee Table is to assist Contract Owners in understanding the
various costs and expenses that a Contract Owner will bear directly or
indirectly. For more complete descriptions of the various costs and expenses,
including possible waivers or reductions of these expenses, see "Charges and
Deductions." Expenses shown do not include premium taxes which may be
applicable.
* This Contract is not available for new sales; however, additional
purchase payments may be made by purchasers who own existing contracts.
** Based upon Management Fee Scale as approved by Shareholders on April
27, 1998.
vii
<PAGE> 104
CONDENSED FINANCIAL INFORMATION
THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES
Per Unit Data for an Accumulation and Annuity Unit outstanding throughout
each year
The following information on per unit data has been audited by Coopers &
Lybrand L.L.P., independent accountants. Their report on the per unit data for
each of the five years in the period ended December 31, 1997 is contained in
the Separate Account's Annual Report which should be read along with this
information and which is incorporated by reference into the SAI. The
consolidated financial statements of The Travelers Insurance Company and
Subsidiaries are also contained in the SAI.
CONTRACTS ISSUED ON OR AFTER MAY 16, 1983.
<TABLE>
<CAPTION>
SELECTED PER UNIT DATA 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total investment income . . . . . $ .228 $ .212 $ .205 $ .189 $ .184 $ .188 $ .198 $ .192 $ .191 $ .168
Operating expenses . . . . . . . . .228 .175 .140 .115 .106 .098 .091 .079 .095 .071
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net investment income . . . . . . .000 .037 .065 .074 .078 .090 .107 .113 .096 .097
Unit Value at beginning of year . 11.371 9.369 6.917 7.007 6.507 6.447 5.048 5.295 4.191 3.601
Net realized and change in unrealized
gains (losses) . . . . . . . . . 3.584 1.965 2.387 (.164) .422 (.030) 1.292 (.360) 1.008 .493
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Unit Value at end of year . . . . $14.955 $11.371 $ 9.369 $ 6.917 $ 7.007 $ 6.507 $ 6.447 $ 5.048 $ 5.295 $ 4.191
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
SIGNIFICANT RATIOS AND ADDITIONAL DATA
Net increase (decrease) in unit
value . . . . . . . . . . . . . . $ 3.58 $ 2.00 2.45 (.09) .50 .06 1.40 (.25) 1.10 .59
Ratio of operating expenses to
average net assets . . . . . . . 1.70% 1.70% 1.70% 1.65% 1.57% 1.58% 1.58% 1.57% 1.58% 1.58%
Ratio of net investment income
to average net assets . . . . . . .00% .36% .79% 1.05% 1.15% 1.43% 1.86% 2.25% 2.33% 2.60%
Number of units outstanding
at end of year (thousands) . . . 29,545 27,578 26,688 26,692 28,497 29,661 26,235 19,634 15,707 12,173
Portfolio turnover rate . . . . . 64% 85% 96% 103% 81% 189% 319% 54% 27% 38%
Average Commission Rate Paid* . . $ .051 $ .047 --- -- -- -- -- -- -- --
</TABLE>
CONTRACTS ISSUED PRIOR TO MAY 16, 1983.
<TABLE>
<CAPTION>
SELECTED PER UNIT DATA 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total investment income . . . . . $ .233 .216 .208 $ .192 $ .189 $ .192 $ .201 $ .199 $ .191 $ .168
Operating expenses . . . . . . . . .201 .154 .123 .100 .092 .085 .077 .069 .066 .053
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net investment income . . . . . . .032 .062 .085 .092 .097 .107 .124 .130 .125 .115
Unit Value at beginning of year . 11.763 9.668 7.120 7.194 6.664 6.587 5.145 5.383 4.250 3.642
Net realized and change in
unrealized gains (losses) . . . . 3.715 2.033 2.463 (.166) .433 (.030) 1.318 (.368) 1.008 .493
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Unit Value at end of year . . . . $15.510 $11.763 $ 9.668 $ 7.120 $ 7.194 $ 6.664 $ 6.587 $ 5.145 $ 5.383 $ 4.250
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
SIGNIFICANT RATIOS AND ADDITIONAL DATA
Net increase (decrease) in unit
value . . . . . . . . . . . . . . $ 3.75 $ 2.10 2.55 (.07) .53 .08 1.44 (.24) 1.13 .61
Ratio of operating expenses to
average net assets . . . . . . . 1.45% 1.45% 1.45% 1.41% 1.33% 1.33% 1.33% 1.33% 1.33% 1.33%
Ratio of net investment income
to average net assets . . . . . . .24% .60% 1.02% 1.30% 1.40% 1.67% 2.11% 2.50% 2.56% 2.85%
Number of units outstanding at
end of year (thousands) . . . . . 15,194 16,554 17,896 19,557 21,841 22,516 24,868 28,053 31,326 35,633
Portfolio turnover rate . . . . . 64% 85% 96% 103% 81% 189% 319% 54% 27% 38%
Average Commission Rate Paid* . . $ .051 $ .047 -- -- -- -- -- -- -- --
</TABLE>
* The Average Commission Rate Paid is required for funds that have over 10%
in equities for which commissions are paid. This information is required
for funds with fiscal year ends on or after September 30, 1996; earlier
compliance is allowed.
C-1
<PAGE> 105
CONDENSED FINANCIAL INFORMATION
THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES
Per Unit Data for an Accumulation and Annuity Unit outstanding throughout
each year
The following information on per unit data has been audited by Coopers &
Lybrand L.L.P., independent accountants. Their report on the per unit data for
each of the five years in the period ended December 31, 1997 is contained in
the Separate Account's Annual Report which should be read along with this
information and which is incorporated by reference into the SAI. The
consolidated financial statements of The Travelers Insurance Company and
Subsidiaries are contained in the SAI.
CONTRACTS ISSUED ON OR AFTER MAY 16, 1983.
<TABLE>
<CAPTION>
SELECTED PER UNIT DATA 1997 1996 1995 1994 1993 1992 * 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total investment income . . . . . $ .342 $ .368 $ .319 $ .310 $ .299 $ .311 $ .299 $ .277 $ .270 $ .259
Operating expenses . . . . . . . . .082 .078 .073 .069 .067 .061 .056 .048 .047 .046
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net investment income . . . . . . .260 .290 .246 .241 .232 .250 .243 .229 .223 .213
Unit Value at beginning of year . 5.060 4.894 4.274 4.381 4.052 3.799 3.357 3.129 2.852 2.697
Net realized and change in
unrealized gains (losses) . . . . .073 (.124) .374 (.348) .097 .003 .199 (.001) .054 (.058)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Unit Value at end of year . . . . $ 5.393 $ 5.060 $ 4.894 $ 4.274 $ 4.381 $ 4.052 $ 3.799 $ 3.357 $ 3.129 $ 2.852
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
SIGNIFICANT RATIOS AND ADDITIONAL DATA
Net increase (decrease) in
unit value . . . . . . . . . . . $ .33 $ .17 .62 (.11) .33 .25 .44 .23 .28 .16
Ratio of operating expenses to
average net assets . . . . . . . 1.57% 1.57% 1.57% 1.57% 1.57% 1.58% 1.57% 1.57% 1.57% 1.58%
Ratio of net investment income
to average net assets . . . . . . 5.00% 5.87% 5.29% 5.62% 5.41% 6.38% 6.84% 7.06% 7.44% 7.67%
Number of units outstanding at
end of year (thousands) . . . . . 21,521 24,804 27,066 27,033 28,472 20,250 17,211 14,245 13,135 9,457
Portfolio turnover rate . . . . . 196% 176% 138% 27% 24% 23% 21% 41% 33% 17%
</TABLE>
CONTRACTS ISSUED PRIOR TO MAY 16, 1983.
<TABLE>
<CAPTION>
SELECTED PER UNIT DATA 1997 1996 1995 1994 1993 1992 * 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total investment income . . . . . $ .353 $ .379 $ .328 $ .318 $ .306 $ .317 $ .304 $ .281 $ .270 $ .259
Operating expenses . . . . . . . . .071 .067 .063 .059 .058 .050 .048 .040 .035 .037
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net investment income . . . . . . .282 .312 .265 .259 .248 .267 .256 .241 .235 .222
Unit Value at beginning of year . 5.234 5.050 4.400 4.498 4.150 3.880 3.421 3.181 2.892 2.728
Net realized and change in
unrealized gains (losses) . . . . .077 (.128) .385 (.357) .100 .003 .203 (.001) .054 (.058)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Unit Value at end of year . . . . $ 5.593 $ 5.234 $ 5.050 $ 4.400 $ 4.498 $ 4.150 $ 3.880 $ 3.421 $ 3.181 $ 2.892
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
SIGNIFICANT RATIOS AND ADDITIONAL DATA
Net increase (decrease) in
unit value . . . . . . . . . . . $ .36 $ .18 .65 (.10) .35 .27 .46 .24 29 .16
Ratio of operating expenses
to average net assets . . . . . . 1.33% 1.33% 1.33% 1.33% 1.33% 1.33% 1.33% 1.33% 1.33% 1.33%
Ratio of net investment income
to average net assets . . . . . . 5.25% 6.12% 5.54% 5.87% 5.66% 6.61% 7.09% 7.31% 7.60% 7.82%
Number of units outstanding
at end of year (thousands) . . . 7,683 8,549 9,325 10,694 12,489 13,416 14,629 16,341 18,248 21,124
Portfolio turnover rate . . . . . 196% 176% 138% 27% 24% 23% 21% 41% 33% 17%
</TABLE>
* On May 1, 1990, TAMIC replaced TIMCO as the investment adviser for Account
QB.
C-2
<PAGE> 106
DESCRIPTION OF THE TRAVELERS AND THE SEPARATE ACCOUNTS
THE INSURANCE COMPANY
The Travelers Insurance Company (the "Company" or "The Travelers") is a stock
insurance company chartered in 1864 in Connecticut and continuously engaged in
the insurance business since that time. It is licensed to conduct life
insurance business in all states of the United States, the District of
Columbia, Puerto Rico, Guam, the U.S. and British Virgin Islands, and the
Bahamas. The Company is an indirect wholly owned subsidiary of Travelers Group
Inc., a financial services holding company. The Company's Home Office is
located at One Tower Square, Hartford, Connecticut 06183.
THE SEPARATE ACCOUNTS
Each of the Separate Accounts available under the Variable Annuity contracts
described in this Prospectus is registered with the SEC under the 1940 Act and
will comply with the provisions 1940 Act, and meets the definition of a
separate account under the federal securities laws. Additionally, the
operations of each of the Separate Accounts are subject to the provisions of
Section 38a-433 of the Connecticut General Statutes which authorizes the
Connecticut Insurance Commissioner to adopt regulations under it. The Section
contains no restrictions on investments of the Separate Accounts, and the
Commissioner has adopted no regulations under the Section that affect the
Separate Accounts.
Account GIS was established on September 22, 1967, and Account QB was
established on July 29, 1974. Each of these Separate Accounts, although an
integral part of the Company, is registered with the SEC as a diversified,
open-end management investment company under the 1940 Act. The assets of
Accounts GIS and QB are invested directly in securities (such as stocks, bonds
or money market instruments) which are compatible with the stated investment
policies of each account.
GENERAL
Under Connecticut law, the assets of the Separate Accounts will be held for the
exclusive benefit of the owners of, and the persons entitled to payment under,
the Variable Annuity contracts offered by this Prospectus and under all other
contracts which provide for accumulated values or dollar amount payments to
reflect investment results of the Separate Accounts. The assets in the
Separate Accounts are not chargeable with liabilities arising out of any other
business which the Company may conduct. The obligations arising under the
Variable Annuity contracts are obligations of the Company.
INVESTMENT ALTERNATIVES
The Investment Alternatives available in connection with the Variable Annuity
contracts described herein each have different investment objectives and
fundamental investment policies, as are set forth below. Neither the
investment objectives nor the fundamental investment policies of an Account
can be changed without a vote of a majority of the outstanding voting
securities of the Account, as defined in the 1940 Act.
THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT
FOR VARIABLE ANNUITIES (ACCOUNT GIS)
INVESTMENT OBJECTIVE
The basic investment objective of Account GIS is the selection of investments
from the point of view of an investor concerned primarily with long-term
accumulation of principal through capital appreciation and retention of net
investment income. This principal objective does not preclude the realization
of short-term gains when conditions
1
<PAGE> 107
would suggest the long-term goal is accomplished by such short-term
transactions. The assets of Account GIS generally will be fully invested in a
portfolio of equity securities, mainly common stocks, spread over industries
and companies. However, when it is determined that investments of other types
may be advantageous on the basis of combined considerations of risk, income and
appreciation, investments may be made in bonds, notes or other evidence of
indebtedness, issued publicly or placed privately, of a type customarily
purchased for investment by institutional investors, including United States
government securities. These investments in other-than-equity securities
generally would not have a prospect of long-term appreciation, and are
temporary for defensive purposes. Such investments may or may not be
convertible into stock or be accompanied by stock purchase options or warrants
for the purchase of stock.
Account GIS will use exchange-traded stock index futures contracts as a hedge
to protect against changes in stock prices. A stock index futures contract is
a contractual obligation to buy or sell a specified index of stocks at a future
date for a fixed price. Stock index futures may also be used to hedge cash
inflows to gain market exposure until the cash is invested in specific common
stocks. Account GIS will not purchase or sell futures contracts for which the
aggregate initial margin exceeds five percent (5%) of the fair market value of
its assets, after taking into account unrealized profits and losses on any such
contracts which it has entered into. When a futures contract is purchased,
Account GIS will set aside, in an identifiable manner, an amount of cash and
cash equivalents equal to the total market value of the futures contract, less
the amount of the initial margin.
All stock index futures will be traded on exchanges that are licensed and
regulated by the Commodity Futures Trading Commission ("CFTC"). To ensure that
its futures transactions meet CFTC standards, Account GIS will enter into
futures contracts for hedging purposes only (i.e., for the purposes or with the
intent specified in CFTC regulations and interpretations, subject to the
requirements of the SEC). Account GIS expects that risk management
transactions involving futures contracts will not impact more than thirty
percent (30%) of its assets at any one time. For a more detailed discussion of
financial futures contracts and associated risks, please see the SAI.
Account GIS may write covered call options on portfolio securities for which
call options are available and which are listed on a national securities
exchange. It may also purchase index or individual equity call options as an
alternative to holding stocks or stock index futures, or purchase index or
individual equity put options as a defensive measure. For a detailed
discussion of options contracts and associated risks, please see the SAI.
Changes in investments may be made from time to time to take into account
changes in the outlook for particular industries or companies. The investments
of Account GIS will not, however, be concentrated in any one industry; that is,
no more than twenty-five percent (25%) of the value of Account GIS's assets
will be invested in any one industry. While Account GIS may occasionally
invest in foreign securities, it is not anticipated that such foreign
securities will, at any time, account for more than ten percent (10%) of the
investment portfolio.
The assets of Account GIS will be kept fully invested, except that (a)
sufficient cash may be kept on hand reasonably to provide for variable annuity
contract obligations, and (b) reasonable amounts of cash, United States
government or other liquid securities, such as short-term bills and notes, may
be held for limited periods, pending investment in accordance with Account
GIS's investment policies.
It must be recognized that there are risks inherent in the ownership of any
security. The investment experience on equity investments over time will tend
to reflect levels of stock market prices and dividend payouts. Both are
affected by diverse factors, including not only business conditions and
investor confidence in the economy, but current conditions in a particular
industry or company. The yield on a common stock is not contractually
determined. Equity securities are subject to financial risks relating to the
earning stability and overall financial soundness of an issue. They are also
subject to market risks relating to the effect of general changes in the
securities market on the price of a security.
2
<PAGE> 108
FUNDAMENTAL INVESTMENT POLICIES
The fundamental investment policies of Account GIS permit it to:
1. invest up to 5% of its assets in the securities of any one issuer
(exclusive of securities issued or guaranteed by the United States
government, its agencies or instrumentalities);
2. borrow from banks in amounts of up to 5% of its assets, but only for
emergency purposes;
3. purchase interests in real estate represented by securities for which
there is an established market;
4. make loans through the acquisition of a portion of a privately placed
issue of bonds, debentures or other evidences of indebtedness of a type
customarily purchased by institutional investors;
5. acquire up to 10% of the voting securities of any one issuer (it is the
present practice of Account GIS not to exceed 5% of the voting
securities of any one issuer);
6. make purchases on margin in the form of short-term credits which are
necessary for the clearance of transactions; and place up to 5% of its
net asset value in total margin deposits for positions in futures
contracts; and
7. invest up to 5% of its assets in restricted securities (securities which
may not be publicly offered without registration under the Securities
Act of 1933).
THE TRAVELERS QUALITY BOND ACCOUNT
FOR VARIABLE ANNUITIES (ACCOUNT QB)
INVESTMENT OBJECTIVE
The basic investment objective of Account QB is the selection of investments
from the point of view of an investor concerned primarily with current income,
moderate capital volatility and total return.
It is contemplated that the assets of Account QB will be invested in money
market obligations, including, but not limited to, Treasury bills, repurchase
agreements, commercial paper, bank certificates of deposit and bankers'
acceptances, and in publicly traded debt securities, including bonds, notes,
debentures, equipment trust certificates and short-term instruments. These
securities may carry certain equity features such as conversion or exchange
rights or warrants for the acquisition of stocks of the same or different
issuer, or participations based on revenues, sales or profits. It is currently
anticipated that the market value-weighted average maturity of the portfolio
will not exceed five years. (In the case of mortgage-backed securities, the
estimated average life of cash flows will be used rather than the average
maturity.) Investment in longer term obligations may be made if the Board of
Managers concludes that the investment yields justify a longer term
commitment. The investments of Account QB will not be concentrated in any one
industry; that is, no more than twenty-five percent (25%) of the value of
Account QB's assets will be invested in any one industry.
The portfolio will be actively managed and investments may be sold prior to
maturity to the extent that this action is considered advantageous in light of
factors such as market conditions or brokerage costs. While the investments of
Account QB are generally not listed securities, there are firms which make
markets in the type of debt instruments that Account QB holds. No problems of
salability are anticipated with regard to the investments of Account QB.
Account QB may from time to time purchase new-issue government or agency
securities on a "when-issued" or "to-be-announced" ("TBA") basis ("when-issued
securities"). The prices of such securities will be fixed at the time the
commitment to purchase is made, and may be expressed in either dollar price or
yield maintenance terms. Delivery
3
<PAGE> 109
and payment may be at a future date beyond customary settlement time. It is
the customary practice of Account QB to make when-issued or TBA purchases for
settlement no more than 90 days beyond the commitment date.
The commitment to purchase when-issued securities may be viewed as a senior
security, and will be marked to market and reflected in Account QB's
Accumulation Unit Value daily from the commitment date. While it is TAMIC's
intention to take physical delivery of these securities, offsetting
transactions may be made prior to settlement, if it is advantageous to do so.
Account QB does not make payment or begin to accrue interest on these
securities until settlement date. In order to invest its assets pending
settlement, Account QB will normally invest in short-term money market
instruments and other securities maturing no later than the scheduled
settlement date.
Account QB does not intend to purchase when-issued securities for speculative
or "leverage" purposes. Consistent with Section 18 of the 1940 Act and the
General Policy Statement of the SEC thereunder, when Account QB commits to
purchase a when-issued security, it will identify and place in a segregated
account high grade money market instruments and other liquid securities equal
in value to the purchase cost of the when-issued securities.
TAMIC believes that purchasing securities in this manner will be advantageous
to Account QB. However, this practice does entail certain risks, namely the
default of the counterparty on its obligation to deliver the security as
scheduled. In this event, Account QB would endure a loss (gain) equal to the
price appreciation (depreciation) in value from the commitment date. TAMIC
employs a rigorous credit quality procedure in determining the counterparties
with which it will deal in when-issued securities and, in some circumstances,
will require the counterparty to post cash or some other form of security as
margin to protect the value of its delivery obligation pending settlement.
Account QB may also purchase and sell interest rate futures contracts to hedge
against changes in interest rates that might otherwise have an adverse effect
upon the value of Account QB's securities. Hedging by use of interest rate
futures seeks to establish, with more certainty than would otherwise be
possible, the effective rate of return on portfolio securities. When hedging
is successful, any depreciation in the value of portfolio securities will
substantially be offset by appreciation in the value of the futures position.
Conversely, any appreciation in the value of the portfolio securities will
substantially be offset by depreciation in the value of the futures position.
Account QB will not purchase or sell futures contracts for which the aggregate
initial margin exceeds five percent (5%) of the fair market value of its
assets, after taking into account unrealized profits and losses on any such
contracts which it has entered into. At no time will Account QB's transactions
in futures contracts be employed for speculative purposes. When a futures
contract is purchased, Account QB will set aside, in an identifiable manner, an
amount of cash and cash equivalents equal to the total market value of the
futures contract, less the amount of the initial margin.
All interest rate futures contracts will be traded on exchanges that are
licensed and regulated by the Commodity Futures Trading Commission ("CFTC").
To ensure that its futures transactions meet CFTC standards, Account QB will
enter into futures contracts for hedging purposes only (i.e., for the purposes
or with the intent specified in CFTC regulations and interpretations, subject
to the requirements of the SEC). For a more detailed discussion of financial
futures contracts and associated risks, please see the SAI.
The Board of Managers will weigh considerations of risks, yield and ratings in
implementing Account QB's fundamental investment policies. There are no
specific criteria with regard to quality or ratings of the investments of
Account QB, but it is anticipated that they will be of investment grade or its
equivalent as determined in good faith by the Board of Managers. There may or
may not be more risk in investing in debt instruments where there are no
specific criteria with regard to quality or ratings of the investments.
The yield on debt instruments over a period of time should reflect prevailing
interest rates, which depend on a number of factors, including government
action in the capital markets, government fiscal and monetary policy, needs of
businesses for capital goods for expansion, and investor expectations as to
future inflation. The yield on a particular debt instrument is also affected
by the risk that the issuer will be unable to pay principal and interest.
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FUNDAMENTAL INVESTMENT POLICIES
The fundamental investment policies of Account QB permit it to:
1. invest up to 15% of the value of its assets in the securities of any one
issuer (exclusive of obligations of the United States government and its
instrumentalities, for which there is no limit);
2. borrow from banks in amounts of up to 5% of its assets, but only for
emergency purposes;
3. purchase interests in real estate represented by securities for which
there is an established market;
4. make loans through the acquisition of a portion of a privately placed
issue of bonds, debentures or other evidences of indebtedness of a type
customarily purchased by institutional investors;
5. acquire up to 10% of the voting securities of any one issuer (it is the
present practice of Account QB not to exceed 5% of the voting securities
of any one issuer); and
6. make purchases on margin in the form of short-term credits which are
necessary for the clearance of transactions; and place up to 5% of its
net asset value in total margin deposits for positions in futures
contracts.
VOTING RIGHTS
Owners of the Variable Annuity contracts participating in Accounts GIS and QB
will be entitled to vote at their meetings on (i) any change in the fundamental
investment policies or other policies relative to the account requiring the
Owners' approval; (ii) amendment of the investment advisory agreement; (iii)
election of the members of the Board of Managers of the account; (iv)
ratification of the selection of an independent accountants for the account;
(v) any other matters which, in the future, under the 1940 Act require the
Owners' approval; and (vi) any other business which may properly come before
the meeting.
The number of votes which each Owner may cast, including fractional votes,
shall be determined as of the date to be chosen by the Board of Managers within
75 days of the date of the meeting, and at least 20 days' written notice of the
meeting will be given.
The number of votes which an Owner may cast in the accumulation period is equal
to the number of Accumulation Units credited to the account under the contract.
During the annuity period, the Owner may cast the number of votes equal to (i)
the reserve related to the contract, divided by (ii) the value of an
Accumulation Unit. During the annuity period, an Owner's voting rights will
decline as the reserve for the contract declines. Accounts GIS and QB are also
used to fund certain other Variable Annuity contracts than the Variable Annuity
contracts described in this Prospectus; votes attributable to such other
annuities are computed in an analogous manner.
Votes for which Annuitants were entitled to instruct the Owner, but for which
the Owner has received no instructions, will be cast by the Owner for or
against each proposal to be voted on only in the same proportion as votes for
which instructions have been received.
On the death of the Annuitant, all voting rights will vest in the beneficiary
of the Variable Annuity contract.
MANAGEMENT
The investments and administration of Accounts GIS and QB are under the
direction of their Boards of Managers. Subject to the authority of the Board
of Managers, Travelers Asset Management International Corporation ("TAMIC")
furnishes investment management and advisory services to Accounts GIS and QB.
The Travelers
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Investment Management Company ("TIMCO") provides sub-advisory services to
Account GIS in connection with the day-to-day operations of the Account.
Additionally, the Board of Managers for each managed Separate Account annually
selects an independent public accountant, reviews the terms of the management
and investment advisory agreements, recommends any changes in the fundamental
investment policies (and submits any such changes to Contract Owners at the
annual meeting), and takes any other actions necessary in connection with the
operation and management of the managed Separate Accounts.
TAMIC is a registered investment adviser which has provided investment advisory
services since its incorporation in 1978. TAMIC, an indirect wholly owned
subsidiary of Travelers Group Inc., is located at One Tower Square, Hartford,
Connecticut 06183. In addition to providing investment advice to Accounts GIS
and QB. TAMIC acts as investment adviser for other investment companies used
to fund variable annuity and variable universal life insurance products offered
by the Company and its affiliates, as well as for individual and pooled pension
and profit-sharing accounts, domestic investment companies affiliated with The
Travelers, and nonaffiliated companies.
TIMCO is a registered investment adviser which has provided investment advisory
services since its incorporation in 1967. TIMCO, a subsidiary of Smith Barney
Holdings Inc., which is a wholly owned subsidiary of Travelers Group Inc., is
located at One Tower Square, Hartford, Connecticut 06183. In addition to
providing investment advice to Account GIS, TIMCO acts as investment adviser
and subadviser for other investment companies used to fund variable annuity and
variable life insurance products; as well as for individual and pooled pension
and profit-sharing accounts, and affiliated companies of the Company.
CHARGES AND DEDUCTIONS
Charges under variable annuity contracts offered by this Prospectus are
assessed in two ways: as deductions from purchase payments for sales expenses
and applicable premium taxes, and as charges to the Separate Accounts for
investment advisory services and the assumption of mortality and expense risks.
DEDUCTIONS FROM PURCHASE PAYMENTS
This Contract is not available for new sales, although additional purchase
payments may be made by purchasers who own existing Contracts. The sales
charge for additional purchase payments is 4.00% of each additional purchase
payment (4.17% of the amount invested). There is no minimum Purchase Payment
under this contract.
PREMIUM TAX
Certain state and local governments impose premium taxes. These taxes
currently range from 0.5% to 5.0% depending upon jurisdiction. The Company, in
its sole discretion and in compliance with any applicable state law, will
determine the method used to recover premium tax expenses incurred. The
Company will deduct any applicable premium taxes from the Contract Value either
upon death, surrender, annuitization, or at the time Purchase Payments are made
to the Contract, but no earlier than when the Company has a tax liability under
state law.
MINIMUM DEATH BENEFIT AND MINIMUM ACCUMULATED VALUE BENEFIT CHARGE
There is no charge for the Minimum Death Benefit and the Minimum Accumulated
Value Benefit. (See "Death Benefit" and "Minimum Accumulated Value Benefit.")
INSURANCE CHARGE
There is an insurance charge against the assets of each Separate Account to
cover the mortality and expense risks associated with guarantees which the
Company provides under the Variable Annuity contracts. This charge, on an
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annual basis, is 1.0017% of the Separate Account value and is deducted on each
Valuation Date at the rate of 0.00363% for each day in the Valuation Period.
The mortality risk assumed by the Company under the contract assures an
Annuitant that neither the Annuitant's own longevity nor an improvement in life
expectancy generally will have any adverse effect on the monthly Annuity
Payments which will be paid under the contract and relieves the Owner from the
risk that the Annuitant will outlive the funds which have been accumulated for
retirement.
With respect to amounts which are not applied to provide an annuity (i.e.,
amounts which are surrendered for cash or which have been paid as Income
Payments), the Company bears no mortality risk and amounts previously charged
to cover this risk are of no benefit to the Owner.
The Company also assumes the risk that the charges under the contracts, which
cannot be increased during the duration of the contract, will be insufficient
to cover actual costs. The Company does not, however, project any deficiency
in the amount of the sales load.
If the amount deducted for these mortality and expense risks is not sufficient
to cover actual mortality costs and expense shortfalls, the loss is borne by
the Company. If the deduction is more than sufficient, the excess will be a
profit to the Company. The Company expects to make a profit from the insurance
charge.
INVESTMENT ADVISORY AND SUB-ADVISORY FEES
TAMIC furnishes investment management and advisory services to Account GIS
according to the terms of written agreements. TAMIC receives an amount
equivalent on an annual basis to 0.3233% of the average daily net assets of
Account QB. For Account GIS, TAMIC receives an amount equivalent on an annual
basis to the following:
<TABLE>
<CAPTION>
Annual Aggregate Net Asset
------ -------------------
Management Fee Value of the Account
--------------- --------------------
<S> <C> <C>
0.65% of the first $ 500,000,000, plus
0.55% of the next $ 500,000,000, plus
0.50% of the next $ 500,000,000, plus
0.45% of the next $ 500,000,000, plus
0.40% of amounts over $ 2,000,000,000
</TABLE>
TIMCO provides sub-advisory services to Account GIS in connection with the day
to day operations of the Account.
For furnishing investment Sub-Advisory services to Account GIS, TIMCO
is paid by TAMIC an amount equivalent on an annual basis to the following:
<TABLE>
<CAPTION>
Annual Aggregate Net Asset
------ -------------------
Sub-Advisory Fee Value of the Account
---------------- --------------------
<S> <C> <C>
0.45% of the first $ 700,000,000, plus
0.275% of the next $ 300,000,000, plus
0.25% of the next $ 500,000,000, plus
0.225% of the next $ 500,000,000, plus
0.20% of amounts over $ 2,000,000,000
</TABLE>
These fees are calculated daily and paid monthly.
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THE VARIABLE ANNUITIES
The individual Variable Annuities described in this Prospectus are both
insurance products and securities. As insurance products, they are subject to
the insurance laws and regulations of each state. The underlying product is an
annuity under which Purchase Payments are paid to the Company and credited to
the Owner's contract to accumulate until retirement.
The following brief description of the key features of the Variable Annuity is
subject to the specific terms of the contract itself. Reference should also be
made to the Glossary of Special Terms.
GENERAL BENEFIT DESCRIPTION
Under the Automatic Option, the Company will automatically begin paying Annuity
Payments to the Owner on the Maturity Date, if the Annuitant is then living.
(See "Automatic Option.") The Owner may choose instead a number of alternative
arrangements for benefit payments. If the Annuitant dies before a payout
begins, the Company will pay a death benefit under the Contract (see "Death
Benefit."). After the tenth Contract Year, a minimum amount is payable upon
the election of an Annuity Option with respect to amounts that were allocated
to Account QB during the accumulation period (see "Minimum Accumulated Value
Benefit").
TERMINATION BY THE COMPANY AND TERMINATION AMOUNT
No Purchase Payments after the first are required to keep the contract in
effect. However, the Company reserves the right to terminate the contract on
any Valuation Date if the Cash Value as of that date is less than $500 and
purchase payments have not been paid for at least three years. Termination will
not occur until 31 days after the Company has mailed notice of termination to
the Owner at the last known address and to any assignee of record. If the
contract is terminated, the Company will pay to the Owner the Cash Value of the
contract, if any, less any applicable premium tax not previously deducted.
DEFERRED MATURITY OPTION
Up to 30 days before the Maturity Date, the Owner may request (in writing) a
Deferred Maturity Date. The same terms and conditions applicable to the
contract before the Maturity Date will continue to the Deferred Maturity Date.
If the Annuitant dies before the Deferred Maturity Date, the Company will pay
the Cash Value to the beneficiary. The Deferred Maturity Date may be any time
before the Annuitant's 70th birthday, or, with the consent of the Company, any
later date. (See "Federal Tax Considerations.") If the Annuitant is living on
the Deferred Maturity Date, the annuity will be payable, unless otherwise
elected, under the same terms and conditions as the annuity that would have
been payable at the Maturity Date had a Deferred Maturity Date not been
elected. The amount of the Annuity Payment will be determined as described in
"Annuity Options."
SUSPENSION OF PAYMENTS
If a national stock exchange is closed (except for holidays or weekends), or
trading is restricted due to an existing emergency as defined by the SEC so
that disposal of the Separate Account's investments or determination of its net
asset value is not reasonably practicable, or the SEC has ordered that the
right of redemption (surrender) be suspended for the protection of Owners, the
Company may postpone all procedures (including making Annuity Payments) which
require valuation of Separate Accounts until the stock exchange is reopened and
trading is no longer restricted.
REQUIRED REPORTS
As often as required by law, but at least once in each Contract Year before the
due date of the first Annuity Payment, the Company will furnish a report which
will show the number of Accumulation Units credited to the
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contract in each Separate Account and the corresponding Accumulation Unit Value
as of the date of the report. The Company will keep all records required under
federal or state laws.
FEDERAL AND STATE INCOME TAX WITHHOLDING
The federal tax law requires income tax withholding on distributions from
pension plans and annuity contracts, unless the Owner, participant or
beneficiary elects not to have withholding apply. Some states also require
withholding from pension and annuity payments unless the Owner, participant or
beneficiary elects not to have withholding apply. (For further information on
federal withholding, see "Federal Income Tax Withholding.")
ACCUMULATION PROVISIONS
APPLICATION OF PURCHASE PAYMENTS
The initial Purchase Payment is due and payable before the contract becomes
effective. Each Purchase Payment is payable at the Company's Home Office.
If the application for the contract is in good order, the first net Purchase
Payment (the Purchase Payment after deduction of sales charges and any
applicable premium tax) will be applied by the Company to provide Accumulation
Units to the credit of the contract as of the valuation next following receipt
of the Purchase Payment in the mail at the Company's Home Office, or on the
date indicated by the applicant in the application for the contract, if later.
If the application for the contract is not in good order, the Company will
attempt to get it in good order within five business days. If it is not
complete at the end of this period, the Company will inform the applicant of
the reason for the delay and that the purchase payment will be returned
immediately unless the applicant specifically consents to the Company keeping
the Purchase Payments until the application is complete. Once the application
is complete, the net Purchase Payment will be applied within two business days.
Any net Purchase Payment after the first will be applied as of the valuation
next following its receipt in the mail at the Company's Home Office.
The net Purchase Payment will be allocated to the Separate Account in the
proportion specified in the application for the contract or as directed by the
Owner from time to time. The Owner may allocate all or part of each net
Purchase Payment to any Separate Account described in this Prospectus.
NUMBER OF ACCUMULATION UNITS
The number of Accumulation Units to be credited to a contract in each Separate
Account upon payment of a Purchase Payment will be determined by dividing the
Purchase Payment applied to the Separate Account by the current Accumulation
Unit Value of that Separate Account.
ACCUMULATION UNIT VALUE
The dollar value of an Accumulation Unit for each Separate Account was
established at $1.00 at its inception. The value of an Accumulation Unit on
any Valuation Date is determined by multiplying the value on the immediately
preceding Valuation Date by the net investment factor for the Valuation Period
just ended. The value of an Accumulation Unit on any date other than a
Valuation Date will be equal to its value as of the next succeeding Valuation
Date. The value of an Accumulation Unit may increase or decrease.
NET INVESTMENT RATE AND NET INVESTMENT FACTOR
Each Separate Account's net investment rate for any Valuation Period is equal
to the gross investment rate for that Separate Account less a deduction of
0.0000363 for Account QB, and 0.0000398 for Account GIS, for each day in the
Valuation Period. The gross investment rate for the Valuation Period is equal
to (i) the investment income and
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capital gains and losses, whether realized or unrealized, on the assets of the
Separate Account less a deduction for any applicable taxes, including income
taxes arising from income and realized and unrealized capital gains of the
Separate Account, divided by (ii) the amount of the assets at the beginning of
the Valuation Period.
At the present time, no federal taxes are deducted from the Separate Accounts.
(See "Federal Tax Considerations.") The gross investment rate for a Separate
Account may be either positive or negative.
The net investment factor for a Separate Account for any Valuation Period is
the sum of 1.000000 plus the net investment rate.
CASH VALUE
The Cash Value of the contract on any date will be equal to the sum of the
accumulated values in the Separate Accounts credited to that contract. The
accumulated value in a Separate Account is equal to the number of Accumulation
Units credited to the contract in that Separate Account, multiplied by the
Accumulation Unit Value for that Separate Account.
CASH SURRENDER (REDEMPTION) OR WITHDRAWAL VALUE
Before the due date of the first Annuity Payment, upon receipt of a written
request, the Company will pay all or any portion of the Cash Value, adjusted
for any applicable premium tax, to the Owner. The Company may defer payment
of any Cash Value for a period of not more than seven days after the request is
received in the mail at its Home Office, but it is its intent to pay as soon as
possible.
The amount of the Cash Value received may be more or less than the Purchase
Payments paid depending on the value of the contract at the time of surrender.
(For the federal income tax consequences of surrenders, see "Federal Tax
Considerations.")
DEATH BENEFIT
If the Annuitant dies before Annuity or Income Payments begin, the Company will
pay to the beneficiary the greater of (a) the Cash Value of the contract as of
the date it receives proof of death at its Home Office, less any premium tax
incurred, or (b) the total Purchase Payments made under the contract, less
prior surrenders or outstanding cash loans.
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MINIMUM ACCUMULATED VALUE BENEFIT UPON ELECTION OF AN ANNUITY--ACCOUNT QB
If an Annuity Option is elected after the tenth Contract Year, the amount
applied under an Annuity Option while there is Cash Value which has not been
applied to effect any Annuity or Income Options will not be less than the
following:
1. the sum of all net premiums allocated to Account QB under the contract,
plus
2. the sum of all amounts transferred into Account QB, minus
3. the sum of all amounts transferred out of Account QB, minus
4. any partial surrenders (whether paid in one sum or applied as an Annuity
or Income Option), minus
5. the value of Accumulation Units credited to this contract in Account QB
which are not applied to effect the Annuity.
This benefit is not available on contracts issued in California.
RIGHT TO RETURN
During the ten days following the delivery of the contract to the applicant,
the applicant may return the contract to the Company by mail or in person, if
for any reason the applicant has changed his or her mind. On return of the
contract, the Company will pay to the applicant the Cash Value determined as of
the Valuation Date next following receipt of the written request at the
Company's Home Office (or any other office which the Company may designate)
plus an amount equal to the difference between the Purchase Payment paid for
the contract and the Net Purchase Payment. The applicant bears the investment
risk during this period.
TRANSFER BETWEEN SEPARATE ACCOUNTS
At any time up to 30 days before the due date of the first Annuity Payment, the
Owner may, upon written request to the Company, transfer all or any part of the
Cash Value of the contract from one Separate Account to any other Separate
Account described in this Prospectus. The Company reserves the right to limit
the number of transfers between Separate Accounts, but will not limit transfers
to less than one in any six month period. The number of Accumulation Units
credited to the Separate Account from which the transfer is made will be
reduced. The reduction will be determined by dividing the amount transferred
by the Accumulation Unit Value for that Separate Account as of the next
valuation after the Company receives the request in the mail at its Home
Office. The number of Accumulation Units credited to the Separate Account to
which the transfer is made will be increased. The increase will be determined
by dividing the amount transferred, less the Separate Account transfer charge,
if any, by the Accumulation Unit Value for that Separate Account as of the next
valuation after the Company receives the written request from the Owner at its
Home Office. There is currently no Separate Account transfer charge. Once
Annuity Payments begin, no further transfers may be made between the Separate
Accounts.
PAYOUT PROVISIONS
SEPARATE ACCOUNT ALLOCATION
When Annuity Payments begin, the accumulated value in each Separate Account
will be applied to provide an Annuity with the amount of Annuity Payments
varying with the investment experience of that same Separate Account. As
described in "Transfer Between Separate Accounts," the Owner may elect to
transfer Cash Value from one Separate Account to another in order to reallocate
the basis on which Annuity Payments will be determined.
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DETERMINATION OF FIRST PAYMENT
The contract contains tables used to determine the first monthly Annuity
Payment. The amount applied to effect an Annuity will be the Cash Value of the
contract as of 14 days before the date Annuity Payments commence less any
applicable premium taxes not previously deducted.
The amount of the first monthly payment depends on the Annuity Option elected
(see "Automatic Option") and the adjusted age of the Annuitant. A formula for
determining the adjusted age is contained in the contract. The tables are
determined from the Progressive Annuity Table assuming births in the year 1900
and an assumed annual net investment rate of 3.5%. (When permitted by state
law, the Company may allow the contract owner to elect an assumed net
investment rate other than the 3.5% specified in the contract. In that event,
the first monthly payment would differ from that shown in the contract. A
higher interest rate assumption would mean a higher initial payment but more
slowly rising subsequent payments or more rapidly falling subsequent payments.
A lower assumption would have the opposite effect.) The total first monthly
Annuity Payment is determined by multiplying the benefit per $1,000 of value
shown in the tables of the contract by the number of thousands of dollars of
value of the contract applied to that Annuity Option. The Company reserves the
right to require proof of age before Annuity Payments begin.
ANNUITY UNIT VALUE
The dollar value of an Annuity Unit for each Separate Account was established
at $1.00 at inception. The value of an Annuity Unit as of any Valuation Date
is determined 14 days in advance in order to allow adequate time for the
required calculations and mailing of annuity checks in advance of their due
dates. (If the date 14 days in advance is not a Valuation Date, the
calculation is made on the next following Valuation Date, which would generally
be 13 or 12 days in advance.)
Specifically, the Annuity Unit Value for a Separate Account as of a Valuation
Date is equal to (a) the value of the Annuity Unit on the immediately preceding
Valuation Date multiplied by (b) the net investment factor for the Valuation
Period ending on or next following 14 days prior to the current Valuation Date,
divided by (c) the assumed net investment factor for the Valuation Period.
(For example, the assumed net investment factor based on an annual assumed net
investment rate of 3.5% for a Valuation Period of one day is 1.0000942 and, for
a period of two days, is 1.0000942 x 1.0000942.)
The value of an Annuity Unit as of any date other than a Valuation Date is
equal to its value on the next succeeding Valuation Date.
NUMBER OF ANNUITY UNITS
The number of Annuity Units credited to the contract is determined by dividing
the first monthly Annuity Payment attributable to each Separate Account by the
Separate Account's Annuity Unit Value as of the due date of the first Annuity
Payment. The number of Annuity Units remains fixed during the annuity period.
DETERMINATION OF SECOND AND SUBSEQUENT PAYMENTS
The dollar amount of the second and subsequent Annuity Payments is not
predetermined and may change from month to month based on the investment
experience of either or both of the Separate Accounts. The actual amounts of
these payments are determined by multiplying the number of Annuity Units
credited to the contract in each Separate Account by the corresponding Annuity
Unit Value as of the date on which payment is due. The interest rate assumed
in the annuity tables would produce a level Annuity Unit Value and, therefore,
level Annuity Payments if the net investment rate remained constant at the
assumed rate. In fact, payments will vary up or down as the net investment
rate varies up or down from the assumed rate, and there can be no assurance
that a net investment rate will be as high as the assumed rate.
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ANNUITY OPTIONS
Subject to conditions in "Election of Options," all or any part of the Cash
Value of the contract otherwise payable in one sum to the Owner on the Maturity
Date or prior Cash Surrender of the contract, or amounts payable under the
contract in one sum to the beneficiary upon the death of the Annuitant, may be
paid under one or more of the Annuity Options below.
AUTOMATIC OPTION--Unless otherwise specified in the application or the plan and
if no election has been made, if the Annuitant is then living on the Maturity
Date, the Company will pay to the Owner the first of a series of Annuity
Payments based on the life of the Annuitant, in accordance with Option 2 with
120 monthly payments assured.
OPTION 1--LIFE ANNUITY--NO REFUND: The Company will make monthly Annuity
Payments during the lifetime of the person on whose life the payments are
based, terminating with the last monthly payment preceding death. This option
offers the maximum monthly payment, since there is no assurance of a minimum
number of payments or provision for a death benefit for beneficiaries. It
would be possible under this option to receive only one Annuity Payment if the
Annuitant died before the due date of the second Annuity Payment, only two if
the Annuitant died before the third Annuity Payment, etc.
OPTION 2--LIFE ANNUITY WITH 120, 180 OR 240 MONTHLY PAYMENTS ASSURED: The
Company will make monthly Annuity Payments during the lifetime of the person on
whose life payments are based, with the agreement that if, at the death of that
person, payments have been made for less than 120, 180 or 240 months, as
elected, payments will be continued during the remainder of the period to the
beneficiary designated. The beneficiary may instead receive a single sum
settlement equal to the discounted value of the future payments with the
interest rate equivalent to the assumption originally used when the Annuity
began.
OPTION 3--UNIT REFUND LIFE ANNUITY: The Company will make monthly Annuity
Payments during the lifetime of the person on whose life payments are based,
terminating with the last payment due before the death of that person, provided
that, at death, the beneficiary will receive in one sum the current dollar
value of the number of Annuity Units equal to (a) minus (b) (if that difference
is positive) where (a) is the total amount applied under the option divided by
the Annuity Unit Value on the due date of the first Annuity Payment, and (b) is
the product of the number of the Annuity Units represented by each payment and
the number of payments made.
OPTION 4--JOINT AND LAST SURVIVOR LIFE ANNUITY--NO REFUND: The Company will
make monthly Annuity Payments during the joint lifetime of the two persons on
whose lives payments are based, and during the lifetime of the survivor. No
further payments will be made following the death of the survivor. It would be
possible under this option to receive only one Annuity Payment if both
Annuitants died before the due date of the second Annuity Payment, only two if
they died before the third Annuity Payment, etc.
OPTION 5--JOINT AND LAST SURVIVOR LIFE ANNUITY--ANNUITY REDUCES ON DEATH OF
PRIMARY PAYEE: The Company will make monthly Annuity Payments during the
lifetime of the two persons on whose lives payments are based. One of the two
persons will be designated as the primary payee. The other will be designated
as the secondary payee. On the death of the secondary payee, if survived by
the primary payee, the Company will continue to make monthly Annuity Payments
to the primary payee in the same amount that would have been payable during the
joint lifetime of the two persons. On the death of the primary payee, if
survived by the secondary payee, the Company will continue to make Annuity
Payments to the secondary payee, in an amount equal to 50% of the payments
which would have been made during the lifetime of the primary payee. No
further payments will be made following the death of the survivor.
OPTION 6--OTHER ANNUITY OPTIONS: The Company will make any other arrangements
for Annuity Payments as may be mutually agreed upon.
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INCOME OPTIONS
Subject to the conditions described under "Election of Options" below, all or
any part of the Cash Value of the contract otherwise payable in one sum to the
Owner on the Maturity Date or prior Cash Surrender of the contract, or amounts
payable under the contract in one sum to the beneficiary on the death of the
Annuitant, may be paid under one or more of the income options described below.
OPTION 1--PAYMENTS OF A FIXED AMOUNT: The Company will make equal monthly
payments of the amount elected until the Cash Value applied under this option
has been exhausted. The first monthly payment will be paid from each Separate
Account in the same proportion that the respective Cash Values bear to the
total Cash Value applied as of fourteen days before the first payment is due.
The second and subsequent payments from each Separate Account will be the same
as the first payment under this option. The final payment will include any
amount insufficient to make another full payment.
OPTION 2--PAYMENTS FOR A FIXED PERIOD: The Company will make monthly payments
for the number of years selected. The amount of each payment will be equal to
the remaining Cash Value applied under this option divided by the number of
remaining payments.
OPTION 3--INVESTMENT INCOME: The Company will make monthly payments during the
lifetime of the primary payee, or for the period agreed on. The amount payable
will be equal to the excess, if any, of the Cash Value under this option over
the amount applied under this option. No payment will be made if the Cash
Value is less than the amount applied, and it is possible that no payments
would be made for a period of time. Payments under this option are not
considered to be Annuity Payments and are taxable in full as ordinary income.
(See "Federal Tax Considerations.")
The Cash Value used to determine the amount of any Income Payment will be
calculated as of 14 days before the date an Income Payment is due and will be
determined on the same basis as the Cash Value of the contract, including the
deduction for mortality risks. Income Options differ from Annuity Options in
that the amount of the payments made under Income Options are unrelated to the
length of life of any person. Although the Company continues to deduct the
charge for mortality and expense risks, it assumes no mortality risks for
amounts applied under any Income Option. Moreover, except with respect to
lifetime payments of investment income under Income Option 3, payments are
unrelated to the actual life span of any person. Thus, the Annuitant may
outlive the payment period. While Income Options do not directly involve
mortality risks for the Company, an Owner may elect to apply the remaining Cash
Value to provide an Annuity at the guaranteed rates even though Income
Payments have been received under an Income Option. Before an Owner makes any
Income Option election, he or she should consult a tax adviser as to any
adverse tax consequences the election might have.
ELECTION OF OPTIONS
Election of an option must be made in writing in a form satisfactory to the
Company. Any election made during the lifetime of the Annuitant must be made
by the Owner of the contract. The terms of the options elected by some
beneficiaries may be restricted to meet the qualification requirements of
Section 72(s) of the Internal Revenue Code. If, at the death of the Annuitant,
there is no election in effect for that Annuitant, election of an option must
be made by the beneficiary entitled to any death benefit payable in one sum
under the contract. The minimum amount that can be placed under an Annuity or
Income Option will be $2,000 unless the Company consents to a lesser amount.
If any monthly periodic payment due any payee is less than $20, the Company
reserves the right to make payments at less frequent intervals.
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FEDERAL TAX CONSIDERATIONS
GENERAL
The Company is taxed as a life insurance company under Subchapter L of the
Internal Revenue Code (the "Code"). The Separate Accounts that form the
investment alternatives described herein are treated as part of the total
operations of the Company and are not taxed separately. Investment income and
gains of a Separate Account that are credited to a purchaser's contract of
insurance incur no current federal income tax. Generally, amounts credited to
a contract are not taxable until received by the Owner, participant or
beneficiary, either in the form of Annuity Payments or other distributions.
NONQUALIFIED ANNUITIES
Individuals may purchase tax-deferred annuities without tax law funding limits.
The Purchase Payments receive no tax benefit, deduction or deferral, but
increases in the value of the contract are generally deferred from tax until
distribution. If a nonqualified annuity is owned by other than an individual,
however, (e.g., by a corporation), the increases in value attributable to
Purchase Payments made after February 28, 1986 are includable in income
annually. Furthermore, for contracts issued after April 22, 1987, all deferred
increases in value will be includable in the income of an Owner when that Owner
transfers the contract without adequate consideration.
The federal tax law requires nonqualified annuity contracts issued on or after
January 19, 1985 to meet minimum mandatory distribution requirements upon the
death of the Contract Owner. Failure to meet these requirements will cause the
succeeding Contract Owner or beneficiary to lose the tax benefits associated
with annuity contracts, i.e., primarily the tax deferral prior to distribution.
The distribution required depends upon whether an Annuity Option is elected or
whether the succeeding Owner is the surviving spouse. Contracts will be
administered by the Company in accordance with these rules.
If two or more nonqualified annuity contracts are purchased from the same
insurer within the same calendar year, distributions from any of them will be
taxed based upon the amount of income in all of the same calendar year series
of annuities. This will generally have the effect of causing taxes to be paid
sooner on the deferred gain in the contracts.
Those receiving partial distributions made before annuitization of a contract
will generally be taxed on an income-first basis to the extent of income in the
contract. Certain pre-August 14, 1982 deposits into a nonqualified annuity
contract that have been placed in the contract by means of a tax-deferred
exchange under Section 1035 of the Code may be withdrawn first without income
tax liability. This information on deposits must be provided to the Company by
the other insurance company at the time of the exchange. There is income in
the contract generally to the extent the Cash Value exceeds the investment in
the contract. The investment in the contract is equal to the amount of
premiums paid less any amount received previously which was excludable from
gross income. Any direct or indirect borrowing against the value of the
contract or pledging of the contract as security for a loan will be treated as
a cash withdrawal under the tax law.
With certain exceptions, the law will impose an additional tax if a Contract
Owner makes a withdrawal of any amount under the contract which is allocable to
an investment made after August 13, 1982. The amount of the additional tax
will be 10% of the amount includable in income by the Contract Owner because of
the withdrawal. The additional tax will not be imposed if the amount is
received on or after the Contract Owner reaches the age of 59 1/2, or if the
amount is one of a series of substantially equal periodic payments made for
life or life expectancy of the taxpayer. The additional tax will not be
imposed if the withdrawal or partial surrender follows the death or disability
of the Contract Owner.
FEDERAL INCOME TAX WITHHOLDING
The portion of a distribution which is taxable income to the recipient will be
subject to federal income tax
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withholding, generally pursuant to Section 3405 of the Code. The application
of this provision is summarized below.
1. NON-PERIODIC DISTRIBUTIONS (FULL OR PARTIAL REDEMPTIONS)
The portion of a non-periodic distribution which constitutes taxable
income will be subject to federal income tax withholding, to the extent
such aggregate distributions exceed $200 for the year, unless the
recipient elects not to have taxes withheld. If an election out is not
provided, 10% of the taxable distribution will be withheld as federal
income tax. Election forms will be provided at the time distributions
are requested. This form of withholding applies to all annuity
programs.
2. PERIODIC DISTRIBUTIONS (DISTRIBUTIONS PAYABLE OVER A PERIOD GREATER THAN
ONE YEAR)
The portion of a periodic distribution which constitutes taxable income
will be subject to federal income tax withholding under the wage
withholding tables as if the recipient were married claiming three
exemptions. A recipient may elect not to have income taxes withheld or
have income taxes withheld at a different rate by providing a completed
election form. Election forms will be provided at the time
distributions are requested. This form of withholding applies to all
annuity programs. As of January 1, 1998, a recipient receiving periodic
payments (e.g., monthly or annual payments under an Annuity Option)
which total $15,200 or less per year, will generally be exempt from the
withholding requirements.
Recipients who elect not to have withholding made are liable for payment of
federal income tax on the taxable portion of the distribution. All recipients
may also be subject to penalties under the estimated tax payment rules if
withholding and estimated tax payments are not sufficient.
Recipients who do not provide a social security number or other taxpayer
identification number will not be permitted to elect out of withholding.
Additionally, United States citizens residing outside of the country, or U.S.
legal residents temporarily residing outside the country, are not permitted to
elect out of withholding.
TAX ADVICE
Because of the complexity of the law and the fact that the tax results will
vary according to the factual status of the individual involved, tax advice may
be needed by a person contemplating purchase of an annuity contract and by an
Owner, participant or beneficiary who may make elections under a contract. It
should be understood that the foregoing description of the federal income tax
consequences under these contracts is not exhaustive and that special rules are
provided with respect to situations not discussed here. It should be
understood that if a tax-benefited plan loses its exempt status, employees
could lose some of the tax benefits described. For further information, a
qualified tax adviser should be consulted.
DISTRIBUTION OF VARIABLE ANNUITY CONTRACTS
The Company intends to sell the contracts in all jurisdictions where the
Company is licensed to do business, except Puerto Rico, and the Bahamas. The
contracts will be sold by agents who are licensed by state insurance
authorities to sell variable annuity contracts issued by the Company, and who
are also registered representatives of broker-dealers which have Selling
Agreements with Tower Square Securities, Inc. ("Tower Square"). Tower Square,
whose principal business address is One Tower Square, Hartford, Connecticut,
serves as the principal underwriter for the variable annuity insurance
contracts described herein. Tower Square is registered as a broker-dealer with
the SEC under the Securities Exchange Act of 1934, and is a member of the
National Association of Securities Dealers, Inc. ("NASD"). Tower Square is an
affiliate of the Company and an indirect wholly owned subsidiary of Travelers
Group Inc., and serves as principal underwriter pursuant to a Distribution and
Underwriting Agreement to which Accounts GIS and QB, the Company and Tower
Square are parties. No amounts have been or will be retained by Tower Square
for acting as principal underwriter for the Contracts.
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<PAGE> 122
Agents will be compensated for sales of the Contracts on a commission and
service fee basis. The compensation paid to said agents will not exceed 7% of
the payments made under the Contract. In addition, certain production,
persistency and managerial bonuses may be paid.
From time to time the Company may pay or permit other promotional incentives,
in cash, credit or other compensation.
STATE REGULATION
The Company is subject to the laws of the state of Connecticut governing
insurance companies and to regulation by the Insurance Commissioner of the
state of Connecticut. An annual statement in a prescribed form must be filed
with that Commissioner on or before March 1 in each year covering the
operations of the Company for the preceding year and its financial condition on
December 31 of such year. Its books and assets are subject to review or
examination by the Commissioner or his agents at all times, and a full
examination of its operations is conducted by the National Association of
Insurance Commissioners ("NAIC") at least once in every four years.
In addition, the Company is subject to the insurance laws and regulations of
the other states in which it is licensed to operate. Generally, the insurance
departments of the states apply the laws of the jurisdiction of domicile in
determining the field of permissible investments.
YEAR 2000 REQUIREMENTS
Generally, computer programs were designed without considering the
impact of the upcoming change in the century. As a result, software and
computer systems may need to be upgraded or replaced in order to comply with
"Year 2000" requirements. If not corrected, these computer applications could
fail or create erroneous results by or at the Year 2000. The business,
financial condition, and results of operations of a company could be materially
and adversely affected by the failure of its systems and applications (or those
either provided or operated by third-parties) to properly operate or manage
dates beyond the year 1999.
The Company has investigated the nature and extent of the work required
for our computer systems to process beyond the turn of the century, and has
made progress toward achieving this goal, including upgrading and/or replacing
existing systems. We are confirming with our service providers that they are
also in the process of replacing or modifying their systems with the same
goal. We expect that our principal systems will be Year 2000 compliant by
early 1999. While these efforts involve substantial costs, we closely monitor
associated costs and continue to evaluate associated risks based on actual
expenses. While it is likely that these efforts will be successful, if
necessary modifications and conversions are not completed in a timely manner,
the Year 2000 requirements could have a material adverse effect on certain
operations of the Company.
LEGAL PROCEEDINGS AND OPINIONS
There are no pending material legal proceedings affecting the Separate
Accounts, the Principal Underwriter or the Company.
Legal matters in connection with federal laws and regulations affecting the
issue and sale of the Variable Annuity contracts described in this Prospectus
and the organization of the Company, its authority to issue Variable Annuity
contracts under Connecticut law and the validity of the forms of the Variable
Annuity contracts under Connecticut law have been passed on by the General
Counsel of the Company.
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APPENDIX A
CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
The SAI contains more specific information and financial statements relating to
the Separate Accounts and The Travelers Insurance Company. A list of the
contents of the SAI is set forth below:
Description of The Travelers and the Separate Accounts
The Insurance Company
The Separate Accounts
Investment Objectives and Policies
The Travelers Growth and Income Stock Account for Variable Annuities
The Travelers Quality Bond Account for Variable Annuities
Description of Certain Types of Investments and Investment Techniques Available
to the Separate Accounts
Writing Covered Call Options
Buying Put and Call Options
Futures Contracts
Money Market Instruments
Investment Management and Advisory Services
Advisory and Subadvisory Fees
TAMIC
TIMCO
Valuation of Assets
The Board of Managers
Distribution and Management Services
Securities Custodian
Independent Accountants
Financial Statements
- --------------------------------------------------------------------------------
COPIES OF THE SAI DATED MAY 1, 1998 (FORM NO. L11895S), ARE AVAILABLE WITHOUT
CHARGE. TO REQUEST A COPY, PLEASE CLIP THIS COUPON ON THE DOTTED LINE ABOVE,
ENTER YOUR NAME AND ADDRESS IN THE SPACES PROVIDED BELOW, AND MAIL TO: THE
TRAVELERS INSURANCE COMPANY, ANNUITY SERVICES, ONE TOWER SQUARE, HARTFORD,
CONNECTICUT 06183-5030.
Name:
-------------------------------------------------------------
Address:
----------------------------------------------------------
- ------------------------------------------------------------------
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THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT
FOR VARIABLE ANNUITIES
AND
THE TRAVELERS QUALITY BOND ACCOUNT
FOR VARIABLE ANNUITIES
INDIVIDUAL VARIABLE ANNUITY CONTRACTS
Issued By
THE TRAVELERS INSURANCE COMPANY
Individual Purchases
L-11895 TIC Ed. 5-98
Printed in U.S.A.
<PAGE> 125
PART B
INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
<PAGE> 126
UNIVERSAL ANNUITY
STATEMENT OF ADDITIONAL INFORMATION: MAY 1, 1998
THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES
THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES
THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES
THE TRAVELERS TIMED GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES
THE TRAVELERS TIMED SHORT-TERM BOND ACCOUNT FOR VARIABLE ANNUITIES
THE TRAVELERS TIMED AGGRESSIVE STOCK ACCOUNT FOR VARIABLE ANNUITIES
THE TRAVELERS TIMED BOND ACCOUNT FOR VARIABLE ANNUITIES
THE TRAVELERS FUND U FOR VARIABLE ANNUITIES
VARIABLE ANNUITY CONTRACTS
ISSUED BY
THE TRAVELERS INSURANCE COMPANY
This Statement of Additional Information is not a prospectus but
relates to, and should be read in conjunction with, the Prospectus dated May 1,
1998. A copy of the Prospectus may be obtained by writing to The Travelers
Insurance Company (the "Company"), Annuity Services, One Tower Square,
Hartford, Connecticut 06183- 5030, or by calling 1-800-842-9368. This Statement
of Additional Information should be read in conjunction with the accompanying
1997 Annual Report for the Separate Accounts.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
DESCRIPTION OF THE TRAVELERS INSURANCE COMPANY AND THE SEPARATE ACCOUNTS . . . . . . . . . 1
The Insurance Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Separate Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Travelers Growth and Income Stock Account for Variable Annuities . . . . . . . . . . 2
The Travelers Timed Growth and Income Stock Account for Variable Annuities . . . . . . . 2
The Travelers Timed Aggressive Stock Account for Variable Annuities. . . . . . . . . . . 3
The Travelers Quality Bond Account for Variable Annuities. . . . . . . . . . . . . . . . 4
The Travelers Timed Bond Account for Variable Annuities. . . . . . . . . . . . . . . . . 6
The Travelers Money Market Account for Variable Annuities. . . . . . . . . . . . . . . . 7
The Travelers Timed Short-Term Bond Account for Variable Annuities . . . . . . . . . . . 8
DESCRIPTION OF CERTAIN TYPES OF INVESTMENTS AND INVESTMENT TECHNIQUES
AVAILABLE TO THE SEPARATE ACCOUNTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
WRITING COVERED CALL OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
BUYING PUT AND CALL OPTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
FUTURES CONTRACTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
MONEY MARKET INSTRUMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
INVESTMENT MANAGEMENT AND ADVISORY SERVICES . . . . . . . . . . . . . . . . . . . . . . . . 16
Advisory Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
TIMCO. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
TAMIC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
VALUATION OF ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
NET INVESTMENT FACTOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
FEDERAL TAX CONSIDERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
PERFORMANCE DATA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Yield Quotations of Account MM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Average Annual Total Return Quotations of Accounts GIS, QB, MM, TGIS, TSB, TAS, TB and
Fund U. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
THE BOARD OF MANAGERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
DISTRIBUTION AND MANAGEMENT SERVICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SECURITIES CUSTODIAN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
<PAGE> 127
DESCRIPTION OF THE TRAVELERS INSURANCE COMPANY
AND THE SEPARATE ACCOUNTS
THE INSURANCE COMPANY
The Travelers Insurance Company (the "Company") is a stock insurance
company chartered in 1864 in Connecticut and continuously engaged in the
insurance business since that time. The Company is a wholly owned subsidiary of
The Travelers Insurance Group, Inc., a holding company which is an indirect
wholly owned subsidiary of Travelers Group Inc., a financial services holding
company. The Company's Home Office is located at One Tower Square, Hartford,
Connecticut 06183.
STATE REGULATION. The Company is subject to the laws of the state of
Connecticut governing insurance companies and to regulation by the Insurance
Commissioner of the state of Connecticut. An annual statement covering the
operations of the Company for the preceding year, as well as its financial
conditions as of December 31 of such year, must be filed with the Commissioner
in a prescribed format on or before March 1 of each year. The Company's books
and assets are subject to review or examination by the Commissioner or his
agents at all times, and a full examination of its operations is conducted at
least once every four years.
The Company is also subject to the insurance laws and regulations of
all other states in which it is licensed to operate. However, the insurance
departments of each of these states generally apply the laws of the home state
(jurisdiction of domicile) in determining the field of permissible investments.
THE SEPARATE ACCOUNTS
Each of the Separate Accounts available under the variable annuity
contracts described in this Statement of Additional Information meets the
definition of a separate account under federal securities laws, and will comply
with the provisions of the Investment Company Act of 1940, as amended (the
"1940 Act"). Additionally, the operations of each of the Separate Accounts are
subject to the provisions of Section 38a-433 of the Connecticut General
Statutes which authorize the Connecticut Insurance Commissioner to adopt
regulations under it. The Section contains no restrictions on investments of
the Separate Accounts, and the Commissioner has adopted no regulations under
the Section that affect the Separate Accounts.
It is conceivable that in the future it may be disadvantageous for both
variable annuity and variable life insurance separate accounts, or for variable
separate accounts of different insurance companies, to invest simultaneously in
the same portfolios (calle "mixed" and "shared" funding). Currently neither the
insurance companies nor the portfolios foresee any such disadvantages to the
companies or to variable contract owners. Each portfolio's board of trustees,
directors or managers intends to monitor events in order to identify any
material conflicts between such policy owners and to determine what action, if
any, should be taken in response thereto.
INVESTMENT RESTRICTIONS
The Separate Accounts described below each have different investment
objectives and policies, as discussed in the Prospectus under "The Managed
Separate Accounts." Each Managed Separate Account has certain fundamental
investment restrictions which are set forth below. Neither the investment
objective nor the fundamental investment restrictions can be changed without a
vote of a majority of the outstanding voting securities of the Accounts, as
defined in the 1940 Act. Additionally, in accomplishing their respective
investment objectives, each Account uses certain types of investments and
investment techniques which are discussed under "Description of Certain Types
of Investments and Investment Techniques Available to the Separate Accounts."
The percentage restrictions (for either fundamental investment
policies or investment restrictions) are interpreted such that if they are
adhered to at the time of investment, a later increase in a percentage beyond
the specified limit resulting from a change in the values of portfolio
securities or in the amount of net assets shall not be considered a violation.
It must be recognized that there are risks inherent in the ownership of any
investment and that there can be no assurance that the investment objectives of
the Separate Accounts will be achieved.
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<PAGE> 128
THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES
THE TRAVELERS TIMED GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES
INVESTMENT RESTRICTIONS
The investment restrictions for Accounts GIS and TGIS, as set forth
below, are identical, except where indicated. The investment restrictions set
forth in items 1 through 9 are fundamental and may not be changed without a
vote of a majority of the outstanding voting securities of Account GIS or
Account TGIS, as defined in the 1940 Act. Items 10 through 13 may be changed by
a vote of the Board of Managers of Account GIS or Account TGIS.
1. Not more than 5% of the assets of the Account will be invested
in the securities of any one issuer, except obligations of the
United States Government and its instrumentalities.
2. Borrowings will not be made, except that the right is reserved
to borrow from banks for emergency purposes, provided that such
borrowings will not exceed 5% of the value of the assets of
Account GIS, or 10% of the value of the assets of Account TGIS,
and that immediately after the borrowing, and at all times
thereafter, and while any such borrowing is unrepaid, there
will be asset coverage of at least 300% for all borrowings of
the Account.
3. Securities of other issuers will not be underwritten, except
that the Account could be deemed an underwriter when engaged in
the sale of restricted securities. (See item 13.)
4. Interests in real estate will not be purchased, except as may
be represented by securities for which there is an established
market.
5. No purchase of commodities or commodity contracts will be made,
except transactions involving financial futures in order to
limit transaction and borrowing costs and for hedging purposes,
as discussed above.
6. Loans will be made only through the acquisition of a portion of
privately placed issue of bonds, debentures or other evidences
of indebtedness of a type customarily purchased by
institutional investors. (See item 13.)
7. Investments will not be made in the securities of a company for
the purpose of exercising management or control.
8. Not more than 10% of the voting securities of any one issuer
will be acquired. (It is the present practice of the Account
not to exceed 5% of the voting securities of any one issuer.)
9. Senior securities will not be issued.
10. Short sales of securities will not be made.
11. Purchases will not be made on margin, except for short-term
credits which are necessary for the clearance of transactions,
and for the placement of not more than 5% of its net asset
value in total margin deposits for positions in futures
contracts.
12. The Account will not invest in the securities of other
investment companies, except as part of a plan of merger,
consolidation or acquisition of assets.
13. Not more than 5% of the value of the assets of the Account may
be invested in restricted securities (securities which may not
be publicly offered without registration under the Securities
Act of 1933).
Changes in the investments of Accounts GIS and TGIS may be made from
time to time to take into account changes in the outlook for particular
industries or companies. The Accounts' investments will not, however, be
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<PAGE> 129
concentrated in any one industry; that is, no more than 25% of the value of
their assets will be invested in any one industry. While Accounts GIS and TGIS
may occasionally invest in foreign securities, it is not anticipated that such
investments will, at any time, account for more than 10% of their investment
portfolios.
The assets of Accounts GIS and TGIS will be kept fully invested,
except that (a) sufficient cash may be kept on hand to provide for variable
annuity contract obligations, and (b) reasonable amounts of cash, United States
Government or other liquid securities, such as short-term bills and notes, may
be held for limited periods, pending investment in accordance with their
respective investment policies.
PORTFOLIO TURNOVER
Although Accounts GIS and TGIS intend to purchase securities for
long-term appreciation of capital and income, and do not intend to place
emphasis on obtaining short-term trading profits, such short-term trading may
occur. A higher turnover rate should not be interpreted as indicating a
variation from the stated investment policy of seeking long-term accumulation
of capital, and will normally increase the brokerage costs of Accounts GIS and
TGIS. However, negotiated fees and the use of futures contracts will help to
reduce brokerage costs. While there is no restriction on portfolio turnover,
Account GIS expects to have a moderate to high level of portfolio turnover in
the range of 150% to 300%, and Account TGIS expects that its portfolio turnover
will be higher than normal since the Account is being timed by third party
investment advisory services. The portfolio turnover rate for Account GIS for
the years ended December 31, 1995, 1996 and 1997 was 96%, 85% and 64%,
respectively. The portfolio turnover rate for Account TGIS for the years ended
December 31, 1995, 1996 and 1997 was 79%, 81% and 63%, respectively.
THE TRAVELERS TIMED AGGRESSIVE STOCK ACCOUNT FOR VARIABLE ANNUITIES
INVESTMENT RESTRICTIONS
The investment restrictions set forth below are fundamental and may
not be changed without a vote of a majority of the outstanding voting
securities of Account TAS, as defined in the 1940 Act. Account TAS may not:
1. invest more than 5% of its total assets, computed at market
value, in the securities of any one issuer;
2. invest in more than 10% of any class of securities of any one
issuer;
3. invest more than 5% of the value of its total assets in
companies which have been in operation for less than three
years;
4. borrow money, except to facilitate redemptions or for emergency
or extraordinary purposes and then only from banks and in
amounts of up to 10% of its gross assets computed at cost;
while outstanding, a borrowing may not exceed one-third of the
value of its net assets, including the amount borrowed; Account
TAS has no intention of attempting to increase its net income
by means of borrowing and all borrowings will be repaid before
additional investments are made; assets pledged to secure
borrowings shall be no more than the lesser of the amount
borrowed or 10% of the gross assets of Account TAS computed at
cost;
5. underwrite securities, except that Account TAS may purchase
securities from issuers thereof or others and dispose of such
securities in a manner consistent with its other investment
policies; in the disposition of restricted securities the
Account may be deemed to be an underwriter, as defined in the
Securities Act of 1933 (the "1933 Act");
6. purchase real estate or interests in real estate, except
through the purchase of securities of a type commonly purchased
by financial institutions which do not include direct interest
in real estate or mortgages, or commodities or commodity
contracts, except transactions involving financial futures in
order to limit transaction and borrowing costs and for hedging
purposes as described above;
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<PAGE> 130
7. invest for the primary purpose of control or management;
8. make margin purchases or short sales of securities, except for
short-term credits which are necessary for the clearance of
transactions, and to place not more than 5% of its net asset
value in total margin deposits for positions in futures
contracts;
9. make loans, except that Account TAS may purchase money market
securities, enter into repurchase agreements, buy publicly and
privately distributed debt securities and lend limited amounts
of its portfolio securities to broker- dealers; all such
investments must be consistent with the Account's investment
objective and policies;
10. invest more than 25% of its total assets in the securities of
issuers in any single industry;
11. purchase the securities of any other investment company,
except in the open market and at customary brokerage rates and
in no event more than 3% of the voting securities of any
investment company;
12. invest in interests in oil, gas or other mineral exploration
or development programs; or
13. invest more than 5% of its net assets in warrants, valued at
the lower of cost or market; warrants acquired by the Account
in units or attached to securities will be deemed to be without
value with regard to this restriction. Account TAS is subject
to restrictions in the sale of portfolio securities to, and in
its purchase or retention of securities of, companies in which
the management personnel of The Travelers Investment Management
Company ("TIMCO") have a substantial interest.
Account TAS may make investments in an amount of up to 10% of the
value of its net assets in restricted securities which may not be publicly sold
without registration under the 1933 Act. In most instances such securities are
traded at a discount from the market value of unrestricted securities of the
same issuer until the restriction is eliminated. If and when Account TAS sells
such portfolio securities, it may be deemed an underwriter, as such term is
defined in the 1933 Act, with respect thereto, and registration of such
securities under the 1933 Act may be required. Account TAS will not bear the
expense of such registration. Account TAS intends to reach agreements with all
such issuers whereby they will pay all expenses of registration. In determining
securities subject to the 10% limitation, Account TAS will include, in addition
to restricted securities, repurchase agreements maturing in more than seven
days and other securities not having readily available market quotations.
PORTFOLIO TURNOVER
Although Account TAS intends to invest in securities selected
primarily for prospective capital growth and does not intend to place emphasis
on obtaining short-term trading profits, such short-term trading may occur. A
high turnover rate should not be interpreted as indicating a variation from the
stated investment policy, and will normally increase Account TAS's brokerage
costs. While there is no restriction on portfolio turnover, Account TAS's
portfolio turnover rate may be high since the Account is being timed by third
party investment advisory services. The portfolio turnover rate for the years
ended December 31, 1995, 1996 and 1997 was 113%, 98% and 92%, respectively.
THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES
INVESTMENT RESTRICTIONS
The investment restrictions set forth in items 1 through 9 below are
fundamental and may not be changed without a vote of a majority of the
outstanding voting securities of Account QB, as defined in the 1940 Act.
Items 10 through 13 may be changed by a vote of the Board of Managers of
Account QB.
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1. Not more than 15% of the value of the assets of Account QB will
be invested in the securities of any one issuer, except
obligations of the United States Government and its
instrumentalities, for which there is no limit.
2. Borrowings will not be made, except that the right is reserved
to borrow from banks for emergency purposes, provided that
these borrowings will not exceed 5% of the value of the assets
of Account QB and that immediately after the borrowing, and at
all times thereafter, and while any borrowing is unrepaid,
there will be asset coverage of at least 300% for all
borrowings of Account QB.
3. Securities of other issuers will not be underwritten, except
that Account QB could be deemed to be an underwriter when
engaged in the sale of restricted securities.
4. Interests in real estate will not be purchased, except as may
be represented by securities for which there is an established
market.
5. No purchase of commodities or commodity contracts will be made,
except transactions involving financial futures used as a hedge
against unanticipated changes in prevailing levels of interest
rates.
6. Loans will be made only through the acquisition of a portion of
privately placed issue of bonds, debentures and other evidences
of indebtedness of a type customarily purchased by
institutional investors.
7. Investments will not be made in the securities of a company for
the purpose of exercising management or control.
8. Not more than 10% of the voting securities of any one issuer
will be acquired.
9. Senior securities will not be issued.
10. Short sales of securities will not be made.
11. Purchases will not be made on margin, except for any short-term
credits that are necessary for the clearance of transactions
and to place up to 5% of the value of its net assets in total
margin deposits for positions in futures contracts.
12. Account QB will not invest in the securities of other
investment companies, except as part of a plan of merger,
consolidation or acquisition of assets.
13. The average period of maturity (or in the case of
mortgage-backed securities, the estimated average life of cash
flows) of all fixed interest debt instruments held by Account
QB will not exceed five years.
The investments of Account QB will not be concentrated in any one
industry; that is, no more than 25% of the value of its assets will be invested
in any one industry. There is no investment policy as to Account QB's
investment in foreign securities.
PORTFOLIO TURNOVER
Brokerage costs associated with short-term debt instruments are
significantly lower than those incurred on equity investments, and thus, a high
portfolio turnover rate would not adversely affect the brokerage costs of
Account QB to the same extent as high turnover in a separate account which
invests primarily in common stock. The portfolio turnover rate for Account QB
for the years ended December 31, 1995, 1996 and 1997 was 138%, 176% and 196%,
respectively.
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THE TRAVELERS TIMED BOND ACCOUNT FOR VARIABLE ANNUITIES
INVESTMENT RESTRICTIONS
The investment restrictions set forth below are fundamental and may
not be changed without a vote of a majority of the outstanding voting
securities of Account TB, as defined in the 1940 Act. Account TB may not:
1. invest more than 5% of its total assets, computed at market
value, in the securities of any one issuer (exclusive of
securities of the United States Government, its agencies or
instrumentalities, for which there is no limit);
2. invest in more than 10% of any class of securities of any one
issuer;
3. invest more than 5% of the value of its total assets in
companies which have been in operation for less than three
years;
4. borrow money, except to facilitate redemptions or for emergency
or extraordinary purposes and then only from banks and in
amounts of up to 10% of its gross assets computed at cost;
while outstanding according to the 1940 Act, a borrowing may
not exceed one-third of the value of the net assets, including
the amount borrowed; Account TB has no intention of attempting
to increase its net income by borrowing and all borrowings will
be repaid before additional investments are made; assets
pledged to secure borrowings shall be no more than the lesser
of the amount borrowed or 10% of the gross assets computed at
cost;
5. underwrite securities, except that Account TB may purchase
securities from issuers thereof or others and dispose of such
securities in a manner consistent with its other investment
policies; in the disposition of restricted securities Account
TB may be deemed to be an underwriter, as defined in the 1933
Act;
6. purchase real estate or interests in real estate, except
through the purchase of securities of a type commonly purchased
by financial institutions which do not include direct interest
in real estate or mortgages, or commodities or commodity
contracts, except transactions involving financial futures in
order to limit transactions and borrowing costs and for hedging
purposes as discussed above;
7. invest for the primary purpose of control or management;
8. make margin purchases or short sales of securities, except for
short-term credits which are necessary for the clearance of
transactions, and to place not more than 5% of its net asset
value in total margin deposits for positions in futures
contracts;
9. make loans, except that Account TB may purchase money market
securities, enter into repurchase agreements, buy publicly and
privately distributed debt securities and lend limited amounts
of its portfolio securities to brokers-dealers; all such
investments must be consistent with the investment objective
and policies;
10. invest more than 25% of its total assets in the securities of
issuers in any single industry (exclusive of securities of the
United States government, its agencies or instrumentalities,
for which there is no limit); or
11. purchase the securities of any other investment company, except
in the open market and at customary brokerage rates and in no
event more than 3% of the voting securities of any investment
company. When consistent with its investment objectives,
Account TB may purchase securities of brokers, dealers,
underwriters or investment advisers. Account TB is subject to
restrictions in the sale of portfolio securities to, and in its
purchase or retention of securities of, companies in which the
management personnel of Travelers Asset Management
International Corporation ("TAMIC") have a substantial
interest.
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PORTFOLIO TURNOVER
Brokerage costs associated with debt instruments are significantly
lower than those incurred on equity investments, and thus, a high portfolio
turnover rate would not adversely affect the brokerage costs of Account TB to
the same extent as high turnover in a separate account which invests primarily
in common stock. While there is no restriction on portfolio turnover, Account
TB's turnover rate may be high since the Account is being timed by third party
investment advisory services. The portfolio turnover rate for Account TB for
the years ended December 31, 1995, 1996 and 1997 was 117%, 153% and 129%,
respectively.
THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES
INVESTMENT RESTRICTIONS
In keeping with the objective of obtaining the highest possible
current income consistent with a high degree of liquidity and preservation of
capital, Account MM operates under the following restrictions, which
restrictions are fundamental and may not be changed without a vote of a
majority of the outstanding voting securities of Account MM, as defined in the
1940 Act. Account MM may not:
1. purchase any security which has a maturity date more than one
year from the date of the Account's purchase;
2. invest more than 25% of its assets in the securities of issuers
in any single industry (exclusive of securities issued by
domestic banks and savings and loan associations, or securities
issued or guaranteed by the United States Government, its
agencies, authorities or instrumentalities). Neither all
finance companies, as a group, nor all utility companies, as a
group, are considered a single industry for the purpose of
restriction;
3. acquire more than 10% of the outstanding securities of any one
issuer, including repurchase agreements with any one bank or
dealer (exclusive of securities issued or guaranteed by the
United States Government, its agencies or instrumentalities);
4. invest more than 5% of its assets in the securities of any one
issuer, other than securities issued or guaranteed by the
United States Government. However, the Fund may invest up to
25% of its total assets in first tier securities, as defined in
Rule 2a-7, of a single issuer for a period of up to three
business days after the purchase thereof;
5. borrow money, except from banks on a temporary basis in an
aggregate amount not to exceed one-third of the Account's
assets (including the amount borrowed); the borrowings may be
used exclusively to facilitate the orderly maturation and sale
of portfolio securities during any periods of abnormally heavy
redemption requests, if they should occur; such borrowings may
not be used to purchase investments and the Account will not
purchase any investment while any such borrowing exists;
immediately after the borrowing, and at all times thereafter
while any borrowing is unrepaid, there will be asset coverage
of at least 300% for all borrowings of the Account;
6. pledge, hypothecate or in any manner transfer, as security for
indebtedness, any securities owned or held by the Account,
except as may be necessary in connection with any borrowing
mentioned above and in an aggregate amount not to exceed 5% of
the Account's assets;
7. make loans, provided that the Account may purchase money market
securities and enter into repurchase agreements;
8. (a) make investments for the purpose of exercising control; (b)
purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or
reorganization; (c) invest in real estate (other than money
market securities secured by real estate or interests therein,
or money market
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securities issued by companies which invest in real estate or
interests therein), commodities or commodity contracts,
interests in oil, gas or other mineral exploration or other
development programs; (d) purchase any securities on margin;
(e) make short sales of securities or maintain a short position
or write, purchase or sell puts, calls, straddles, spreads or
combinations thereof; (f) invest in securities of issuers
(other than agencies, authorities or instrumentalities of the
United States Government) having a record, together with
predecessors, of less than three years of continuous operation
if more than 5% of the Account's assets would be invested in
such securities; (g) purchase or retain securities of any
issuer if the officers and directors of the investment adviser
who individually own more than 0.5% of the outstanding
securities of such issuer together own more than 5% of the
securities of such issuer; or (h) act as an underwriter of
securities;
9. invest in securities which under the 1933 Act or other
securities laws cannot be readily disposed of with registration
or which are otherwise not readily marketable at the time of
purchase, including repurchase agreements that mature in more
than seven days, if as a result more than 10% of the value of
the Account's assets is invested in these securities. At
present, the Account has no investments in these securities and
has no present expectation of purchasing any, although it may
in the future; and
10. issue senior securities.
PORTFOLIO TURNOVER
A portfolio turnover rate is not applicable to Account MM which
invests only in money market instruments.
THE TRAVELERS TIMED SHORT-TERM BOND ACCOUNT FOR VARIABLE ANNUITIES
INVESTMENT RESTRICTIONS
In keeping with the objective of obtaining the highest possible
current income consistent with a high degree of liquidity and preservation of
capital, Account TSB operates under the following restrictions, which
restrictions are fundamental and may not be changed without a vote of a
majority of the outstanding voting securities of Account TSB, as defined in the
1940 Act. Account TSB may not:
1. purchase any security which has a maturity date more than three
years from the date such security was purchased;
2. invest more than 25% of its assets in the securities of issuers
in any single industry (exclusive of securities issued by
domestic banks and savings and loan associations, or securities
issued or guaranteed by the United States Government, its
agencies, authorities or instrumentalities); neither all
finance companies, as a group, nor all utility companies, as a
group, are considered a single industry for the purpose of
restriction;
3. invest more than 10% of its assets in the securities of any one
issuer, including repurchase agreements with any one bank or
dealer (exclusive of securities issued or guaranteed by the
United States Government, its agencies or instrumentalities);
4. acquire more than 10% of the outstanding securities of any one
issuer (exclusive of securities issued or guaranteed by the
United States Government, its agencies or instrumentalities);
5. borrow money, except from banks on a temporary basis in an
aggregate amount not to exceed one-third of the Account's
assets (including the amount borrowed); the borrowings may be
used exclusively to facilitate the orderly maturation and sale
of portfolio securities during any periods of abnormally heavy
redemption requests, if they should occur; such borrowings may
not be used to purchase investments and the Account will not
purchase any investment while any such borrowing exists;
immediately after the
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borrowing, and at all times thereafter while any borrowing is
unrepaid, there will be asset coverage of at least 300% for all
borrowings of the Account;
6. pledge, hypothecate or in any manner transfer, as security for
indebtedness, any securities owned or held by the Account,
except as may be necessary in connection with any borrowing
mentioned above and in an aggregate amount not to exceed 5% of
the Account's assets;
7. make loans, provided that the Account may purchase money market
securities and enter into repurchase agreements;
8. (a) make investments for the purpose of exercising control; (b)
purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or
reorganization; (c) invest in real estate (other than money
market securities secured by real estate or interests therein,
or money market securities issued by companies which invest in
real estate or interests therein), commodities or commodity
contracts, interests in oil, gas or other mineral exploration
or other development programs; (d) purchase any securities on
margin; (e) make short sales of securities or maintain a short
position or write, purchase or sell puts, calls, straddles,
spreads or combinations thereof; (f) invest in securities of
issuers (other than agencies, authorities or instrumentalities
of the United States Government) having a record, together with
predecessors, of less than three years of continuous operation
if more than 5% of the Account's assets would be invested in
such securities; (g) purchase or retain securities of any
issuer if the officers and directors of the investment adviser
who individually own more than 0.5% of the outstanding
securities of such issuer together own more than 5% of the
securities of such issuer; or (h) act as an underwriter of
securities;
9. invest in securities which under the 1933 Act or other
securities laws cannot be readily disposed of with registration
or which are otherwise not readily marketable at the time of
purchase, including repurchase agreements that mature in more
than seven days, if as a result more than 10% of the value of
the Account's assets is invested in these securities. At
present, the Account has no investments in these securities and
has no present expectation of purchasing any, although it may
in the future; and
10. issue senior securities.
PORTFOLIO TURNOVER
Brokerage costs associated with short-term debt instruments are
significantly lower than those incurred on equity investments, and thus, a high
portfolio turnover rate would not adversely affect the brokerage costs of
Account TSB to the same extent as high turnover in a separate account which
invests primarily in common stock. While there is no restriction on portfolio
turnover, Account TSB's turnover rate may be high since the Account is being
timed by third party investment advisory services.
A portfolio turnover rate is not applicable to Account TSB which invests only
in short-term instruments.
DESCRIPTION OF CERTAIN TYPES OF INVESTMENTS AND INVESTMENT
TECHNIQUES AVAILABLE TO THE SEPARATE ACCOUNTS
WRITING COVERED CALL OPTIONS
Accounts GIS, TGIS, TAS and TB may write covered call options on
portfolio securities for which call options are available and which are listed
on a national securities exchange. These call options generally will be
short-term contracts with a duration of nine months or less.
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The Accounts will write only "covered" call options, that is, they
will own the underlying securities which are acceptable for escrow when they
write the call option and until the obligation to sell the underlying security
is extinguished by exercise or expiration of the call option, or until a call
option covering the same underlying security and having the same exercise price
and expiration date is purchased. The Accounts will receive a premium for
writing a call option, but give up, until the expiration date, the opportunity
to profit from an increase in the underlying security's price above the
exercise price. The Accounts will retain the risk of loss from a decrease in
the price of the underlying security. Writing covered call options is a
conservative investment technique which is believed to involve relatively
little risk, but which is capable of enhancing an Account's total returns.
The premium received for writing a covered call option will be
recorded as a liability in each Account's Statement of Assets and Liabilities.
This liability will be adjusted daily to the option's current market value,
which will be the latest sale price at the close of the New York Stock
Exchange, or, in the absence of such sale, at the latest bid quotation. The
liability will be extinguished upon expiration of the option, the purchase of
an identical option in a closing transaction, or delivery of the underlying
security upon exercise of the option.
The Options Clearing Corporation is the issuer of, and the obligor
on, the covered call options written by the Accounts. In order to secure an
obligation to deliver to the Options Clearing Corporation the underlying
security of a covered call option, the Accounts will be required to make escrow
arrangements.
In instances where the Accounts believe it is appropriate to close a
covered call option, they can close out the previously written call option by
purchasing a call option on the same underlying security with the same exercise
price and expiration date. The Accounts may also, under certain circumstances,
be able to transfer a previously written call option.
A previously written call option can be closed out by purchasing an
identical call option only on a national securities exchange which provides a
secondary market in the call option. There is no assurance that a liquid
secondary market will exist for a particular call option at such time. If the
Accounts cannot effect a closing transaction, they will not be able to sell the
underlying security while the previously written option remains outstanding,
even though it might otherwise be advantageous to do so.
If a substantial number of the call options are exercised, the
Accounts' rates of portfolio turnover may exceed historical levels. This would
result in higher brokerage commissions in connection with the writing of
covered call options and the purchase of call options to close out previously
written options. Such brokerage commissions are normally higher than those
applicable to purchases and sales of portfolio securities.
BUYING PUT AND CALL OPTIONS
Accounts GIS, TGIS and TAS may purchase put options on securities
held, or on futures contracts whose price volatility is expected to closely
match that of securities held, as a defensive measure to preserve contract
owners' capital when market conditions warrant. The Accounts may purchase call
options on specific securities, or on futures contracts whose price volatility
is expected to closely match that of securities, eligible for purchase by the
Accounts, in anticipation of or as a substitute for the purchase of the
securities themselves. These options may be listed on a national exchange or
executed "over-the-counter" with a broker-dealer as the counterparty. While the
investment advisers anticipate that the majority of option purchases and sales
will be executed on a national exchange, put or call options on specific
securities or for non-standard terms are likely to be executed directly with a
broker-dealer when it is advantageous to do so. Option contracts will be
short-term in nature, generally less than nine months.
The Accounts will pay a premium in exchange for the right to
purchase (call) or sell (put) a specific number of shares of an equity security
or futures contract at a specified price (the strike price) on or before the
expiration date of the options contract. In either case, each Account's risk is
limited to the option premium paid.
The Accounts may sell the put and call options prior to their
expiration and realize a gain or loss thereby. A call option will expire
worthless if the price of the related security is below the contract strike
price at the time of expiration; a put option will expire worthless if the
price of the related security is above the contract strike price at the time of
expiration.
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Put and call options will be employed for bona fide hedging purposes
only. Liquid securities sufficient to fulfill the call option delivery
obligation will be identified and segregated in an account; deliverable
securities sufficient to fulfill the put option obligation will be similarly
identified and segregated. In the case of put options on futures contracts,
portfolio securities whose price volatility is expected to match that of the
underlying futures contract will be identified and segregated.
FUTURES CONTRACTS
STOCK INDEX FUTURES
Accounts GIS, TGIS and TAS will invest in stock index futures. A
stock index futures contract provides for one party to take and the other to
make delivery of an amount of cash over the hedging period equal to a specified
amount times the difference between a stock index value at the close of the
last trading day of the contract or the selling price and the price at which
the futures contract is originally struck. The stock index assigns relative
values to the common stocks included in the index and reflects overall price
trends in the designated market for equity securities. Therefore, price changes
in a stock index futures contract reflect changes in the specified index of
equity securities on which the futures contract is based. Stock index futures
may also be used, to a limited extent, to hedge specific common stocks with
respect to market (systematic) risk (involving the market's assessment of
overall economic prospects) as distinguished from stock-specific risk
(involving the market's evaluation of the merits of the issuer of a particular
security). By establishing an appropriate "short" position in stock index
futures, the Accounts may seek to protect the value of their equity securities
against an overall decline in the market for equity securities. Alternatively,
in anticipation of a generally rising market, the Accounts can seek to avoid
losing the benefit of apparently low current prices by establishing a "long"
position in stock index futures and later liquidating that position as
particular equity securities are in fact acquired. None of the Accounts will be
a hedging fund; however, to the extent that any hedging strategies actually
employed are successful, the Accounts will be affected to a lesser degree by
adverse overall market price movements unrelated to the merits of specific
portfolio equity securities than would otherwise be the case. Gains and losses
on futures contracts employed as hedges for specific securities will normally
be offset by losses or gains, respectively, on the hedged security.
INTEREST RATE FUTURES
Accounts TGIS, TAS, QB and TB may purchase and sell futures
contracts on debt securities ("interest rate futures") to hedge against
anticipated changes in interest rates that might otherwise have an adverse
effect upon the value of an Account's debt securities. An interest rate futures
contract is a binding contractual commitment which, if held to maturity, will
result in an obligation to make or accept delivery, during a particular future
month, of debt securities having a standardized face value and rate of return.
By purchasing interest rate futures (assuming a "long" position) the
Accounts will be legally obligated to accept the future delivery of the
underlying security and pay the agreed price. This would be done, for example,
when the Account intends to purchase particular debt securities when it has the
necessary cash, but expects the rate of return available in the securities
markets at that time to be less favorable than rates currently available in the
futures markets. If the anticipated rise in the price of the debt securities
should occur (with its concurrent reduction in yield), the increased cost of
purchasing the securities will be offset, at least to some extent, by the rise
in the value of the futures position taken in anticipation of the securities
purchase.
By selling interest rate futures held by it, or interest rate
futures having characteristics similar to those held by it (assuming a "short"
position), the Account will be legally obligated to make the future delivery of
the security against payment of the agreed price. Such a position seeks to
hedge against an anticipated rise in interest rates that would adversely affect
the value of the Account's portfolio debt securities.
Open futures positions on debt securities will be valued at the most
recent settlement price, unless such price does not appear to the Board of
Managers to reflect the fair value of the contract, in which case the positions
will be valued at fair value determined in good faith by or under the direction
of the Board of Managers.
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Hedging by use of interest rate futures seeks to establish, with
more certainty than would otherwise be possible, the effective rate of return
on portfolio securities. When hedging is successful, any depreciation in the
value of portfolio securities will substantially be offset by appreciation in
the value of the futures position.
FUTURES MARKETS AND REGULATIONS
When a futures contract is purchased, the Accounts will set aside,
in an identifiable manner, an amount of cash and cash equivalents equal to the
total market value of the futures contract, less the amount of the initial
margin. The Accounts will incur brokerage fees in connection with their futures
transactions, and will be required to deposit and maintain funds with brokers
as margin to guarantee performance of future obligations.
Positions taken in the futures markets are not normally held to
maturity, but instead are liquidated through offsetting transactions which may
result in a profit or a loss. Closing out an open futures contract sale or
purchase is effected by entering into an offsetting futures contract purchase
or sale, respectively, for the same aggregate amount of the stock index or
interest rate futures contract and the same delivery date. If the offsetting
purchase price is less than the original sale price, the Accounts realize a
gain; if it is more, the Accounts realize a loss. Conversely, if the offsetting
sale price is more than the original purchase price, the Accounts realize a
gain; if less, a loss. While futures positions taken by the Accounts will
usually be liquidated in this manner, the Accounts may instead make or take
delivery of the underlying securities whenever it appears economically
advantageous for them to do so. In determining gain or loss, transaction costs
must also be taken into account. There can be no assurance that the Accounts
will be able to enter into an offsetting transaction with respect to a
particular contract at a particular time.
A clearing corporation associated with the exchange on which futures
are traded guarantees that the sale and purchase obligations will be performed
with regard to all positions that remain open at the termination of the
contract.
All stock index and interest rate futures will be traded on
exchanges that are licensed and regulated by the Commodity Futures Trading
Commission ("CFTC"). Stock index futures are currently traded on the New York
Futures Exchange and the Chicago Mercantile Exchange. Interest rate futures are
actively traded on the Chicago Board of Trade and the International Monetary
Market at the Chicago Mercantile Exchange.
The investment advisers do not believe any of the Accounts to be a
"commodity pool" as defined under the Commodity Exchange Act. The Accounts will
only enter into futures contracts for bona fide hedging or other appropriate
risk management purposes as permitted by CFTC regulations and interpretations,
and subject to the requirements of the Securities and Exchange Commission. The
Accounts will not purchase or sell futures contracts for which the aggregate
initial margin exceeds five percent (5%) of the fair market value of their
individual assets, after taking into account unrealized profits and unrealized
losses on any such contracts which they have entered into. The Accounts will
further seek to assure that fluctuations in the price of any futures contracts
that they use for hedging purposes will be substantially related to
fluctuations in the price of the securities which they hold or which they
expect to purchase, although there can be no assurance that the expected result
will be achieved.
As evidence of its hedging intent, Account GIS expects that on
seventy-five percent (75%) or more of the occasions on which it purchases a
long futures contract, it will effect the purchase of securities in the cash
market or take delivery at the close of a futures position. In particular
cases, however, when it is economically advantageous, a long futures position
may be terminated without the corresponding purchase of securities.
SPECIAL RISKS
While certain futures contracts may be purchased and sold to reduce
certain risks, these transactions may entail other risks. Thus, while the
Accounts may benefit from the use of such futures, unanticipated changes in
stock price movements or interest rates may result in a poorer overall
performance for the Account than if it had not entered into such futures
contracts. Moreover, in the event of an imperfect correlation between the
futures position and the portfolio position which is intended to be protected,
the desired protection may not be obtained and the Accounts may be exposed to
risk of loss. The investment advisers will attempt to reduce this risk by
engaging in futures transactions, to the extent possible, where, in their
judgment, there is a significant correlation between changes in the prices of
the futures contracts and the prices of any portfolio securities sought to be
hedged.
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In addition to the possibility that there may be a less than perfect
correlation between movements in the futures contracts and securities in the
portfolio being hedged, the prices of futures contracts may not correlate
perfectly with movements in the underlying security due to certain market
distortions. First, rather than meeting variation margin deposit requirements
should a futures contract value move adversely, investors may close futures
contracts through offsetting transactions which could distort the normal
relationship between the index and futures markets. Second, since margin
requirements in the futures market are less onerous than in the securities
market, the futures market may attract more speculators than the securities
market. Increased participation by speculators may cause temporary price
distortions. Due to the possibility of such price distortion, and also because
of the imperfect correlation discussed above, even a correct forecast of
general market trends by the investment advisers may not result in a successful
hedging transaction in the futures market over a short time period. However, as
is noted above, the use of financial futures by the Accounts is intended
primarily to limit transaction and borrowing costs. At no time will the
Accounts use financial futures for speculative purposes.
Successful use of futures contracts for hedging purposes is also
subject to the investment advisers' ability to predict correctly movements in
the direction of the market. However, the investment advisers believe that over
time the value of the Accounts' portfolios will tend to move in the same
direction as the market indices which are intended to correlate to the price
movements of the portfolio securities sought to be hedged.
MONEY MARKET INSTRUMENTS
Money market securities are instruments with remaining maturities of
one year or less, such as bank certificates of deposit, bankers' acceptances,
commercial paper (including master demand notes), and obligations issued or
guaranteed by the United States Government, its agencies or instrumentalities,
some of which may be subject to repurchase agreements.
CERTIFICATES OF DEPOSIT
Certificates of deposit are receipts issued by a bank in exchange
for the deposit of funds. The issuer agrees to pay the amount deposited plus
interest to the bearer of the receipt on the date specified on the certificate.
The certificate usually can be traded in the secondary market prior to
maturity.
Certificates of deposit will be limited to U.S. dollar-denominated
certificates of United States banks which have at least $1 billion in deposits
as of the date of their most recently published financial statements (including
foreign branches of U.S. banks, U.S. branches of foreign banks which are
members of the Federal Reserve System or the Federal Deposit Insurance
Corporation).
The Accounts will not acquire time deposits or obligations issued by
the International Bank for Reconstruction and Development, the Asian
Development Bank or the Inter-American Development Bank. Additionally, the
Accounts do not currently intend to purchase such foreign securities (except to
the extent that certificates of deposit of foreign branches of U.S. banks may
be deemed foreign securities) or purchase certificates of deposit, bankers'
acceptances or other similar obligations issued by foreign banks. Additionally,
Account TSB invests in Euro Certificates of Deposit issued by banks outside of
the United States, with interest and principal paid in U.S. dollars.
BANKERS' ACCEPTANCES
Bankers' acceptances typically arise from short-term credit
arrangements designed to enable businesses to obtain funds to finance
commercial transactions. Generally, an acceptance is a time draft drawn on a
bank by an exporter or an importer to obtain a stated amount of funds to pay
for specific merchandise. The draft is then "accepted" by the bank which, in
effect, unconditionally guarantees to pay the face value of the instrument on
its maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
Bankers' acceptances acquired by Accounts MM or TSB must have been accepted by
U.S. commercial banks, including foreign branches of U.S. commercial banks,
having total deposits at the time of purchase in excess of $1 billion, and must
be payable in U.S. dollars.
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COMMERCIAL PAPER RATINGS
Investments in commercial paper are limited to those rated A-1 by
Standard & Poor's Corporation and Prime-1 by Moody's Investors Service, Inc.
Commercial paper rated A-1 by S&P has the following characteristics: (1)
liquidity ratios are adequate to meet cash requirements; (2) the issuer's
long-term senior debt is rated "A" or better, although in some cases "BBB"
credits may be allowed; (3) the issuer has access to at least two additional
channels of borrowing; (4) basic earnings and cash flow have an upward trend
with allowances made for unusual circumstances; and (5) the issuer's industry
is typically well established and the issuer has a strong position within the
industry.
The rating Prime-1 is the highest commercial paper rating assigned
by Moody's. Among the factors considered by Moody's in assigning ratings are
the following: (1) evaluating the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation
of the issuer's products in relation to competition and customer acceptance;
(4) liquidity; (5) amount and quality of long-term debt; (6) trend of earnings
over a period of ten years; (7) financial strength of a parent company and the
relationship which exists with the issuer; and (8) recognition by the
management of obligations which may be present or may arise as a result of
public preparations to meet such obligations. The relative strength or weakness
of the above factors determines how the issuer's commercial paper is rated
within various categories.
MASTER DEMAND NOTES
Master demand notes are unsecured obligations that permit the
investment of fluctuating amounts at varying rates of interest pursuant to
direct arrangements between the lender (issuer) and the borrower. Master demand
notes may permit daily fluctuations in the interest rate and daily changes in
the amounts borrowed. An Account has the right to increase the amount under the
note at any time up to the full amount provided by the note agreement, or to
decrease the amount, and the borrower may repay up to the full amount of the
note without penalty. Notes purchased by a separate account must permit it to
demand payment of principal and accrued interest at any time (on not more than
seven days notice) or to resell the note at any time to a third party. Master
demand notes may have maturities of more than one year, provided they specify
that (i) the account be entitled to payment of principal and accrued interest
upon not more than seven days notice, and (ii) the rate of interest on such
notes be adjusted automatically at periodic intervals which normally will not
exceed 31 days, but which may extend up to one year. Because these types of
notes are direct lending arrangements between the lender and the borrower, such
instruments are not normally traded, and there is no secondary market for these
notes, although they are redeemable and thus repayable by the borrower at face
value plus accrued interest at any time. Accordingly, the right to redeem is
dependent upon the ability of the borrower to pay principal and interest on
demand. In connection with master demand note arrangements, the investment
adviser considers earning power, cash flow, and other liquidity ratios of the
borrower to pay principal and interest on demand. These notes, as such, are not
typically rated by credit rating agencies. Unless they are so rated, a separate
account may invest in them only if at the time of an investment the issuer
meets the criteria set forth above for commercial paper. The notes will be
deemed to have a maturity equal to the longer of the period remaining to the
next interest rate adjustment or the demand notice period.
UNITED STATES GOVERNMENT SECURITIES
Securities issued or guaranteed by the United States Government
include a variety of Treasury securities that differ only in their interest
rates, maturities and dates of issuance. Treasury Bills have maturities of one
year or less, Treasury Notes have maturities of one to ten years, and Treasury
Bonds generally have maturities of greater than ten years at the date of
issuance.
Securities issued or guaranteed by the United States Government or
its agencies or instrumentalities include direct obligations of the United
States Treasury and securities issued or guaranteed by the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Government National Mortgage
Association, General Services Administration, Central Bank for Cooperatives,
Federal Home Loan Banks, Federal Loan Mortgage Corporation, Federal
Intermediate Credit Banks,
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Federal Land Banks, Maritime Administration, The Tennessee Valley
Authority, District of Columbia Armory Board and Federal National Mortgage
Association.
Some obligations of United States Government agencies and
instrumentalities, such as Treasury Bills and Government National Mortgage
Association pass-through certificates, are supported by the full faith and
credit of the United States; others, such as securities of Federal Home Loan
Banks, are supported by the right of the issuer to borrow from the Treasury;
still others, such as bonds issued by the Federal National Mortgage
Association, a private corporation, are supported only by the credit of the
instrumentality. Because the United States Government is not obligated by law
to provide support to an instrumentality it sponsors, the Accounts will invest
in the securities issued by such an instrumentality only when the investment
advisers determine that the credit risk with respect to the instrumentality
does not make the securities unsuitable investments. United States Government
securities will not include international agencies or instrumentalities in
which the United States Government, its agencies or instrumentalities
participate, such as the World Bank, the Asian Development Bank or the
Inter-American Development Bank, or issues insured by the Federal Deposit
Insurance Corporation.
REPURCHASE AGREEMENTS
Interim cash balances may be invested from time to time in
repurchase agreements with approved counterparties. Approved counterparties are
limited to national banks or reporting broker-dealers meeting the Advisor's
credit quality standards as presenting minimal risk of default. All repurchase
transactions must be collateralized by U.S. Government securities with market
value no less than 102% of the amount of the transaction, including accrued
interest. Repurchase transactions generally mature the next business day but,
in the event of a transaction of longer maturity, collateral will be marked to
market daily and, when required, additional cash or qualifying collateral will
be required from the counterparty.
In executing a repurchase agreement, a portfolio purchases eligible
securities subject to the seller's simultaneous agreement to repurchase them on
a mutually agreed upon date and at a mutually agreed upon price. The purchase
and resale prices are negotiated with the counterparty on the basis of current
short-term interest rates, which may be more or less than the rate on the
securities collateralizing the transaction. Physical delivery or, in the case
of "book-entry" securities, segregation in the counterparty's account at the
Federal Reserve for the benefit of the Portfolio is required to establish a
perfected claim to the collateral for the term of the agreement in the event
the counterparty fails to fulfill its obligation.
As the securities collateralizing a repurchase transaction are
generally of longer maturity than the term of the transaction, in the event of
default by the counterparty on its obligation, the Portfolio would bear the
risks of delay, adverse market fluctuation and transaction costs in disposing
of the collateral.
FOREIGN BANK OBLIGATIONS
Accounts MM and TSB may invest in obligations of foreign branches of
U.S. banks or U.S. branches of foreign banks. The obligations of foreign
branches of United States banks may be general obligations of the parent bank
in addition to the issuing branch, or may be limited by the terms of a specific
obligation and by government regulation. Payment of interest and principal upon
these obligations may also be affected by governmental action in the country of
domicile of the branch (generally referred to as "sovereign risk"). In
addition, evidences of ownership of such securities may be held outside the
United States and Accounts MM and TSB may be subject to the risks associated
with the holding of such property overseas. Various provisions of federal law
governing domestic branches do not apply to foreign branches of domestic banks.
Obligations of United States branches of foreign banks may be
general obligations of the parent bank in addition to the issuing branch, or
may be limited by the terms of a specific obligation and by federal and state
regulation as well as by governmental action in the country in which the
foreign bank has its head office. In addition, there may be less publicly
available information about a United States branch of a foreign bank than about
a domestic bank.
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INVESTMENT MANAGEMENT AND ADVISORY SERVICES
The investments and administration of the separate accounts are
under the direction of the Board of Managers. The Travelers Investment
Management Company (TIMCO) furnishes investment management and advisory
services to Accounts TGIS, TSB and TAS according to the terms of written
Investment Advisory Agreements. The Investment Advisory Agreements between
Account TGIS and TIMCO and Account TSB and TIMCO, were each approved by a vote
of the variable annuity contract owners at their meeting held on April 23,
1993. The Investment Advisory Agreement between Account GIS and TIMCO was
approved by a vote of the variable annuity contract owners at their meeting
held on April 23, 1993, and amended effective May 1, 1994 by virtue of contract
owner approval at a meeting held on April 22, 1994. The Investment Advisory
Agreement between Account TAS and TIMCO was approved by a vote of the variable
annuity contract owners at their meeting held on April 23, 1993, and amended
effective May 1, 1996 by virtue of contract owner approval at a meeting held on
April 19, 1996.
Travelers Asset Management International Corporation (TAMIC)
furnishes investment management and advisory services to Accounts GIS, QB, MM
and TB according to the terms of written Investment Advisory Agreements. The
Investment Advisory Agreements between Account QB and TAMIC, Account MM and
TAMIC, and Account TB and TAMIC, were each approved by a vote of variable
annuity contract owners at their meeting held on April 23, 1993. The agreement
between Account GIS and TAMIC was approved by a vote of the variable annuity
contract owners at their meeting held on April 27, 1998.
The agreements between Accounts TGIS, TSB and TAS and TIMCO, and the
agreements between Accounts GIS, QB, MM and TB and TAMIC, will all continue in
effect as described below in (3), as required by the 1940 Act. Each of the
agreements:
1. provides that for investment management and advisory services,
the Company will pay to TIMCO and TAMIC, on an annual basis, an
advisory fee based on the current value of the assets of the
accounts for which TIMCO and TAMIC act as investment advisers
(see "Advisory Fees" in the prospectus);
2. may not be terminated by TIMCO or TAMIC without the prior
approval of a new investment advisory agreement by those
casting a majority of the votes entitled to be cast and will be
subject to termination without the payment of any penalty, upon
sixty days written notice, by the Board of Managers or by a
vote of those casting a majority of the votes entitled to be
cast;
3. will continue in effect for a period more than two years from
the date of its execution, only so long as its continuance is
specifically approved at least annually by a vote of a majority
of the Board of Managers, or by a vote of a majority of the
outstanding voting securities of the Accounts. In addition, and
in either event, the terms of the agreements must be approved
annually by a vote of a majority of the Board of Managers who
are not parties to, or interested persons of any party to, the
agreements, cast in person at a meeting called for the purpose
of voting on the approval and at which the Board of Managers
has been furnished the information that is reasonably necessary
to evaluate the terms of the agreements; and
4. will automatically terminate upon assignment.
ADVISORY FEES
The advisory fee for each Separate Account is described in the
prospectus.
The advisory fees paid to TIMCO by each of the Accounts during the
last three fiscal years were:
<TABLE>
<CAPTION>
ACCOUNT GIS ACCOUNT TSB ACCOUNT TGIS ACCOUNT TAS
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
1995 $ 1,700,124 $ 444,144 $ 479,029 $ 215,616
1996 $ 2,079,020 $ 267,590 $ 596,659 $ 259,403
1997 $ 2,723,508 $ 248,469 $ 631,320 $ 281,157
</TABLE>
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<PAGE> 143
The advisory fees paid to TAMIC by each of the Accounts during the
last three fiscal years were:
<TABLE>
<CAPTION>
ACCOUNT QB ACCOUNT MM ACCOUNT TB
<S> <C> <C> <C>
1995 $ 547,715 $ 254,985 $ 62,947
1996 $ 576,329 $ 253,092 $ 26,799
1997 $ 529,458 $ 290,557 $ 10,088
</TABLE>
TIMCO
Investment decisions for Accounts TGIS, TSB and TAS will be made
independently from each other and from any other accounts that may be or become
managed by TIMCO. If, however, accounts managed by TIMCO are simultaneously
engaged in the purchase of the same security, then available securities may be
allocated to each account and may be averaged as to price in whatever manner
TIMCO deems to be fair. In some cases, this system might adversely affect the
price or volume of securities being bought or sold by an account, while in
other cases it may produce better executions or lower brokerage rates.
BROKERAGE
Subject to approval of the Board of Managers, and in accordance with
the Investment Advisory Agreements, TIMCO will place purchase and sale orders
for portfolio securities of the Accounts through brokerage firms which it may
select from time to time with the objective of seeking the best execution by
responsible brokerage firms at reasonably competitive rates. To the extent
consistent with this policy, certain brokerage transactions may be placed with
firms which provide brokerage and research services to TIMCO, and such
transactions may be paid for at higher rates than other firms would charge. The
term "brokerage and research services" includes advice as to the value of
securities; the advisability of investing in, purchasing or selling securities;
the availability of securities for purchasers or sellers of securities;
furnishing analyses and reports concerning issues, industries, securities,
economic factors and trends, portfolio strategy and performance of accounts;
and effecting securities transactions and performing functions incidental
thereto (such as clearance and settlement). These brokerage and research
services may be utilized in providing investment advice to Accounts TGIS, TSB
and TAS, and may also be utilized in providing investment advice and management
to all accounts over which TIMCO exercises investment discretion, but not all
of such services will necessarily be utilized in providing investment advice to
all accounts. This practice may be expected to result in greater cost to the
Accounts than might otherwise be the case if brokers whose charges were based
on execution alone were used for such transactions. TIMCO believes that
brokers' research services are very important in providing investment advice to
the Accounts, but is unable to give the services a dollar value. While research
services are not expected to reduce the expenses of TIMCO, TIMCO will, through
the use of these services, avoid the additional expenses which would be
incurred if it should attempt to develop comparable information through its own
staff.
Transactions in the over-the-counter market are placed with the
principal market makers unless better price and execution may be obtained
otherwise. Brokerage fees will be incurred in connection with futures
transactions, and Accounts TGIS and TAS will be required to deposit and
maintain funds with brokers as margin to guarantee performance of future
obligations.
The overall reasonableness of brokerage commissions paid is
evaluated by personnel of TIMCO responsible for trading and managing the
portfolios of Accounts GIS, TGIS, TSB and TAS by comparing brokerage firms
utilized by TIMCO to other firms with respect to the following factors: the
prices paid or received in securities transactions, speed of execution and
settlement, size and difficulty of the brokerage transactions, the financial
soundness of the firms, and the quality, timeliness and quantity of research
information and reports.
The total brokerage commissions paid by Account GIS for the fiscal
years ended December 31, 1995, 1996 and 1997 were $866,658, $890,690 and
$818,411, respectively. For the fiscal year ended December 31, 1997, portfolio
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transactions in the amount of $600,869,008 were directed to certain brokers
because of research services, of which $677,205 paid in commissions with
respect to these transactions. Commissions in the amount of $71,521 and $22,730
were paid to Smith Barney Inc. and The Robinson Humphrey Company, Inc.,
respectively, both affiliates of TIMCO, which equals, for each, 8.7% and 2.8%
of Account GIS's aggregate brokerage commissions paid to such brokers during
1997. The percentage of the Account GIS's aggregate dollar amount of
transactions involving the payment of commissions effected through Smith Barney
and Robinson Humphrey was 9.8% and 2.5% respectively.
The total brokerage commissions paid by Account TGIS for the fiscal
years ended December 31, 1995, 1996 and 1997 were $260,684, $307,174 and
$235,144, respectively. For the fiscal year ended December 31, 1997,
portfolio transactions in the amount of $147,832,519 were directed to certain
brokers because of research services, of which $169,825 was paid in commissions
with respect to these transactions. Commissions in the amount of $18,386 and
$6,263 were paid to Smith Barney Inc. and The Robinson Humphrey Company, Inc.,
respectively, both affiliates of TIMCO, which equals, for each, 7.8% and 2.7%
of Account TGIS's aggregate brokerage commissions paid to such brokers during
1997. The percentage of the Account TGIS's aggregate dollar amount of
transactions involving the payment of commissions effected through Smith Barney
and Robinson Humphrey was 8.8% and 2.4% respectively.
The total brokerage commissions paid by Account TAS for the fiscal
years ended December 31, 1995, 1996 and 1997 were $247,733, $263,570 and
$168,647, respectively. For the fiscal year ended December 31, 1997, portfolio
transactions in the amount of $89,497,195 were directed to certain brokers
because of research services, of which $133,340 was paid in commissions with
respect to these transactions. Commissions in the amount of $4,244 and $3,320
were paid to Smith Barney Inc. and The Robinson Humphrey Company, Inc.,
respectively, both affiliates of TIMCO, which equals, for each, 2.5% and 2.0%
of Account TAS's aggregate brokerage commissions paid to such brokers during
1997. The percentage of the Account TAS's aggregate dollar amount of
transactions involving the payment of commissions effected through Smith Barney
and Robinson Humphrey was 2.4% and 1.3%, respectively.
No formulas were used in placing portfolio transactions with brokers
which provided research services, and no specific amount of transactions was
allocated for research services.
TAMIC
Investment advice and management for TAMIC's clients (Accounts GIS,
QB, MM and TB) are furnished in accordance with their respective investment
objectives and policies and investment decisions for the Accounts will be made
independently from those of any other accounts managed by TAMIC. However,
securities owned by Accounts GIS, QB, MM or TB may also be owned by other
clients and it may occasionally develop that the same investment advice and
decision for more than one client is made at the same time. Furthermore, it may
develop that a particular security is bought or sold for only some clients even
though it might be held or bought or sold for other clients, or that a
particular security is bought for some clients when other clients are selling
the security. When two or more accounts are engaged in the purchase or sale of
the same security, the transactions are allocated as to amount in accordance
with a formula which is equitable to each account. It is recognized that in
some cases this system could have a detrimental effect on the price or volume
of the security as far as Accounts QB, MM or TB are concerned. In other cases,
however, it is believed that the ability of the accounts to participate in
volume transactions will produce better executions for the accounts.
BROKERAGE
Subject to approval of the Board of Managers, it is the policy of
TAMIC, in executing transactions in portfolio securities, to seek best
execution of orders at the most favorable prices. The determination of what may
constitute best execution and price in the execution of a securities
transaction by a broker involves a number of considerations, including, without
limitation, the overall direct net economic result to Accounts QB and TB,
involving both price paid or received and any commissions and other cost paid,
the efficiency with which the transaction is effected, the ability to effect
the transaction at all where a large block is involved, the availability of the
broker to stand ready to execute possible difficult transactions in the future,
and the financial strength and stability of the broker. Such considerations are
judgmental and are weighed by management in determining the overall
reasonableness of brokerage commissions paid. Subject to the foregoing, a
factor in the selection of brokers is the receipt of research services,
analyses and
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<PAGE> 145
reports concerning issuers, industries, securities, economic factors and
trends, and other statistical and factual information. Any such research and
other statistical and factual information provided by brokers is considered to
be in addition to and not in lieu of services required to be performed by TAMIC
under its Investment Advisory Agreements. The cost, value and specific
application of such information are indeterminable and hence are not
practicably allocable among Accounts QB and TB and other clients of TAMIC who
may indirectly benefit from the availability of such information. Similarly,
Accounts QB and TB may indirectly benefit from information made available as a
result of transactions for such clients.
Purchases and sales of bonds and money market instruments will
usually be principal transactions and will normally be purchased directly from
the issuer or from the underwriter or market maker for the securities. There
usually will be no brokerage commissions paid for such purchases. Purchases
from the underwriters will include the underwriting commission or concession,
and purchases from dealers serving as market makers will include the spread
between the bid and asked prices. Where transactions are made in the
over-the-counter market, Accounts GIS, QB and TB will deal with primary market
makers unless more favorable prices are otherwise obtainable. Brokerage fees
will be incurred in connection with futures transactions, and Accounts QB and
TB will be required to deposit and maintain funds with brokers as margin to
guarantee performance of future obligations.
TAMIC may follow a policy of considering the sale of units of
Account QB and TB a factor in the selection of broker-dealers to execute
portfolio transactions, subject to the requirements of best execution described
above.
The policy of TAMIC with respect to brokerage is and will be
reviewed by the Board of Managers periodically. Because of the possibility of
further regulatory developments affecting the securities exchanges and
brokerage practices generally, the foregoing practices may be changed, modified
or eliminated.
The total brokerage commissions paid by Account QB for the fiscal
years ended December 31, 1995, 1996 and 1997 were $549,540, $745,209 and $0,
respectively. For the fiscal year ended December 31, 1997, no portfolio
transactions were directed to certain brokers because of research services. No
commissions were paid to broker dealers affiliated with TAMIC.
The total brokerage commissions paid by Account TB for the fiscal
years ended December 31, 1995, 1996 and 1997 were $65,596, $75,437 and $0,
respectively. For the fiscal year ended December 31, 1997, no portfolio
transactions were directed to certain brokers because of research services.
PORTFOLIO TRANSACTIONS
Subject to the general supervision of the Board of Managers, TAMIC
is responsible for the investment decisions and the placement of orders for
portfolio transactions of Account MM. Portfolio transactions occur primarily
with issuers, underwriters or major dealers in money market instruments acting
as principals. Such transactions are normally on a net basis and do not involve
payment of brokerage commissions. The cost of securities purchased from an
underwriter usually includes a commission paid by the issuer to the
underwriter, and transactions with dealers normally reflect the spread between
the bid and asked prices. TAMIC seeks to obtain the best net price and most
favorable execution of orders for the purchase and sale of portfolio
securities.
VALUATION OF ASSETS
The value of the assets of each funding option is determined on each
business day as of the close of the New York Stock Exchange. Each security
traded on a national securities exchange is valued at the last reported sale
price on the business day. If there has been no sale on that day, then the
value of the security is taken to be the mean between the reported bid and
asked prices on the business day or on the basis of quotations received from a
reputable broker or any other recognized source.
When market quotations are not considered to be readily available
for long-term corporate bonds and notes, such investments are generally stated
at fair value on the basis of valuations furnished by a pricing service. These
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<PAGE> 146
valuations are determined for normal institutional-size trading units of such
securities using methods based on market transactions for comparable securities
and various relationships between securities which are generally recognized by
institutional traders. Securities, including restricted securities, for which
pricing services are not readily available are value by management at prices
which it deems in good faith to be fair.
Short term investments for which a quoted market price is available
are valued at market. Short-term investments for which there is no reliable
quoted market price are valued at amortized cost which approximates market.
NET INVESTMENT FACTOR
THE CONTRACT VALUE: The value of an Accumulation Unit on any business day is
determined by multiplying the value on the immediately preceding business day
by the net investment factor for the valuation period just ended. The net
investment factor is used to measure the investment performance of an
investment alternative from one Valuation Period to the next. The net
investment factor is determined by dividing (a) by (b) and adding (c) to the
result where:
(a) is the net result of the Valuation Period's investment income
(including, in the case of assets invested in an underlying
mutual fund, distributions whose ex-dividend date occurs
during the Valuation Period), PLUS capital gains and losses
(whether realized or unrealized), LESS any deduction for
applicable taxes (presently zero);
(b) is the value of the assets at the beginning of the Valuation
Period (or, in the case of assets invested in an underlying
mutual fund, value is based on the net asset value of the
mutual fund);
(c) is the net result of 1.000, LESS the Valuation Period
deduction for the insurance charge, LESS the applicable
deduction for the investment advisory fee, and in the case of
Accounts TGIS, TSB, TAS and TB, LESS the applicable deduction
for market timing fees (the deduction for the investment
advisory fee is not applicable in the case of assets invested
in an Underlying Fund, since the fee is reflected in the net
asset value of the fund).
The net investment factor may be more or less than one.
ACCUMULATION UNIT VALUE. The value of an accumulation unit on any business day
is determined by multiplying the value on the preceding business day by the net
investment factor for the business day just ended. The net investment factor is
calculated for each funding option and takes into account the investment
performance, expenses and the deduction of certain expenses.
ANNUITY UNIT VALUE. An Annuity Unit Value as of any business day is equal to
(a) the value of the Annuity Unit on the preceding business day, multiplied by
(b) the corresponding net investment factor for the business day just ended,
divided by (c) the assumed net investment factor for the valuation period. (For
example, the assumed net investment factor based on an annual assumed net
investment rate of 3.0% for a valuation period of one day is 1.000081 and, for
a period of two days, is 1.000081 x 1.000081.)
FEDERAL TAX CONSIDERATIONS
The following description of the federal income tax consequences
under this Contract is not exhaustive and is not intended to cover all
situations. Because of the complexity of the law and the fact that the tax
results will vary according to the factual status of the individual involved,
tax advice may be needed by a person contemplating purchase of an annuity
contract and by a contract owner or beneficiary who may make elections under a
contract. For further information, please consult a qualified tax adviser.
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MANDATORY DISTRIBUTIONS FOR QUALIFIED PLANS
Federal tax law requires that minimum annual distributions begin by
April 1st of the calendar year following the calendar year in which a
participant under a qualified plan, a Section 403(b) annuity, or an IRA attains
age 70 1/2. Distributions must also begin or be continued according to required
patterns following the death of the contract owner or the annuitant.
NONQUALIFIED ANNUITY CONTRACTS
Individuals may purchase tax-deferred annuities without tax law
funding limits. The purchase payments receive no tax benefit, deduction or
deferral, but increases in the value of the contract are generally deferred
from tax until distribution. If a nonqualified annuity is owned by other than
an individual, however, (e.g., by a corporation), the increases in value
attributable to purchase payments made after February 28, 1986 are includable
in income annually. Furthermore, for contracts issued after April 22, 1987, all
deferred increases in value will be includable in the income of a contract
owner when the contract owner transfers the contract without adequate
consideration.
If two or more annuity contracts are purchased from the same insurer
within the same calendar year, distributions from any of them will be taxed
based upon the amount of income in all of the same calendar year series of
annuities. This will generally have the effect of causing taxes to be paid
sooner on the deferred gain in the contracts.
Those receiving partial distributions made before the maturity date
will generally be taxed on an income-first basis to the extent of income in the
contract. If you are exchanging another annuity contract for this annuity,
certain pre-August 14, 1982 deposits into an annuity contract that have been
placed in the contract by means of a tax-deferred exchange under Section 1035
of the Code may be withdrawn first without income tax liability. This
information on deposits must be provided to the Company by the other insurance
company at the time of the exchange. There is income in the contract generally
to the extent the cash value exceeds the investment in the contract. The
investment in the contract is equal to the amount of premiums paid less any
amount received previously which was excludable from gross income. Any direct
or indirect borrowing against the value of the contract or pledging of the
contract as security for a loan will be treated as a cash distribution under
the tax law.
The federal tax law requires that nonqualified annuity contracts
meet minimum mandatory distribution requirements upon the death of the contract
owner, including the first of joint owners. Failure to meet these requirements
will cause the surviving joint owner, or the beneficiary to lose the tax
benefits associated with annuity contracts, i.e., primarily the tax deferral
prior to distribution. The distribution required depends, among other things,
upon whether an annuity option is elected or whether the new contract owner is
the surviving spouse. Contracts will be administered by the Company in
accordance with these rules and the Company will make a notification when
payments should be commenced.
INDIVIDUAL RETIREMENT ANNUITIES
To the extent of earned income for the year and not exceeding $2,000
per individual, an individual may make deductible contributions to an
individual retirement annuity (IRA). There are certain limits on the deductible
amount based on the adjusted gross income of the individual and spouse and
based on their participation in a retirement plan. If an individual is married
and the spouse does not have earned income, the individual may establish IRAs
for the individual and spouse. Purchase payments may then be made annually into
IRAs for both spouses in the maximum amount of 100% of earned income up to a
combined limit of $4,000.
The Code provides for the purchase of a Simplified Employee Pension
(SEP) plan. A SEP is funded through an IRA with an annual employer contribution
limit of 15% of compensation up to $30,000 for each participant.
SIMPLE Plan IRA Form
Effective January 1, 1997, employers may establish a savings
incentive match plan for employees ("SIMPLE plan") under which employees can
make elective salary reduction contributions to an IRA based on a percentage of
compensation of up to $6,000. (Alternatively, the employer can establish a
SIMPLE cash or deferred arrangement under IRS Section 401(k)). Under a SIMPLE
plan IRA, the employer must either make a matching contribution of 100% on the
first 3% or 7% contribution for all eligible employees. Early withdrawals are
subject to the 10% early
21
<PAGE> 148
withdrawal penalty generally applicable to IRAs, except that an early
withdrawal by an employee under a SIMPLE plan IRA, within the first two years
of participation, shall be subject to a 25% early withdrawal tax.
ROTH IRAS
Effective January 1, 1998, Section 408A of the Code permits certain
individuals to contribute to a Roth IRA. Eligibility to make contributions is
based upon income, and the applicable limits vary based on marital status
and/or whether the contribution is a rollover contribution from another IRA or
an annual contribution. Contributions to a Roth IRA, which are subject to
certain limitations, ($2,000 per year for annual contributions), are not
deductible and must be made in cash or as a rollover or transfer from another
Roth IRA or other IRA. A conversion of a "traditional" IRA to a Roth IRA may be
subject to tax and other special rules apply. You should consult a tax adviser
before combining any converted amounts with other Roth IRA contributions,
including any other conversion amounts from other tax years.
Qualified distributions from a Roth IRA are tax-free. A qualified
distribution requires that the Roth IRA has been held for at least 5 years, and
the distribution is made after age 59 1/2, on death or disability of the owner,
or for a limited amount ($10,000) for a qualified first time home purchase for
the owner or certain relatives. Income tax and a 10% penalty tax may apply to
distributions made (1) before age 59 1/2 (subject to certain exceptions) or (2)
during five taxable years starting with the year in which the first
contribution is made to the Roth IRA.
QUALIFIED PENSION AND PROFIT-SHARING PLANS
Under a qualified pension or profit-sharing plan, purchase payments
made by an employer are not currently taxable to the participant and increases
in the value of a contract are not subject to taxation until received by a
participant or beneficiary.
Distributions are taxable to the participant or beneficiary as
ordinary income in the year of receipt. Any distribution that is considered the
participant's "investment in the contract" is treated as a return of capital
and is not taxable. Certain lump-sum distributions may be eligible for special
forward averaging tax treatment for certain classes of individuals.
FEDERAL INCOME TAX WITHHOLDING
The portion of a distribution which is taxable income to the
recipient will be subject to federal income tax withholding as follows:
1. ELIGIBLE ROLLOVER DISTRIBUTION FROM SECTION 403(b) PLANS OR ARRANGEMENTS
OR FROM QUALIFIED PENSION AND PROFIT-SHARING PLANS
There is a mandatory 20% tax withholding for plan distributions that are
eligible for rollover to an IRA or to another retirement plan but that are not
directly rolled over. A distribution made directly to a participant or
beneficiary may avoid this result if:
(a) a periodic settlement distribution is elected based upon a life or
life expectancy calculation, or
(b) a term-for-years settlement distribution is elected for a period of
ten years or more, payable at least annually, or
(c) a minimum required distribution as defined under the tax law is
taken after the attainment of the age of 70 1/2 or as otherwise
required by law.
A distribution including a rollover that is not a direct rollover
will be subject to the 20% withholding, and a 10% additional tax penalty may
apply to any amount not added back in the rollover. The 20% withholding may be
recovered when the participant or beneficiary files a personal income tax
return for the year if a rollover was completed within 60 days of receipt of
the funds, except to the extent that the participant or spousal beneficiary is
otherwise underwithheld or short on estimated taxes for that year.
22
<PAGE> 149
2. OTHER NON-PERIODIC DISTRIBUTIONS (FULL OR PARTIAL REDEMPTIONS)
To the extent not described as requiring 20% withholding in 1 above, the
portion of a non-periodic distribution which constitutes taxable income will be
subject to federal income tax withholding, if the aggregate distributions
exceed $200 for the year, unless the recipient elects not to have taxes
withheld. If no such election is made, 10% of the taxable distribution will be
withheld as federal income tax. Election forms will be provided at the time
distributions are requested. This form of withholding applies to all annuity
programs.
3. PERIODIC DISTRIBUTIONS (DISTRIBUTIONS PAYABLE OVER A PERIOD GREATER THAN ONE
YEAR)
The portion of a periodic distribution which constitutes taxable income
will be subject to federal income tax withholding under the wage withholding
tables as if the recipient were married claiming three exemptions. A recipient
may elect not to have income taxes withheld or have income taxes withheld at a
different rate by providing a completed election form. Election forms will be
provided at the time distributions are requested. This form of withholding
applies to all annuity programs. As of January 1, 1998, a recipient receiving
periodic payments (e.g., monthly or annual payments under an annuity option)
which total $15,200 or less per year, will generally be exempt from periodic
withholding.
Recipients who elect not to have withholding made are liable for
payment of federal income tax on the taxable portion of the distribution. All
recipients may also be subject to penalties under the estimated tax payment
rules if withholding and estimated tax payments are not sufficient to cover tax
liabilities.
Recipients who do not provide a social security number or other
taxpayer identification number will not be permitted to elect out of
withholding. Additionally, U.S citizens residing outside of the country, or
U.S. legal residents temporarily residing outside the country, are not
permitted to elect out of withholding.
PERFORMANCE DATA
YIELD QUOTATIONS OF ACCOUNT MM
Yield quotations of Account MM are calculated using the base period
return for a seven-day period. The base period return is calculated using a
hypothetical pre-existing account having a balance of one accumulation unit at
the beginning of the period; base period return per accumulation unit is equal
to accrued interest on portfolio securities plus or minus amortized purchase
discount or premium less all accrued expenses for investment advisory fees and
mortality and expense guarantees, and less a pro rata portion of the contract
administrative charge (calculated in the manner described under "Average Annual
Total Return" below), divided by the accumulation unit value at the beginning
of the period. Realized capital gains or losses and unrealized appreciation or
depreciation of the portfolio are not included in the base period return, but
are included in accumulation unit values.
Current yield is equal to the base period return multiplied by 365,
and the result divided by 7. The current yield for Account MM for the seven-day
period ended December 31, 1997 was 3.90%.
Effective yield, which includes the effects of compounding, is equal
to the sum of 1 plus the base period return, raised to a power equal to 365
divided by 7, minus 1. The effective yield for Account MM for the seven-day
period ended December 31, 1997 was 3.97%.
These quotations do not reflect a deduction for any applicable
surrender charge. If the surrender charge was included, yield and effective
yield would be reduced.
PERFORMANCE INFORMATION
From time to time, the Company may advertise several types of
historical performance for Accounts GIS, QB, MM, TGIS, TSB, TAS, TB and the
Funding Options of Fund U.
23
<PAGE> 150
STANDARDIZED METHOD. Quotations of average annual total returns are
computed according to a formula in which a hypothetical initial investment of
$1,000 is applied to an Account or Funding Option, and then related to ending
redeemable values over one-, five-, and ten-year periods, or for a period
covering the time during which the Funding Option has been in existence, if
less. If a Funding Option has been in existence for less than one year, the
"since inception" total return performance quotations are year-to-date and are
not average annual total returns. These quotations reflect the deduction of all
recurring charges during each period (on a pro rata basis in the case of
fractional periods). The deduction for the annual contract administrative
charge ($30) is converted to a percentage of assets based on the actual fee
collected (or anticipated to be collected, if a new product), divided by the
average net assets for contracts sold (or anticipated to be sold) under the
Prospectus to which this Statement of Additional Information relates. Each
quotation assumes a total redemption at the end of each period with the
assessment of any applicable withdrawal charge at that time. For Accounts TGIS,
TSB, TAS and TB, market timing fees are included in expenses in the calculation
of performance for periods on or after May 1, 1990, the date on which the
market timing fee became a charge against the daily assets of the timed
accounts. The performance for periods prior to May 1, 1990 does not reflect the
deduction of the market timing fee.
NONSTANDARDIZED METHOD. Nonstandardized "total returns" will be
calculated in a similar manner based on the performance of the Funding Options
over a period of time, usually for the calendar year-to-date, and for the past
one-, three-, five- and ten-year periods. Nonstandardized total returns will
not reflect the deduction of any applicable withdrawal charge or the $30 annual
contract administrative charge, which, if reflected, would decrease the level
of performance shown. The withdrawal charge is not reflected because the
Contract is designed for long-term investment.
TOTAL RETURN QUOTATIONS FOR TIMED ACCOUNTS. Because Accounts TGIS,
TSB, TAS and TB are primarily available to Contract Owners who have entered
into third party market timing services agreements, the Accounts may experience
wide fluctuations in assets over a given time period. Consequently, performance
data computed according to both the standardized and nonstandardized methods
for Accounts TGIS, TSB, TAS and TB may not always be useful in evaluating the
performance of these Accounts. In addition, performance data for Accounts TGIS,
TSB, TAS and TB alone will not generally be useful to the purchase of
evaluating the performance of a market timing strategy that uses these
Accounts.
For funding options that were in existence before they became
available under Fund U, the standardized average total return quotations may be
accompanied by returns showing the investment performance that such funding
options would have achieved (reduced by the applicable charges) had they been
held available under the Contract for the period quoted. The total return
quotations are based upon historical earnings and are not necessarily
representative of future performance.
GENERAL. Within the guidelines prescribed by the SEC and the
National Association of Securities Dealers, Inc. ("NASD"), performance
information may be quoted numerically or may be presented in a table, graph or
other illustration. Advertisements may include data comparing performance to
well-known indices of market performance (including, but not limited to, the
Dow Jones Industrial Average, the Standard & Poor's (S&P) 500 Index and the S&P
400 Index, the Lehman Brothers Long T-Bond Index, the Russell 1000, 2000 and
3000 Indices, the Value Line Index, and the Morgan Stanley Capital
International's EAFE Index). Advertisements may also include published
editorial comments and performance rankings compiled by independent
organizations (including, but not limited to, Lipper Analytical Services, Inc.
and Morningstar, Inc.) and publications that monitor the performance of Fund
ABD II and the Funding Options.
Average annual total returns of each managed Separate Account
computed according to the standardized and non-standardized methods for the
periods ended December 31, 1997 are set forth in the following tables.
Average annual total returns for each of the Funding Options
(excluding Money Market Portfolio) computed according to the standardized and
nonstandardized methods for the period ending December 31, 1997 are set forth
in the following tables.
24
<PAGE> 151
<TABLE>
<CAPTION>
STANDARDIZED AVERAGE ANNUAL TOTAL RETURNS
(taking into account all charges and fees)
- ---------------------------------------------------------------------------------------------------------------------------------
INVESTMENT ALTERNATIVE SUBACCOUNT 1 YEAR 5 YEAR 10 YEAR
INCEPTION
DATE (4)
=================================================================================================================================
<S> <C> <C> <C> <C>
Account GIS 5/83 26.34% 17.33% 15.01%
- ---------------------------------------------------------------------------------------------------------------------------------
Account QB 5/83 1.43% 4.83% 6.89%
- ---------------------------------------------------------------------------------------------------------------------------------
Account MM 5/83 -1.05% 2.25% 4.22%
- ---------------------------------------------------------------------------------------------------------------------------------
Account TGIS 12/87 24.62% 15.00% 13.14%
- ---------------------------------------------------------------------------------------------------------------------------------
Account TSB(1) 11/87 -2.34% 0.77% 3.12%
- ---------------------------------------------------------------------------------------------------------------------------------
Account TAS 11/87 24.01% 15.03% 12.54%
- ---------------------------------------------------------------------------------------------------------------------------------
Account TB 11/87 -1.81% 1.21% 2.11%
- ---------------------------------------------------------------------------------------------------------------------------------
FUND U
- ---------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund 5/16/83 19.41% 17.03% 14.71%
- ---------------------------------------------------------------------------------------------------------------------------------
Dreyfus Stock Index Fund 1/24/92 26.14% 17.44% 14.90% *
- ---------------------------------------------------------------------------------------------------------------------------------
High Yield Bond Trust 5/16/83 9.96% 9.64% 8.63%
- ---------------------------------------------------------------------------------------------------------------------------------
Managed Assets Trust 5/16/83 14.64% 11.10% 11.38%
- ---------------------------------------------------------------------------------------------------------------------------------
American Odyssey Funds (CHART fee included)
- ---------------------------------------------------------------------------------------------------------------------------------
Core Equity Fund 5/1/93 23.53% 15.50% * ---
- ---------------------------------------------------------------------------------------------------------------------------------
Emerging Opportunities Fund 5/1/93 -0.77% 7.37% * ---
- ---------------------------------------------------------------------------------------------------------------------------------
Global High Yield Bond Fund 5/1/93 -1.64% 1.20% * ---
- ---------------------------------------------------------------------------------------------------------------------------------
Intermediate-Term Bond Fund 5/1/93 -0.28% 2.07% * ---
- ---------------------------------------------------------------------------------------------------------------------------------
International Equity Fund 5/1/93 -2.72% 8.12% * ---
- ---------------------------------------------------------------------------------------------------------------------------------
Long-Term Bond Fund 5/1/93 4.15% 4.27% * ---
- ---------------------------------------------------------------------------------------------------------------------------------
American Odyssey Funds (no CHART fee included)
- ---------------------------------------------------------------------------------------------------------------------------------
Core Equity Fund 5/1/93 24.91% 16.87% * ---
- ---------------------------------------------------------------------------------------------------------------------------------
Emerging Opportunities Fund 5/1/93 0.44% 8.69% * ---
- ---------------------------------------------------------------------------------------------------------------------------------
Global High Yield Bond Fund 5/1/93 -0.35% 2.48% * ---
- ---------------------------------------------------------------------------------------------------------------------------------
Intermediate-Term Bond Fund 5/1/93 1.02% 3.35% * ---
- ---------------------------------------------------------------------------------------------------------------------------------
International Equity Fund 5/1/93 -1.39% 9.47% * ---
- ---------------------------------------------------------------------------------------------------------------------------------
Long-Term Bond Fund 5/1/93 5.50% 5.57% * ---
- ---------------------------------------------------------------------------------------------------------------------------------
Delaware Group Premium Fund Inc.:
- ---------------------------------------------------------------------------------------------------------------------------------
REIT Series 5/1/98 --- --- ---
- ---------------------------------------------------------------------------------------------------------------------------------
Dreyfus Variable Investment Fund :
- ---------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Portfolio 5/1/98 --- --- ---
- ---------------------------------------------------------------------------------------------------------------------------------
Small Cap Portfolio 5/1/98 --- --- ---
- ---------------------------------------------------------------------------------------------------------------------------------
Fidelity's Variable Insurance Products Fund:
- ---------------------------------------------------------------------------------------------------------------------------------
Equity Income Portfolio 7/93 21.35% 18.18% * ---
- ---------------------------------------------------------------------------------------------------------------------------------
Growth Portfolio 1/24/92 16.78% 15.73% 13.91% *
- ---------------------------------------------------------------------------------------------------------------------------------
High Income Portfolio 1/24/92 11.05% 11.64% 13.01% *
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NONSTANDARDIZED TOTAL RETURNS
(taking into account all charges and fees except
deferred sales charges and contract administrative charge)
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT ALTERNATIVE FUND 1 YEAR 3 YEAR 5 YEAR 10 YEAR
INCEPTION
DATE (5)
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Account GIS 5/83 31.52% 29.31% 18.11% 15.30%
- ------------------------------------------------------------------------------------------------------------------------------------
Account QB 5/83 6.58% 8.05% 5.88% 7.17%
- ------------------------------------------------------------------------------------------------------------------------------------
Account MM 5/83 4.10% 4.16% 3.38% 4.50%
- ------------------------------------------------------------------------------------------------------------------------------------
Account TGIS 1/88 29.69% 27.63% 15.80% 13.44%
- ------------------------------------------------------------------------------------------------------------------------------------
Account TSB(1) 11/87 2.81% 2.68% 1.95% 3.39%
- ------------------------------------------------------------------------------------------------------------------------------------
Account TAS 11/87 29.19% 25.71% 15.85% 12.84%
- ------------------------------------------------------------------------------------------------------------------------------------
Account TB 11/87 3.34% 1.56% 2.37% 2.38%
- ------------------------------------------------------------------------------------------------------------------------------------
FUND U
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund 5/16/83 24.58% 28.55% 17.81% 15.01%
- ------------------------------------------------------------------------------------------------------------------------------------
Dreyfus Stock Index Fund 1/24/92 31.32% 29.00% 18.22% 14.41% *
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield Bond Trust 5/16/83 15.12% 14.60% 10.56% 8.92%
- ------------------------------------------------------------------------------------------------------------------------------------
Managed Assets Trust 5/16/83 19.81% 19.11% 11.99% 11.67%
- ------------------------------------------------------------------------------------------------------------------------------------
American Odyssey Funds (CHART fee included)
- ------------------------------------------------------------------------------------------------------------------------------------
Core Equity Fund 5/1/93 28.71% 27.83% 16.38% * ---
- ------------------------------------------------------------------------------------------------------------------------------------
Emerging Opportunities Fund 5/1/93 4.38% 8.32% 8.41% * ---
- ------------------------------------------------------------------------------------------------------------------------------------
Global High Yield Bond Fund 5/1/93 3.51% 4.25% 2.43% * ---
- ------------------------------------------------------------------------------------------------------------------------------------
Intermediate-Term Bond Fund 5/1/93 4.87% 6.04% 3.27% * ---
- ------------------------------------------------------------------------------------------------------------------------------------
International Equity Fund 5/1/93 2.43% 12.21% 9.14% * ---
- ------------------------------------------------------------------------------------------------------------------------------------
Long-Term Bond Fund 5/1/93 9.31% 8.85% 5.40% * ---
- ------------------------------------------------------------------------------------------------------------------------------------
American Odyssey Funds (no CHART fee included)
- ------------------------------------------------------------------------------------------------------------------------------------
Core Equity Fund 5/1/93 30.09% 29.37% 17.72% * ---
- ------------------------------------------------------------------------------------------------------------------------------------
Emerging Opportunities Fund 5/1/93 5.59% 9.67% 9.70% * ---
- ------------------------------------------------------------------------------------------------------------------------------------
Global High Yield Bond Fund 5/1/93 4.80% 5.55% 3.67% * ---
- ------------------------------------------------------------------------------------------------------------------------------------
Intermediate-Term Bond Fund 5/1/93 6.17% 7.37% 4.51% * ---
- ------------------------------------------------------------------------------------------------------------------------------------
International Equity Fund 5/1/93 3.76% 13.65% 10.46% * ---
- ------------------------------------------------------------------------------------------------------------------------------------
Long-Term Bond Fund 5/1/93 10.66% 10.21% 6.66% * ---
- ------------------------------------------------------------------------------------------------------------------------------------
Delaware Group Premium Fund Inc.:
- ------------------------------------------------------------------------------------------------------------------------------------
REIT Series --- --- --- ---
- ------------------------------------------------------------------------------------------------------------------------------------
Dreyfus Variable Investment Fund :
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Portfolio --- --- --- ---
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Portfolio --- --- --- ---
- ------------------------------------------------------------------------------------------------------------------------------------
Fidelity's Variable Insurance Products Fund:
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Income Portfolio 10/86 26.52% 23.96% 18.66% 15.27%
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Portfolio 10/86 21.95% 22.69% 16.54% 15.74% *
- ------------------------------------------------------------------------------------------------------------------------------------
High Income Portfolio 9/85 16.21% 15.95% 12.52% 11.41% *
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 152
<TABLE>
<S> <C> <C> <C> <C>
Fidelity's Variable Insurance Products Fund II:
- -------------------------------------------------------------------------------------------------------------------------------
Asset Manager Portfolio 1/24/92 13.99% 10.64% 10.98% *
- -------------------------------------------------------------------------------------------------------------------------------
Salomon Brothers Variable Series Fund Inc.:
- -------------------------------------------------------------------------------------------------------------------------------
Salomon Brothers Variable Investors Fund 5/1/98 --- --- ---
- -------------------------------------------------------------------------------------------------------------------------------
Templeton Variable Products Series Fund
- -------------------------------------------------------------------------------------------------------------------------------
Templeton Asset Allocation Fund 1/24/92 8.93% 13.26% 12.48% *
- -------------------------------------------------------------------------------------------------------------------------------
Templeton Bond Fund 1/24/92 -3.91% 4.05% 4.39% *
- -------------------------------------------------------------------------------------------------------------------------------
Templeton Stock Fund 1/24/92 5.33% 15.31% 13.47% *
- -------------------------------------------------------------------------------------------------------------------------------
Travelers Series Fund, Inc.:
- -------------------------------------------------------------------------------------------------------------------------------
Alliance Growth Portfolio 2/13/95 22.29% 27.87% * ---
- -------------------------------------------------------------------------------------------------------------------------------
MFS Total Return Portfolio 2/13/95 14.52% 17.01% * ---
- -------------------------------------------------------------------------------------------------------------------------------
Putnam Diversified Income Portfolio 2/13/95 1.20% 7.34% * ---
- -------------------------------------------------------------------------------------------------------------------------------
Smith Barney High Income Portfolio 2/13/95 7.28% 11.12% * ---
- -------------------------------------------------------------------------------------------------------------------------------
Smith Barney International Equity Portfolio 2/13/95 -3.80% 9.02% * ---
- -------------------------------------------------------------------------------------------------------------------------------
Smith Barney Large Cap Value Portfolio 2/13/95 19.89% 22.26% * ---
- -------------------------------------------------------------------------------------------------------------------------------
Travelers Series Trust :
- -------------------------------------------------------------------------------------------------------------------------------
Convertible Bond Portfolio 5/1/98 --- --- ---
- -------------------------------------------------------------------------------------------------------------------------------
Disciplined Mid Cap Stock Portfolio 5/1/98 --- --- ---
- -------------------------------------------------------------------------------------------------------------------------------
Disciplined Small Cap Stock Portfolio 5/1/98 --- --- ---
- -------------------------------------------------------------------------------------------------------------------------------
MFS Mid Cap Growth Portfolio 5/1/98 --- --- ---
- -------------------------------------------------------------------------------------------------------------------------------
MFS Research Portfolio 5/1/98 --- --- ---
- -------------------------------------------------------------------------------------------------------------------------------
Social Awareness Stock Portfolio 5/1/92 20.53% 14.07% ---
- -------------------------------------------------------------------------------------------------------------------------------
Strategic Stock Portfolio 5/1/98 --- --- ---
- -------------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities Portfolio 1/24/92 6.08% 5.63% ---
- -------------------------------------------------------------------------------------------------------------------------------
Utilities Portfolio 2/94 18.56% 13.21% ---
- -------------------------------------------------------------------------------------------------------------------------------
Warburg Pincus Trust
- -------------------------------------------------------------------------------------------------------------------------------
Warburg Pincus Emerging Markets Portfolio 5/1/98 --- --- ---
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Fidelity's Variable Insurance Products Fund II:
- -----------------------------------------------------------------------------------------------------------------------------------
Asset Manager Portfolio 9/89 19.15% 15.92% 11.55% 11.33% *
- -----------------------------------------------------------------------------------------------------------------------------------
Salomon Brothers Variable Series Fund Inc.:
- -----------------------------------------------------------------------------------------------------------------------------------
Salomon Brothers Variable Investors Fund 1/2/98 --- --- --- ---
- -----------------------------------------------------------------------------------------------------------------------------------
Templeton Variable Products Series Fund
- -----------------------------------------------------------------------------------------------------------------------------------
Templeton Asset Allocation Fund 8/88 14.09% 17.47% 14.11% 11.26% *
- -----------------------------------------------------------------------------------------------------------------------------------
Templeton Bond Fund 8/88 1.23% 7.49% 5.13% 6.07% *
- -----------------------------------------------------------------------------------------------------------------------------------
Templeton Stock Fund 8/88 10.49% 18.22% 16.13% 11.91% *
- -----------------------------------------------------------------------------------------------------------------------------------
Travelers Series Fund, Inc.:
- -----------------------------------------------------------------------------------------------------------------------------------
Alliance Growth Portfolio 6/20/94 27.47% 29.43% 26.10% * ---
- -----------------------------------------------------------------------------------------------------------------------------------
MFS Total Return Portfolio 6/20/94 19.69% 18.86% 15.08% * ---
- -----------------------------------------------------------------------------------------------------------------------------------
Putnam Diversified Income Portfolio 6/20/94 6.36% 9.64% 8.37% * ---
- -----------------------------------------------------------------------------------------------------------------------------------
Smith Barney High Income Portfolio 6/20/94 12.44% 13.54% 10.99% * ---
- -----------------------------------------------------------------------------------------------------------------------------------
Smith Barney International Equity Portfolio 6/20/94 1.35% 8.96% 6.15% * ---
- -----------------------------------------------------------------------------------------------------------------------------------
Smith Barney Large Cap Value Portfolio 6/20/94 25.07% 24.81% 20.05% * ---
- -----------------------------------------------------------------------------------------------------------------------------------
Travelers Series Trust :
- -----------------------------------------------------------------------------------------------------------------------------------
Convertible Bond Portfolio 5/1/98 --- --- --- ---
- -----------------------------------------------------------------------------------------------------------------------------------
Disciplined Mid Cap Stock Portfolio 5/1/98 --- --- --- ---
- -----------------------------------------------------------------------------------------------------------------------------------
Disciplined Small Cap Stock Portfolio 5/1/98 --- --- --- ---
- -----------------------------------------------------------------------------------------------------------------------------------
MFS Mid Cap Growth Portfolio 5/1/98 --- --- --- ---
- -----------------------------------------------------------------------------------------------------------------------------------
MFS Research Portfolio 5/1/98 --- --- --- ---
- -----------------------------------------------------------------------------------------------------------------------------------
Social Awareness Stock Portfolio 5/1/92 25.70% 25.19% 14.91% 14.69% *
- -----------------------------------------------------------------------------------------------------------------------------------
Strategic Stock Portfolio 5/1/98 --- --- --- ---
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities Portfolio 1/24/92 11.24% 11.06% 6.66% 6.73% *
- -----------------------------------------------------------------------------------------------------------------------------------
Utilities Portfolio 2/94 23.74% 18.80% 14.31% * ---
- -----------------------------------------------------------------------------------------------------------------------------------
Warburg Pincus Trust
- -----------------------------------------------------------------------------------------------------------------------------------
Warburg Pincus Emerging Markets Portfolio --- --- --- ---
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Formerly The Travelers Timed Money Market Account for Variable Annuities
(Account TMM).
(2) Formerly Aggressive Stock Trust.
(3) Formerly American Odyssey Short-Term Bond Fund, the name, investment
objective, and subadviser of this fund were changed pursuant to a
shareholder vote effective May 1, 1998.
* Figures represent period "Since Inception," as defined below.
(4) Subaccount Inception Date reflects the actual date that the
underlying fund became available under the Separate Account, as
determined by the effective date of the Separate Account's 1940 Act
Registration Statement.
(5) Fund Inception Date reflects the date that the underlying fund
commenced operations. For those funds that were in existence prior to
the date that they became available under the Separate Account, the
performance figures represent actual returns of the fund adjusted to
reflect the charges that would have been assessed under the Separate
Account during the period(s) shown. As illustrated herein, periods
greater than 1 year reflect Hypothetical Adjusted Returns.
26
<PAGE> 153
THE BOARD OF MANAGERS
The investments and administration of each of the Separate Accounts
are under the direction of the Board of Managers, listed below. Members of the
Board of Managers of Accounts GIS, QB, MM, TGIS, TSB, TAS and TB are elected
annually by those Contract Owners participating in the Separate Accounts. A
majority of the members of the Board of Managers are persons who are not
affiliated with The Travelers Insurance Company, TIMCO, TAMIC or their
affiliates.
<TABLE>
<CAPTION>
Name Present Position and Principal Occupation During Last Five Years
- ---- ----------------------------------------------------------------
<S> <C>
*Heath B. McLendon Managing Director (1993-present), Smith Barney Inc. ("Smith Barney");
Chairman and Member Chairman (1993-present), Smith Barney Strategy Advisors, Inc.; President
388 Greenwich Street and Director (1994-present), Mutual Management Corp.; Director and New York,
Age 64 New York President (1996-present), Travelers Investment Adviser, Inc.; Chairman
and Director of forty-two investment companies associated with Smith
Barney; Chairman, Board of Trustees, Drew University; Advisory Director, First
Empire State Corporation; Chairman, Board of Managers, seven Variable Annuity
Separate Accounts of The Travelers Insurance Company+; Chairman, Board of
Trustees, five Mutual Funds sponsored by The Travelers Insurance Company++; prior
to July 1993, Senior Executive Vice President of Shearson Lehman Brothers Inc.
Knight Edwards Of Counsel (1988-present), Edwards & Angell, Attorneys; Member, Advisory Board
Member (1973-1994), thirty-one mutual funds sponsored by Keystone Group, Inc.; Member,
2700 Hospital Trust Tower Board of Managers, seven Variable Annuity Separate Accounts of The Travelers
Providence, Rhode Island Insurance Company+; Trustee, five Mutual Funds sponsored by The Travelers
Age 74 Insurance Company++.
Robert E. McGill, III Retired manufacturing executive. Director (1983-1995), Executive Vice
Member President (1989-1994) and Senior Vice President, Finance and
295 Hancock Street Administration (1983-1989), The Dexter Corporation (manufacturer of
Williamstown, Massachusetts specialty chemicals and materials); Vice Chairman (1990-1992), Director
Age 66 (1983-1995), Life Technologies, Inc. (life science/biotechnology
products); Director, (1994-present), The Connecticut Surety Corporation
(insurance); Director (1995-present), CN Bioscience, Inc. (life/biotechnology
products); Director (1995-present), Chemfab Corporation (specialty materials
manufacturer); Member, Board of Managers, seven Variable Annuity Separate Accounts
of The Travelers Insurance Company+; Trustee, five Mutual Funds sponsored by The
Travelers Insurance Company++.
Lewis Mandell Dean, College of Business Administration (1995-present), Marquette
Member University; Professor of Finance (1980-1995) and Associate Dean (1993-1995),
606 N. 13th Street School of Business Administration, and Director, Center for Research and
Milwaukee, WI 53233 Development in Financial Services (1980-1995), University of Connecticut; Director
Age 55 (1992-present), GZA Geoenvironmental Tech, Inc. (engineering services); Member,
Board of Managers, seven Variable Annuity Separate Accounts of The Travelers
Insurance Company+; Trustee, five Mutual Funds sponsored by The Travelers
Insurance Company++.
</TABLE>
27
<PAGE> 154
<TABLE>
<S> <C>
Frances M. Hawk, CFA, CFP Private Investor, (1997-present), Portfolio Manager (1992-1997), HLM
Member Management Company, Inc. (investment management); Assistant Treasurer,
222 Berkeley Street Pensions and Benefits. Management (1989-1992), United Technologies
Boston, Massachusetts Corporation (broad-based designer and manufacturer of high technology
Age 50 products); Member, Board of Managers, seven Variable Annuity Separate
Accounts of The Travelers Insurance Company+; Trustee, five Mutual Funds
sponsored by The Travelers Insurance Company++.
Ernest J. Wright Vice President and Secretary (1996-present), Assistant Secretary (1994-1996),
Secretary to the Board Counsel (1987-present), The Travelers Insurance Company; Secretary, Board of
One Tower Square Managers, seven Variable Annuity Separate Accounts of The Travelers Insurance
Hartford, Connecticut Company+; Secretary, Board of Trustees, five Mutual Funds sponsored by The
Age 57 Travelers Insurance Company++.
Kathleen A. McGah Assistant Secretary and Counsel (1995-present), The Travelers Insurance
Assistant Secretary to the Board Company; Assistant Secretary, Board of Managers, seven Variable Annuity
One Tower Square Separate Accounts of The Travelers Insurance Company+; Assistant Secretary, Board
Hartford, Connecticut of Trustees, five Mutual Funds sponsored by The Travelers Insurance Company++.
Age 47 Prior to January 1995, Counsel, ITT Hartford Life Insurance Company.
</TABLE>
+ These seven Variable Annuity Separate Accounts are: The Travelers Growth
and Income Stock Account for Variable Annuities, The Travelers Quality
Bond Account for Variable Annuities, The Travelers Money Market Account
for Variable Annuities, The Travelers Timed Growth and Income Stock
Account for Variable Annuities, The Travelers Timed Short-Term Bond
Account for Variable Annuities, The Travelers Timed Aggressive Stock
Account for Variable Annuities and The Travelers Timed Bond Account for
Variable Annuities.
++ These five Mutual Funds are: Capital Appreciation Fund, Money Market
Portfolio, High Yield Bond Trust, Managed Assets Trust and The Travelers
Series Trust.
* Mr. McLendon is an "interested person" within the meaning of the
1940 Act by virtue of his position as Managing Director of Smith Barney Inc.,
an indirect wholly owned subsidiary of Travelers Group Inc. and also owns
shares and options to purchase shares of Travelers Group Inc., the indirect
parent of The Travelers Insurance Company.
The Company is responsible for payment of the fees and expenses of
the Board of Managers, and the expenses of audit of the Separate Accounts, as
well as other expenses for services related to the operations of the accounts,
for which it deducts certain amounts from purchase payments and from the
accounts.
Members of the Board of Managers who are also officers or employees
of Travelers Group Inc. or its subsidiaries are not entitled to any fee.
Members of the Board of Managers who are not affiliated as employees of
Travelers Group Inc. or its subsidiaries receive an aggregate retainer of
$19,000 for service on the Boards of the seven Variable Annuity Separate
Accounts established by The Travelers Insurance Company and the five Mutual
Funds sponsored by The Travelers Insurance Company. They also receive an
aggregate fee of $2,500 for each meeting of such Boards attended. Board Members
with 10 years of service may agree to provide services as emeritus director at
age 72 or upon reaching 80 years of age and will receive 50% of the annual
retainer and 50% of meeting fees if attended.
28
<PAGE> 155
DISTRIBUTION AND MANAGEMENT SERVICES
Under the terms of a Distribution and Management Agreement between
each Separate Account, the Company and Tower Square Securities, Inc., the
Company provides all sales and administrative services and mortality and
expense risk guarantees related to variable annuity contracts issued by the
Company in connection with the Separate Accounts and assumes the risk of
minimum death benefits, as applicable. The Company also pays all sales costs
(including costs associated with the preparation of sales literature); all
costs of qualifying the Separate Accounts and the variable annuity contracts
with regulatory authorities; the costs of proxy solicitation; all custodian,
accountants' and legal fees; and all compensation paid to the unaffiliated
members of the Board of Managers. In addition, under the terms of the
Distribution and Management Agreements between the Company and Accounts TGIS,
TSB, TAS and TB, the Company deducts amounts necessary to pay fees to
third-party registered investment advisers which provide market timing
investment advisory services to Contract Owners in those accounts and, in turn,
pays such fees to the registered investment advisers. The Company also provides
without cost to the Separate Accounts all necessary office space, facilities,
and personnel to manage its affairs.
The Company received the following amounts from the Separate
Accounts in each of the last three fiscal years for services provided under the
Distribution and Management Agreements:
<TABLE>
<CAPTION>
SEPARATE ACCOUNT 1997 1996 1995
---------------- ---- ---- ----
<S> <C> <C> <C>
GIS $ 7,623,733 $ 5,889,123 $ 4,557,639
QB $ 2,144,373 $ 2,322,938 $ 2,119,384
MM $ 1,296,431 $ 1,141,046 $ 1,122,833
U $ 60,630,629 $ 43,929,076 $ 27,747,007
TGIS $ 2,750,311 $ 2,727,368 $ 1,986,950
TSB $ 1,092,109 $ 1,217,057 $ 1,860,151
TAS $ 1,191,956 $ 1,196,757 $ 906,250
TB $ 32,789 $ 77,050 $ 179,197
</TABLE>
SECURITIES CUSTODIAN
Chase Manhattan Bank, N.A., Chase MetroTech Center, Brooklyn, New
York, is the custodian of the portfolio securities and similar investments of
Accounts GIS, QB, MM, TGIS, TSB, TAS and TB.
INDEPENDENT ACCOUNTANTS
Financial statements as of and for the year ended December 31, 1997
of Accounts GIS, QB, MM, TGIS, TSB, TAS, TB and Fund U, included in the Annual
Reports for each incorporated by reference in this SAI, have been incorporated
herein in reliance on the report of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
The consolidated financial statements of The Travelers Insurance
Company and Subsidiaries as of December 31, 1997 and 1996, and for each of the
years in the three-year period ended December 31, 1997, have been included
herein and in the registration statement in reliance upon the reports of KPMG
Peat Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
29
<PAGE> 156
FINANCIAL STATEMENTS
TRAVELERS INSURANCE COMPANY
30
<PAGE> 157
STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES
THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES
- --------------------------------------------------------------------------------
GROUP VARIABLE ANNUITY CONTRACTS
ISSUED BY THE TRAVELERS INSURANCE COMPANY
FOR FUNDING QUALIFIED RETIREMENT PLANS
UNDER PENSION AND PROFIT-SHARING PROGRAMS
May 1, 1998
This Statement of Additional Information ("SAI") is not a prospectus but
relates to, and should be read in conjunction with, the Prospectus dated May 1,
1998. A copy of the Prospectus may be obtained by writing to The Travelers
Insurance Company (the "Company"), Annuity Services, One Tower Square,
Hartford, Connecticut 06183-5030, or by calling 800-842-9368.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
DESCRIPTION OF THE TRAVELERS AND THE SEPARATE ACCOUNTS . . . . . . . . . . . . . . . . . 2
The Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The Separate Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT
FOR VARIABLE ANNUITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES . . . . . . . . . . . . . 4
DESCRIPTION OF CERTAIN TYPES OF INVESTMENTS AND INVESTMENT
TECHNIQUES AVAILABLE TO THE SEPARATE ACCOUNTS . . . . . . . . . . . . . . . . . . . 6
WRITING COVERED CALL OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
BUYING PUT AND CALL OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
FUTURES CONTRACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
MONEY MARKET INSTRUMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
INVESTMENT MANAGEMENT AND ADVISORY SERVICES. . . . . . . . . . . . . . . . . . . . . . . 12
Advisory and Subadvisory Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
TAMIC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
TIMCO. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
VALUATION OF ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
THE BOARD OF MANAGERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
DISTRIBUTION AND MANAGEMENT SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . 18
SECURITIES CUSTODIAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
INDEPENDENT ACCOUNTANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
FINANCIAL STATEMENTS - THE TRAVELERS INSURANCE COMPANY . . . . . . . . . . . . . . . . . FS-1
</TABLE>
<PAGE> 158
DESCRIPTION OF THE TRAVELERS AND THE SEPARATE ACCOUNTS
THE INSURANCE COMPANY
The Travelers Insurance Company (the "Company") is a stock insurance company
chartered in 1864 in Connecticut and continuously engaged in the insurance
business since that time. It is licensed to conduct life insurance business in
all states of the United States, the District of Columbia, Puerto Rico, Guam,
the U.S. and British Virgin Islands and the Bahamas. The Company is an
indirect wholly owned subsidiary of Travelers Group Inc., a financial services
holding company. The Company's Home Office is located at One Tower Square,
Hartford, Connecticut 06183.
THE SEPARATE ACCOUNTS
Each of the Separate Accounts which serve as the funding vehicles for the
Variable Annuity contracts described in this Statement of Additional
Information meets the definition of a separate account under the federal
securities laws, and will comply with the provisions of the Investment Company
Act of 1940, as amended (the "1940 Act"). Additionally, the operations of each
of the Separate Accounts are subject to the provisions of Section 38a-433 of
the Connecticut General Statutes which authorizes the Connecticut Insurance
Commissioner to adopt regulations under it. The Section contains no
restrictions on investments of the Separate Accounts, and the Commissioner has
adopted no regulations under the Section that affect the Separate Accounts.
The Travelers Growth and Income Stock Account for Variable Annuities (Account
GIS) was established on September 22, 1967, and The Travelers Quality Bond
Account for Variable Annuities (Account QB) was established on July 29, 1974.
Each of the Separate Accounts, although an integral part of the Company, is
registered with the Securities and Exchange Commission ("SEC") as a
diversified, open-end management investment Company under the 1940 Act. The
assets of Accounts GIS and QB are invested directly in securities (such as
stocks, bonds or money market instruments) which are compatible with the stated
investment policies of each account.
Purchase Payments may be allocated to either of the Separate Accounts. The
Company may make additions to or deletions from the investment alternatives
available under the Contract, as permitted by law. The investment objectives
of each of the Separate Accounts are as follows:
ACCOUNT GIS: The primary objective of Account GIS is long-term accumulation
of principal through capital appreciation and retention of net
investment income. The assets of Account GIS will normally be
invested in a portfolio of common stocks spread over
industries and companies.
ACCOUNT QB: The primary objective of Account QB is current income,
moderate capital volatility and total return. Assets of
Account QB will be invested in short-term to intermediate-term
bonds or other debt securities with a market value-weighted
average maturity of five years or less.
INVESTMENT OBJECTIVES AND POLICIES
Each Separate Account has a different investment objective and different
investment policies, and each Separate Account has certain fundamental
investment restrictions, all of which are set forth below. Neither the
investment objective nor the fundamental investment restrictions can be changed
without a vote of a majority of the outstanding voting securities of the
Accounts, as defined in the 1940 Act. Additionally, in accomplishing their
respective investment objectives, each Account uses certain types of
investments and investment techniques which are discussed under "Investments
and Investment Techniques."
The percentage restrictions (for either fundamental investment policies or
investment restrictions) are interpreted such that if they are adhered to at
the time of investment, a later increase in a percentage beyond the specified
limit
2
<PAGE> 159
resulting from a change in the values of portfolio securities or in the amount
of net assets shall not be considered a violation. It must be recognized that
there are risks inherent in the ownership of any investment and that there can
be no assurance that the investment objectives of the Separate Accounts will be
achieved.
THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES
INVESTMENT OBJECTIVE
The basic investment objective of Account GIS is the selection of investments
from the point of view of an investor concerned primarily with long-term
accumulation of principal through capital appreciation and retention of net
investment income. This principal objective does not preclude the realization
of short-term gains when conditions would suggest the long-term goal is
accomplished by such short-term transactions. The assets of Account GIS will
primarily be invested in a portfolio of equity securities, mainly common
stocks, spread over industries and companies. However, when it is determined
that investments of other types may be advantageous on the basis of combined
considerations of risk, income and appreciation, investments may also be made
in bonds, notes or other evidence of indebtedness, issued publicly or placed
privately, of a type customarily purchased for investment by institutional
investors, including United States Government securities. These investments
generally would not have a prospect of long-term appreciation. Investments in
other than equity securities are temporary for defensive purposes. Such
investments may or may not be convertible into stock or be accompanied by stock
purchase options or warrants for the purchase of stock.
Account GIS may use exchange-traded financial futures contracts as a hedge to
protect against changes in stock prices. The use of stock index futures by
Account GIS is intended primarily to limit transaction and borrowing costs.
Account GIS expects that risk management transactions involving futures
contracts will not impact more than thirty percent (30%) of Account GIS's
assets at any one time. Account GIS may also write covered call options on
securities which it owns, and may purchase index or individual equity call or
put options.
INVESTMENT RESTRICTIONS
The investment restrictions for Account GIS set forth in items 1 through 9 are
fundamental and may not be changed without a vote of a majority of the
outstanding voting securities, as defined in the 1940 Act. Items 10 through 13
may be changed by a vote of the Board of Managers.
1. Not more than 5% of the assets of the Account will be invested in the
securities of any one issuer, except obligations of the United States
Government and its instrumentalities.
2. Borrowings will not be made, except that the right is reserved to
borrow from banks for emergency purposes, provided that such
borrowings will not exceed 5% of the value of the assets of the
Account and that immediately after the borrowing, and at all times
thereafter, and while any such borrowing is unrepaid, there will be
asset coverage of at least 300% for all borrowings of the Account.
3. Securities of other issuers will not be underwritten, except that the
Account could be deemed an underwriter when engaged in the sale of
restricted securities. (See item 13.)
4. Interests in real estate will not be purchased, except as may be
represented by securities for which there is an established market.
5. No purchase of commodities or commodity contracts will be made, except
transactions involving financial futures in order to limit transaction
and borrowing costs and for hedging purposes, as discussed above.
6. Loans will be made only through the acquisition of a portion of
privately placed issue of bonds, debentures or other evidences of
indebtedness of a type customarily purchased by institutional
investors. (See item 13.)
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<PAGE> 160
7. Investments will not be made in the securities of a company for the
purpose of exercising management or control.
8. Not more than 10% of the voting securities of any one issuer will be
acquired. (It is the present practice of Account GIS not to exceed 5%
of the voting securities of any one issuer.)
9. Senior securities will not be issued.
10. Short sales of securities will not be made.
11. Purchases will not be made on margin, except for short-term credits
which are necessary for the clearance of transactions, and for the
placement of not more than 5% of its net asset value in total margin
deposits for positions in futures contracts.
12. The Account will not invest in the securities of other investment
companies, except as part of a plan of merger, consolidation or
acquisition of assets.
13. Not more than 5% of the value of the assets of the Account may be
invested in restricted securities (securities which may not be
publicly offered without registration under the Securities Act of
1933).
Changes in the investments of Account GIS may be made from time to time to take
into account changes in the outlook for particular industries or companies.
Account GIS's investments will not, however, be concentrated in any one
industry; that is, no more than twenty-five percent (25%) of the value of its
assets will be invested in any one industry. While Account GIS may
occasionally invest in foreign securities, it is not anticipated that such
investments will, at any time, account for more than ten percent (10%) of its
investment portfolio.
The assets of Account GIS will be kept fully invested, except that (a)
sufficient cash may be kept on hand to provide for variable annuity contract
obligations, and (b) reasonable amounts of cash, United States Government or
other liquid securities, such as short-term bills and notes, may be held for
limited periods, pending investment in accordance with their respective
investment policies.
PORTFOLIO TURNOVER
Although Account GIS intends to purchase securities for long-term appreciation
of capital and income, and does not intend to place emphasis on obtaining
short-term trading profits, such short-term trading may occur. A higher
turnover rate should not be interpreted as indicating a variation from the
stated investment policy of seeking long-term accumulation of capital, and will
normally increase the brokerage costs of Account GIS. However, negotiated fees
and the use of futures contracts will help to reduce brokerage costs. While
there is no restriction on portfolio turnover, Account GIS expects to have a
moderate to high level of portfolio turnover in the range of 150% to 300%. The
portfolio turnover rate for Account GIS for the years ended December 31, 1995,
1996 and 1997 was 96%, 85% and 64%, respectively.
THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES
INVESTMENT OBJECTIVE
The basic investment objective of Account QB is the selection of investments
from the point of view of an investor concerned primarily with current income,
moderate capital volatility and total return.
It is contemplated that the assets of Account QB will be invested in money
market obligations, including, but not limited to, Treasury bills, repurchase
agreements, commercial paper, bank certificates of deposit and bankers'
acceptances, and in publicly traded debt securities, including bonds, notes,
debentures, equipment trust certificates
4
<PAGE> 161
and short-term instruments. These securities may carry certain equity features
such as conversion or exchange rights or warrants for the acquisition of stocks
of the same or different issuer, or participations based on revenues, sales or
profits. It is currently anticipated that the market value-weighted average
maturity of the portfolio will not exceed five years. (In the case of
mortgage-backed securities, the estimated average life of cash flows will be
used instead of average maturity.) Investments in longer term obligations may
be made if the Board of Managers concludes that the investment yields justify a
longer term commitment.
Account QB may purchase and sell futures contracts on debt securities
("interest rate futures") to hedge against changes in interest rates that might
otherwise have an adverse effect upon the value of Account QB's securities.
The portfolio will be actively managed and Account QB may sell investments
prior to maturity to the extent that his action is considered advantageous in
light of factors such as market conditions or brokerage costs. While the
investments of Account QB are generally not listed securities, there are firms
which make markets in the type of debt instruments which Account QB holds. No
problems of salability are anticipated with regard to the investments of
Account QB.
The Board of Managers will weigh considerations of risks, yield and ratings in
implementing Account QB's fundamental investment policies. There are no
specific criteria with regard to quality or ratings of the investments of
Account QB, but it is anticipated that they will be of investment grade or its
equivalent as determined in good faith by the Board of Managers. There may or
may not be more risk in investing in debt instruments where there are no
specific criteria with regard to quality or ratings of the investments.
INVESTMENT RESTRICTIONS
The investment restrictions set forth in items 1 through 9 below are
fundamental and may not be changed without a vote of a majority of the
outstanding voting securities of Account QB, as defined in the 1940 Act. Items
10 through 13 may be changed by a vote of the Board of Managers of Account QB.
1. Not more than 15% of the value of the assets of Account QB will be
invested in the securities of any one issuer, except obligations of
the United States Government and its instrumentalities, for which
there is no limit.
2. Borrowings will not be made, except that the right is reserved to
borrow from banks for emergency purposes, provided that these
borrowings will not exceed 5% of the value of the assets of Account QB
and that immediately after the borrowing, and at all times thereafter,
and while any borrowing is unrepaid, there will be asset coverage of
at least 300% for all borrowings of Account QB.
3. Securities of other issuers will not be underwritten, except that
Account QB could be deemed to be an underwriter when engaged in the
sale of restricted securities.
4. Interests in real estate will not be purchased, except as may be
represented by securities for which there is an established market.
5. No purchase of commodities or commodity contracts will be made, except
transactions involving financial futures used as a hedge against
unanticipated changes in prevailing levels of interest rates.
6. Loans will be made only through the acquisition of a portion of
privately placed issue of bonds, debentures and other evidences of
indebtedness of a type customarily purchased by institutional
investors.
7. Investments will not be made in the securities of a company for the
purpose of exercising management or control.
8. Not more than 10% of the voting securities of any one issuer will be
acquired.
5
<PAGE> 162
9. Senior securities will not be issued.
10. Short sales of securities will not be made.
11. Purchases will not be made on margin, except for any short- term
credits that are necessary for the clearance of transactions and to
place up to 5% of the value of its net assets in total margin deposits
for positions in futures contracts.
12. Account QB will not invest in the securities of other investment
companies, except as part of a plan of merger, consolidation or
acquisition of assets.
13. The average period of maturity (or in the case of mortgage-backed
securities, the estimated average life of cash flows) of all fixed
interest debt instruments held by Account QB will not exceed five
years.
The investments of Account QB will not be concentrated in any one industry;
that is, no more than twenty-five percent (25%) of the value of its assets will
be invested in any one industry. There is no investment policy as to Account
QB's investment in foreign securities.
PORTFOLIO TURNOVER
Brokerage costs associated with short-term debt instruments are significantly
lower than those incurred on equity investments, and thus, a high portfolio
turnover rate would not adversely affect the brokerage costs of Account QB to
the same extent as high turnover in a separate account which invests primarily
in common stock. The portfolio turnover rate for Account QB for the years
ended December 31, 1995, 1996 and 1997 was 138%, 176% and 196%, respectively.
The marked increase in the portfolio turnover rate for 1995 was due to a
restructuring of corporate bond positions in order to seek increased returns.
DESCRIPTION OF CERTAIN TYPES OF INVESTMENTS AND INVESTMENT TECHNIQUES
AVAILABLE TO THE SEPARATE ACCOUNTS
WRITING COVERED CALL OPTIONS
Account GIS may write covered call options on portfolio securities for which
call options are available and which are listed on a national securities
exchange. These call options generally will be short-term contracts with a
duration of nine months or less.
Account GIS will write only "covered" call options, that is, it will own the
underlying securities which are acceptable for escrow when it writes the call
option and until the obligation to sell the underlying security is extinguished
by exercise or expiration of the call option, or until a call option covering
the same underlying security and having the same exercise price and expiration
date is purchased. Account GIS will receive a premium for writing a call
option, but gives up, until the expiration date, the opportunity to profit from
an increase in the underlying security's price above the exercise price.
Account GIS will retain the risk of loss from a decrease in the price of the
underlying security. Writing covered call options is a conservative investment
technique which is believed to involve relatively little risk, but which is
capable of enhancing an account's total returns.
The premium received for writing a covered call option will be recorded as a
liability in the Account's Statement of Assets and Liabilities. This liability
will be adjusted daily to the option's current market value, which will be the
latest sale price at the close of the New York Stock Exchange, or, in the
absence of such sale, at the latest bid quotation. The liability will be
extinguished upon expiration of the option, the purchase of an identical option
in a closing transaction, or delivery of the underlying security upon exercise
of the option.
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<PAGE> 163
The Options Clearing Corporation is the issuer of, and the obligor on, the
covered call options written by Account GIS. In order to secure an obligation
to deliver to the Options Clearing Corporation the underlying security of a
covered call option written by Account GIS, the Account will be required to
make escrow arrangements.
In instances where Account GIS believes it is appropriate to close a covered
call option, it can close out the previously written call option by purchasing
a call option on the same underlying security with the same exercise price and
expiration date. Account GIS may also, under certain circumstances, be able to
transfer a previously written call option.
A previously written call option can be closed out by purchasing an identical
call option only on a national securities exchange which provides a secondary
market in the call option. There is no assurance that a liquid secondary
market will exist for a particular call option at such time. If Account GIS
cannot effect a closing transaction, it will not be able to sell the underlying
security while the previously written option remains outstanding, even though
it might otherwise be advantageous to do so.
If a substantial number of the call options are exercised, the Account's rate
of portfolio turnover may exceed historical levels. This would result in
higher brokerage commissions in connection with the writing of covered call
options and the purchase of call options to close out previously written
options. Such brokerage commissions are normally higher than those applicable
to purchases and sales of portfolio securities.
BUYING PUT AND CALL OPTIONS
Account GIS may purchase put options on securities held, or on futures
contracts whose price volatility is expected to closely match that of
securities held, as a defensive measure to preserve contract owners' capital
when market conditions warrant. Account GIS may purchase call options on
specific securities, or on futures contracts whose price volatility is expected
to closely match that of securities, eligible for purchase by Account GIS, in
anticipation of or as a substitute for the purchase of the securities
themselves. These options may be listed on a national exchange or executed
"over-the-counter" with a broker-dealer as the counterparty. While the
investment adviser anticipates that the majority of option purchases and sales
will be executed on a national exchange, put or call options on specific
securities or for non-standard terms are likely to be executed directly with a
broker-dealer when it is advantageous to do so. Option contracts will be
short-term in nature, generally less than nine months. Account GIS will pay a
premium in exchange for the right to purchase (call) or sell (put) a specific
number of shares of an equity security or futures contract at a specified price
(the strike price) on or before the expiration date of the options contract.
In either case, Account GIS's risk is limited to the option premium paid.
Account GIS may sell the put and call options prior to their expiration and
realize a gain or loss thereby. A call option will expire worthless if the
price of the related security is below the contract strike price at the time of
expiration; a put option will expire worthless if the price of the related
security is above the contract strike price at the time of expiration.
Put and call options will be employed for bona fide hedging purposes only.
Liquid securities sufficient to fulfill the call option delivery obligation
will be identified and segregated in an account; deliverable securities
sufficient to fulfill the put option obligation will be similarly identified
and segregated. In the case of put options on futures contracts, portfolio
securities whose price volatility is expected to match that of the underlying
futures contract will be identified and segregated.
FUTURES CONTRACTS
STOCK INDEX FUTURES
Account GIS will invest in stock index futures. A stock index futures contract
provides for one party to take and the other to make delivery of an amount of
cash over the hedging period equal to a specified amount times the difference
between a stock index value at the close of the last trading day of the
contract or the selling price and the price at which the futures contract is
originally struck. The stock index assigns relative values to the common
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stocks included in the index and reflects overall price trends in the
designated market for equity securities. Therefore, price changes in a stock
index futures contract reflect changes in the specified index of equity
securities on which the futures contract is based. Stock index futures may
also be used, to a limited extent, to hedge specific common stocks with respect
to market (systematic) risk (involving the market's assessment of overall
economic prospects) as distinguished from stock-specific risk (involving the
market's evaluation of the merits of the issuer of a particular security). By
establishing an appropriate "short" position in stock index futures, Account
GIS may seek to protect the value of its equity securities against an overall
decline in the market for equity securities. Alternatively, in anticipation of
a generally rising market, Account GIS can seek to avoid losing the benefit of
apparently low current prices by establishing a "long" position in stock index
futures and later liquidating that position as particular equity securities are
in fact acquired. Account GIS will not be a hedging fund; however, to the
extent that any hedging strategies actually employed are successful, Account
GIS will be affected to a lesser degree by adverse overall market price
movements unrelated to the merits of specific portfolio equity securities than
would otherwise be the case. Gains and losses on futures contracts employed as
hedges for specific securities will normally be offset by losses or gains,
respectively, on the hedged security.
INTEREST RATE FUTURES
Account QB may purchase and sell futures contracts on debt securities
("interest rate futures") to hedge against anticipated changes in interest
rates that might otherwise have an adverse effect upon the value of an
Account's debt securities. An interest rate futures contract is a binding
contractual commitment which, if held to maturity, will result in an obligation
to make or accept delivery, during a particular future month, of debt
securities having a standardized face value and rate of return.
By purchasing interest rate futures (assuming a "long" position), Account QB
will be legally obligated to accept the future delivery of the underlying
security and pay the agreed price. This would be done, for example, when
Account QB intends to purchase particular debt securities when it has the
necessary cash, but expects the rate of return available in the securities
markets at that time to be less favorable than rates currently available in the
futures markets. If the anticipated rise in the price of the debt securities
should occur (with its concurrent reduction in yield), the increased cost of
purchasing the securities will be offset, at least to some extent, by the rise
in the value of the futures position taken in anticipation of the securities
purchase.
By selling interest rate futures held by it, or interest rate futures having
characteristics similar to those held by it (assuming a "short" position),
Account QB will be legally obligated to make the future delivery of the
security against payment of the agreed price. Such a position seeks to hedge
against an anticipated rise in interest rates that would adversely affect the
value of Account QB's portfolio debt securities.
Open futures positions on debt securities will be valued at the most recent
settlement price, unless such price does not appear to the Board of Managers to
reflect the fair value of the contract, in which case the positions will be
valued at fair value determined in good faith by or under the direction of the
Board of Managers.
Hedging by use of interest rate futures seeks to establish, with more certainty
than would otherwise be possible, the effective rate of return on portfolio
securities. When hedging is successful, any depreciation in the value of
portfolio securities will substantially be offset by appreciation in the value
of the futures position.
FUTURES MARKETS AND REGULATIONS
When a futures contract is purchased, Accounts GIS and QB will set aside, in an
identifiable manner, an amount of cash and cash equivalents equal to the total
market value of the futures contract, less the amount of the initial margin.
The Accounts will incur brokerage fees in connection with their futures
transactions, and will be required to deposit and maintain funds with brokers
as margin to guarantee performance of future obligations.
Positions taken in the futures markets are not normally held to maturity, but
instead are liquidated through offsetting transactions which may result in a
profit or a loss. Closing out an open futures contract sale or purchase is
effected by entering into an offsetting futures contract purchase or sale,
respectively, for the same aggregate amount of the
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stock index or interest rate futures contract and the same delivery date. If
the offsetting purchase price is less than the original sale price, the
Accounts realize a gain; if it is more, the Accounts realize a loss.
Conversely, if the offsetting sale price is more than the original purchase
price, the Accounts realize a gain; if less, a loss. While futures positions
taken by the Accounts will usually be liquidated in this manner, the Accounts
may instead make or take delivery of the underlying securities whenever it
appears economically advantageous for them to do so. In determining gain or
loss, transaction costs must also be taken into account. There can be no
assurance that the Accounts will be able to enter into an offsetting
transaction with respect to a particular contract at a particular time.
A clearing corporation associated with the exchange on which futures are traded
guarantees that the sale and purchase obligations will be performed with regard
to all positions that remain open at the termination of the contract.
All stock index and interest rate futures will be traded on exchanges that are
licensed and regulated by the Commodity Futures Trading Commission ("CFTC").
Stock index futures are currently traded on the New York Futures Exchange and
the Chicago Mercantile Exchange. Interest rate futures are actively traded on
the Chicago Board of Trade and the International Monetary Market at the Chicago
Mercantile Exchange.
The investment advisers do not believe any of the Accounts to be a "commodity
pool" as defined under the Commodity Exchange Act. The Accounts will only
enter into futures contracts for bona fide hedging or other appropriate risk
management purposes as permitted by CFTC regulations and interpretations, and
subject to the requirements of the SEC. The Accounts will not purchase or sell
futures contracts for which the aggregate initial margin exceeds five percent
(5%) of the fair market value of their individual assets, after taking into
account unrealized profits and unrealized losses on any such contracts which
they have entered into. The Accounts will further seek to assure that
fluctuations in the price of any futures contracts that they use for hedging
purposes will be substantially related to fluctuations in the price of the
securities which they hold or which they expect to purchase, although there can
be no assurance that the expected result will be achieved.
As evidence of their hedging intent, the Accounts expect that on seventy-five
percent (75%) or more of the occasions on which they purchase a long futures
contract, they will effect the purchase of securities in the cash market or
take delivery at the close of a futures position. In particular cases,
however, when it is economically advantageous, a long futures position may be
terminated without the corresponding purchase of securities.
SPECIAL RISKS
While certain futures contracts may be purchased and sold to reduce certain
risks, these transactions may entail other risks. Thus, while the Accounts may
benefit from the use of such futures, unanticipated changes in stock price
movements or interest rates may result in a poorer overall performance for the
Account than if it had not entered into such futures contracts. Moreover, in
the event of an imperfect correlation between the futures position and the
portfolio position which is intended to be protected, the desired protection
may not be obtained and the Accounts may be exposed to risk of loss. The
investment advisers will attempt to reduce this risk by engaging in futures
transactions, to the extent possible, where, in their judgment, there is a
significant correlation between changes in the prices of the futures contracts
and the prices of any portfolio securities sought to be hedged.
In addition to the possibility that there may be a less than perfect
correlation between movements in the futures contracts and securities in the
portfolio being hedged, the prices of futures contracts may not correlate
perfectly with movements in the underlying security due to certain market
distortions. First, rather than meeting variation margin deposit requirements
should a futures contract value move adversely, investors may close futures
contracts through offsetting transactions which could distort the normal
relationship between the index and futures markets. Second, since margin
requirements in the futures market are less onerous than in the securities
market, the futures market may attract more speculators than the securities
market. Increased participation by speculators may cause temporary price
distortions. Due to the possibility of such price distortion, and also because
of the imperfect correlation discussed above, even a correct forecast of
general market trends by the investment advisers may not result in a successful
hedging transaction in the futures market over a short time period. However,
as is noted
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above, the use of financial futures by the Accounts is intended primarily to
limit transaction and borrowing costs. At no time will the Accounts use
financial futures for speculative purposes.
Successful use of futures contracts for hedging purposes is also subject to the
investment advisers' ability to predict correctly movements in the direction of
the market. However, the investment advisers believe that over time the value
of the Accounts' portfolios will tend to move in the same direction as the
market indices which are intended to correlate to the price movements of the
portfolio securities sought to be hedged.
MONEY MARKET INSTRUMENTS
Money market securities are instruments with remaining maturities of one year
or less, such as bank certificates of deposit, bankers' acceptances, commercial
paper (including master demand notes), and obligations issued or guaranteed by
the United States Government, its agencies or instrumentalities, some of which
may be subject to repurchase agreements.
CERTIFICATES OF DEPOSIT
Certificates of deposit are receipts issued by a bank in exchange for the
deposit of funds. The issuer agrees to pay the amount deposited plus interest
to the bearer of the receipt on the date specified on the certificate. The
certificate usually can be traded in the secondary market prior to maturity.
Certificates of deposit will be limited to U.S. dollar-denominated certificates
of United States banks which have at least $1 billion in deposits as of the
date of their most recently published financial statements (including foreign
branches of U.S. banks, U.S. branches of foreign banks which are members of the
Federal Reserve System or the Federal Deposit Insurance Corporation).
The Accounts will not acquire time deposits or obligations issued by the
International Bank for Reconstruction and Development, the Asian Development
Bank or the Inter-American Development Bank. Additionally, the Accounts do not
currently intend to purchase such foreign securities (except to the extent that
certificates of deposit of foreign branches of U.S. banks may be deemed foreign
securities) or purchase certificates of deposit, bankers' acceptances or other
similar obligations issued by foreign banks.
BANKERS' ACCEPTANCES
Bankers' acceptances typically arise from short-term credit arrangements
designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by the bank which, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be
as long as 270 days, most acceptances have maturities of six months or less.
Bankers' acceptances acquired by the Accounts must have been accepted by U.S.
commercial banks, including foreign branches of U.S. commercial banks, having
total deposits at the time of purchase in excess of $1 billion, and must be
payable in U.S. dollars.
COMMERCIAL PAPER RATINGS
Investments in commercial paper are limited to those rated A-1 by Standard &
Poor's Corporation and Prime-1 by Moody's Investors Service, Inc. Commercial
paper rated A-1 by S&P has the following characteristics: (1) liquidity ratios
are adequate to meet cash requirements; (2) the issuer's long- term senior debt
is rated "A" or better, although in some cases "BBB" credits may be allowed;
(3) the issuer has access to at least two additional channels of borrowing; (4)
basic earnings and cash flow have an upward trend with allowances made for
unusual circumstances; and (5) the issuer's industry is typically well
established and the issuer has a strong position within the industry.
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The rating Prime-1 is the highest commercial paper rating assigned by Moody's.
Among the factors considered by Moody's in assigning ratings are the following:
(1) evaluating the management of the issuer; (2) economic evaluation of the
issuer's industry or industries and an appraisal of speculative-type risks
which may be inherent in certain areas; (3) evaluation of the issuer's products
in relation to competition and customer acceptance; (4) liquidity; (5) amount
and quality of long-term debt; (6) trend of earnings over a period of ten
years; (7) financial strength of a parent company and the relationship which
exists with the issuer; and (8) recognition by the management of obligations
which may be present or may arise as a result of public preparations to meet
such obligations. The relative strength or weakness of the above factors
determines how the issuer's commercial paper is rated within various
categories.
MASTER DEMAND NOTES
Master demand notes are unsecured obligations that permit the investment of
fluctuating amounts at varying rates of interest pursuant to direct
arrangements between the lender (issuer) and the borrower. Master demand notes
may permit daily fluctuations in the interest rate and daily changes in the
amounts borrowed. An Account has the right to increase the amount under the
note at any time up to the full amount provided by the note agreement, or to
decrease the amount, and the borrower may repay up to the full amount of the
note without penalty. Notes purchased by a separate account must permit it to
demand payment of principal and accrued interest at any time (on not more than
seven days notice) or to resell the note at any time to a third party. Master
demand notes may have maturities of more than one year, provided they specify
that (i) the account be entitled to payment of principal and accrued interest
upon not more than seven days notice, and (ii) the rate of interest on such
notes be adjusted automatically at periodic intervals which normally will not
exceed 31 days, but which may extend up to one year. Because these types of
notes are direct lending arrangements between the lender and the borrower, such
instruments are not normally traded, and there is no secondary market for these
notes, although they are redeemable and thus repayable by the borrower at face
value plus accrued interest at any time. Accordingly, the right to redeem is
dependent upon the ability of the borrower to pay principal and interest on
demand. In connection with master demand note arrangements, the investment
adviser considers earning power, cash flow, and other liquidity ratios of the
borrower to pay principal and interest on demand. These notes, as such, are
not typically rated by credit rating agencies. Unless they are so rated, a
separate account may invest in them only if at the time of an investment the
issuer meets the criteria set forth above for commercial paper. The notes will
be deemed to have a maturity equal to the longer of the period remaining to the
next interest rate adjustment or the demand notice period.
UNITED STATES GOVERNMENT SECURITIES
Securities issued or guaranteed by the United States Government include a
variety of Treasury securities that differ only in their interest rates,
maturities and dates of issuance. Treasury Bills have maturities of one year
or less, Treasury Notes have maturities of one to ten years, and Treasury Bonds
generally have maturities of greater than ten years at the date of issuance.
Securities issued or guaranteed by the United States Government or its agencies
or instrumentalities include direct obligations of the United States Treasury
and securities issued or guaranteed by the Federal Housing Administration,
Farmers Home Administration, Export-Import Bank of the United States, Small
Business Administration, Government National Mortgage Association, General
Services Administration, Central Bank for Cooperatives, Federal Home Loan
Banks, Federal Loan Mortgage Corporation, Federal Intermediate Credit Banks,
Federal Land Banks, Maritime Administration, The Tennessee Valley Authority,
District of Columbia Armory Board and Federal National Mortgage Association.
Some obligations of United States Government agencies and instrumentalities,
such as Treasury Bills and Government National Mortgage Association
pass-through certificates, are supported by the full faith and credit of the
United States; others, such as securities of Federal Home Loan Banks, are
supported by the right of the issuer to borrow from the Treasury; still others,
such as bonds issued by the Federal National Mortgage Association, a private
corporation, are supported only by the credit of the instrumentality. Because
the United States Government is not obligated by law to provide support to an
instrumentality it sponsors, the Accounts will invest in the securities issued
by such an instrumentality only when the investment advisers determine that the
credit risk with respect to
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the instrumentality does not make the securities unsuitable investments.
United States Government securities will not include international agencies or
instrumentalities in which the United States Government, its agencies or
instrumentalities participate, such as the World Bank, the Asian Development
Bank or the Inter-American Development Bank, or issues insured by the Federal
Deposit Insurance Corporation.
REPURCHASE AGREEMENTS
Interim cash balances may be invested from time to time in repurchase
agreements with approved counterparties. Approved counterparties are limited
to national banks or reporting broker-dealers meeting the Advisor's credit
quality standards as presenting minimal risk of default. All repurchase
transactions must be collateralized by U.S. Government securities with market
value no less than 102% of the amount of the transaction, including accrued
interest. Repurchase transactions generally mature the next business day but,
in the event of a transaction of longer maturity, collateral will be marked to
market daily and, when required, additional cash or qualifying collateral will
be required from the counterparty.
In executing a repurchase agreement, a portfolio purchases eligible securities
subject to the seller's simultaneous agreement to repurchase them on a mutually
agreed upon date and at a mutually agreed upon price. The purchase and resale
prices are negotiated with the counterparty on the basis of current short-term
interest rates, which may be more or less than the rate on the securities
collateralizing the transaction. Physical delivery or, in the case of
"book-entry" securities, segregation in the counterparty's account at the
Federal Reserve for the benefit of the Portfolio is required to establish a
perfected claim to the collateral for the term of the agreement in the event
the counterparty fails to fulfill its obligation.
As the securities collateralizing a repurchase transaction are generally of
longer maturity than the term of the transaction, in the event of default by
the counterparty on its obligation, the Portfolio would bear the risks of
delay, adverse market fluctuation and transaction costs in disposing of the
collateral.
INVESTMENT MANAGEMENT AND ADVISORY SERVICES
The investments and administration of the separate accounts are under the
direction of the Board of Managers. Subject to the authority of the Board of
Managers, Travelers Asset Management International Corporation ("TAMIC")
furnishes investment management and advisory services to Account GIS and QB,
according to the terms of written Investment Advisory Agreements. The
agreement effective May 1, 1998 between Account GIS and TAMIC was approved by a
vote of the Variable Annuity Contract Owners at their meeting held on April 27,
1998. The agreement between Account QB and TAMIC was approved by a vote of the
Variable Annuity Contract Owners at their meeting held on April 23, 1993.
Each of these agreements will continue in effect as described below in (3), as
required by the 1940 Act. Each of the agreements:
1. provides that for investment management and advisory services, the
Company will pay to TAMIC, an advisory fee based on the current value
of the assets of the accounts for which TAMIC acts as investment
adviser (see "Advisory and Subadvisory Fees" below:);
2. may not be terminated by TAMIC without prior approval of a new
investment advisory agreement by those casting a majority of the votes
entitled to be cast and will be subject to termination without the
payment of any penalty, upon sixty days written notice, by the Board
of Managers or by a vote of those casting a majority of the votes
entitled to be cast;
3. will continue in effect for a period more than two years from the date
of its execution, only so long as its continuance is specifically
approved at least annually by a vote of a majority of the Board of
Managers, or by a vote of a majority of the outstanding voting
securities of the Account. In addition, and in either event, the
terms of the agreement must be approved annually by a vote of a
majority of the Board of Managers
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who are not parties to, or interested persons of any party to, the
agreement, cast in person, at a meeting called for the purpose of
voting on the approval and at which the Board of Managers has been
furnished the information that is reasonably necessary to evaluate the
terms of the agreement;
4. will automatically terminate upon assignment.
The Travelers Investment Management Company (TIMCO) serves as subadviser to
Account GIS, pursuant to a written agreement dated May 1, 1998 with TAMIC,
which was approved by a vote of the Variable Annuity Contract Owners at their
meeting held on April 27, 1998. TAMIC pays TIMCO an amount equivalent on an
annual basis to a maximum of 0.45% of the aggregate of the average daily net
assets of Account GIS, grading down to 0.20%.
ADVISORY AND SUBADVISORY FEES
For furnishing investment management and advisory services to Account GIS,
under a management agreement effective May 1, 1998, TAMIC is paid an amount
equivalent, on an annual basis, to a maximum of 0.65% of the average daily net
assets of Account GIS, grading down to 0.40%.. The fee is computed daily and
paid monthly. Prior to May 1, 1998, TIMCO was the investment advisor, and the
fee was 0.45%. The total advisory fees paid to TIMCO by Account GIS for the
fiscal years ended December 31, 1995, 1996 and 1997 were $1,700,124;
$2,079,020; and $2,723,508 respectively. Had the new advisory fee been in
effect during 1997, the amount paid by GIS would have been $3,807,000.
TIMCO became the subadvisor to Account GIS effective May 1, 1998; therefore,
there are no subadvisory fees for 1997 and earlier.
For furnishing investment management and advisory services to Account QB, TAMIC
is paid an amount equivalent on an annual basis to 0.3233% of the average daily
net assets of Account QB. For the years ended December 31, 1995, 1996 and 1997
the advisory fees were $547,715, $576,329 and $529,458, respectively.
TAMIC
TAMIC, an indirect wholly owned subsidiary of Travelers Group Inc., is located
at One Tower Square, Hartford, Connecticut 06183. In addition to providing
subadvisory services to Accounts GIS and QB, TAMIC acts as investment adviser
for other investment companies which serve as the funding media for certain
variable annuity and variable life insurance contracts offered by The Travelers
Insurance Company and its affiliates. TAMIC also acts as investment adviser
for individual and pooled pension and profit-sharing accounts, for offshore
insurance companies affiliated with The Travelers Insurance Company, and for
non-affiliated insurance companies, both domestic and offshore.
Investment advice and management for TAMIC's clients are furnished in
accordance with their respective investment objectives and policies and
investment decisions for the Accounts will be made independently from those of
any other accounts managed by TAMIC. However, securities owned by Accounts GIS
and QB may also be owned by other clients and it may occasionally develop that
the same investment advice and decision for more than one client is made at the
same time. Furthermore, it may develop that a particular security is bought or
sold for only some clients even though it might be held or bought or sold for
other clients, or that a particular security is bought for some clients when
other clients are selling the security. When two or more accounts are engaged
in the purchase or sale of the same security, the transactions are allocated as
to amount in accordance with a formula which is equitable to each account. It
is recognized that in some cases this system could have a detrimental effect on
the price or volume of the security as far as Accounts GIS and QB are
concerned. In other cases, however, it is believed that the ability of Account
QB to participate in volume transactions will produce better executions for the
account.
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BROKERAGE
Subject to approval of the Board of Managers, it is the policy of TAMIC, in
executing transactions in portfolio securities, to seek best execution of
orders at the most favorable prices. The determination of what may constitute
best execution and price in the execution of a securities transaction by a
broker involves a number of considerations, including, without limitation, the
overall direct net economic result to Account QB, involving both price paid or
received and any commissions and other cost paid, the efficiency with which the
transaction is effected, the ability to effect the transaction at all where a
large block is involved, the availability of the broker to stand ready to
execute potentially difficult transactions in the future and the financial
strength and stability of the broker. Such considerations are judgmental and
are weighed by management in determining the overall reasonableness of
brokerage commissions paid. Subject to the foregoing, a factor in the
selection of brokers is the receipt of research services, analyses and reports
concerning issuers, industries, securities, economic factors and trends, and
other statistical and factual information. Any such research and other
statistical and factual information provided by brokers is considered to be in
addition to and not in lieu of services required to be performed by TAMIC under
its Investment Advisory Agreements. The cost, value and specific application
of such information are indeterminable and hence are not practicably allocable
among Account QB and other clients of TAMIC who may indirectly benefit from the
availability of such information. Similarly, Account QB may indirectly benefit
from information made available as a result of transactions for such clients.
Purchases and sales of bonds and money market instruments will usually be
principal transactions and will normally be purchased directly from the issuer
or from the underwriter or market maker for the securities. There usually will
be no brokerage commissions paid for such purchases. Purchases from the
underwriters will include the underwriting commission or concession, and
purchases from dealers serving as market makers will include the spread between
the bid and asked prices. Where transactions are made in the over-the-counter
market, Account QB will deal with primary market makers unless more favorable
prices are otherwise obtainable. Brokerage fees will be incurred in connection
with futures transactions, and Account QB will be required to deposit and
maintain funds with brokers as margin to guarantee performance of future
obligations.
TAMIC may follow a policy of considering the sale of units of Account QB a
factor in the selection of broker-dealers to execute portfolio transactions,
subject to the requirements of best execution described above.
The policy of TAMIC with respect to brokerage is and will be reviewed by the
Board of Managers periodically. Because of the possibility of further
regulatory developments affecting the securities exchanges and brokerage
practices generally, the foregoing practices may be changed, modified or
eliminated.
The total brokerage commissions paid by Account QB for the fiscal years ended
December 31, 1995, 1996 and 1997 were $549,540, $745,209 and $0, respectively.
For the fiscal year ended December 31, 1997, no portfolio transactions were
directed to certain brokers because of research services. No commissions were
paid to broker dealers affiliated with TAMIC.
TIMCO
TIMCO, an indirect wholly owned subsidiary of Travelers Group Inc., is located
at One Tower Square, Hartford, Connecticut 06183. In addition to providing
subadvisory services to Account GIS, TIMCO acts as investment adviser (or
subadviser) for other investment companies which serve as the funding media for
certain variable annuity and variable life insurance contracts offered by The
Travelers Insurance Company and its affiliates. TIMCO also acts as investment
adviser for individual and pooled pension and profit-sharing accounts and for
affiliated companies of The Travelers Insurance Company.
Investment decisions for Account GIS will be made independently from those of
any other accounts managed by TIMCO. If, however, accounts managed by TIMCO
are simultaneously engaged in the purchase of the same security, then available
securities may be allocated to each account and may be averaged as to price in
whatever manner TIMCO deems to be fair. In some cases, this system might
adversely affect the price or volume of
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securities being bought or sold by an account, while in other cases it may
produce better executions or lower brokerage rates.
BROKERAGE
Subject to approval of the Board of Managers, and in accordance with the
Investment Advisory Agreement, TIMCO will place purchase and sale orders for
the portfolio securities of Account GIS through brokerage firms which it may
select from time to time with the objective of seeking the best execution by
responsible brokerage firms at reasonably competitive rates. To the extent
consistent with this policy, certain brokerage transactions may be placed with
firms which provide brokerage and research services to TIMCO, and such
transactions may be paid for at higher rates than other firms would charge.
The term "brokerage and research services" includes advice as to the value of
securities; the advisability of investing in, purchasing or selling securities;
the availability of securities for purchasers or sellers of securities;
furnishing analyses and reports concerning issues, industries, securities,
economic factors and trends, portfolio strategy and performance of accounts;
and effecting securities transactions and performing functions incidental
thereto (such as clearance and settlement). These brokerage and research
services may be utilized in providing investment advice to Account GIS and may
also be utilized in providing investment advice and management to all accounts
over which TIMCO exercises investment discretion, but not all of such services
will necessarily be utilized in providing investment advice to all accounts.
This practice may be expected to result in greater cost to the Accounts than
might otherwise be the case if brokers whose charges were based on execution
alone were used for such transactions. TIMCO believes that brokers' research
services are very important in providing investment advice to the Accounts but
is unable to give the services a dollar value. While research services are not
expected to reduce the expenses of TIMCO, TIMCO will, through the use of these
services, avoid the additional expenses which would be incurred if it should
attempt to develop comparable information through its own staff.
Transactions in the over-the-counter market are placed with the principal
market makers unless better price and execution may be obtained otherwise.
Brokerage fees will be incurred in connection with futures transactions, and
Account GIS will be required to deposit and maintain funds with brokers as
margin to guarantee performance of future obligations.
The overall reasonableness of brokerage commissions paid is evaluated by
personnel of TIMCO responsible for trading and for managing Account GIS's
portfolio by comparing brokerage firms utilized by TIMCO and other firms with
respect to the following factors: the prices paid or received in securities
transactions, speed of execution and settlement, size and difficulty of the
brokerage transactions, the financial soundness of the firms, and the quality,
timeliness and quantity of research information and reports.
The total brokerage commissions paid by Account GIS for the fiscal years ending
December 31, 1995, 1996 and 1997 were $866,658, $890,690 and $818,411,
respectively. For the fiscal year ended December 31, 1997, portfolio
transactions in the amount of $600,869,008 were directed to certain brokers
because of research services, of which $677,205 was paid in commissions with
respect to such transactions. No formula was used in placing such transactions
and no specific amount of transactions was allocated for research services. For
the year ended December 31, 1997 commissions in the amounts of $71,521 and
$22,730 were paid to Smith Barney Inc. and The Robinson Humphrey Company, Inc.,
respectively, both affiliates of TIMCO, which equals, for each, 8.7% and 2.8%
of Account GIS's aggregate brokerage commissions paid to such brokers during
1997. The percentage of Account GIS's aggregate dollar amount of transactions
involving the payment of commissions effected through Smith Barney and Robinson
Humphrey were 9.8% and 2.5%, respectively.
VALUATION OF ASSETS
The value of the assets of each Separate Account is determined on each
Valuation Date as of the close of the New York Stock Exchange (the "Exchange").
If the Exchange is not open for trading on any such day, then such computation
shall be made as of the normal close of the Exchange. Each security traded on
a national securities
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exchange is valued at the last reported sale price on the Valuation Date. If
there has been no sale on that day, then the value of the security is taken to
be the mean between the reported bid and asked prices on the Valuation Date or
on the basis of quotations received from a reputable broker or any other
recognized source.
Any security not traded on a securities exchange but traded in the
over-the-counter market and for which market quotations are readily available
is valued at the mean between the quoted bid and asked prices on the Valuation
Date or on the basis of quotations received from a reputable broker or any
other recognized source.
Securities traded on the over-the-counter market and listed securities with no
reported sales are valued at the mean between the last reported bid and asked
prices or on the basis of quotations received from a reputable broker or other
recognized source.
Short-term investments for which a quoted market price is available are valued
at market. Short term investments maturing in more than sixty days for which
there is no reliable quoted market price are valued by "marking to market"
(computing a market value based upon quotations from dealers or issuers for
securities of a similar type, quality and maturity). "Marking to market" takes
into account unrealized appreciation or depreciation due to changes in interest
rates or other factors which would influence the current fair values of such
securities. Short-term investments maturing in sixty days or less for which
there is no reliable quoted market price are valued at amortized cost which
approximates market.
THE BOARD OF MANAGERS
The investment and administration of each of the Separate Accounts are under
the direction of the Board of Managers, listed below. Members of the Board of
Managers are elected annually by those Contract Owners participating in the
Separate Accounts. A majority of the members of the Board of Managers are
persons who are not affiliated with The Travelers Insurance Company, TIMCO,
TAMIC or their affiliates.
<TABLE>
<CAPTION>
Name Present Position and Principal Occupation During Last Five Years
- ---- ----------------------------------------------------------------
<S> <C>
*Heath B. McLendon Managing Director (1993-present), Smith Barney Inc. ("Smith Barney");
Chairman and Member Chairman (1993-present), Smith Barney Strategy Advisors, Inc.;
388 Greenwich Street President and Director (1994-present), Mutual Funds Management Corp.;
New York, New York President and Director (1996-present), Travelers Investment Adviser,
Age 64 Inc.; Chairman and Director of forty-two investment companies
associated with Smith Barney; Chairman, Board of Trustees, Drew
University; Advisory Director, First Empire State Corporation;
Chairman, Board of Managers, seven Variable Annuity Separate Accounts
of The Travelers Insurance Company+; Chairman, Board of Trustees, five
Mutual Funds sponsored by The Travelers Insurance Company++; prior to
July 1993, Senior Executive Vice President of Shearson Lehman Brothers
Inc.
Knight Edwards Of Counsel (1988-present), Partner (1956-1988), Edwards & Angell,
Member Attorneys; Member, Advisory Board (1973-1994), thirty-one mutual funds
2700 Hospital Trust Tower sponsored by Keystone Group, Inc.; Member, Board of Managers, seven
Providence, Rhode Island Variable Annuity Separate Accounts of The Travelers Insurance Company+;
Age 74 Trustee, five Mutual Funds sponsored by The Travelers Insurance
Company.++
</TABLE>
16
<PAGE> 173
<TABLE>
<S> <C>
Robert E. McGill, III Retired manufacturing executive. Director (1983-1995), Executive Vice
Member President (1989-1994) and Senior Vice President, Finance and
295 Hancock Street Administration (1983-1989), The Dexter Corporation (manufacturer of
Williamstown, Massachusetts specialty chemicals and materials); Vice Chairman (1990-1992), Director
Age 66 (1983-1995), Life Technologies, Inc. (life science/biotechnology
products); Director, (1994-present), The Connecticut Surety Corporation
(insurance); Director (1995-present), CN Bioscience (life
science/biotechnology products); Director (1995-present), Chemfab
Corporation (specialty materials manufacturer); Member, Board of
Managers, seven Variable Annuity Separate Accounts of The Travelers
Insurance Company+; Trustee, five Mutual Funds sponsored by The
Travelers Insurance Company.++
Lewis Mandell Dean, College of Business Administration (1995-present), Marquette
Member University; Professor of Finance (1980-1995) and Associate Dean
606 N. 13th Street (1993-1995), School of Business Administration, and Director, Center
Milwaukee, WI 53233 for Research and Development in Financial Services (1980-1995),
Age 55 University of Connecticut; Director (1992-present), GZA
Geoenvironmental Tech, Inc. (engineering services); Member, Board of
Managers, seven Variable Annuity Separate Accounts of The Travelers
Insurance Company+; Trustee, five Mutual Funds sponsored by The
Travelers Insurance Company.++
Frances M. Hawk, CFA, CFP Private Investor, (1997-present); Portfolio Manager (1992-1997), HLM
Member Management Company, Inc. (investment management); Assistant Treasurer,
222 Berkeley Street Pensions and Benefits. Management (1989-1992), United Technologies
Boston, Massachusetts Corporation (broad-based designer and manufacturer of high technology
Age 50 products); Member, Board of Managers, seven Variable Annuity Separate
Accounts of The Travelers Insurance Company+; Trustee, five Mutual
Funds sponsored by The Travelers Insurance Company.++
Ernest J. Wright Vice President and Secretary (1996 - present), Assistant Secretary
Secretary to the Board (1994-1996), Counsel (1987-present), The Travelers Insurance Company;
One Tower Square Secretary, Board of Managers, seven Variable Annuity Separate Accounts
Hartford, Connecticut of The Travelers Insurance Company+; Secretary, Board of Trustees, five
Age 57 Mutual Funds sponsored by The Travelers Insurance Company.++
Kathleen A. McGah Assistant Secretary and Counsel (1995-present), The Travelers Insurance
Assistant Secretary to the Board Company; Assistant Secretary, Board of Managers, seven Variable Annuity
One Tower Square Separate Accounts of The Travelers Insurance Company+; Assistant
Hartford, Connecticut Secretary, Board of Trustees, five Mutual Funds sponsored by The
Age 47 Travelers Insurance Company.++ Prior to January 1995, Counsel, ITT
Hartford Life Insurance Company.
</TABLE>
+ These seven Variable Annuity Separate Accounts are: The Travelers Growth
and Income Stock Account for Variable Annuities, The Travelers Quality
Bond Account for Variable Annuities, The Travelers Money Market Account
for Variable Annuities, The Travelers Timed Growth and Income Stock
Account for Variable Annuities, The Travelers Timed Short-Term Bond
Account for Variable Annuities, The Travelers Timed Aggressive Stock
Account for Variable Annuities and The Travelers Timed Bond Account for
Variable Annuities.
17
<PAGE> 174
++ These five Mutual Funds are: Capital Appreciation Fund, Money Market
Portfolio Trust, High Yield Bond Trust, Managed Assets Trust and The
Travelers Series Trust.
* Mr. McLendon is an "interested person" within the meaning of the 1940
Act by virtue of his position as Managing Director of Smith Barney Inc., an
indirect wholly owned subsidiary of Travelers Group Inc. and also owns shares
and options to purchase shares of Travelers Group Inc., the indirect parent of
The Travelers Insurance Company.
The Company is responsible for payment of the fees and expenses of the Board of
Managers, and the expenses of audit of the Separate Accounts, as well as other
expenses for services related to the operations of the accounts, for which it
deducts certain amounts from purchase payments and from the accounts.
Members of the Board of Managers who are also officers or employees of
Travelers Group Inc. or its subsidiaries are not entitled to any fee. Members
of the Board of Managers who are not affiliated as employees of Travelers Group
Inc. or its subsidiaries receive an aggregate retainer of $19,000 for service
on the Boards of the seven Variable Annuity Separate Accounts established by
The Travelers Insurance Company and the five Mutual Funds sponsored by The
Travelers Insurance Company. They also receive an aggregate fee of $2,500 for
each meeting of such Boards attended. Board Members with 10 years of service
may agree to provide services as emeritus director at age 72 or upon reaching
80 years of age and will receive 50% of the annual retainer and 50% of meeting
fees if attended.
DISTRIBUTION AND MANAGEMENT SERVICES
Under the terms of a Distribution and Management Agreement each Separate
Account, the Company and Tower Square Securities, Inc., the Company provides
all sales and administrative services and mortality and expense risk guarantees
related to variable annuity contracts issued by the Company in connection with
Account GIS and assumes the risk of minimum death benefits, as applicable. The
Company also pays all sales costs (including costs associated with the
preparation of sales literature); all costs of qualifying Account GIS and the
variable annuity contracts with regulatory authorities; the costs of proxy
solicitation; all custodian, accountants' and legal fees; and all compensation
paid to the unaffiliated members of the Board of Managers. The Company also
provides without cost to Account GIS all necessary office space, facilities,
and personnel to manage its affairs.
The Company received the following amounts from the Separate Accounts in each
of the last three fiscal years for services provided under the Distribution and
Management Agreements:
<TABLE>
<CAPTION>
SEPARATE ACCOUNT 1997 1996 1995
<S> <C> <C> <C>
GIS $7,623,733 $5,889,123 $ 4,557,639
QB $2,144,373 $2,322,938 $ 2,119,384
</TABLE>
SECURITIES CUSTODIAN
Chase Manhattan Bank, N.A., Chase MetroTech Center, Brooklyn, New York, is the
custodian of the portfolio securities and similar investments of Accounts GIS
and QB.
18
<PAGE> 175
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., independent accountants, 100 Pearl Street, Hartford,
Connecticut, are the independent auditors for Account GIS and Account QB. The
services provided to Account GIS and Account QB include primarily the
examination of the Accounts' financial statements. Financial statements as of
and for the year ended December 31, 1997 of Accounts GIS and QB, included in
the Annual Report incorporated by reference in this SAI, have been incorporated
herein in reliance on the report of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
The consolidated financial statements of The Travelers Insurance Company and
Subsidiaries as of December 31, 1997 and 1996, and for each of the years in the
three-year period ended December 31, 1997, have been included herein in
reliance upon the reports of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
19
<PAGE> 176
FINANCIAL STATEMENTS
THE 1997 FINANCIALS WILL BE INCLUDED HERE.
F-1
<PAGE> 177
THETRAVELERS
THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES AND
THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES
GROUP VARIABLE ANNUITY CONTRACTS
ISSUED BY
THE TRAVELERS INSURANCE COMPANY
Pension and Profit-Sharing Programs
L-11162S TIC Ed. 5-98
Printed in U.S.A.
<PAGE> 178
STATEMENT OF ADDITIONAL INFORMATION
- ------------------------------------------------------------------------------
THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES
THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES
- ------------------------------------------------------------------------------
INDIVIDUAL VARIABLE ANNUITY CONTRACTS ISSUED BY
THE TRAVELERS INSURANCE COMPANY
MAY 1, 1998
This Statement of Additional Information ("SAI") is not a prospectus but
relates to, and should be read in conjunction with, the Prospectus dated May 1,
1998. A copy of the Prospectus may be obtained by writing to The Travelers
Insurance Company (the "Company"), Annuity Services, One Tower Square,
Hartford, Connecticut 06183-5030, or by calling 800-842-9368.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
DESCRIPTION OF THE TRAVELERS AND THE SEPARATE ACCOUNTS . . . . . . . . . . . . . . 2
The Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The Separate Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . 2
INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . . . . . . . . . . . . . 2
THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT
FOR VARIABLE ANNUITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES . . . . . . . . . . . . 4
DESCRIPTION OF CERTAIN TYPES OF INVESTMENTS AND INVESTMENT
TECHNIQUES AVAILABLE TO THE SEPARATE ACCOUNTS . . . . . . . . . . . . . . . . . . . 6
WRITING COVERED CALL OPTIONS . . . . . . . . . . . . . . . . . . . . . . . 6
BUYING PUT AND CALL OPTIONS . . . . . . . . . . . . . . . . . . . . . . . 7
FUTURES CONTRACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
MONEY MARKET INSTRUMENTS . . . . . . . . . . . . . . . . . . . . . . . . 10
INVESTMENT MANAGEMENT AND ADVISORY SERVICES . . . . . . . . . . . . . . . . . . . . 12
Advisory and Subadvisory Fees . . . . . . . . . . . . . . . . . . . . . . 13
TAMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
TIMCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
VALUATION OF ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
THE BOARD OF MANAGERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
DISTRIBUTION AND MANAGEMENT SERVICES . . . . . . . . . . . . . . . . . . . . . . . 18
SECURITIES CUSTODIAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
1
<PAGE> 179
DESCRIPTION OF THE TRAVELERS AND THE SEPARATE ACCOUNTS
THE INSURANCE COMPANY
The Travelers Insurance Company (the "Company") is a stock insurance company
chartered in 1864 in Connecticut and continuously engaged in the insurance
business since that time. It is licensed to conduct a life insurance business
in all states of the United States, the District of Columbia, Puerto Rico,
Guam, the Virgin Islands, Canada and the Bahamas. The Company is an indirect
wholly owned subsidiary of Travelers Group Inc., a financial services holding
company. The Company's Home Office is located at One Tower Square, Hartford,
Connecticut 06183.
THE SEPARATE ACCOUNTS
Each of the Separate Accounts which serve as the funding vehicles for the
Variable Annuity contracts described in this SAI meets the definition of a
separate account under the federal securities laws, and will comply with the
provisions of the Investment Company Act of 1940, as amended (the "1940 Act").
Additionally, the operations of each of the Separate Accounts are subject to
the provisions of Section 38a-433 of the Connecticut General Statutes which
authorizes the Connecticut Insurance Commissioner to adopt regulations under
it. The Section contains no restrictions on investments of the Separate
Accounts, and the Commissioner has adopted no regulations under the Section
that affect the Separate Accounts.
The Travelers Growth and Income Stock Account for Variable Annuities (Account
GIS) was established on September 22, 1967, and The Travelers Quality Bond
Account for Variable Annuities (Account QB) was established on July 29, 1974.
Each of the Separate Accounts, although an integral part of the Company, is
registered with the Securities and Exchange Commission ("SEC") as a
diversified, open-end management investment company under the 1940 Act. The
assets of Accounts GIS and QB are invested directly in securities (such as
stocks, bonds or money market instruments) which are compatible with the stated
investment policies of each account.
Purchase Payments may be allocated to either of the Separate Accounts. The
Company may make additions to or deletions from the investment alternatives
available under the Contract, as permitted by law. The investment objectives
of each of the Separate Accounts are as follows:
ACCOUNT GIS: The primary objective of Account GIS is long-term
accumulation of principal through capital
appreciation and retention of net investment income.
The assets of Account GIS will normally be invested
in a portfolio of common stocks spread over
industries and companies.
ACCOUNT QB: The primary objective of Account QB is current
income, moderate capital volatility and total return.
Assets of Account QB will be invested in short-term
to intermediate-term bonds or other debt securities
with a market value-weighted average maturity of five
years or less.
INVESTMENT OBJECTIVES AND POLICIES
Each Separate Account has a different investment objective and different
investment policies, and each Separate Account has certain fundamental
investment restrictions, all of which are set forth below. Neither the
investment objective nor the fundamental investment restrictions can be changed
without a vote of a majority of the outstanding voting securities of the
Accounts, as defined in the 1940 Act. Additionally, in accomplishing their
respective investment objectives, each Account uses certain types of
investments and investment techniques which are discussed under "Investments
and Investment Techniques".
2
<PAGE> 180
The percentage restrictions (for either fundamental investment policies or
investment restrictions) are interpreted such that if they are adhered to at
the time of investment, a later increase in a percentage beyond the specified
limit resulting from a change in the values of portfolio securities or in the
amount of net assets shall not be considered a violation. It must be
recognized that there are risks inherent in the ownership of any investment and
that there can be no assurance that the investment objectives of the Separate
Accounts will be achieved.
THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES
INVESTMENT OBJECTIVE
The basic investment objective of Account GIS is the selection of investments
from the point of view of an investor concerned primarily with long-term
accumulation of principal through capital appreciation and retention of net
investment income. This principal objective does not preclude the realization
of short-term gains when conditions would suggest the long-term goal is
accomplished by such short-term transactions. The assets of Account GIS will
primarily be invested in a portfolio of equity securities, mainly common
stocks, spread over industries and companies. However, when it is determined
that investments of other types may be advantageous on the basis of combined
considerations of risk, income and appreciation, investments may also be made
in bonds, notes or other evidence of indebtedness, issued publicly or placed
privately, of a type customarily purchased for investment by institutional
investors, including United States Government securities. These investments
generally would not have a prospect of long-term appreciation. Investments in
other than equity securities are temporary for defensive purposes. Such
investments may or may not be convertible into stock or be accompanied by stock
purchase options or warrants for the purchase of stock.
Account GIS may use exchange-traded financial futures contracts as a hedge to
protect against changes in stock prices. The use of stock index futures by
Account GIS is intended primarily to limit transaction and borrowing costs.
Account GIS expects that risk management transactions involving futures
contracts will not impact more than thirty percent (30%) of Account GIS's
assets at any one time. Account GIS may also write covered call options on
securities which it owns, and may purchase index or individual equity call or
put options.
INVESTMENT RESTRICTIONS
The investment restrictions for Account GIS set forth in items 1 through 9 are
fundamental and may not be changed without a vote of a majority of the
outstanding voting securities, as defined in the 1940 Act. Items 10 through 13
may be changed by a vote of the Board of Managers.
1. Not more than 5% of the assets of the Account will be invested
in the securities of any one issuer, except obligations of the
United States Government and its instrumentalities.
2. Borrowings will not be made, except that the right is reserved
to borrow from banks for emergency purposes, provided that such
borrowings will not exceed 5% of the value of the assets of the
Account and that immediately after the borrowing, and at all
times thereafter, and while any such borrowing is unrepaid,
there will be asset coverage of at least 300% for all borrowings
of the Account.
3. Securities of other issuers will not be underwritten, except
that the Account could be deemed an underwriter when engaged in
the sale of restricted securities. (See item 13.)
4. Interests in real estate will not be purchased, except as may be
represented by securities for which there is an established
market.
5. No purchase of commodities or commodity contracts will be made,
except transactions involving financial futures in order to
limit transaction and borrowing costs and for hedging purposes,
as discussed above.
3
<PAGE> 181
6. Loans will be made only through the acquisition of a portion of
privately placed issue of bonds, debentures or other evidences
of indebtedness of a type customarily purchased by institutional
investors. (See item 13.)
7. Investments will not be made in the securities of a company for
the purpose of exercising management or control.
8. Not more than 10% of the voting securities of any one issuer
will be acquired. (It is the present practice of Account GIS
not to exceed 5% of the voting securities of any one issuer.)
9. Senior securities will not be issued.
10. Short sales of securities will not be made.
11. Purchases will not be made on margin, except for short-term
credits which are necessary for the clearance of transactions,
and for the placement of not more than 5% of its net asset value
in total margin deposits for positions in futures contracts.
12. The Account will not invest in the securities of other
investment companies, except as part of a plan of merger,
consolidation or acquisition of assets.
13. Not more than 5% of the value of the assets of the Account may
be invested in restricted securities (securities which may not
be publicly offered without registration under the Securities
Act of 1933).
Changes in the investments of Account GIS may be made from time to time to take
into account changes in the outlook for particular industries or companies.
Account GIS's investments will not, however, be concentrated in any one
industry; that is, no more than twenty-five percent (25%) of the value of its
assets will be invested in any one industry. While Account GIS may
occasionally invest in foreign securities, it is not anticipated that such
investments will, at any time, account for more than ten percent (10%) of its
investment portfolio.
The assets of Account GIS will be kept fully invested, except that (a)
sufficient cash may be kept on hand to provide for variable annuity contract
obligations, and (b) reasonable amounts of cash, United States Government or
other liquid securities, such as short-term bills and notes, may be held for
limited periods, pending investment in accordance with their respective
investment policies.
PORTFOLIO TURNOVER
Although Account GIS intends to purchase securities for long-term appreciation
of capital and income, and does not intend to place emphasis on obtaining
short-term trading profits, such short-term trading may occur. A higher
turnover rate should not be interpreted as indicating a variation from the
stated investment policy of seeking long-term accumulation of capital, and will
normally increase the brokerage costs of Account GIS. However, negotiated fees
and the use of futures contracts will help to reduce brokerage costs. While
there is no restriction on portfolio turnover, Account GIS expects to have a
moderate to high level of portfolio turnover in the range of 150% to 300%. The
portfolio turnover rate for Account GIS for the years ended December 31, 1995,
1996 and 1997 was 96% , 85% and 64%, respectively.
THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES
INVESTMENT OBJECTIVE
The basic investment objective of Account QB is the selection of investments
from the point of view of an investor concerned primarily with current income,
moderate capital volatility and total return.
4
<PAGE> 182
It is contemplated that the assets of Account QB will be invested in money
market obligations, including, but not limited to, Treasury bills, repurchase
agreements, commercial paper, bank certificates of deposit and bankers'
acceptances, and in publicly traded debt securities, including bonds, notes,
debentures, equipment trust certificates and short-term instruments. These
securities may carry certain equity features such as conversion or exchange
rights or warrants for the acquisition of stocks of the same or different
issuer, or participations based on revenues, sales or profits. It is currently
anticipated that the market value-weighted average maturity of the portfolio
will not exceed five years. (In the case of mortgage-backed securities, the
estimated average life of cash flows will be used instead of average maturity.)
Investments in longer term obligations may be made if the Board of Managers
concludes that the investment yields justify a longer term commitment.
Account QB may purchase and sell futures contracts on debt securities
("interest rate futures") to hedge against changes in interest rates that might
otherwise have an adverse effect upon the value of Account QB's securities.
The portfolio will be actively managed and Account QB may sell investments
prior to maturity to the extent that this action is considered advantageous in
light of factors such as market conditions or brokerage costs. While the
investments of Account QB are generally not listed securities, there are firms
which make markets in the type of debt instruments which Account QB holds. No
problems of salability are anticipated with regard to the investments of
Account QB.
The Board of Managers will weigh considerations of risks, yield and ratings in
implementing Account QB's fundamental investment policies. There are no
specific criteria with regard to quality or ratings of the investments of
Account QB, but it is anticipated that they will be of investment grade or its
equivalent as determined in good faith by the Board of Managers. There may or
may not be more risk in investing in debt instruments where there are no
specific criteria with regard to quality or ratings of the investments.
INVESTMENT RESTRICTIONS
The investment restrictions set forth in items 1 through 9 below are
fundamental and may not be changed without a vote of a majority of the
outstanding voting securities of Account QB, as defined in the 1940 Act. Items
10 through 13 may be changed by a vote of the Board of Managers of Account QB.
1. Not more than 15% of the value of the assets of Account QB will
be invested in the securities of any one issuer, except
obligations of the United States Government and its
instrumentalities, for which there is no limit.
2. Borrowings will not be made, except that the right is reserved
to borrow from banks for emergency purposes, provided that these
borrowings will not exceed 5% of the value of the assets of
Account QB and that immediately after the borrowing, and at all
times thereafter, and while any borrowing is unrepaid, there
will be asset coverage of at least 300% for all borrowings of
Account QB.
3. Securities of other issuers will not be underwritten, except
that Account QB could be deemed to be an underwriter when
engaged in the sale of restricted securities.
4. Interests in real estate will not be purchased, except as may be
represented by securities for which there is an established
market.
5. No purchase of commodities or commodity contracts will be made,
except transactions involving financial futures used as a hedge
against unanticipated changes in prevailing levels of interest
rates.
6. Loans will be made only through the acquisition of a portion of
privately placed issue of bonds, debentures and other evidences
of indebtedness of a type customarily purchased by institutional
investors.
5
<PAGE> 183
7. Investments will not be made in the securities of a company for
the purpose of exercising management or control.
8. Not more than 10% of the voting securities of any one issuer
will be acquired.
9. Senior securities will not be issued.
10. Short sales of securities will not be made.
11. Purchases will not be made on margin, except for any short-term
credits that are necessary for the clearance of transactions and
to place up to 5% of the value of its net assets in total margin
deposits for positions in futures contracts.
12. Account QB will not invest in the securities of other investment
companies, except as part of a plan of merger, consolidation or
acquisition of assets.
13. The average period of maturity (or in the case of
mortgage-backed securities, the estimated average life of cash
flows) of all fixed interest debt instruments held by Account QB
will not exceed five years.
The investments of Account QB will not be concentrated in any one industry;
that is, no more than twenty-five percent (25%) of the value of its assets will
be invested in any one industry. There is no investment policy as to Account
QB's investment in foreign securities.
PORTFOLIO TURNOVER
Brokerage costs associated with short-term debt instruments are significantly
lower than those incurred on equity investments, and thus, a high portfolio
turnover rate would not adversely affect the brokerage costs of Account QB to
the same extent as high turnover in a separate account which invests primarily
in common stock. The portfolio turnover rate for Account QB for the years
ended December 31, 1995, 1996 and 1997 was 138% ,176% and 196%, respectively.
The marked increase in the portfolio turnover rate for 1995 and 1996 was due to
a restructuring of corporate bond positions in order to seek increased return.
DESCRIPTION OF CERTAIN TYPES OF INVESTMENTS AND INVESTMENT TECHNIQUES
AVAILABLE TO THE SEPARATE ACCOUNTS
WRITING COVERED CALL OPTIONS
Account GIS may write covered call options on portfolio securities for which
call options are available and which are listed on a national securities
exchange. These call options generally will be short-term contracts with a
duration of nine months or less.
Account GIS will write only "covered" call options, that is, it will own the
underlying securities which are acceptable for escrow when it writes the call
option and until the obligation to sell the underlying security is extinguished
by exercise or expiration of the call option, or until a call option covering
the same underlying security and having the same exercise price and expiration
date is purchased. Account GIS will receive a premium for writing a call
option, but gives up, until the expiration date, the opportunity to profit from
an increase in the underlying security's price above the exercise price.
Account GIS will retain the risk of loss from a decrease in the price of the
underlying security. Writing covered call options is a conservative investment
technique which is believed to involve relatively little risk, but which is
capable of enhancing an account's total returns.
6
<PAGE> 184
The premium received for writing a covered call option will be recorded as a
liability in the Account's Statement of Assets and Liabilities. This liability
will be adjusted daily to the option's current market value, which will be the
latest sale price at the close of the New York Stock Exchange, or, in the
absence of such sale, at the latest bid quotation. The liability will be
extinguished upon expiration of the option, the purchase of an identical option
in a closing transaction, or delivery of the underlying security upon exercise
of the option.
The Options Clearing Corporation is the issuer of, and the obligor on, the
covered call options written by Account GIS. In order to secure an obligation
to deliver to the Options Clearing Corporation the underlying security of a
covered call option written by Account GIS, the Account will be required to
make escrow arrangements.
In instances where Account GIS believes it is appropriate to close a covered
call option, it can close out the previously written call option by purchasing
a call option on the same underlying security with the same exercise price and
expiration date. Account GIS may also, under certain circumstances, be able to
transfer a previously written call option.
A previously written call option can be closed out by purchasing an identical
call option only on a national securities exchange which provides a secondary
market in the call option. There is no assurance that a liquid secondary
market will exist for a particular call option at such time. If Account GIS
cannot effect a closing transaction, it will not be able to sell the underlying
security while the previously written option remains outstanding, even though
it might otherwise be advantageous to do so.
If a substantial number of the call options are exercised, the Account's rate
of portfolio turnover may exceed historical levels. This would result in
higher brokerage commissions in connection with the writing of covered call
options and the purchase of call options to close out previously written
options. Such brokerage commissions are normally higher than those applicable
to purchases and sales of portfolio securities.
BUYING PUT AND CALL OPTIONS
Account GIS may purchase put options on securities held, or on futures
contracts whose price volatility is expected to closely match that of
securities held, as a defensive measure to preserve contract owners' capital
when market conditions warrant. Account GIS may purchase call options on
specific securities, or on futures contracts whose price volatility is expected
to closely match that of securities, eligible for purchase by Account GIS, in
anticipation of or as a substitute for the purchase of the securities
themselves. These options may be listed on a national exchange or executed
"over-the-counter" with a broker-dealer as the counterparty. While the
investment adviser anticipates that the majority of option purchases and sales
will be executed on a national exchange, put or call options on specific
securities or for non-standard terms are likely to be executed directly with a
broker-dealer when it is advantageous to do so. Option contracts will be
short-term in nature, generally less than nine months. Account GIS will pay a
premium in exchange for the right to purchase (call) or sell (put) a specific
number of shares of an equity security or futures contract at a specified price
(the strike price) on or before the expiration date of the options contract.
In either case, Account GIS's risk is limited to the option premium paid.
Account GIS may sell the put and call options prior to their expiration and
realize a gain or loss thereby. A call option will expire worthless if the
price of the related security is below the contract strike price at the time of
expiration; a put option will expire worthless if the price of the related
security is above the contract strike price at the time of expiration.
Put and call options will be employed for bona fide hedging purposes only.
Liquid securities sufficient to fulfill the call option delivery obligation
will be identified and segregated in an account; deliverable securities
sufficient to fulfill the put option obligation will be similarly identified
and segregated. In the case of put options on futures contracts, portfolio
securities whose price volatility is expected to match that of the underlying
futures contract will be identified and segregated.
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FUTURES CONTRACTS
STOCK INDEX FUTURES
Account GIS will invest in stock index futures. A stock index futures contract
provides for one party to take and the other to make delivery of an amount of
cash over the hedging period equal to specified amount times the difference
between a stock index value at the close of the last trading day of the
contract or the selling price and the price at which the futures contract is
originally struck. The stock index assigns relative values to the common
stocks included in the index and reflects overall price trends in the
designated market for equity securities. Therefore, price changes in a stock
index futures contract reflect changes in the specified index of equity
securities on which the futures contract is based. Stock index futures may
also be used, to a limited extent, to hedge specific common stocks with respect
to market (systematic) risk (involving the market's assessment of overall
economic prospects) as distinguished from stock-specific risk (involving the
market's evaluation of the merits of the issuer of a particular security). By
establishing an appropriate "short" position in stock index futures, Account
GIS may seek to protect the value of its equity securities against an overall
decline in the market for equity securities. Alternatively, in anticipation of
a generally rising market, Account GIS can seek to avoid losing the benefit of
apparently low current prices by establishing a "long" position in stock index
futures and later liquidating that position as particular equity securities are
in fact acquired. Account GIS will not be a hedging fund; however, to the
extent that any hedging strategies actually employed are successful, Account
GIS will be affected to a lesser degree by adverse overall market price
movements unrelated to the merits of specific portfolio equity securities than
would otherwise be the case. Gains and losses on futures contracts employed as
hedges for specific securities will normally be offset by losses or gains,
respectively, on the hedged security.
INTEREST RATE FUTURES
Account QB may purchase and sell futures contracts on debt securities
("interest rate futures") to hedge against anticipated changes in interest
rates that might otherwise have an adverse effect upon the value of an
Account's debt securities. An interest rate futures contract is a binding
contractual commitment which, if held to maturity, will result in an obligation
to make or accept delivery, during a particular future month, of debt
securities having a standardized face value and rate of return.
By purchasing interest rate futures (assuming a "long" position), Account QB
will be legally obligated to accept the future delivery of the underlying
security and pay the agreed price. This would be done, for example, when
Account QB intends to purchase particular debt securities when it has the
necessary cash, but expects the rate of return available in the securities
markets at that time to be less favorable than rates currently available in the
futures markets. If the anticipated rise in the price of the debt securities
should occur (with its concurrent reduction in yield), the increased cost of
purchasing the securities will be offset, at least to some extent, by the rise
in the value of the futures position taken in anticipation of the securities
purchase.
By selling interest rate futures held by it, or interest rate futures having
characteristics similar to those held by it (assuming a "short" position),
Account QB will be legally obligated to make the future delivery of the
security against payment of the agreed price. Such a position seeks to hedge
against an anticipated rise in interest rates that would adversely affect the
value of Account QB's portfolio debt securities.
Open futures positions on debt securities will be valued at the most recent
settlement price, unless such price does not appear to the Board of Managers to
reflect the fair value of the contract, in which case the positions will be
valued at fair value determined in good faith by or under the direction of the
Board of Managers.
Hedging by use of interest rate futures seeks to establish, with more certainty
than would otherwise be possible, the effective rate of return on portfolio
securities. When hedging is successful, any depreciation in the value of
portfolio securities will substantially be offset by appreciation in the value
of the futures position.
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FUTURES MARKETS AND REGULATIONS
When a futures contract is purchased, Accounts GIS and QB will set aside, in an
identifiable manner, an amount of cash and cash equivalents equal to the total
market value of the futures contract, less the amount of the initial margin.
The Accounts will incur brokerage fees in connection with their futures
transactions, and will be required to deposit and maintain funds with brokers
as margin to guarantee performance of future obligations.
Positions taken in the futures markets are not normally held to maturity, but
instead are liquidated through offsetting transactions which may result in a
profit or a loss. Closing out an open futures contract sale or purchase is
effected by entering into an offsetting futures contract purchase or sale,
respectively, for the same aggregate amount of the stock index or interest rate
futures contract and the same delivery date. If the offsetting purchase price
is less than the original sale price, the Accounts realize a gain; if it is
more, the Accounts realize a loss. Conversely, if the offsetting sale price is
more than the original purchase price, the Accounts realize a gain; if less, a
loss. While futures positions taken by the Accounts will usually be liquidated
in this manner, the Accounts may instead make or take delivery of the
underlying securities whenever it appears economically advantageous for them to
do so. In determining gain or loss, transaction costs must also be taken into
account. There can be no assurance that the Accounts will be able to enter
into an offsetting transaction with respect to a particular contract at a
particular time.
A clearing corporation associated with the exchange on which futures are traded
guarantees that the sale and purchase obligations will be performed with regard
to all positions that remain open at the termination of the contract.
All stock index and interest rate futures will be traded on exchanges that are
licensed and regulated by the Commodity Futures Trading Commission ("CFTC").
Stock index futures are currently traded on the New York Futures Exchange and
the Chicago Mercantile Exchange. Interest rate futures are actively traded on
the Chicago Board of Trade and the International Monetary Market at the Chicago
Mercantile Exchange.
The investment advisers do not believe any of the Accounts to be a "commodity
pool" as defined under the Commodity Exchange Act. The Accounts will only
enter into futures contracts for bona fide hedging or other appropriate risk
management purposes as permitted by CFTC regulations and interpretations, and
subject to the requirements of the SEC. The Accounts will not purchase or sell
futures contracts for which the aggregate initial margin exceeds five percent
(5%) of the fair market value of their individual assets, after taking into
account unrealized profits and unrealized losses on any such contracts which
they have entered into. The Accounts will further seek to assure that
fluctuations in the price of any futures contracts that they use for hedging
purposes will be substantially related to fluctuations in the price of the
securities which they hold or which they expect to purchase, although there can
be no assurance that the expected result will be achieved.
As evidence of their hedging intent, the Accounts expect that on seventy-five
percent (75%) or more of the occasions on which they purchase a long futures
contract, they will effect the purchase of securities in the cash market or
take delivery at the close of a futures position. In particular cases,
however, when it is economically advantageous, a long futures position may be
terminated without the corresponding purchase of securities.
SPECIAL RISKS
While certain futures contracts may be purchased and sold to reduce certain
risks, these transactions may entail other risks. Thus, while the Accounts may
benefit from the use of such futures, unanticipated changes in stock price
movements or interest rates may result in a poorer overall performance for the
Account than if it had not entered into such futures contracts. Moreover, in
the event of an imperfect correlation between the futures position and the
portfolio position which is intended to be protected, the desired protection
may not be obtained and the Accounts may be exposed to risk of loss. The
investment advisers will attempt to reduce this risk by engaging in futures
transactions, to the extent possible, where, in their judgment, there is a
significant correlation between changes in the prices of the futures contracts
and the prices of any portfolio securities sought to be hedged.
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In addition to the possibility that there may be a less than perfect
correlation between movements in the futures contracts and securities in the
portfolio being hedged, the prices of futures contracts may not correlate
perfectly with movements in the underlying security due to certain market
distortions. First, rather than meeting variation margin deposit requirements
should a futures contract value move adversely, investors may close futures
contracts through offsetting transactions which could distort the normal
relationship between the index and futures markets. Second, since margin
requirements in the futures market are less onerous than in the securities
market, the futures market may attract more speculators than the securities
market. Increased participation by speculators may cause temporary price
distortions. Due to the possibility of such price distortion, and also because
of the imperfect correlation discussed above, even a correct forecast of
general market trends by the investment advisers may not result in a successful
hedging transaction in the futures market over a short time period. However,
as is noted above, the use of financial futures by the Accounts is intended
primarily to limit transaction and borrowing costs. At no time will the
Accounts use financial futures for speculative purposes.
Successful use of futures contracts for hedging purposes is also subject to the
investment advisers' ability to predict correctly movements in the direction of
the market. However, the investment advisers believe that over time the value
of the Accounts' portfolios will tend to move in the same direction as the
market indices which are intended to correlate to the price movements of the
portfolio securities sought to be hedged.
MONEY MARKET INSTRUMENTS
Money market securities are instruments with remaining maturities of one year
or less, such as bank certificates of deposit, bankers' acceptances, commercial
paper (including master demand notes), and obligations issued or guaranteed by
the United States Government, its agencies or instrumentalities, some of which
may be subject to repurchase agreements.
CERTIFICATES OF DEPOSITS
Certificates of deposit are receipts issued by a bank in exchange for the
deposit of funds. The issuer agrees to pay the amount deposited plus interest
to the bearer of the receipt on the date specified on the certificate. The
certificate usually can be traded in the secondary market prior to maturity.
Certificates of deposit will be limited to U.S. dollar-denominated certificates
of United States banks which have at least $1 billion in deposits as of the
date of their most recently published financial statements (including foreign
branches of U.S. banks, U.S. branches of foreign banks which are members of the
Federal Reserve System or the Federal Deposit Insurance Corporation).
The Accounts will not acquire time deposits or obligations issued by the
International Bank for Reconstruction and Development, the Asian Development
Bank or the Inter-American Development Bank. Additionally, the Accounts do not
currently intend to purchase such foreign securities (except to the extent that
certificates of deposit of foreign branches of U.S. banks may be deemed foreign
securities) or purchase certificates of deposit, bankers' acceptances or other
similar obligations issued by foreign banks.
BANKERS' ACCEPTANCES
Bankers' acceptances typically arise from short-term credit arrangements
designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by the bank which, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be
as long as 270 days, most acceptances have maturities of six months or less.
Bankers' acceptances acquired by the Accounts must have been accepted by U.S.
commercial banks, including foreign branches of U.S. commercial banks, having
total deposits at the time of purchase in excess of $1 billion, and must be
payable in U.S. dollars.
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COMMERCIAL PAPER RATINGS
Investments in commercial paper are limited to those rated A-1 by Standard &
Poor's Corporation and Prime-1 by Moody's Investors Service, Inc. Commercial
paper rated A-1 by S&P has the following characteristics: (1) liquidity ratios
are adequate to meet cash requirements; (2) the issuer's long-term senior debt
is rated "A" or better, although in some cases "BBB" credits may be allowed;
(3) the issuer has access to at least two additional channels of borrowing; (4)
basic earnings and cash flow have an upward trend with allowances made for
unusual circumstances; and (5) the issuer's industry is typically well
established and the issuer has a strong position within the industry.
The rating Prime-1 is the highest commercial paper rating assigned by Moody's.
Among the factors considered by Moody's in assigning ratings are the following:
(1) evaluating the management of the issuer; (2) economic evaluation of the
issuer's industry or industries and an appraisal of speculative-type risks
which may be inherent in certain areas; (3) evaluation of the issuer's products
in relation to competition and customer acceptance; (4) liquidity; (5) amount
and quality of long-term debt; (6) trend of earnings over a period of ten
years; (7) financial strength of a parent company and the relationship which
exists with the issuer; and (8) recognition by the management of obligations
which may be present or may arise as a result of public preparations to meet
such obligations. The relative strength or weakness of the above factors
determines how the issuer's commercial paper is rated within various
categories.
MASTER DEMAND NOTES
Master demand notes are unsecured obligations that permit the investment of
fluctuating amounts at varying rates of interest pursuant to direct
arrangements between the lender (issuer) and the borrower. Master demand notes
may permit daily fluctuations in the interest rate and daily changes in the
amounts borrowed. An Account has the right to increase the amount under the
note at any time up to the full amount provided by the note agreement, or to
decrease the amount, and the borrower may repay up to the full amount of the
note without penalty. Notes purchased by a separate account must permit it to
demand payment of principal and accrued interest at any time (on not more than
seven days notice) or to resell the note at any time to a third party. Master
demand notes may have maturities of more than one year, provided they specify
that (i) the account be entitled to payment of principal and accrued interest
upon not more than seven days notice, and (ii) the rate of interest on such
notes be adjusted automatically at periodic intervals which normally will not
exceed 31 days, but which may extend up to one year. Because these types of
notes are direct lending arrangements between the lender and the borrower, such
instruments are not normally traded, and there is no secondary market for these
notes, although they are redeemable and thus repayable by the borrower at face
value plus accrued interest at any time. Accordingly, the right to redeem is
dependent upon the ability of the borrower to pay principal and interest on
demand. In connection with master demand note arrangements, the investment
adviser considers earning power, cash flow, and other liquidity ratios of the
borrower to pay principal and interest on demand. These notes, as such, are
not typically rated by credit rating agencies. Unless they are so rated, a
separate account may invest in them only if at the time of an investment the
issuer meets the criteria set forth above for commercial paper. The notes will
be deemed to have a maturity equal to the longer of the period remaining to the
next interest rate adjustment or the demand notice period.
UNITED STATES GOVERNMENT SECURITIES
Securities issued or guaranteed by the United States Government include a
variety of Treasury securities that differ only in their interest rates,
maturities and dates of issuance. Treasury Bills have maturities of one year
or less, Treasury Notes have maturities of one to ten years, and Treasury Bonds
generally have maturities of greater than ten years at the date of issuance.
Securities issued or guaranteed by the United States Government or its agencies
or instrumentalities include direct obligations of the United States Treasury
and securities issued or guaranteed by the Federal Housing Administration,
Farmers Home Administration, Export-Import Bank of the United States, Small
Business Administration, Government National Mortgage Association, General
Services Administration, Central Bank for Cooperatives, Federal Home Loan
Banks, Federal Loan Mortgage Corporation, Federal Intermediate Credit Banks,
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Federal Land Banks, Maritime Administration, The Tennessee Valley Authority,
District of Columbia Armory Board and Federal National Mortgage Association.
Some obligations of United States Government agencies and instrumentalities,
such as Treasury Bills and Government National Mortgage Association
pass-through certificates, are supported by the full faith and credit of the
United States; others, such as securities of Federal Home Loan Banks, are
supported by the right of the issuer to borrow from the Treasury; still others,
such as bonds issued by the Federal National Mortgage Association, a private
corporation, are supported only by the credit of the instrumentality. Because
the United States Government is not obligated by law to provide support to an
instrumentality it sponsors, the Accounts will invest in the securities issued
by such an instrumentality only when the investment advisers determine that the
credit risk with respect to the instrumentality does not make the securities
unsuitable investments. United States Government securities will not include
international agencies or instrumentalities in which the United States
Government, its agencies or instrumentalities participate, such as the World
Bank, the Asian Development Bank or the Inter-American Development Bank, or
issues insured by the Federal Deposit Insurance Corporation.
REPURCHASE AGREEMENTS
Interim cash balances may be invested from time to time in repurchase
agreements with approved counterparties. Approved counterparties are limited
to national banks or reporting broker-dealers meeting the Advisor's credit
quality standards as presenting minimal risk of default. All repurchase
transactions must be collateralized by U.S. Government securities with market
value no less than 102% of the amount of the transaction, including accrued
interest. Repurchase transactions generally mature the next business day but,
in the event of a transaction of longer maturity, collateral will be marked to
market daily and, when required, additional cash or qualifying collateral will
be required from the counterparty.
In executing a repurchase agreement, a portfolio purchases eligible securities
subject to the seller's simultaneous agreement to repurchase them on a mutually
agreed upon date and at a mutually agreed upon price. The purchase and resale
prices are negotiated with the counterparty on the basis of current short-term
interest rates, which may be more or less than the rate on the securities
collateralizing the transaction. Physical delivery or, in the case of
"book-entry" securities, segregation in the counterparty's account at the
Federal Reserve for the benefit of the Portfolio is required to establish a
perfected claim to the collateral for the term of the agreement in the event
the counterparty fails to fulfill its obligation.
As the securities collateralizing a repurchase transaction are generally of
longer maturity than the term of the transaction, in the event of default by
the counterparty on its obligation, the Portfolio would bear the risks of
delay, adverse market fluctuation and transaction costs in disposing of the
collateral.
INVESTMENT MANAGEMENT AND ADVISORY SERVICES
The investments and administration of the separate accounts are under the
direction of the Board of Managers. Subject to the authority of the Board of
Managers, Travelers Asset Management International Corporation ("TAMIC")
furnishes investment management and advisory services to Account QB and GIS,
according to the terms of written Investment Advisory Agreements. The
agreement effective May 1, 1998 between Account GIS and TAMIC was approved by a
vote of the Variable Annuity Contract Owners at their meeting held on April 27,
1998. The agreement between Account QB and TAMIC was approved by a vote of the
Variable Annuity Contract Owners at their meeting held on April 23, 1993.
Each of these agreements will continue in effect as described below in (3), as
required by the 1940 Act. Each of the agreements:
1. provides that for investment management and advisory services,
the Company will pay to TAMIC, an advisory fee based on the
current value of the assets of the accounts for which TAMIC acts
as investment adviser (see "Advisory and Subadvisory Fees"
below);
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2. may not be terminated by TAMIC without prior approval of a new
investment advisory agreement by those casting a majority of the
votes entitled to be cast and will be subject to termination
without the payment of any penalty, upon sixty days' written
notice, by the Board of Managers or by a vote of those casting a
majority of the votes entitled to be cast;
3. will continue in effect for a period more than two years from
the date of its execution, only so long as its continuance is
specifically approved at least annually by a vote of a majority
of the Board of Managers, or by a vote of a majority of the
outstanding voting securities of the Account. In addition, and
in either event, the terms of the agreement must be approved
annually by a vote of a majority of the Board of Managers who
are not parties to, or interested persons of any party to, the
agreement, cast in person, at a meeting called for the purpose
of voting on the approval and at which the Board of Managers has
been furnished the information that is reasonably necessary to
evaluate the terms of the agreement;
4. will automatically terminate upon assignment.
The Travelers Investment Management Company (TIMCO) serves as subadviser to
Account GIS, pursuant to a written agreement dated May 1, 1998 with TAMIC,
which was approved by a vote of the Variable Annuity Contract Owners at their
meeting held on April 27, 1998. TAMIC pays TIMCO an amount equivalent on an
annual basis to a maximum of 0.45% of the aggregate of the average daily net
assets of Account GIS, grading down to 0.20%.
ADVISORY AND SUBADVISORY FEES
For furnishing investment management and advisory services to Account GIS,
under a management agreement effective May 1, 1998, TAMIC is paid an amount
equivalent on an annual basis, to a maximum of 0.65% of the average daily net
assets of Account GIS, grading down to 0.40%. The fee is computed daily and
paid monthly. Prior to May 1, 1998, TIMCO was the investment advisor, and the
fee was 0.45%. The total advisory fees paid to TIMCO by Account GIS for the
fiscal years ended December 31, 1995, 1996 and 1997 were $1,700,124;
$2,079,020; and $2,723,508 respectively. Had the new advisory fee been in
effect during 1997, the amount paid by GIS would have been $3,807,000.
TIMCO became the subadvisor to Account GIS effective May 1, 1998; therefore,
there are no subadvisory fees for 1997 and earlier.
For furnishing investment management and advisory services to Account QB, TAMIC
is paid an amount equivalent on an annual basis to 0.3233% of the average daily
net assets of Account QB. For the years ended December 31, 1995, 1996 and 1997
the advisory fees were $547,715, $576,329 and $529,458, respectively.
TAMIC
TAMIC, an indirect wholly owned subsidiary of Travelers Group Inc., is located
at One Tower Square, Hartford, Connecticut 06183. In addition to providing
investment management and advisory services to Account GIS, TAMIC acts as
investment adviser for investment companies which serve as the funding media
for certain variable annuity and variable life insurance contracts offered by
The Travelers Insurance Company and its affiliates. TAMIC also acts as
investment adviser for individual and pooled pension and profit-sharing
accounts, for offshore insurance companies affiliated with The Travelers
Insurance Company, and for non-affiliated insurance companies, both domestic
and offshore.
Investment advice and management for TAMIC's clients are furnished in
accordance with their respective investment objectives and policies and
investment decisions for the Accounts will be made independently from those of
any other accounts managed by TAMIC. However, securities owned by Account QB
may also be owned by other clients and it may occasionally develop that the
same investment advice and decision for more than one
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client is made at the same time. Furthermore, it may develop that a particular
security is bought or sold for only some clients even though it might be held
or bought or sold for other clients, or that a particular security is bought
for some clients when other clients are selling the security. When two or more
accounts are engaged in the purchase or sale of the same security, the
transactions are allocated as to amount in accordance with a formula which is
equitable to each account. It is recognized that in some cases this system
could have a detrimental effect on the price or volume of the security as far
as Account QB is concerned. In other cases, however, it is believed that the
ability of Account QB to participate in volume transactions will produce better
executions for the account.
BROKERAGE
Subject to approval of the Board of Managers, it is the policy of TAMIC, in
executing transactions in portfolio securities, to seek best execution of
orders at the most favorable prices. The determination of what may constitute
best execution and price in the execution of a securities transaction by a
broker involves a number of considerations, including, without limitation, the
overall direct net economic result to Account QB, involving both price paid or
received and any commissions and other cost paid, the efficiency with which the
transaction is effected, the ability to effect the transaction at all where a
large block is involved, the availability of the broker to stand ready to
execute potentially difficult transactions in the future and the financial
strength and stability of the broker. Such considerations are judgmental and
are weighed by management in determining the overall reasonableness of
brokerage commissions paid. Subject to the foregoing, a factor in the
selection of brokers is the receipt of research services, analyses and reports
concerning issuers, industries, securities, economic factors and trends, and
other statistical and factual information. Any such research and other
statistical and factual information provided by brokers is considered to be in
addition to and not in lieu of services required to be performed by TAMIC under
its Investment Advisory Agreements. The cost, value and specific application
of such information are indeterminable and hence are not practicably allocable
among Account QB and other clients of TAMIC who may indirectly benefit from the
availability of such information. Similarly, Account QB may indirectly benefit
from information made available as a result of transactions for such clients.
Purchases and sales of bonds and money market instruments will usually be
principal transactions and will normally be purchased directly from the issuer
or from the underwriter or market maker for the securities. There usually will
be no brokerage commissions paid for such purchases. Purchases from the
underwriters will include the underwriting commission or concession, and
purchases from dealers serving as market makers will include the spread between
the bid and asked prices. Where transactions are made in the over-the-counter
market, Account QB will deal with primary market makers unless more favorable
prices are otherwise obtainable. Brokerage fees will be incurred in connection
with futures transactions, and Account QB will be required to deposit and
maintain funds with brokers as margin to guarantee performance of future
obligations.
TAMIC may follow a policy of considering the sale of units of Account QB a
factor in the selection of broker-dealers to execute portfolio transactions,
subject to the requirements of best execution described above.
The policy of TAMIC with respect to brokerage is and will be reviewed by the
Board of Managers periodically. Because of the possibility of further
regulatory developments affecting the securities exchanges and brokerage
practices generally, the foregoing practices may be changed, modified or
eliminated.
The total brokerage commissions paid by Account QB for the fiscal years ended
December 31, 1995, 1996 and 1997 were $549,540, $745,209 and $0, respectively.
For the fiscal year ended December 31, 1997, no portfolio transactions were
directed to certain brokers because of research services. No commissions were
paid to broker dealers affiliated with TAMIC.
TIMCO
TIMCO, an indirect wholly owned subsidiary of Travelers Group Inc., is located
at One Tower Square, Hartford, Connecticut 06183. In addition to providing
subadvisory services to Account GIS, TIMCO acts as investment adviser (or
subadviser) for other investment companies which serve as the funding media for
certain variable
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annuity and variable life insurance contracts offered by The Travelers
Insurance Company and its affiliates. TIMCO also acts as investment adviser for
individual and pooled pension and profit-sharing accounts and for affiliated
companies of The Travelers Insurance Company.
Investment decisions for Account GIS will be made independently from those of
any other accounts managed by TIMCO. If, however, accounts managed by TIMCO
are simultaneously engaged in the purchase of the same security, then available
securities may be allocated to each account and may be averaged as to price in
whatever manner TIMCO deems to be fair. In some cases, this system might
adversely affect the price or volume of securities being bought or sold by an
account, while in other cases it may produce better executions or lower
brokerage rates.
BROKERAGE
Subject to approval of the Board of Managers, and in accordance with the
Investment Advisory Agreement, TIMCO will place purchase and sale orders for
the portfolio securities of Account GIS through brokerage firms which it may
select from time to time with the objective of seeking the best execution by
responsible brokerage firms at reasonably competitive rates. To the extent
consistent with this policy, certain brokerage transactions may be placed with
firms which provide brokerage and research services to TIMCO, and such
transactions may be paid for at higher rates than other firms would charge.
The term "brokerage and research services" includes advice as to the value of
securities; the advisability of investing in, purchasing or selling securities;
the availability of securities for purchasers or sellers of securities;
furnishing analyses and reports concerning issues, industries, securities,
economic factors and trends, portfolio strategy and performance of accounts;
and effecting securities transactions and performing functions incidental
thereto (such as clearance and settlement). These brokerage and research
services may be utilized in providing investment advice to Account GIS and may
also be utilized in providing investment advice and management to all accounts
over which TIMCO exercises investment discretion, but not all of such services
will necessarily be utilized in providing investment advice to all accounts.
This practice may be expected to result in greater cost to the Accounts than
might otherwise be the case if brokers whose charges were based on execution
alone were used for such transactions. TIMCO believes that brokers' research
services are very important in providing investment advice to the Accounts but
is unable to give the services a dollar value. While research services are not
expected to reduce the expenses of TIMCO, TIMCO will, through the use of these
services, avoid the additional expenses which would be incurred if it should
attempt to develop comparable information through its own staff.
Transactions in the over-the-counter market are placed with the principal
market makers unless better price and execution may be obtained otherwise.
Brokerage fees will be incurred in connection with futures transactions, and
Account GIS will be required to deposit and maintain funds with brokers as
margin to guarantee performance of future obligations.
The overall reasonableness of brokerage commissions paid is evaluated by
personnel of TIMCO responsible for trading and for managing Account GIS's
portfolio by comparing brokerage firms utilized by TIMCO and other firms with
respect to the following factors: the prices paid or received in securities
transactions, speed of execution and settlement, size and difficulty of the
brokerage transactions, the financial soundness of the firms, and the quality,
timeliness and quantity of research information and reports.
The total brokerage commissions paid by Account GIS for the fiscal years ending
December 31, 1995, 1996 and 1997 were $866,658, $890,690 and $818,411,
respectively. For the fiscal year ended December 31, 1997, portfolio
transactions in the amount of $600,869,008 were directed to certain brokers
because of research services, of which $677,205 was paid in commissions with
respect to such transactions. No formula was used in placing such transactions
and no specific amount of transactions was allocated for research services.
For the year ended December 31, 1997, commissions in the amounts of $71,521 and
$22,730 were paid to Smith Barney Inc. and The Robinson Humphrey Company, Inc.,
respectively, both affiliates of TIMCO, which equals, for each, 8.7% and 2.8%
of Account GIS's aggregate brokerage commissions paid to such brokers during
1997. The percentage of Account GIS's aggregate dollar amount of transactions
involving the payment of commissions effected through Smith Barney and Robinson
Humphrey were 9.8% and 2.5%, respectively.
15
<PAGE> 193
VALUATION OF ASSETS
The value of the assets of each Separate Account is determined on each
Valuation Date as of the close of the New York Stock Exchange (the "Exchange").
If the Exchange is not open for trading on any such day, then such computation
shall be made as of the normal close of the Exchange. Each security traded on
a national securities exchange is valued at the last reported sale price on the
Valuation Date. If there has been no sale on that day, then the value of the
security is taken to be the mean between the reported bid and asked prices on
the Valuation Date or on the basis of quotations received from a reputable
broker or any other recognized source.
Any security not traded on a securities exchange but traded in the
over-the-counter market and for which market quotations are readily available
is valued at the mean between the quoted bid and asked prices on the Valuation
Date or on the basis of quotations received from a reputable broker or any
other recognized source.
Securities traded on the over-the-counter market and listed securities with no
reported sales are valued at the mean between the last reported bid and asked
prices or on the basis of quotations received from a reputable broker or other
recognized source.
Short-term investments for which a quoted market price is available are valued
at market. Short-term investments maturing in more than sixty days for which
there is no reliable quoted market price are valued by "marking to market"
(computing a market value based upon quotations from dealers or issuers for
securities of a similar type, quality and maturity). "Marking to market" takes
into account unrealized appreciation or depreciation due to changes in interest
rates or other factors which would influence the current fair values of such
securities. Short-term investments maturing in sixty days or less for which
there is no reliable quoted market are valued at amortized cost which
approximates market.
THE BOARD OF MANAGERS
The investment and administration of each of the Separate Accounts are under
the direction of the Board of Managers, listed below. Members of the Board of
Managers are elected annually by those Contract Owners participating in the
Separate Accounts. A majority of the members of the Board of Managers are
persons who are not affiliated with The Travelers Insurance Company, TIMCO,
TAMIC or their affiliates.
<TABLE>
<CAPTION>
Name Present Position and Principal Occupation During Last Five Years
---- ----------------------------------------------------------------
<S> <C>
*Heath B. McLendon Managing Director (1993-present), Smith Barney Inc. ("Smith Barney");
Chairman and Member Chairman (1993-present), Smith Barney Strategy Advisors, Inc.;
388 Greenwich Street President and Director (1994-present), Mutual Management Corp.;
New York, New York Director and President (1996-present), Travelers Investment Adviser,
Age 64 Inc.; Chairman and Director of forty-two investment companies
associated with Smith Barney; Chairman, Board of Trustees, Drew
University; Advisory Director, First Empire State Corporation;
Chairman, Board of Managers, seven Variable Annuity Separate Accounts
of The Travelers Insurance Company+; Chairman, Board of Trustees, five
Mutual Funds sponsored by The Travelers Insurance Company++; prior to
July 1993, Senior Executive Vice President of Shearson Lehman Brothers
Inc.
Knight Edwards Of Counsel (1988-present), Partner (1956-1988), Edwards & Angell,
Member Attorneys; Member, Advisory Board (1973-1994), thirty-one mutual funds
2700 Hospital Trust Tower sponsored by Keystone Group, Inc.; Member, Board of Managers, seven
Providence, Rhode Island Variable Annuity Separate Accounts of The Travelers Insurance Company+;
Age 74 Trustee, five Mutual Funds sponsored by The Travelers
</TABLE>
16
<PAGE> 194
<TABLE>
<S> <C>
Insurance Company.++
Robert E. McGill, III Retired manufacturing executive. Director (1983-1995), Executive Vice
Member President (1989-1994) and Senior Vice President, Finance and
295 Hancock Street Administration (1983-1989), The Dexter Corporation (manufacturer of
Williamstown, Massachusetts specialty chemicals and materials); Vice Chairman (1990-1992), Director
Age 66 (1983-1995), Life Technologies, Inc. (life science/biotechnology
products); Director, (1994-present), The Connecticut Surety Corporation
(insurance); Director (1995-present), CN Bioscience, Inc. (life
science/biotechnology products); Director (1995-present), Chemfab
Corporation (specialty materials manufacturer); Member, Board of
Managers, seven Variable Annuity Separate Accounts of The Travelers
Insurance Company+; Trustee, five Mutual Funds sponsored by The
Travelers Insurance Company.++
Lewis Mandell Dean, College of Business Administration (1995-present), Marquette
Member University; Professor of Finance (1980-1995) and Associate Dean
606 N. 13th Street (1993-1995), School of Business Administration, and Director, Center
Milwaukee, WI 53233 for Research and Development in Financial Services (1980-1995),
Age 55 University of Connecticut; Director (1992-present), GZA
Geoenvironmental Tech, Inc. (engineering services); Member, Board of
Managers, seven Variable Annuity Separate Accounts of The Travelers
Insurance Company+; Trustee, five Mutual Funds sponsored by The
Travelers Insurance Company.++
Frances M. Hawk, CFA, CFP Private Investor, (1997-present); Portfolio Manager (1992-1997), HLM
Member Management Company, Inc. (investment management); Assistant Treasurer,
222 Berkeley Street Pensions and Benefits. Management (1989-1992), United Technologies
Boston, Massachusetts Corporation (broad- based designer and manufacturer of high technology
Age 50 products); Member, Board of Managers, seven Variable Annuity Separate
Accounts of The Travelers Insurance Company+; Trustee, five Mutual
Funds sponsored by The Travelers Insurance Company.++
Ernest J. Wright Vice President and Secretary (1996-present), Assistant Secretary
Secretary to the Board (1994-1996), Counsel (1987-present), The Travelers Insurance Company;
One Tower Square Secretary, Board of Managers, seven Variable Annuity Separate Accounts
Hartford, Connecticut of The Travelers Insurance Company+; Secretary, Board of Trustees, five
Age 57 Mutual Funds sponsored by The Travelers Insurance Company.++
Kathleen A. McGah Assistant Secretary and Counsel (1995-present), The Travelers Insurance
Assistant Secretary to the Board Company; Assistant Secretary, Board of Managers, seven Variable Annuity
One Tower Square Separate Accounts of The Travelers Insurance Company+; Assistant
Hartford, Connecticut Secretary, Board of Trustees, five Mutual Funds sponsored by The
Age 47 Travelers Insurance Company.++ Prior to January 1995, Counsel, ITT
Hartford Life Insurance Company.
</TABLE>
+ These seven Variable Annuity Separate Accounts are: The Travelers Growth
and Income Stock Account for Variable Annuities, The Travelers Quality
Bond Account for Variable Annuities, The Travelers Money Market Account
for Variable Annuities, The Travelers Timed Growth and Income Stock
Account for Variable Annuities, The Travelers Timed Short-Term Bond
Account for Variable Annuities, The Travelers Timed Aggressive Stock
Account for Variable Annuities and The Travelers Timed Bond Account for
Variable Annuities.
17
<PAGE> 195
++ These five Mutual Funds are: Capital Appreciation Fund, Money Market
Portfolio, High Yield Bond Trust, Managed Assets Trust and The Travelers
Series Trust.
* Mr. McLendon is an "interested person" within the meaning of the 1940
Act by virtue of his position as Managing Director of Smith Barney Inc., an
indirect wholly owned subsidiary of Travelers Group Inc. and also owns shares
and options to purchase shares of Travelers Group Inc., the indirect parent of
The Travelers Insurance Company.
The Company is responsible for payment of the fees and expenses of the Board of
Managers, and the expenses of audit of the Separate Accounts, as well as other
expenses for services related to the operations of the accounts, for which it
deducts certain amounts from purchase payments and from the accounts.
Members of the Board of Managers who are also officers or employees of
Travelers Group Inc. or its subsidiaries are not entitled to any fee. Members
of the Board of Managers who are not affiliated as employees of Travelers Group
Inc. or its subsidiaries receive an aggregate retainer of $19,000 for service
on the Boards of the seven Variable Annuity Separate Accounts established by
The Travelers Insurance Company and the five Mutual Funds sponsored by The
Travelers Insurance Company. They also receive an aggregate fee of $2,500 for
each meeting of such Boards attended. Board members with 10 years of service
may agree to provide services as emeritus director at age 72 or upon reaching
80 years of age and will receive 50% of the annual retainer and 50% of meeting
fees if attended.
DISTRIBUTION AND MANAGEMENT SERVICES
Under the terms of a Distribution and Management Agreement between each
Separate Account, the Company and Tower Square Securities, Inc., the Company
provides all sales and administrative services and mortality and expense risk
guarantees related to variable annuity contracts issued by the Company in
connection with the Separate Accounts, and assumes the risk of minimum death
benefits, as applicable. The Company also pays all sales costs (including
costs associated with the preparation of sales literature); all costs of
qualifying the Separate Accounts and the variable annuity contracts with
regulatory authorities; the costs of proxy solicitation; all custodian,
accountants and legal fees; and all compensation paid to the unaffiliated
members of the Board of Managers. The Company also provides without cost to
the Separate Accounts all necessary office space, facilities, and personnel to
manage its affairs.
The Company received the following amounts from the Separate Accounts in each
of the last three fiscal years for services provided under the Distribution and
Management Agreements:
<TABLE>
<CAPTION>
SEPARATE ACCOUNT 1997 1996 1995
---------------- ---- ---- ----
<S> <C> <C> <C>
GIS $7,623,733 $5,889,123 $ 4,557,639
QB $2,144,373 $2,322,938 $ 2,119,384
</TABLE>
SECURITIES CUSTODIAN
Chase Manhattan Bank, N.A., Chase MetroTech Center, Brooklyn, New York, is the
custodian of the portfolio securities and similar investments of Accounts GIS
and QB.
18
<PAGE> 196
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., independent accountants, 100 Pearl Street, Hartford,
Connecticut, are the independent auditors for Account GIS and Account QB. The
services provided to Account GIS and Account QB include primarily the
examination of the Accounts' financial statements. Financial statements as of
and for the year ended December 31, 1997 of Accounts GIS and QB, included in
the Annual Report incorporated by reference in this SAI, have been incorporated
herein in reliance on the report of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
The consolidated financial statements of The Travelers Insurance Company and
Subsidiaries as of December 31, 1997 and 1996, and for each of the years in the
three-year period ended December 31, 1997, have been included herein in
reliance upon the reports of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
19
<PAGE> 197
FINANCIAL STATEMENTS
THE 1997 FINANCIALS WILL BE INCLUDED HERE.
F-1
<PAGE> 198
THETRAVELERS (LOGO UMBRELLA)
THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES
AND
THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES
Individual Variable Annuity Contracts
Issued By
THE TRAVELERS INSURANCE COMPANY
Individual Purchasers
TIC Ed.5-98
L-11895S Printed in U.S.A.
<PAGE> 199
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder
The Travelers Insurance Company and Subsidiaries:
We have audited the accompanying consolidated balance sheets of The Travelers
Insurance Company and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income and retained earnings and cash flows
for each of the years in the three-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 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. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Travelers
Insurance Company and Subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
January 26, 1998
F-1
<PAGE> 200
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
($ IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
REVENUES
Premiums $1,583 $1,387 $1,504
Net investment income 2,037 1,950 1,884
Realized investment gains 199 65 106
Other revenues 354 284 204
- -------------------------------------------------------------------------------------------
Total Revenues $4,173 $3,686 $3,698
- -------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Current and future insurance benefits 1,341 1,187 1,206
Interest credited to contractholders 829 863 997
Amortization of deferred acquisition costs and value of
insurance in force 293 281 290
General and administrative expenses 427 380 368
- -------------------------------------------------------------------------------------------
Total Benefits and Expenses 2,890 2,711 2,861
- -------------------------------------------------------------------------------------------
Income from continuing operations before federal income taxes 1,283 975 837
- -------------------------------------------------------------------------------------------
Federal income taxes:
Current expense 434 284 233
Deferred 10 58 57
- -------------------------------------------------------------------------------------------
Total Federal Income Taxes 444 342 290
- -------------------------------------------------------------------------------------------
Income from continuing operations 839 633 547
- -------------------------------------------------------------------------------------------
Discontinued operations, net of income taxes
Income from operations (net of taxes of $0, $0 and $18) -- -- 72
Gain on disposition (net of taxes of $0, $14 and $68) -- 26 131
- -------------------------------------------------------------------------------------------
Income from Discontinued Operations -- 26 203
- -------------------------------------------------------------------------------------------
Net income 839 659 750
Retained earnings beginning of year 2,471 2,312 1,562
Dividends to parent 500 500 --
- -------------------------------------------------------------------------------------------
Retained Earnings End of Year $2,810 $2,471 $2,312
===========================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE> 201
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ IN MILLIONS)
<TABLE>
<CAPTION>
December 31, 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale at fair value (cost,
$20,682; $19,284) $21,511 $19,637
Equity securities, at fair value (cost, $480; $330) 512 338
Mortgage loans 2,869 2,920
Real estate held for sale 134 297
Trading securities, at market value 800 --
Policy loans 1,872 1,910
Short-term securities 1,102 902
Other invested assets 1,702 1,253
- ----------------------------------------------------------------------------------
Total Investments $30,502 $27,257
- ----------------------------------------------------------------------------------
Cash 58 74
Investment income accrued 338 355
Premium balances receivable 106 105
Reinsurance recoverables 4,339 3,858
Deferred acquisition costs and value of insurance in force 2,312 2,133
Separate and variable accounts 11,319 8,127
Other assets 1,052 1,064
- ----------------------------------------------------------------------------------
Total Assets $50,026 $42,973
- ----------------------------------------------------------------------------------
LIABILITIES
Contractholder funds 14,913 14,189
Future policy benefits 12,569 11,762
Policy and contract claims 378 536
Trading securities sold not yet purchased, at market value 462 --
Separate and variable accounts 11,309 8,115
Commercial paper -- 50
Deferred federal income taxes 409 57
Other liabilities 2,661 1,936
- ----------------------------------------------------------------------------------
Total Liabilities $42,701 $36,645
- ----------------------------------------------------------------------------------
SHAREHOLDER'S EQUITY
Common stock, par value $2.50; 40 million shares authorized,
issued and outstanding 100 100
Additional paid-in capital 3,187 3,170
Retained earnings 2,810 2,471
Unrealized investment gains, net of taxes 1,228 587
- ----------------------------------------------------------------------------------
Total Shareholder's Equity $ 7,325 $ 6,328
- ----------------------------------------------------------------------------------
Total Liabilities and Shareholder's Equity $50,026 $42,973
==================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 202
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
($ IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Premiums collected $ 1,519 $ 1,387 $ 1,346
Net investment income received 2,059 1,910 1,855
Other revenues received 180 131 90
Benefits and claims paid (1,230) (1,060) (846)
Interest credited to contractholders (853) (820) (960)
Operating expenses paid (445) (343) (615)
Income taxes paid (368) (328) (63)
Trading account investments, (purchases) sales, net (54) -- --
Other 18 (70) (137)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 826 807 670
Net cash used in discontinued operations -- (350) (596)
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operations $ 826 $ 457 $ 74
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 2,259 1,928 1,974
Mortgage loans 663 917 680
Proceeds from sales of investments
Fixed maturities 7,592 9,101 6,773
Equity securities 341 479 379
Mortgage loans 207 178 704
Real estate held for sale 169 210 253
Purchases of investments
Fixed maturities (11,143) (11,556) (10,748)
Equity securities (483) (594) (305)
Mortgage loans (771) (470) (144)
Policy loans, net 38 (23) (325)
Short-term securities, (purchases) sales, net (2) 498 291
Other investments, (purchases) sales, net (260) (137) (267)
Securities transactions in course of settlement 311 (52) 258
Net cash provided by investing activities of discontinued operations -- 348 1,425
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (used in) Investing Activities $ (1,079) $ 827 $ 948
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of commercial paper, net (50) (23) (1)
Contractholder fund deposits 3,544 2,493 2,705
Contractholder fund withdrawals (2,757) (3,262) (3,755)
Dividends to parent company (500) (500) --
Other -- 9 --
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (used in) Financing Activities $ 237 $ (1,283) $ (1,051)
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash $ (16) $ 1 $ (29)
- ----------------------------------------------------------------------------------------------------------------------
Cash at December 31, $ 58 $ 74 $ 73
======================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 203
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies used in the preparation of the accompanying
financial statements follow.
Basis of Presentation
The Travelers Insurance Company and Subsidiaries (the Company) is a wholly
owned subsidiary of The Travelers Insurance Group Inc. (TIGI), an indirect
wholly owned subsidiary of Travelers Group Inc. (Travelers Group). The
consolidated financial statements include the accounts of the Company and its
insurance and non-insurance subsidiaries on a fully consolidated basis. The
primary insurance subsidiaries of the Company are The Travelers Life and
Annuity Company (TLAC) and Primerica Life Insurance Company (Primerica Life)
and its subsidiary National Benefit Life Insurance Company (NBL).
- TRAVELERS LIFE AND ANNUITY offers fixed and variable deferred annuities,
payout annuities and term, universal and variable life and long-term care
insurance to individuals and small businesses. It also provides group
pension products, including guaranteed investment contracts and group
annuities for employer-sponsored retirement and savings plans. These
products are primarily marketed through The Copeland Companies (Copeland),
an indirect, wholly owned subsidiary of the Company, the Financial
Consultants of Salomon Smith Barney, an affiliate of the Company, and a
nationwide network of independent agents. The Company's Corporate and
Other Segment was absorbed into Travelers Life and Annuity during the
second quarter of 1996.
- PRIMERICA LIFE INSURANCE offers individual life products, primarily term
insurance, to consumers through a nationwide sales force of approximately
80,000 full and part-time independent agents.
As discussed in Note 2 of Notes to Consolidated Financial Statements, in
January 1995 the group life insurance and related businesses of the Company
were sold to Metropolitan Life Insurance Company (MetLife). Also in January
1995, the group medical component was exchanged for a 42% interest in The
MetraHealth Companies, Inc. (MetraHealth). The Company's interest in
MetraHealth was sold on October 2, 1995 and through that date was accounted
for on the equity method. The Company's discontinued operations reflect the
results of the medical insurance business not transferred, the equity
interest in the earnings of MetraHealth through October 2, 1995 (date of
sale) and the gains from the sales of these businesses.
In September 1995, Travelers Group made a pro rata distribution to its
stockholders of shares of Class A Common Stock of Transport Holdings Inc.,
which at the time was a wholly owned subsidiary of Travelers Group and was
the indirect owner of the business of Transport Life Insurance Company
(Transport Life). Immediately prior to this distribution, the Company
distributed Transport Life, an indirect wholly owned subsidiary of the
Company, to TIGI, as a return of capital.
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 benefits and expenses during the
reporting period. Actual results could differ from those estimates.
Certain prior year amounts have been reclassified to conform with the 1997
presentation.
F-5
<PAGE> 204
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Accounting Changes
EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS
In February, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" (FAS 132). FAS 132
supersedes the disclosure requirements in FASB Statements No. 87, "Employers'
Accounting for Pensions," No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefits Pension Plans and Termination of Benefits,"
and No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." FAS 132 addresses disclosure only and does not address measurement
or recognition. In addition to other disclosure changes, FAS 132 allows
employers to disclose total contributions to multi-employer plans without
disaggregating the amounts attributable to pensions and other postretirement
benefits. This statement is effective for fiscal years beginning after
December 15, 1997. Earlier application is encouraged. Effective December 31,
1997, the Company adopted FAS 132. The adoption of this standard did not have
any impact on results of operations, financial condition or liquidity.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" (FAS 125). FAS 125
establishes accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. These standards are
based on an approach that focuses on control. Under this approach, after a
transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. FAS 125 provides standards for
distinguishing transfers of financial assets that are sales from transfers
that are secured borrowings. The requirements of FAS 125 are effective for
transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and are to be applied
prospectively. However, in December 1996 the FASB issued Statement of
Financial Accounting Standards No. 127, "Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125," which delays until January 1,
1998 the effective date for certain provisions. Application of FAS 125 prior
to the effective date or retroactively is not permitted. The adoption of the
provisions of FAS 125 effective January 1, 1997 did not have a material
impact on results of operations, financial condition or liquidity. The
adoption of the provisions of FAS 127 effective January, 1998 are
not expected to have a material impact on the results of operations,
financial condition or liquidity.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS
TO BE DISPOSED OF
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." This statement
establishes accounting standards for the impairment of long-lived assets and
certain identifiable intangibles to be disposed. This statement requires a
write down to fair value when long-lived assets to be held and used are
impaired. The statement also requires long-lived assets to be disposed (e.g.,
real estate held for sale) be carried at the lower of cost or fair value less
cost to sell, and does not allow such assets to be depreciated. The adoption
of this standard did not have a material impact on the Company's financial
condition, results of operations or liquidity.
F-6
<PAGE> 205
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (FAS 123). This statement
establishes financial accounting and reporting standards for stock-based
employee compensation plans as well as transactions in which an entity issues
its equity instruments to acquire goods or services from non-employees. This
statement defines a fair value-based method of accounting for employee stock
options or similar equity instruments, and encourages all entities to adopt
this method of accounting for all employee stock compensation plans. However,
it also allows an entity to continue to measure compensation cost for those
plans using the intrinsic value-based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25). Entities electing to remain with the accounting method
prescribed in APB 25 must make pro-forma disclosures of net income and
earnings per share, as if the fair value-based method of accounting defined
by FAS 123 had been applied. FAS 123 is applicable to fiscal years beginning
after December 15, 1995. The Company has elected to continue to account for
its stock-based employee compensation plans using the accounting method
prescribed by APB 25 and has included in the notes to consolidated financial
statements the pro-forma disclosures required by FAS 123. See Note 9. The
Company has adopted FAS 123 for its stock-based non-employee compensation
plans.
Accounting Policies
INVESTMENTS
Fixed maturities include bonds, notes and redeemable preferred stocks. Fair
values of investments in fixed maturities are based on quoted market prices
or dealer quotes or, if these are not available, discounted expected cash
flows using market rates commensurate with the credit quality and maturity of
the investment. Also included in fixed maturities are loan-backed and
structured securities, which are amortized using the retrospective method.
Fixed maturities are classified as "available for sale" and are reported at
fair value, with unrealized investment gains and losses, net of income taxes,
charged or credited directly to shareholder's equity.
Equity securities, which include common and nonredeemable preferred stocks,
are classified as "available for sale" and carried at fair value based
primarily on quoted market prices. Changes in fair values of equity
securities are charged or credited directly to shareholder's equity, net of
income taxes.
Mortgage loans are carried at amortized cost. A mortgage loan is considered
impaired when it is probable that the Company will be unable to collect
principal and interest amounts due. For mortgage loans that are determined to
be impaired, a reserve is established for the difference between the
amortized cost and fair market value of the underlying collateral. In
estimating fair value, the Company uses interest rates reflecting the higher
returns required in the current real estate financing market. Impaired loans
were insignificant at December 31, 1997 and 1996.
Real estate held for sale is carried at the lower of cost or fair value less
estimated cost to sell. Fair value of foreclosed properties is established at
the time of foreclosure by internal analysis or external appraisers, using
discounted cash flow analyses and other accepted techniques. Thereafter, an
allowance for losses on real estate held for sale is established if the
carrying value of the property exceeds its current fair value less estimated
costs to sell. There was no such allowance at December 31, 1997 and 1996.
F-7
<PAGE> 206
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Trading securities are carried at market value. Realized and unrealized gains
and losses on trading securities are included in investment income.
Short-term securities, consisting primarily of money market instruments and
other debt issues purchased with a maturity of less than one year, are
carried at amortized cost which approximates market.
Accrual of income, included in other assets, is suspended on fixed maturities
or mortgage loans that are in default, or on which it is likely that future
payments will not be made as scheduled. Interest income on investments in
default is recognized only as payment is received.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments, including financial
futures contracts, equity options, forward contracts and interest rate swaps
and caps, as a means of hedging exposure to interest rate, equity price and
foreign currency risk. Hedge accounting is used to account for derivatives.
To qualify for hedge accounting the changes in value of the derivative must
be expected to substantially offset the changes in value of the hedged item.
Hedges are monitored to ensure that there is a high correlation between the
derivative instruments and the hedged investment.
Gains and losses arising from financial futures contracts are used to adjust
the basis of hedged investments and are recognized in net investment income
over the life of the investment.
Forward contracts, equity options, and interest rate swaps and caps were not
significant at December 31, 1997 and 1996. Information concerning derivative
financial instruments is included in Note 6.
INVESTMENT GAINS AND LOSSES
Realized investment gains and losses are included as a component of pretax
revenues based upon specific identification of the investments sold on the
trade date. Also included are gains and losses arising from the remeasurement
of the local currency value of foreign investments to U.S. dollars, the
functional currency of the Company. The foreign exchange effects of Canadian
operations are included in unrealized gains and losses.
POLICY LOANS
Policy loans are carried at the amount of the unpaid balances that are not in
excess of the net cash surrender values of the related insurance policies.
The carrying value of policy loans, which have no defined maturities, is
considered to be fair value.
DEFERRED ACQUISITION COSTS AND VALUE OF INSURANCE IN FORCE
Costs of acquiring individual life insurance, annuities and long-term care
business, principally commissions and certain expenses related to policy
issuance, underwriting and marketing, all of which vary with and are
primarily related to the production of new business, are deferred.
Acquisition costs relating to traditional life insurance, including term
insurance and long-term care insurance, are amortized in relation to
anticipated premiums; universal life in relation to estimated gross profits;
and annuity contracts employing a level yield method. For life insurance, a
10- to 25-year amortization period is used; for long-term care business, a
10- to 20-year period is used, and a 10- to 20-year period is employed for
annuities. Deferred acquisition costs are reviewed periodically for
recoverability to determine if any adjustment is required.
F-8
<PAGE> 207
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The value of insurance in force is an asset recorded at the time of
acquisition of an insurance company. It represents the actuarially determined
present value of anticipated profits to be realized from life insurance,
annuities and health contracts at the date of acquisition using the same
assumptions that were used for computing related liabilities where
appropriate. The value of insurance in force was the actuarially determined
present value of the projected future profits discounted at interest rates
ranging from 14% to 18%. Traditional life insurance and guaranteed renewable
health policies are amortized in relation to anticipated premiums; universal
life is amortized in relation to estimated gross profits; and annuity
contracts are amortized employing a level yield method. The value of
insurance in force is reviewed periodically for recoverability to determine
if any adjustment is required.
SEPARATE AND VARIABLE ACCOUNTS
Separate and variable accounts primarily represent funds for which investment
income and investment gains and losses accrue directly to, and investment
risk is borne by, the contractholders. Each account has specific investment
objectives. The assets of each account are legally segregated and are not
subject to claims that arise out of any other business of the Company. The
assets of these accounts are carried at market value. Certain other separate
accounts provide guaranteed levels of return or benefits and the assets of
these accounts are primarily carried at market value. Amounts assessed to the
contractholders for management services are included in revenues. Deposits,
net investment income and realized investment gains and losses for these
accounts are excluded from revenues, and related liability increases are
excluded from benefits and expenses.
GOODWILL
Goodwill represents the cost of acquired businesses in excess of net assets
and is being amortized on a straight-line basis principally over a 40-year
period. The carrying amount is regularly reviewed for indication of
impairment in value that in the view of management would be other than
temporary. Impairments would be recognized in operating results if a
permanent diminution in value is deemed to have occurred.
CONTRACTHOLDER FUNDS
Contractholder funds represent receipts from the issuance of universal life,
pension investment and certain deferred annuity contracts. Contractholder
fund balances are increased by such receipts and credited interest and
reduced by withdrawals, mortality charges and administrative expenses charged
to the contractholders. Interest rates credited to contractholder funds range
from 3.5% to 9.45%.
FUTURE POLICY BENEFITS
Benefit reserves represent liabilities for future insurance policy benefits.
Benefit reserves for life insurance and annuities have been computed based
upon mortality, morbidity, persistency and interest assumptions applicable to
these coverages, which range from 2.5% to 10.0%, including adverse deviation.
These assumptions consider Company experience and industry standards. The
assumptions vary by plan, age at issue, year of issue and duration.
Appropriate recognition has been given to experience rating and reinsurance.
F-9
<PAGE> 208
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company, whose insurance subsidiaries are domiciled principally in
Connecticut and Massachusetts, prepares statutory financial statements in
accordance with the accounting practices prescribed or permitted by the
insurance departments of those states. Prescribed statutory accounting
practices include certain publications of the National Association of
Insurance Commissioners as well as state laws, regulations, and general
administrative rules. Permitted statutory accounting practices encompass all
accounting practices not so prescribed. The impact of any permitted
accounting practices on statutory surplus of the Company is not material.
PREMIUMS
Premiums are recognized as revenues when due. Reserves are established for
the portion of premiums that will be earned in future periods and for
deferred profits on limited-payment policies that are being recognized in
income over the policy term.
OTHER REVENUES
Other revenues include surrender, mortality and administrative charges and
fees as earned on investment, universal life and other insurance contracts.
Other revenues also include gains and losses on dispositions of assets and
operations other than realized investment gains and losses and revenues of
non-insurance subsidiaries.
INTEREST CREDITED TO CONTRACTHOLDERS
Interest credited to contractholders represents amounts earned by universal
life, pension investment and certain deferred annuity contracts in accordance
with contract provisions.
FEDERAL INCOME TAXES
The provision for federal income taxes is comprised of two components,
current income taxes and deferred income taxes. Deferred federal income taxes
arise from changes during the year in cumulative temporary differences
between the tax basis and book basis of assets and liabilities. The deferred
federal income tax asset is recognized to the extent that future realization
of the tax benefit is more likely than not, with a valuation allowance for
the portion that is not likely to be recognized.
Future Application of Accounting Standards
In December 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments" (SOP 97-3). SOP 97-3 provides guidance for
determining when an entity should recognize a liability for guaranty-fund and
other insurance-related assessments, how to measure that liability, and when
an asset may be recognized for the recovery of such assessments through
premium tax offsets or policy surcharges. This SOP is effective for financial
statements for fiscal years beginning after December 15, 1998, and the effect
of initial adoption is to be reported as a cumulative catch-up adjustment.
Restatement of previously issued financial statements is not allowed. The
Company has not yet determined when it will implement this SOP and does not
anticipate any material impact on the Company's financial condition, results
of operations or liquidity.
F-10
<PAGE> 209
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (FAS 130). FAS 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. All items
that are required to be recognized under accounting standards as components
of comprehensive income are to be reported in a financial statement that is
displayed with the same prominence as other financial statements. FAS 130
stipulates that comprehensive income reflect the change in equity of an
enterprise during a period from transactions and other events and
circumstances from non-owner sources. Comprehensive income will thus
represent the sum of net income and other comprehensive income, although FAS
130 does not require the use of the terms comprehensive income or other
comprehensive income. The accumulated balance of other comprehensive income
shall be displayed separately from retained earnings and additional paid-in
capital in the statement of financial position. FAS 130 is effective for
fiscal years beginning after December 15, 1997. The Company anticipates that
the adoption of FAS 130 will result primarily in reporting unrealized gains
and losses on investments in debt and equity securities in comprehensive
income.
In June 1997, the FASB also issued Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" (FAS 131). FAS 131 establishes standards for the way that public
enterprises report information about operating segments in annual financial
statements and requires that selected information about those operating
segments be reported in interim financial statements. FAS 131 supersedes
Statement of Financial Accounting Standards No. 14, "Financial Reporting for
Segments of a Business Enterprise" (FAS 14). FAS 131 requires that all
public enterprises report financial and descriptive information about its
reportable operating segments. Operating segments are defined as components
of an enterprise about which separate financial information is available that
is evaluated regularly by the chief operating decision maker in deciding how
to allocate resources and in assessing performance. FAS 131 is effective for
fiscal years beginning after December 15, 1997. The Company is currently
determining the impact of the adoption of FAS 131.
2. DISPOSITIONS AND DISCONTINUED OPERATIONS
On January 3, 1995, the Company and its affiliates completed the sale of
their group life and related non-medical group insurance businesses to
MetLife for $350 million and recognized in the first quarter of 1995 a gain
of $20 million net of taxes. In connection with the sale, the Company ceded
100% of its risks in the group life and related businesses to MetLife on an
indemnity reinsurance basis, effective January 1, 1995. In connection with
the reinsurance transaction, the Company transferred assets with a fair
market value of approximately $1.5 billion to MetLife, equal to the statutory
reserves and other liabilities transferred.
On January 3, 1995, the Company and MetLife and certain of their affiliates,
formed the MetraHealth joint venture by contributing their group medical
businesses to MetraHealth, in exchange for shares of common stock of
MetraHealth. No gain was recognized as a result of this transaction . Upon
formation of the joint venture, the Company owned 42% of the outstanding
capital stock of MetraHealth, TIGI owned 8% and the other 50% was owned by
MetLife and its affiliates. In March 1995, MetraHealth acquired HealthSpring,
Inc. for common stock of MetraHealth resulting in a reduction in the
participation of the Company and TIGI, and MetLife in the MetraHealth venture
to 48.25% each. As the medical insurance business of the Company came due for
renewal, the risks were transferred to MetraHealth and the related operating
results for this medical insurance business were reported by the Company in
1995 as part of discontinued operations.
F-11
<PAGE> 210
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
On October 2, 1995, the Company and its affiliates completed the sale of
their ownership in MetraHealth to United HealthCare Corporation and through
that date had accounted for its interest in MetraHealth on the equity method.
Gross proceeds to the Company in 1995 were $708 million in cash, an after-tax
gain of $111 million was recognized. During 1996 the Company received a
contingency payment based on MetraHealth's 1995 results. In conjunction with
this payment, certain reserves associated with the group medical business and
exit costs related to the discontinued operations were reevaluated resulting
in a final after-tax gain of $26 million.
All of the businesses sold to MetLife or contributed to MetraHealth were
included in the Company's Managed Care and Employee Benefit Operations
(MCEBO) segment prior to 1995. The Company's discontinued operations in 1996
and 1995 reflect the results of the medical insurance business not
transferred, the equity interest in the earnings of MetraHealth through
October 2, 1995 (date of sale) and the gains from sales of these businesses.
Revenues from discontinued operations were insignificant for the year ended
December 31, 1996 and $1.2 billion for the year ended December 31, 1995.
In September 1995, Travelers Group made a pro rata distribution to its
stockholders of shares of Class A Common Stock of Transport Holdings Inc.,
which at the time was a wholly owned subsidiary of Travelers Group and was
the indirect owner of the business of Transport Life. Immediately prior to
this distribution, the Company distributed Transport, an indirect wholly
owned subsidiary of the Company, to TIGI as a return of capital, resulting in
a reduction in additional paid-in capital of $334 million. The results of
Transport through September 1995 are included in income from continuing
operations.
3. COMMERCIAL PAPER AND LINES OF CREDIT
The Company issues commercial paper directly to investors. No commercial
paper was outstanding at December 31, 1997 and $50 million was outstanding at
December 31, 1996. The Company maintains unused credit availability under
bank lines of credit at least equal to the amount of the outstanding
commercial paper. Interest expense related to the commercial paper was not
significant in 1997 or 1996.
Travelers Group, Commercial Credit Company (CCC) (an indirect wholly owned
subsidiary of Travelers Group) and the Company have an agreement with a
syndicate of banks to provide $1.0 billion of revolving credit, to be
allocated to any of Travelers Group, CCC or the Company. The Company's
participation in this agreement is limited to $250 million. The revolving
credit facility consists of a five-year revolving credit facility that
expires in 2001. At December 31, 1997, $50 million was allocated to the
Company. Under this facility the Company is required to maintain certain
minimum equity and risk-based capital levels. At December 31, 1997, the
Company was in compliance with these provisions. There were no amounts
outstanding under this agreement at December 31, 1997 and 1996. If the
Company had borrowings on this facility, the interest rate would be based
upon LIBOR plus a negotiated margin.
F-12
<PAGE> 211
\ THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. REINSURANCE
The Company participates in reinsurance in order to limit losses, minimize
exposure to large risks, provide additional capacity for future growth and to
effect business-sharing arrangements. Reinsurance is accomplished through
various plans of reinsurance, primarily yearly renewable term coinsurance and
modified coinsurance. The Company remains primarily liable as the direct
insurer on all risks reinsured. During 1997, new universal life business was
reinsured under an 80%/20% quota share reinsurance program and new term life
business was reinsured under a 90%/10% quota share reinsurance program.
Maximum retention of $1.5 million is generally reached on policies in excess
of $7.5 million. For other plans of insurance, it is the policy of the
Company to obtain reinsurance for amounts above certain retention limits on
individual life policies, which limits vary with age and underwriting
classification. Generally, the maximum retention on an ordinary life risk is
$1.5 million.
The Company writes workers' compensation business through its Accident
Department. This business is ceded 100% to an affiliate, The Travelers
Indemnity Company.
A summary of reinsurance financial data reflected within the consolidated
statement of operations and retained earnings is presented below ($ in
millions):
<TABLE>
<CAPTION>
---------------------------------------------------------------------
WRITTEN PREMIUMS 1997 1996 1995
---------------------------------------------------------------------
<S> <C> <C> <C>
Direct $2,148 $1,982 $2,166
Assumed from:
Non-affiliated companies 1 5 --
Ceded to:
Affiliated companies (280) (284) (374)
Non-affiliated companies (273) (309) (302)
---------------------------------------------------------------------
Total Net Written Premiums $1,596 $1,394 $1,490
=====================================================================
<CAPTION>
---------------------------------------------------------------------
EARNED PREMIUMS 1997 1996 1995
---------------------------------------------------------------------
<S> <C> <C> <C>
Direct $2,170 $1,897 $2,067
Assumed from:
Non-affiliated companies 1 5 --
Ceded to:
Affiliated companies (321) (219) (283)
Non-affiliated companies (291) (315) (298)
---------------------------------------------------------------------
Total Net Earned Premiums $1,559 $1,368 $1,486
=====================================================================
</TABLE>
F-13
<PAGE> 212
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Reinsurance recoverables at December 31, 1997 and 1996 include amounts
recoverable on unpaid and paid losses and were as follows ($ in millions):
<TABLE>
<CAPTION>
----------------------------------------------------------
REINSURANCE RECOVERABLES 1997 1996
----------------------------------------------------------
<S> <C> <C>
Life and Accident and Health
Business:
Non-affiliated companies $1,362 $1,497
Property-Casualty Business:
Affiliated companies 2,977 2,361
----------------------------------------------------------
Total Reinsurance Recoverables $4,339 $3,858
==========================================================
</TABLE>
Total reinsurance recoverables at December 31, 1997 and 1996 include $697
million and $720 million, respectively, from MetLife in connection with the
sale of the Company's group life and related businesses. See Note 2.
5. SHAREHOLDER'S EQUITY
Additional Paid-In Capital
The increase of $17 million in additional paid-in capital during 1997 is due
to tax benefits related to exercising Travelers Group stock options by the
Company's employees.
Unrealized Investment Gains (Losses)
An analysis of the change in unrealized gains and losses on investments is
shown in Note 13.
Shareholder's Equity and Dividend Availability
The Company's statutory net income, which includes all insurance
subsidiaries, was $754 million, $656 million, and $235 million for the years
ended December 31, 1997, 1996 and 1995, respectively.
The Company's statutory capital and surplus was $4.12 billion and $3.44
billion at December 31, 1997 and 1996, respectively.
The Company is currently subject to various regulatory restrictions that
limit the maximum amount of dividends available to be paid to its parent
without prior approval of insurance regulatory authorities. Statutory surplus
of $551 million is available in 1998 for dividend payments by the Company
without prior approval of the Connecticut Insurance Department. In addition,
under a revolving credit facility, the Company is required to maintain
certain minimum equity and risk based capital levels. The Company is in
compliance with these covenants at December 31, 1997 and 1996.
F-14
<PAGE> 213
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
6. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Derivative Financial Instruments
The Company uses derivative financial instruments, including financial
futures, equity options, forward contracts and interest rate swaps as a means
of hedging exposure to foreign currency, equity price changes and/or interest
rate risk on anticipated transactions or existing assets and liabilities. The
Company does not hold or issue derivative instruments for trading purposes.
These derivative financial instruments have off-balance sheet risk. Financial
instruments with off-balance sheet risk involve, to varying degrees, elements
of credit and market risk in excess of the amount recognized in the balance
sheet. The contract or notional amounts of these instruments reflect the
extent of involvement the Company has in a particular class of financial
instrument. However, the maximum loss of cash flow associated with these
instruments can be less than these amounts. For forward contracts and
interest rate swaps, credit risk is limited to the amounts calculated to be
due the Company on such contracts. Financial futures contracts and purchased
listed option contracts have little credit risk since organized exchanges are
the counterparties.
The Company monitors creditworthiness of counterparties to these financial
instruments by using criteria of acceptable risk that are consistent with
on-balance sheet financial instruments. The controls include credit
approvals, limits and other monitoring procedures.
The Company uses exchange traded financial futures contracts to manage its
exposure to changes in interest rates which arise from the sale of certain
insurance and investment products, or the need to reinvest proceeds from the
sale or maturity of investments. To hedge against adverse changes in interest
rates, the Company enters long or short positions in financial futures
contracts to offset asset price changes resulting from changes in market
interest rates until an investment is purchased or a product is sold.
Margin payments are required to enter a futures contract and contract gains
or losses are settled daily in cash. The contract amount of futures contracts
represents the extent of the Company's involvement, but not future cash
requirements, as open positions are typically closed out prior to the
delivery date of the contract.
At December 31, 1997 and 1996, the Company held financial futures contracts
with notional amounts of $625 million and $169 million, respectively, and a
deferred gain of $.7 million and a deferred loss of $4.1 million and a
deferred gain of $1.2 million, and a deferred loss of $.1 million,
respectively. Total losses of $5.8 million and gains of $2.0 million from
financial futures were deferred at December 31, 1997 and 1996, respectively,
relating to anticipated investment purchases and investment product sales,
and are reported as other liabilities. At December 31, 1997 and 1996, the
Company's futures contracts had no fair value because these contracts were
marked to market and settled in cash daily.
The off-balance sheet risks of equity options, forward contracts, and
interest rate swaps were not significant at December 31, 1997 and 1996.
F-15
<PAGE> 214
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company purchased a 5-year interest rate cap, with a notional amount of
$200 million, from Travelers Group in 1995 to hedge against losses that could
result from increasing interest rates. This instrument, which does not have
off-balance sheet risk, gives the Company the right to receive payments if
interest rates exceed specific levels at specific dates. The premium of $2
million paid for this instrument is being amortized over its life. The
interest rate cap asset is reported at fair value which is $0 and $1 million
at December 31, 1997 and 1996, respectively.
Financial Instruments with Off-Balance Sheet Risk
In the normal course of business, the Company issues fixed and variable rate
loan commitments and has unfunded commitments to partnerships. The
off-balance sheet risk of these financial instruments was not significant at
December 31, 1997 and 1996.
Fair Value of Certain Financial Instruments
The Company uses various financial instruments in the normal course of its
business. Fair values of financial instruments that are considered insurance
contracts are not required to be disclosed and are not included in the
amounts discussed.
At December 31, 1997 and 1996, investments in fixed maturities had a carrying
value and a fair value of $21.5 billion and $19.6 billion, respectively. See
Notes 1 and 13.
At December 31, 1997 and 1996, mortgage loans had a carrying value of $2.9
billion, which approximated fair value. In estimating fair value, the Company
used interest rates reflecting the higher returns required in the current
real estate financing market.
The carrying values of $143 million and $174 million of financial instruments
classified as other assets approximated their fair values at December 31,
1997 and 1996, respectively. The carrying values of $2.0 billion and $850
million of financial instruments classified as other liabilities also
approximated their fair values at December 31, 1997 and 1996, respectively.
Fair value is determined using various methods, including discounted cash
flows, as appropriate for the various financial instruments.
At December 31, 1997, contractholder funds with defined maturities had a
carrying value of $2.3 billion and a fair value of $2.3 billion, compared
with a carrying value of $1.4 billion and a fair value of $1.5 billion at
December 31, 1996. The fair value of these contracts is determined by
discounting expected cash flows at an interest rate commensurate with the
Company's credit risk and the expected timing of cash flows. Contractholder
funds without defined maturities had a carrying value of $9.7 billion and a
fair value of $9.5 billion at December 31, 1997, compared with a carrying
value of $9.1 billion and a fair value of $8.8 billion at December 31, 1996.
These contracts generally are valued at surrender value.
The assets of separate accounts providing a guaranteed return had a carrying
value and a fair value of $260 million and $260 million, respectively, at
December 31, 1997, compared with a carrying value and a fair value of $217
million and $217 million, respectively, at December 31, 1996. The liabilities
of separate accounts providing a guaranteed return had a carrying value and a
fair value of $209 million and $206 million, respectively, at December 31,
1997, compared with a carrying value and a fair value of $208 million and
$204 million, respectively, at December 31, 1996.
F-16
<PAGE> 215
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The carrying values of cash, short-term securities, trading securities,
investment income accrued, trading securities sold not purchased, and
commercial paper approximated their fair values.
The carrying value of policy loans, which have no defined maturities, is
considered to be fair value.
7. COMMITMENTS AND CONTINGENCIES
Financial Instruments with Off-Balance Sheet Risk
See Note 6 for a discussion of financial instruments with off-balance sheet
risk.
Litigation
In March 1997, a purported class action entitled Patterman v. The Travelers,
Inc. was commenced in the Superior Court of Richmond County, Georgia,
alleging, among other things, violations of the Georgia RICO statute and
other state laws by an affiliate of the Company, Primerica Financial
Services, Inc. and certain of its affiliates. Plaintiffs seek unspecified
compensatory and punitive damages and other relief. In April 1997, the
lawsuit was removed to the U.S. District Court for the Southern District of
Georgia, and in October 1997, the lawsuit was remanded to the Superior Court
of Richmond County. Later in October 1997, the defendants answered the
complaint, denied liability and asserted numerous affirmative defenses. In
February 1998, the Superior Court of Richmond County transferred the lawsuit
to the Superior Court of Gwinnett County, Georgia, and certified the transfer
order for immediate appellate review. Also in February 1998, plaintiffs
served an application for appellate review of the transfer order; defendants
subsequently opposed that application; and later in February 1998, the Court
of Appeals of the State of Georgia granted plaintiffs' application for
appellate review. Pending appeal proceedings in the trial court have been
stayed. The Company intends to vigorously contest the litigation.
The Company is also a defendant or co-defendant in various other litigation
matters in the normal course of business. Although there can be no
assurances, as of December 31, 1997, the Company believes, based on
information currently available, that the ultimate resolution of these legal
proceedings would not be likely to have a material adverse effect on its
results of operations, financial condition or liquidity.
8. BENEFIT PLANS
Pension and Other Postretirement Benefits
The Company participates in a qualified, noncontributory defined benefit
pension plan sponsored by an affiliate. In addition, the Company provides
certain other postretirement benefits to retired employees through a plan
sponsored by an affiliate. The Company's share of net expense for the
qualified pension and other postretirement benefit plans was not significant
for 1997, 1996 and 1995. Beginning January 1, 1996, the Company's other
postretirement benefit plans were amended to restrict benefit eligibility to
retirees and certain retiree-eligible employees. Previously, covered
employees could become eligible for postretirement benefits if they reached
retirement age while working for the Company.
F-17
<PAGE> 216
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Through plans sponsored by TIGI, the Company also provides defined
contribution pension plans for certain agents. Company contributions are
primarily a function of production. The expense for these plans was not
significant in 1997, 1996 and 1995.
401(k) Savings Plan
Substantially all of the Company's employees are eligible to participate in a
401(k) savings plan sponsored by Travelers Group. Prior to January 1, 1996,
the Company made matching contributions to the 401(k) savings plan on behalf
of participants in the amount of 50% of the first 5% of pre-tax contributions
made by the employee, plus an additional variable matching contribution based
on the profitability of TIGI and its subsidiaries. During 1996, the Company
made matching contributions in an amount equal to the lesser of 100% of the
pre-tax contributions made by the employee or $1,000. Effective January 1,
1997, the Company discontinued matching contributions for the majority of its
employees. The Company's expenses in connection with the 401(k) savings plan
were not significant in 1997, 1996 and 1995.
9. RELATED PARTY TRANSACTIONS
The principal banking functions, including payment of salaries and expenses,
for certain subsidiaries and affiliates of TIGI are handled by two companies.
The Travelers Insurance Company (Life Department) handles banking functions
for the life and annuity operations of Travelers Life and Annuity and some of
its non-insurance affiliates. The Travelers Indemnity Company handles banking
functions for the property-casualty operations, including most of its
property-casualty insurance and non-insurance affiliates. Settlements between
companies are made at least monthly. The Company provides various employee
benefits coverages to employees of certain subsidiaries of TIGI. The premiums
for these coverages were charged in accordance with cost allocation
procedures based upon salaries or census. In addition, investment advisory
and management services, data processing services and claims processing
services are shared with affiliated companies. Charges for these services are
shared by the companies on cost allocation methods based generally on
estimated usage by department.
The Company maintains a short-term investment pool in which its insurance
affiliates participate. The position of each company participating in the
pool is calculated and adjusted daily. At December 31, 1997 and 1996, the
pool totaled approximately $2.6 billion and $2.9 billion, respectively. The
Company's share of the pool amounted to $725 million and $196 million at
December 31, 1997 and 1996, respectively, and is included in short-term
securities in the consolidated balance sheet.
The Company sells structured settlement annuities to The Travelers Indemnity
Company in connection with the settlement of certain policyholder
obligations. Such deposits were $88 million, $40 million, and $38 million for
1997, 1996 and 1995, respectively.
The Company markets deferred annuity products and life and health insurance
through its affiliate, Salomon Smith Barney. Premiums and deposits related to
these products were $1.0 billion, $820 million, and $583 million in 1997,
1996 and 1995, respectively.
At December 31, 1996, the Company had an investment of $22 million in bonds
of its affiliate, CCC. This was included in fixed maturities in the
consolidated balance sheet.
F-18
<PAGE> 217
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company had an investment of $1.15 billion and $648 million in common
stock of Travelers Group at December 31, 1997 and 1996, respectively. This
investment is carried at fair value.
The Company participates in a stock option plan sponsored by Travelers Group
that provides for the granting of stock options in Travelers Group common
stock to officers and key employees. To further encourage employee stock
ownership, during 1997 Travelers Group introduced the WealthBuilder stock
option program. Under this program all employees meeting certain requirements
have been granted Travelers Group stock options.
The Company applies APB 25 and related interpretations in accounting for
stock options. Since stock options under the Travelers Group plans are issued
at fair market value on the date of award, no compensation cost has been
recognized for these awards. FAS 123 provides an alternative to APB 25
whereby fair values may be ascribed to options using a valuation model and
amortized to compensation cost over the vesting period of the options.
Had the Company applied FAS 123 in accounting for Travelers Group stock
options, net income would have been the pro forma amounts indicated below:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
YEAR ENDING DECEMBER 31, 1997 1996 1995
($ IN MILLIONS)
-----------------------------------------------------------------------
<S> <C> <C> <C>
Net income, as reported $839 $659 $750
-----------------------------------------------------------------------
FAS 123 pro forma adjustments, (9) (3) (1)
after tax
-----------------------------------------------------------------------
Net income, pro forma $830 $656 $749
</TABLE>
The Company has an interest rate cap agreement with Travelers Group. See Note
6.
10. LEASES
Most leasing functions for TIGI and its subsidiaries are administered by TAP.
In 1996, TAP assumed the obligations for several leases. Rent expense related
to all leases are shared by the companies on a cost allocation method based
generally on estimated usage by department. Rent expense was $15 million, $24
million, and $22 million in 1997, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
--------------------------------------------------
YEAR ENDING DECEMBER 31, MINIMUM OPERATING
($ in millions) RENTAL PAYMENTS
--------------------------------------------------
<S> <C>
1998 $ 49
1999 44
2000 43
2001 45
2002 43
Thereafter 337
--------------------------------------------------
Total Rental Payments $561
==================================================
</TABLE>
F-19
<PAGE> 218
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Future sublease rental income of approximately $73 million will partially
offset these commitments. Also, the Company will be reimbursed for 50% of the
rental expense for a particular lease totaling $218 million, by an affiliate.
Minimum future capital lease payments are not significant.
The Company is reimbursed for use of furniture and equipment through cost
sharing agreements by its affiliates.
11. FEDERAL INCOME TAXES
<TABLE>
<CAPTION>
EFFECTIVE TAX RATE
---------------------------------------------------------------------
For The Year Ended December 31, 1997 1996 1995
($ in millions)
---------------------------------------------------------------------
<S> <C> <C> <C>
Income Before Federal Income Taxes $1,283 $ 975 $ 837
Statutory Tax Rate 35% 35% 35%
---------------------------------------------------------------------
Expected Federal Income Taxes 449 341 293
Tax Effect of:
Non-taxable investment income (4) (3) (4)
Other, net (1) 4 1
=====================================================================
Federal Income Taxes $ 444 $ 342 $ 290
=====================================================================
Effective Tax Rate 35% 35% 35%
---------------------------------------------------------------------
COMPOSITION OF FEDERAL INCOME TAXES
Current:
United States $ 410 $ 263 $ 220
Foreign 24 21 13
---------------------------------------------------------------------
Total 434 284 233
---------------------------------------------------------------------
Deferred:
United States 10 57 52
Foreign -- 1 5
---------------------------------------------------------------------
Total 10 58 57
---------------------------------------------------------------------
Federal Income Taxes $ 444 $ 342 $ 290
=====================================================================
</TABLE>
Tax benefits allocated directly to shareholder's equity for the years ended
December 31, 1997, 1996 and 1995 were $17 million, $8 million and $7 million,
respectively.
F-20
<PAGE> 219
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The net deferred tax liabilities at December 31, 1997 and 1996 were comprised
of the tax effects of temporary differences related to the following assets
and liabilities:
<TABLE>
<CAPTION>
($ in millions) 1997 1996
------- -------
<S> <C> <C>
Deferred Tax Assets:
Benefit, reinsurance and other reserves $ 550 $ 510
Contractholder funds 11 32
Operating lease reserves 68 71
Other employee benefits 102 104
Other 139 121
- -----------------------------------------------------------------------------------
Total 870 838
- -----------------------------------------------------------------------------------
Deferred Tax Liabilities:
Deferred acquisition costs and value of 608 571
insurance in force
Investments, net 484 131
Other 87 93
- -----------------------------------------------------------------------------------
Total 1,179 795
- -----------------------------------------------------------------------------------
Net Deferred Tax (Liability) Asset Before Valuation Allowance (309) 43
Valuation Allowance for Deferred Tax Assets (100) (100)
- -----------------------------------------------------------------------------------
Net Deferred Tax Liability After Valuation Allowance $ (409) $ (57)
- -----------------------------------------------------------------------------------
</TABLE>
Starting in 1994 and continuing for at least five years, the Company and its
life insurance subsidiaries will file a consolidated federal income tax
return. Federal income taxes are allocated to each member of the consolidated
group on a separate return basis adjusted for credits and other amounts
required by the consolidation process. Any resulting liability will be paid
currently to the Company. Any credits for losses will be paid by the Company
to the extent that such credits are for tax benefits that have been utilized
in the consolidated federal income tax return.
A net deferred tax asset valuation allowance of $100 million has been
established to reduce the deferred tax asset on investment losses to the
amount that, based upon available evidence, is more likely than not to be
realized. Reversal of the valuation allowance is contingent upon the
recognition of future capital gains in the Company's consolidated life
insurance company federal income tax return through 1998, and if
life/non-life consolidation is elected in 1999, the consolidated federal
income tax return of Travelers Group commencing in 1999, or a change in
circumstances which causes the recognition of the benefits to become more
likely than not. There was no change in the valuation allowance during 1997.
The initial recognition of any benefit produced by the reversal of the
valuation allowance will be recognized by reducing goodwill.
At December 31, 1997, the Company had no ordinary or capital loss
carryforwards.
The policyholders surplus account, which arose under prior tax law, is
generally that portion of the gain from operations that has not been
subjected to tax, plus certain deductions. The balance of this account,
which, under provisions of the Tax Reform Act of 1984, will not increase
after 1983, is estimated to be $932 million. This amount has not been
subjected to current income taxes but, under certain conditions that
management considers to be remote, may become subject to income taxes in
future years. At current rates, the maximum amount of such tax (for which no
provision has been made in the financial statements) would be approximately
$326 million.
F-21
<PAGE> 220
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
12. NET INVESTMENT INCOME
<TABLE>
<CAPTION>
---------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1997 1996 1995
($ in millions)
---------------------------------------------------------------------
<S> <C> <C> <C>
GROSS INVESTMENT INCOME
Fixed maturities $1,460 $1,387 $1,248
Mortgage loans 291 334 419
Policy loans 137 156 166
Real estate held for sale 88 94 111
Other, including trading 150 77 97
securities
---------------------------------------------------------------------
2,126 2,048 2,041
---------------------------------------------------------------------
Investment expenses 89 98 157
---------------------------------------------------------------------
Net investment income $2,037 $1,950 $1,884
---------------------------------------------------------------------
</TABLE>
13. INVESTMENTS AND INVESTMENT GAINS (LOSSES)
Realized investment gains (losses) for the periods were as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1997 1996 1995
($ in millions)
---------------------------------------------------------------------
<S> <C> <C> <C>
REALIZED INVESTMENT GAINS
Fixed maturities $71 $(63) $(43)
Equity securities (9) 47 36
Mortgage loans 59 49 47
Real estate held for sale 67 33 18
Other 11 (1) 48
---------------------------------------------------------------------
Total Realized Investment Gains $199 $65 $106
---------------------------------------------------------------------
</TABLE>
F-22
<PAGE> 221
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Changes in net unrealized investment gains (losses) that are included as a
separate component of shareholder's equity were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1997 1996 1995
($ in millions)
-------------------------------------------------------------------------
<S> <C> <C> <C>
UNREALIZED INVESTMENT GAINS
Fixed maturities $ 446 $ (323) $1,974
Equity securities 25 (35) 46
Other 520 220 200
-------------------------------------------------------------------------
Total Realized Investment Gains 991 (138) 2,220
-------------------------------------------------------------------------
Related taxes 350 (43) 778
-------------------------------------------------------------------------
Change in unrealized investment gains
(losses) 641 (95) 1,442
Balance beginning of year 587 682 (760)
-------------------------------------------------------------------------
Balance End of Year $1,228 $ 587 $ 682
-------------------------------------------------------------------------
</TABLE>
Included in Other are gains of $506 million, $203 million and $214 million
for 1997, 1996 and 1995, respectively, related to appreciation of Travelers
Group stock.
Fixed Maturities
Proceeds from sales of fixed maturities classified as available for sale were
$7.6 billion, $10.2 billion and $6.8 billion in 1997, 1996 and 1995,
respectively. Gross gains of $170 million, $107 million and $80 million and
gross losses of $99 million, $175 million and $124 million in 1997, 1996 and
1995, respectively, were realized on those sales.
Fair values of investments in fixed maturities are based on quoted market
prices or dealer quotes or, if these are not available, discounted expected
cash flows using market rates commensurate with the credit quality and
maturity of the investment. The fair value of investments for which a quoted
market price or dealer quote are not available amounted to $5.1 billion and
$4.6 billion at December 31, 1997 and 1996, respectively.
F-23
<PAGE> 222
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The amortized cost and fair value of investments in fixed maturities were as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
DECEMBER 31, 1997 GROSS GROSS
($ in millions) AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Mortgage-backed securities - CMOs and
pass-through securities $ 3,842 $ 124 $ 2 $ 3,964
U.S. Treasury securities and obligations
of U.S. Government and government
agencies and authorities 1,580 149 1 1,728
Obligations of states, municipalities
and political subdivisions 78 8 -- 86
Debt securities issued by
foreign governments 622 31 4 649
All other corporate bonds 14,548 547 24 15,071
Redeemable preferred stock 12 1 -- 13
- ---------------------------------------------------------------------------------------
Total Available For Sale $20,682 860 31 $21,511
- ---------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------
DECEMBER 31, 1996 GROSS GROSS
($ in millions) AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Mortgage-backed securities - CMOs and
pass-through securities $ 3,821 $ 71 $ 23 $ 3,869
U.S. Treasury securities and obligations
of U.S. Government and government
agencies and authorities 1,329 56 4 1,381
Obligations of states, municipalities and
political subdivisions 89 1 1 89
Debt securities issued by foreign
governments 618 26 3 641
All other corporate bonds 13,421 273 43 13,651
Redeemable preferred stock 6 -- -- 6
- ----------------------------------------------------------------------------------------
Total Available For Sale $19,284 $ 427 $ 74 $19,637
- ----------------------------------------------------------------------------------------
</TABLE>
F-24
<PAGE> 223
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The amortized cost and fair value of fixed maturities at December 31, 1997,
by contractual maturity, are shown below. Actual maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
----------------------------------------------------------
($ in millions) AMORTIZED FAIR
COST VALUE
----------------------------------------------------------
<S> <C> <C>
MATURITY:
Due in one year or less $ 1,184 $ 1,191
Due after 1 year through 5 years 5,200 5,335
Due after 5 years through 10 years 5,332 5,515
Due after 10 years 5,124 5,506
---------------------------------------------------------
16,840 17,547
---------------------------------------------------------
Mortgage-backed securities 3,842 3,964
---------------------------------------------------------
Total Maturity $20,682 $21,511
---------------------------------------------------------
</TABLE>
The Company makes investments in collateralized mortgage obligations (CMOs).
CMOs typically have high credit quality, offer good liquidity, and provide a
significant advantage in yield and total return compared to U.S. Treasury
securities. The Company's investment strategy is to purchase CMO tranches
which are protected against prepayment risk, including planned amortization
class (PAC) tranches. Prepayment protected tranches are preferred because
they provide stable cash flows in a variety of interest rate scenarios. The
Company does invest in other types of CMO tranches if a careful assessment
indicates a favorable risk/return tradeoff. The Company does not purchase
residual interests in CMOs.
At December 31, 1997 and 1996, the Company held CMOs classified as available
for sale with a fair value of $2.1 billion and $2.0 billion, respectively.
Approximately 72% and 88%, respectively, of the Company's CMO holdings are
fully collateralized by GNMA, FNMA or FHLMC securities at December 31, 1997
and 1996. In addition, the Company held $1.9 billion and $1.9 billion of
GNMA, FNMA or FHLMC mortgage-backed pass-through securities at December 31,
1997 and 1996, respectively. Virtually all of these securities are rated AAA.
F-25
<PAGE> 224
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Equity Securities
The cost and fair values of investments in equity securities were as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
EQUITY SECURITIES:
GROSS GROSS
($ in millions) UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Common stocks $179 $ 34 $ 11 $202
Non-redeemable preferred stocks 301 13 4 310
-----------------------------------------------------------------------------
Total Equity Securities $480 $ 47 $ 15 $512
-----------------------------------------------------------------------------
DECEMBER 31, 1996
Common stocks $212 $ 39 $ 30 $221
Non-redeemable preferred stocks 118 2 3 117
-----------------------------------------------------------------------------
Total Equity Securities $330 $ 41 $ 33 $338
-----------------------------------------------------------------------------
</TABLE>
Proceeds from sales of equity securities were $341 million, $487 million and
$379 million in 1997, 1996 and 1995, respectively. Gross gains of $53
million, $64 million and $27 million and gross losses of $62 million, $11
million and $2 million in 1997, 1996 and 1995, respectively, were realized on
those sales.
Mortgage Loans and Real Estate Held For Sale
Underperforming assets include delinquent mortgage loans, loans in the
process of foreclosure, foreclosed loans and loans modified at interest rates
below market.
At December 31, 1997 and 1996, the Company's mortgage loan and real estate
held for sale portfolios consisted of the following ($ in millions):
<TABLE>
<CAPTION>
----------------------------------------------------------
1997 1996
----------------------------------------------------------
<S> <C> <C>
Current Mortgage Loans $2,866 $2,869
Underperforming Mortgage Loans 3 51
----------------------------------------------------------
Total 2,869 2,920
----------------------------------------------------------
Real Estate Held For Sale 134 297
----------------------------------------------------------
Total $3,003 $3,217
----------------------------------------------------------
</TABLE>
F-26
<PAGE> 225
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Aggregate annual maturities on mortgage loans at December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
------------------------------------------------
YEAR ENDING DECEMBER 31,
($ in millions)
------------------------------------------------
<S> <C>
Past Maturity $ 54
1998 243
1999 252
2000 321
2001 393
2002 121
Thereafter 1,485
------------------------------------------------
Total $2,869
================================================
</TABLE>
Joint Venture
In October 1997, the Company and Tishman Speyer Properties (Tishman), a
worldwide real estate owner, developer and manager, formed a joint real
estate venture with an initial equity commitment of $792 million. The Company
and certain of its affiliates committed $420 million in real estate equity
and $100 million in cash while Tishman committed $272 million in properties
and cash. Both companies are serving as asset managers for the venture and
Tishman is primarily responsible for the venture's real estate acquisition
and development efforts.
Trading Securities
Trading securities are held in a special purpose subsidiary, Tribeca
Investments LLC.
<TABLE>
<CAPTION>
-----------------------------------------------------
TRADING SECURITIES OWNED 1997
<S> <C>
Merger arbitrage $352
Convertible bond arbitrage 370
Other 78
-----------------------------------------------------
Total $800
-----------------------------------------------------
TRADING SECURITIES SOLD NOT YET PURCHASED
Merger arbitrage $213
Convertible bond arbitrage 249
-----------------------------------------------------
Total $462
-----------------------------------------------------
</TABLE>
The Company's trading portfolio investments and related liabilities are
normally held for periods less than six months. Therefore, expected future
cash flows for these assets and liabilities are expected to be realized in
less than one year.
F-27
<PAGE> 226
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Concentrations
At December 31, 1997 and 1996, the Company had no concentration of credit
risk in a single investee exceeding 10% of consolidated shareholder's equity.
The Company participates in a short-term investment pool maintained by an
affiliate. See Note 9.
Included in fixed maturities are below investment grade assets totaling $1.4
billion and $1.1 billion at December 31, 1997 and 1996, respectively. The
Company defines its below investment grade assets as those securities rated
"Ba1" or below by external rating agencies, or the equivalent by internal
analysts when a public rating does not exist. Such assets include publicly
traded below investment grade bonds and certain other privately issued bonds
that are classified as below investment grade loans.
The Company had concentrations of investments, primarily fixed maturities, in
the following industries:
<TABLE>
<CAPTION>
-------------------------------------------------
($ in millions) 1997 1996
-------------------------------------------------
<S> <C> <C>
Banking $2,215 $1,959
Finance 1,556 1,823
Electric Utilities 1,377 1,093
Asset-Backed Credit Cards 778 688
-------------------------------------------------
</TABLE>
Below investment grade assets included in the preceding table were not
significant.
At December 31, 1997 and 1996, concentrations of mortgage loans were for
properties located in highly populated areas in the states listed below:
<TABLE>
<CAPTION>
-------------------------------------------------
($ in millions) 1997 1996
-------------------------------------------------
<S> <C> <C>
California $794 $643
New York 310 297
-------------------------------------------------
</TABLE>
Other mortgage loan investments are relatively evenly dispersed throughout
the United States, with no holdings in any state exceeding $284 million and
$258 million at December 31, 1997 and 1996, respectively.
Concentrations of mortgage loans by property type at December 31, 1997 and
1996 were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------
($ in millions) 1997 1996
-------------------------------------------------
<S> <C> <C>
Office $1,382 $1,208
Agricultural 771 693
Apartment 204 291
Hotel 201 217
-------------------------------------------------
</TABLE>
F-28
<PAGE> 227
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company monitors creditworthiness of counterparties to all financial
instruments by using controls that include credit approvals, limits and other
monitoring procedures. Collateral for fixed maturities often includes pledges
of assets, including stock and other assets, guarantees and letters of
credit. The Company's underwriting standards with respect to new mortgage
loans generally require loan to value ratios of 75% or less at the time of
mortgage origination.
Non-Income Producing Investments
Investments included in the consolidated balance sheets that were non-income
producing for the preceding 12 months were insignificant.
Restructured Investments
The Company had mortgage loans and debt securities that were restructured at
below market terms totaling approximately $7 million and $18 million at
December 31, 1997 and 1996, respectively. The new terms typically defer a
portion of contract interest payments to varying future periods. The accrual
of interest is suspended on all restructured assets, and interest income is
reported only as payment is received. Gross interest income on restructured
assets that would have been recorded in accordance with the original terms of
such loans amounted to $.9 million in 1997 and $5 million in 1996. Interest
on these assets, included in net investment income, aggregated $.2 million
and $2 million in 1997 and 1996, respectively.
14. DEPOSIT FUNDS AND RESERVES
At December 31, 1997, the Company had $24.0 billion of life and annuity
deposit funds and reserves. Of that total, $13.0 billion is not subject to
discretionary withdrawal based on contract terms. The remaining $11.0 billion
is for life and annuity products that are subject to discretionary withdrawal
by the contractholder. Included in the amount that is subject to
discretionary withdrawal is $2.0 billion of liabilities that are
surrenderable with market value adjustments. Also included are an additional
$5.2 billion of the life insurance and individual annuity liabilities which
are subject to discretionary withdrawals, and have an average surrender
charge of 4.8%. In the payout phase, these funds are credited at
significantly reduced interest rates. The remaining $3.8 billion of
liabilities are surrenderable without charge. More than 16.8% of these relate
to individual life products. These risks would have to be underwritten again
if transferred to another carrier, which is considered a significant
deterrent against withdrawal by long-term policyholders. Insurance
liabilities that are surrendered or withdrawn are reduced by outstanding
policy loans and related accrued interest prior to payout.
F-29
<PAGE> 228
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
15. RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
The following table reconciles net income to net cash provided by operating
activities:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1997 1996 1995
($ in millions)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income From Continuing Operations $ 839 $ 633 $ 547
Adjustments to reconcile net income to
net cash provided by operating activities:
Realized gains (199) (65) (106)
Deferred federal income taxes 10 58 57
Amortization of deferred policy
acquisition costs and value of
insurance in force 293 281 290
Additions to deferred policy
acquisition costs (471) (350) (454)
Investment income accrued 14 2 (9)
Premium balances receivable 3 (6) (8)
Insurance reserves and accrued expenses 131 (1) 291
Other 206 255 62
- --------------------------------------------------------------------------------
Net cash provided by operating activities 826 807 670
Net cash used in discontinued operations -- (350) (596)
Net cash provided by operations $ 826 $ 457 $ 74
- --------------------------------------------------------------------------------
</TABLE>
16. NON-CASH INVESTING AND FINANCING ACTIVITIES
Significant noncash investing and financing activities include: a) the
conversion of $119 million of real estate held for sale to other invested
assets as a joint venture in 1997; b) the 1995 transfer of assets with a fair
market value of approximately $1.5 billion and statutory reserves and other
liabilities of approximately $1.5 billion to MetLife (see Note 2); c) the
1995 return of capital of Transport to TIGI (see Note 2); d) the acquisition
of real estate through foreclosures of mortgage loans amounting to $10
million, $117 million and $97 million in 1997, 1996 and 1995, respectively;
e) the acceptance of purchase money mortgages for sales of real estate
aggregating $4 million, $23 million and $27 million in 1997, 1996 and 1995,
respectively.
F-30
<PAGE> 229
THETRAVELERS
THE TRAVELERS
VARIABLE ANNUITIES
INDIVIDUAL AND GROUP VARIABLE ANNUITY CONTRACTS
Issued By
THE TRAVELERS INSURANCE COMPANY
PENSION AND PROFIT-SHARING,
SECTION 403(b) AND SECTION 408, AND
DEFERRED COMPENSATION PROGRAMS
L-11165S TIC Ed. 5-98
Printed in U.S.A.
31
<PAGE> 230
PART C
OTHER INFORMATION
Item 28. Financial Statements and Exhibits
(a) The financial statements of the Registrant, as well as of The Travelers
Growth and Income Stock Account for Variable Annuities, The Travelers
Money Market Account for Variable Annuities, The Travelers Timed Growth
and Income Stock Account for Variable Annuities, The Travelers Timed
Short-Term Bond Account for Variable Annuities, The Travelers Timed
Aggressive Stock Account for Variable Annuities, The Travelers Timed Bond
Account for Variable Annuities and The Travelers Fund U for Variable
Annuities, and the Reports of Independent Accountants thereto, are in the
Annual Reports for the respective Accounts and are incorporated into the
Statement of Additional Information by reference. For each of the
Accounts, these financial statements include as applicable:
Statement of Assets and Liabilities as of December 31, 1997
(except The Travelers Timed Bond Account for Variable
Annuities which was timed out as of December 31, 1997)
Statement of Operations for the year ended December 31, 1997
Statement of Changes in Net Assets for the years ended December
31, 1997 and 1996
Statement of Investments as of December 31, 1997 (except The
Travelers Timed Bond Account for Variable Annuities which was
timed out as of December 31, 1997)
Notes to Financial Statements
The consolidated financial statements of The Travelers Insurance Company
and Subsidiaries and the report of Independent Auditors are contained in
the Statement of Additional Information. The consolidated financial
statements of The Travelers Insurance Company and Subsidiaries include:
Consolidated Statements of Income and Retained Earnings for the
years ended December 31, 1997, 1996 and 1995
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
(b) Exhibits
1. Resolution of The Travelers Insurance Company's Board of Directors
authorizing the establishment of the Registrant. (Incorporated herein
by reference to Exhibit 1 to Post-Effective Amendment No. 42 to the
Registration Statement on Form N-3, filed on April 22, 1996.)
2. Rules and Regulations of the Registrant. (Incorporated herein by
reference to Exhibit 2 to Post-Effective Amendment No. 42 to the
Registration Statement on Form N-3, filed on April 22, 1996.)
3. Custody Agreement between the Registrant and Chase Manhattan Bank, N.
A., Brooklyn, New York. (Incorporated herein by reference to Exhibit
3 to Post-Effective Amendment No. 41 to the Registration Statement on
Form N-3, filed April 26, 1995.)
4. Investment Advisory Agreement between the Registrant and Travelers
Asset Management International Corporation. (Incorporated herein by
reference to Exhibit 4 to Post-Effective Amendment No. 42 to the
Registration Statement on Form N-3, filed on April 22, 1996.)
<PAGE> 231
5(a). Distribution and Management Agreement between the Registrant, The
Travelers Insurance Company and Travelers Equities Sales, Inc. (now
known as Tower Square Securities, Inc.) (Incorporated herein by
reference to Exhibit 5 to Post-Effective Amendment No. 41 to the
Registration Statement on Form N-3, filed April 26, 1995.)
5(b). Selling Agreement. (Incorporated herein by reference to Exhibit 3(b)
to Post-Effective Amendment No. 29 to the Registration Statement on
Form N-4 , File No. 2-79529, filed on April 19, 1996.)
6. Example of Variable Annuity Contract (Incorporated herein by
reference to Exhibit 4 to Post-Effective Amendment No. 29 to the
Registration Statement on Form N-4 , File No. 2-79529, filed on April
19, 1996.)
7. Example of Application. (Incorporated herein by reference to Exhibit
7 to Post-Effective Amendment No. 29 to the Registration Statement on
Form N-4, File No. 2-79529, filed on April 19, 1996.)
8(a). Charter of The Travelers Insurance Company, as amended on October 19,
1994. (Incorporated herein by reference to Exhibit 3(a)(i) to the
Registration Statement on Form S-2, File No. 33-58677, filed via EDGAR
on April 18, 1995.)
8(b). By-Laws of The Travelers Insurance Company, as amended on October 20,
1994. (Incorporated herein by reference to Exhibit 3(b)(i) to the
Registration Statement on Form S-2, File No. 33-58677, filed via EDGAR
on April 18, 1995.)
12. Opinion of Counsel as to the legality of the securities being
registered. (Incorporated herein by reference to Exhibit 12 to
Post-Effective Amendment No. 44 to the Registration Statement on Form
N-3 filed April 30, 1997.)
13(a). Consent of Coopers & Lybrand L.L.P., Independent Accountants.
13(b). Consent of KPMG Peat Marwick LLP, Independent Certified Public
Accountants.
16. Schedule for Computation of Total Return Calculations - Standardized
and Non-Standardized. (Incorporated herein by reference to Exhibit 16
to Post-Effective Amendment No. 44 to the Registration Statement on
Form N-4, filed April 30, 1998.)
18(a) Powers of Attorney authorizing Ernest J. Wright or Kathleen A. McGah
as signatory for Heath B. McLendon, Knight Edwards, Robert E. McGill
III, Lewis Mandell and Frances M. Hawk. (Incorporated herein by
reference to Exhibit 18(a) to Post-Effective Amendment No. 42 to the
Registration Statement on Form N-3, filed on April 22, 1996.)
18(b). Powers of Attorney authorizing Ernest J. Wright or Kathleen A. McGah
as signatory for Michael A. Carpenter, Jay S. Benet, George C.
Kokulis, Ian R. Stuart and Katherine M. Sullivan. (Incorporated
herein by reference to Exhibit 18(b) to Post-Effective Amendment No.
43 to the Registration Statement on Form N-3 filed on February 20,
1997.)
<PAGE> 232
18(c). Powers of Attorney authorizing Jay S. Fishman or Ernest J. Wright as
signatory for Robert I. Lipp, Charles O. Prince, III, Marc P. Weill,
Irwin R. Ettinger and Donald T. DeCarlo. (Incorporated herein by
reference to Exhibit 18(c) to Post-Effective Amendment No. 41 to the
Registration Statement on Form N-3, filed April 26, 1995.)
27. Financial Data Schedule.
Item 29. Directors and Officers of The Travelers Insurance Company
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address with Insurance Company with Registrant
- -------------------------- ---------------------- ------------------------
<S> <C> <C>
Michael A. Carpenter* Director, Chairman of the Board ----
President and Chief Executive Officer
Jay S. Benet* Director and Senior Vice President ----
George C. Kokulis* Director and Senior Vice President ----
Robert I. Lipp* Director ----
Ian R. Stuart* Director, Senior Vice President, Principal Accounting
Chief Financial Officer, Chief Officer
Accounting Officer and Controller
Katherine M. Sullivan* Director and Senior Vice President ----
and General Counsel
Marc P. Weill** Director and Senior Vice President ----
Stuart Baritz** Senior Vice President ----
Jay S. Fishman* Senior Vice President ----
Elizabeth C. Georgakopoulos* Senior Vice President ----
Barry Jacobson* Senior Vice President ----
Russell H. Johnson* Senior Vice President ----
Warren H. May* Senior Vice President ----
Christine M. Modie* Senior Vice President ----
David A. Tyson* Senior Vice President ----
F. Denney Voss* Senior Vice President ----
Paula Burton* Vice President ----
Virginia M. Meany* Vice President ----
Selig Ehrlich* Vice President and Actuary ----
Donald R. Munson, Jr.* Second Vice President ----
Ernest J. Wright* Vice President and Secretary Secretary to the
Board of Managers
Kathleen A. McGah* Assistant Secretary and Counsel Assistant Secretary to
the Board of Managers
David A. Golino* Second Vice President Principal Accounting
Officer
Principal Business Address:
* The Travelers Insurance Company ** Travelers Group Inc.
One Tower Square 388 Greenwich Street
Hartford, CT 06183 New York, N.Y. 10013
</TABLE>
<PAGE> 233
Item 30. Person Controlled by or Under Common Control with the Depositor or
Registrant
Incorporated herein by reference to Item 26 to Post-Effective Amendment No. 5
to the Registration Statement on Form N-4, File No. 33-73466, filed April 10,
1998.
Item 31. Number of Contract Owners
As of March 1, 1998, 12,742 contract owners held qualified and non-qualified
contracts offered by the Registrant.
Item 32. Indemnification
Pursuant to the provisions of Article VI of the Rules and Regulations of the
Registrant, indemnification is provided to members of the Board of Managers,
officers and employees of the fund in accordance with the standards established
by Section 33-770 of the Connecticut General Statutes ("C.G.S.") to
indemnification under the Connecticut Stock Corporation Act.
Section 33-770 of the Connecticut General Statutes regarding indemnification of
directors and officers of Connecticut corporations provides in general that
Connecticut corporations shall indemnify their officers, directors and certain
other defined individuals against judgments, fines, penalties, amounts paid in
settlement and reasonable expenses actually incurred in connection with
proceedings against the corporation. The corporation's obligation to provide
such indemnification generally does not apply unless (1) the individual is
successful on the merits in the defense of any such proceeding; or (2) a
determination is made (by persons specified in the statute) that the individual
acted in good faith and in the best interests of the corporation; or (3) the
court, upon application by the individual, determines in view of all of the
circumstances that such person is fairly and reasonably entitled to be
indemnified, and then for such amount as the court shall determine. With
respect to proceedings brought by or in the right of the corporation, the
statute provides that the corporation shall indemnify its officers, directors
and certain other defined individuals, against reasonable expenses actually
incurred by them in connection with such proceedings, subject to certain
limitations.
C.G.S. Section 33-770 provides an exclusive remedy; a Connecticut corporation
cannot indemnify a director or officer to an extent either greater or less than
that authorized by the statute, e.g., pursuant to its certificate of
incorporation, by-laws, or any separate contractual arrangement. However, the
statute does specifically authorize a corporation to procure indemnification
insurance to provide greater indemnification rights. The premiums for such
insurance may be shared with the insured individuals on an agreed basis.
Travelers Group Inc. also provides liability insurance for its directors and
officers and the directors and officers of its subsidiaries, including the
Registrant. This insurance provides for coverage against loss from claims made
against directors and officers in their capacity as such, including, subject to
certain exceptions, liabilities under the Federal securities laws.
Rule 484 Undertaking
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liability (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
<PAGE> 234
Item 33. Business and Other Connections of Investment Adviser
Officers and Directors of Travelers Asset Management International Corporation
(TAMIC), the Fund's Investment Adviser, are set forth in the following table:
<TABLE>
<CAPTION>
Name Position with TAMIC Other Business
- ---- ------------------- --------------
<S> <C> <C>
Marc P. Weill Director and Chairman Senior Vice President **
David A. Tyson Director, President and Senior Vice President *
Chief Investment Officer
Joseph E. Rueli, Jr. Director, Senior Vice President Vice President*
and Chief Financial Officer
F. Denney Voss Director and Senior Senior Vice President*
Vice President
John R. Britt Director and Secretary Assistant Secretary *
Harvey Eisen Senior Vice President Senior Vice President**
Joseph M. Mullally Senior Vice President Vice President*
David Amaral Vice President Assistant Director*
John R. Calcagni Vice President Second Vice President*
Gene Collins Vice President Vice President*
John Green Vice President Second Vice President*
Thomas Hajdukiewicz Vice President Vice President*
Edward Hinchliffe III Vice President and Cashier Second Vice President & Cashier
Richard John Vice President Vice President*
Kathryn D. Karlic Vice President Vice President*
David R. Miller Vice President Vice President*
Emil J. Molinaro Vice President Vice President*
Andrew Sanford Vice President Investment Officer*
Charles Silverstein Vice President Second Vice President*
Robert Simmons Vice President Assistant Investment Officer*
Jordan M. Stitzer Vice President Vice President*
Joel Strauch Vice President Vice President**
William H. White Treasurer Vice President and Treasurer *
Charles B. Chamberlain Assistant Treasurer Assistant Treasurer *
George M. Quaggin, Jr. Assistant Treasurer Assistant Treasurer *
Marla A. Berman Assistant Secretary Assistant Secretary**
Andrew Feldman Assistant Secretary Senior Counsel**
Millie Kim Assistant Secretary Senior Counsel**
Patricia A. Uzzel Compliance Officer Assistant Director*
Frank J. Fazzina Controller Director *
</TABLE>
* Positions are held with The Travelers Insurance Company, One Tower
Square, Hartford, Connecticut 06183.
** Positions are held with Travelers Group Inc., 388 Greenwich Street, New
York, N.Y. 10013.
<PAGE> 235
Item 34. Principal Underwriter
(a) Tower Square Securities, Inc.
One Tower Square
Hartford, Connecticut 06183
Tower Square Securities, Inc. also serves as principal underwriter for the
following :
The Travelers Growth and Income Stock Account for Variable Annuities
The Travelers Money Market Account for Variable Annuities
The Travelers Timed Growth and Income Stock Account for Variable
Annuities
The Travelers Timed Short-Term Bond Account for Variable Annuities
The Travelers Timed Aggressive Stock Account for Variable Annuities
The Travelers Timed Bond Account for Variable Annuities
The Travelers Fund U for Variable Annuities
The Travelers Fund VA for Variable Annuities
The Travelers Fund BD for Variable Annuities
The Travelers Fund BD II for Variable Annuities
The Travelers Fund BD III for Variable Annuities
The Travelers Fund BD IV for Variable Annuities
The Travelers Fund ABD for Variable Annuities
The Travelers Fund ABD II for Variable Annuities
The Travelers Fund UL for Variable Life Insurance
The Travelers Fund UL II for Variable Life Insurance
The Travelers Variable Life Insurance Separate Account One
The Travelers Variable Life Insurance Separate Account Three
The Travelers Variable Life Insurance Separate Account Two
The Travelers Variable Life Insurance Separate Account Four
The Travelers Separate Account QP for Variable Annuities
The Travelers Separate Account PF II for Variable Annuities
The Travelers Separate Account PF II for Variable Annuities
<TABLE>
<CAPTION>
(b) Name and Principal Positions and Offices Positions and Offices
Business Address * With Underwriter With Registrant
------------------ ---------------------------- ---------------------
<S> <C> <C>
Russell H. Johnson Chairman of the Board -----
Chief Executive Officer, President -----
and Chief Operating Officer
William F. Scully, III Member, Board of Directors, -----
Senior Vice President, Treasurer
and Chief Financial Officer
Cynthia P. Macdonald Vice President, Chief Compliance -----
Officer, and Assistant Secretary
Joanne K. Russo Member, Board of Directors -----
Senior Vice President
William D. Wilcox General Counsel and Secretary -----
Kathleen A. McGah Assistant and Secretary Assistant Secretary
Jay S. Benet Member, Board of Directors -----
George C. Kokulis Member, Board of Directors -----
Warren H. May Member, Board of Directors -----
Donald R. Munson, Jr. Senior Vice President -----
</TABLE>
<PAGE> 236
<TABLE>
<CAPTION>
(b) Name and Principal Positions and Offices Positions and Offices
Business Address * With Underwriter With Registrant
------------------ ---------------------------- ---------------------
<S> <C> <C>
Stuart L. Baritz Vice President -----
Michael P. Kiley Vice President -----
Tracey Kiff-Judson Vice President -----
Robin A. Jones Second Vice President -----
Whitney F. Burr Second Vice President -----
Marlene M. Ibsen Second Vice President -----
John J. Williams, Jr. Director and Assistant Compliance -----
Officer
Susan M. Curcio Director and Operations Manager -----
Dennis D. D'Angelo Director -----
Thomas P. Tooley Director -----
Nancy S. Waldrop Assistant Treasurer -----
</TABLE>
* Principal business address: One Tower Square, Hartford,
Connecticut 06183
(c) Not applicable.
Item 35. Location of Accounts and Records
(1) The Travelers Insurance Company
One Tower Square
Hartford, Connecticut 06183
(2) Chase Manhattan Bank, N. A.
Chase MetroTech Center
Brooklyn, New York 11245
Item 36. Management Services
Inapplicable.
<PAGE> 237
Item 37. Undertakings
The undersigned Registrant hereby undertakes:
(a) To file a post-effective amendment to this registration statement as
frequently as is necessary to ensure that the audited financial
statements in the registration statement are never more than sixteen
months old for so long as payments under the variable annuity
contracts may be accepted;
(b) To include either (1) as part of any application to purchase a
contract offered by the prospectus, a space that an applicant can
check to request a Statement of Additional Information, or (2) a post
card or similar written communication affixed to or included in the
prospectus that the applicant can remove to send for a Statement of
Additional Information; and
(c) To deliver any Statement of Additional Information and any financial
statements required to be made available under this Form N-3 promptly
upon written or oral request.
The Company hereby represents:
(a) That the aggregate charges under the Contracts of the Registrant
described herein are reasonable in relation to the services rendered,
the expenses expected to be incurred, and the risks assumed by the
Company.
<PAGE> 238
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant certifies that it meets the requirements of Securities Act
Rule 485(a) for effectiveness of this post-effective amendment to this
registration statement and has caused this amendment to this registration
statement to be signed on its behalf, in the City of Hartford, State of
Connecticut, on the 17th day of April , 1998.
THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES
(Registrant)
By: *HEATH B. McLENDON
---------------------------------
Heath B. McLendon
Chairman of the Board of Managers
As required by the Securities Act of 1933, this post-effective amendment to
this registration statement has been signed by the following persons in the
capacities indicated on April 17, 1998.
*HEATH B. McLENDON Chairman, Board of Managers
- -------------------------
(Heath B. McLendon)
*KNIGHT EDWARDS Member, Board of Managers
- -------------------------
(Knight Edwards)
*ROBERT E. McGILL, III Member, Board of Managers
- -------------------------
(Robert E. McGill, III)
*LEWIS MANDELL Member, Board of Managers
- -------------------------
(Lewis Mandell)
*FRANCES M. HAWK Member, Board of Managers
- -------------------------
(Frances M. Hawk)
*By: Ernest J. Wright, Attorney-in-Fact
Secretary, Board of Managers
<PAGE> 239
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant certifies that it meets the requirements of Securities Act
Rule 485(a) for effectiveness of this post-effective amendment to this
registration statement and has caused this amendment to this registration
statement to be signed on its behalf, in the City of Hartford, State of
Connecticut, on the 17th day of April , 1998.
THE TRAVELERS INSURANCE COMPANY
(Insurance Company)
By: *IAN R. STUART
-----------------------------------------------
Ian R. Stuart
Senior Vice President, Chief Financial Officer,
Chief Accounting Officer and Controller
As required by the Securities Act of 1933, this post-effective amendment to
this Registration Statement has been signed by the following persons in the
capacities indicated on April 17, 1998.
*MICHAEL A. CARPENTER Director, Chairman of the Board, President
- ------------------------- and Chief Executive Officer
(Michael A. Carpenter)
*JAY S. BENET Director
- -------------------------
(Jay S. Benet)
*GEORGE C. KOKULIS Director
- -------------------------
(George C. Kokulis
*ROBERT I. LIPP Director
- -------------------------
(Robert I. Lipp)
*IAN R. STUART Director, Senior Vice President, Chief
- ------------------------- Financial Officer, Chief Accounting Officer
(Ian R. Stuart) and Controller
*KATHERINE M. SULLIVAN Director, Senior Vice President and
- ------------------------- General Counsel
(Katherine M. Sullivan)
*MARC P. WEILL Director
- -------------------------
(Marc P. Weill)
*By: Ernest J. Wright, Attorney-in-Fact
<PAGE> 240
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
1. Resolution of The Travelers Insurance Company's Board of
Directors authorizing the establishment of the Registrant.
(Incorporated herein by reference to Exhibit 1 to Post-Effective
Amendment No. 42 to the Registration Statement on Form N-3,
filed on April 22, 1996.
2. Rules and Regulations of the Registrant. (Incorporated herein by
reference to Exhibit 2 to Post-Effective Amendment No. 42 to the
Registration Statement on Form N-3, filed on April 22, 1996.)
3. Custody Agreement between the Registrant and Chase Manhattan
Bank, N.A., Brooklyn, New York. (Incorporated herein by reference
to Exhibit 3 to Post-Effective Amendment No. 41 to the Registration
Statement on Form N-3, filed on April 26, 1995.)
4. Investment Advisory Agreement between the Registrant and
Travelers Asset Management International Corporation.
(Incorporated herein by reference to Exhibit 4 to Post-Effective
Amendment No. 42 to the Registration Statement on Form N-3,
filed on April 22, 1996.)
5(a). Distribution and Management Agreement between the Registrant,
The Travelers Insurance Company and Travelers Equities Sales, Inc.
(now known as Tower Square Securities, Inc.) (Incorporated herein
by reference to Exhibit 5 to Post-Effective Amendment No. 41 to the
Registration Statement on Form N-3, filed on April 26, 1995.)
5(b). Selling Agreement. (Incorporated herein by reference to Exhibit 3(b)
to Post-Effective Amendment No. 29 to the Registration Statement
on Form N-4 , File No. 2-79529, filed on April 19, 1996.)
6. Example of Variable Annuity Contract. (Incorporated herein by
reference to Exhibit 4 to Post-Effective Amendment No. 29 to the
Registration Statement on Form N-4, File No. 2-79529 filed on
April 19, 1996.)
7. Example of Application. (Incorporated herein by reference to
Exhibit 7 to Post-Effective Amendment No. 29 to the Registration
Statement on Form N-4, File No. 2-79529, filed on April 19, 1996.)
</TABLE>
<PAGE> 241
<TABLE>
<S> <C> <C>
8(a). Charter of The Travelers Insurance Company, as amended on
October 19, 1994. (Incorporated herein by reference to Exhibit 3(a)(i)
to the Registration Statement filed on Form S-2, File No. 33-58677,
filed via Edgar on April 18, 1995.)
8(b). By-Laws of The Travelers Insurance Company, as amended on
October 20, 1994. (Incorporated herein by reference to Exhibit 3(b)(ii)
to the Registration Statement filed on Form S-2., File No. 33-58677,
filed via Edgar on April 18, 1995.)
12. Opinion of Counsel as to the legality of the securities being registered.
(Incorporated herein by reference to Exhibit 12 to Post-Effective
Amendment No. 44 to the Registration Statement on Form N-3
filed April 30, 1997.)
13(a). Consent of Coopers & Lybrand L.L.P., Independent Accountants. Electronically
13(b). Consent of KPMG Peat Marwick LLP, Independent Certified Electronically
Public Accountants.
16. Schedule for Computation of Total Return Calculations -
Standardized and Non-Standardized. (Incorporated herein by
reference to Exhibit 16 to Post-Effective Amendment No. 44 to
the Registration Statement on Form N-4 filed April 30, 1997.)
18(a). Powers of Attorney authorizing Ernest J. Wright or Kathleen A.
McGah as signatory for Heath B. McLendon, Knight Edwards,
Robert E. McGill III, Lewis Mandell and Frances M. Hawk.
(Incorporated herein by reference to Exhibit 18(a) to Post-Effective
Amendment No. 42 to the Registration Statement on Form N-3,
filed on April 22, 1996.)
18(b). Powers of Attorney authorizing Ernest J. Wright or Kathleen A.
McGah as signatory for Michael A. Carpenter, Jay S. Benet,
George C. Kokulis, Ian R. Stuart and Katherine M. Sullivan.
(Incorporated herein by reference to Exhibit 18(b) to Post-Effective
Amendment No. 43 to the Registration Statement on Form N-3
filed on February 20, 1997.)
18(c). Powers of Attorney authorizing Jay S. Fishman or Ernest J. Wright
as signatory for Robert I. Lipp, Charles O. Prince, Marc P. Weill,
Irwin R. Ettinger and Donald T. DeCarlo. (Incorporated herein by
reference to Exhibit 18(c) to Post-Effective Amendment No. 41 to
the Registration Statement, filed April 26, 1995.)
27. Financial Data Schedule. Electronically
</TABLE>
<PAGE> 1
EXHIBIT 13(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this post-effective amendment
No. 45 to the registration statement of The Travelers Quality Bond Account for
Variable Annuities on Form N-3 (File Nos. 2-53757; 811-2571) of our reports
dated February 19, 1998, on our audits of the financial statements of The
Travelers Growth and Income Stock Account for Variable Annuities, The Travelers
Quality Bond Account for Variable Annuities, The Travelers Money Market Account
for Variable Annuities, The Travelers Timed Growth and Income Stock Account for
Variable Annuities, The Travelers Timed Short-Term Bond Account for Variable
Annuities, The Travelers Timed Aggressive Stock Account for Variable Annuities,
The Travelers Timed Bond Account for Variable Annuities and The Travelers Fund
U for Variable Annuities, which reports are included in each applicable Annual
Report for the year ended December 31, 1997 which are incorporated by reference
in this post-effective amendment to the registration statement. We also
consent to the reference to our Firm as experts in the registration statement.
COOPERS & LYBRAND L.L.P.
Hartford, Connecticut
April 17, 1998
<PAGE> 1
EXHIBIT 13(b)
Consent of Independent Certified Public Accountants
The Board of Directors
The Travelers Insurance Company
We consent to the use of our report included herein and to the reference to our
firm as experts under the heading "Independent Accountants".
KPMG Peat Marwick LLP
Hartford, Connecticut
April 17, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 155,120,474
<INVESTMENTS-AT-VALUE> 156,815,587
<RECEIVABLES> 6,282,088
<ASSETS-OTHER> 1,602
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 163,099,277
<PAYABLE-FOR-SECURITIES> 3,514,681
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 553,297
<TOTAL-LIABILITIES> 4,067,978
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 29,204,421
<SHARES-COMMON-PRIOR> 33,353,307
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 159,031,299
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 10,740,468
<OTHER-INCOME> 0
<EXPENSES-NET> 2,457,486
<NET-INVESTMENT-INCOME> 8,282,982
<REALIZED-GAINS-CURRENT> 692,660
<APPREC-INCREASE-CURRENT> 1,496,038
<NET-CHANGE-FROM-OPS> 10,471,680
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (11,177,053)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 529,458
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,457,486
<AVERAGE-NET-ASSETS> 164,389,522
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 1.57
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>