<PAGE> 1
UNIVERSAL ANNUITY
ANNUAL REPORTS
DECEMBER 31, 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 Insurance Company
The Travelers Life and Annuity Company
One Tower Square
Hartford, CT 06183
<PAGE> 2
Travelers Asset Management International Corporation ("TAMIC") provides fixed
income management and advisory services for the following Travelers Variable
Products Separate Accounts contained in this report: The Travelers Quality
Bond Account for Variable Annuities, The Travelers Money Market Account for
Variable Annuities and The Travelers Growth and Income Stock Account for
Variable Annuities.
The Travelers Investment Management Company ("TIMCO") provides
equity management and subadvisory services for The Travelers Growth and
Income Stock Account for Variable Annuities.
<PAGE> 3
THE TRAVELERS VARIABLE PRODUCT SEPARATE ACCOUNTS
INVESTMENT ADVISORY COMMENTARY AS OF DECEMBER 31, 1998
ECONOMIC REVIEW AND OUTLOOK
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The year 1998 saw a widely gyrating U.S. stock market with sector performance
varying. The large-cap oriented Standard & Poor's 500 Stock Index ("S&P 500")
returned 28.6% for the year. The Standard & Poor's 400 Midcap Stock Index had a
gain of 19.1% while the Russell 2000 Stock Index ("Russell 2000") of smaller
companies had a negative return of 2.6% for the year. Dividend-paying defensive
stocks such as utilities performed better than the average small- and mid-cap
stocks. While technology stocks were adversely impacted by the global financial
crisis which began in late 1997, they have since rebounded, led by
Internet-related names.
The economies of the developed world flourished in 1998 while emerging markets
generally suffered. Low interest rates, robust consumer spending and benign
inflation fueled economic growth in the U.S. and Europe creating favorable
conditions for corporate profitability. In contrast, Russia's economy collapsed,
Asia's economies remained mired in recession and Brazil's economy faltered at
year-end after $30 billion was spent to defend its currency during the year.
The year 1998 was also a record for mergers and acquisitions, nearly double
1997's total. An example of this trend is the merger of oil giants Exxon and
Mobil announced in December which will result in the creation of the world's
largest company in terms of revenue. In the technology sector, merger activity
between Internet service providers, phone companies, cable companies and
telecommunications firms heated up, as "convergence" became the new mantra.
We remain guardedly optimistic about the U.S. economy's resiliency in the first
half of 1999 and expect interest rates to stay low and the technology - led
revolution to continue. However, the risks from foreign markets cannot be
discounted and future corporate earnings may come under increasing pressure.
EQUITY COMMENTARY
- -----------------
The deepening global financial crisis and its adverse impact on global economies
and leveraged hedge funds sent the U.S. stock market into a tailspin during the
third quarter of 1998. The S&P 500 fell by almost 10% in the third quarter while
the Russell 2000 fared even worse with a decline of 20%.
The third quarter began on a promising note as stock prices rose by almost 5% in
the first half of July. From the all-time highs established on July 17, 1998, a
series of bad news related to political and currency turmoil led the stock
market down through the end of August. The market decline over that period was
close to 20%, which qualifies under most scenarios as a bear market.
The bulk of the bad news in August came from the political and economic crisis
in Russia and the continuing spread of the currency contagion. The collapse of
the Russian ruble and the restructuring of Russian debt triggered trading and
lending losses at brokerage firms and banks. The crisis in the financial sector
took a turn for the worse later in the quarter as several hedge funds disclosed
losses related to the global financial turmoil. Several stocks in the financial
sector saw their market value cut in half during the third quarter.
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Increased uncertainty over Clinton's presidency and the bigger question of the
damage to corporate profits added to the volatility in the stock market. The
increased prospects of a global and U.S. economic slowdown led to some easing of
monetary policy. Japan first decreased short-term interest rates by 20 basis
points and the Federal Reserve Board ("Fed") followed suit with a 25 basis point
rate cut in late September. The U.S. stock market rallied in anticipation of the
rate cut and stock prices rose by almost 6% in September.
In the large capitalization stock universe, high quality growth stocks performed
better than value stocks in the third quarter of 1998. The Utilities sector
produced the only positive performance in the third quarter while the Financial
Services and Energy sectors at the other end of the spectrum fell by over 20%.
Large cap Technology and Health Care stocks held up reasonably well, but
consumer stocks declined sharply against the likely backdrop of an economic
slowdown.
A proactive and aggressive stance by the Fed halted the stock market slide early
in the fourth quarter of 1998 and sent stock prices soaring in November and
December. The fourth quarter rally erased losses from the third quarter and most
market measures reached all-time highs.
The negative sentiment in the stock market persisted through the first week of
October as the S&P 500 fell another 6%. Investor concerns focused on the impact
of the Russian crisis, global lending and trading losses on U.S. economic and
earnings growth.
Sentiment reversed in the second week of October after most market indexes had
declined over 20% from their all-time highs. The reversal in trend turned into a
significant stock market rally when the Fed cut short term rates by an
unexpected 25 basis points in the middle of October. The surprise Fed action
raised hopes that a proactive stimulative monetary policy by most central banks
would avert a global recession.
The stock market rally, triggered by the unexpected Fed rate cut in mid-October,
continued almost unabated through the months of November and December. The
market was also helped by economic reports in the fourth quarter which were well
ahead of expectations. Despite the strength in the economy, interest rates
remained low mainly as a result of low inflation.
In the large cap universe, all sectors except Energy which declined by 3%,
registered strong gains in the fourth quarter. The market rally was led by the
Technology and Health Care sectors which rose by over 30%. The Financial
Services, Transportation and Producer Durables sectors also performed well.
The performance of the U.S. stock market in 1998 proves yet again that interest
rate changes and liquidity flows may have a more dominant influence on stock
prices than most other factors. In a year where earnings growth was close to
zero, most measures of the U.S. stock market have risen by over 20%. Declining
interest rates, which fell from 5.9% to 5.1% during 1998, have triggered a
significant expansion in the market price-to-earnings ratio ("P/E"). The upward
pressure on stock prices has been further amplified by strong money flows as
yields on alternative investments have dwindled.
A notable aspect of the stock market performance in 1998 was the divergence in
returns across different styles and segments of the market. While the S&P 500
rose by 28.6% in 1998, the Russell 2000 actually declined by 2.6%. The gain in
large company growth stocks of 42.2% was well ahead of the 14.7% advance of
large company value stocks and almost out of sight compared to small company
value stocks which fell by 6.5%.
With earnings growth slowing down, the market P/E multiple has now reached 23
times 1998 earnings. It appears that the biggest risk to the stock market still
remains on the earnings front. Earnings estimates for 1999 remain high and it is
quite likely that these earnings forecasts will be revised down. Despite the
overhang of possible downward earnings revisions, we believe that support from
low interest rates should limit an excessive downside.
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FIXED INCOME COMMENTARY
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Problems that started with Asia's currency devaluations in the summer of 1997
hit the bond market hard in August and September of 1998. Bond values fell
dramatically and asset-backed bonds, mortgage-backed securities, emerging-market
debt and corporate bonds all were negatively affected. In 1998, the more risk a
bond investor assumed, the more he or she suffered.
For the year ended December 31, 1998, the Lehman Government/Corporate Index
returned 9.47%. During the year, the spreads between different types of bonds
and U.S. Treasuries widened at record speed as investors gravitated to safety
amidst rising stock market volatility and higher investor anxiety about the
global economy. The Fed then changed its monetary policy from one of vigilance
against inflation to one of combating deflation during the reporting period and
cut rates three times. So far in 1999, spreads have tightened, bond market
liquidity has returned and the bond market has stabilized.
Markets and policy makers expect real U.S. economic growth to finally slow to
the 1%-2% level in 1999 after 3 years of 3% plus growth. The slowdown is
expected to be led by a sharp reduction in the growth rate of investment
spending and continued weakness in the export sector. The Conference Board
survey of corporate sentiment indicates that capital-spending plans have not yet
rebounded with the stock market and consumer sentiment. Year 2000 compliance
("Y2K") spending is temporarily boosting capital spending, yet industrial
overcapacity and several years of rapid spending in technology make slower
investment spending highly likely.
However, a drop in the rate of consumer spending growth is essential to any
meaningful forecast of 1%-2% real Gross Domestic Product growth. This has not
happened yet despite two years where consumer spending has been close to
consumer income. The wealth effect from three years of 20% plus stock market
gains is estimated to increase spending 1.5% more than implied by income growth.
Lower interest rates, lower oil and other commodity prices, and declining import
prices have further boosted consumer purchasing power.
The tight employment market has also been a major force behind high consumer
confidence and spending plans. December brought a further sharp drop in oil
prices and continued record high (which substantially exceeded expectations)
auto sales and housing starts. These factors cause us to push any forecast of a
consumer slowdown further out into the future which will delay any further Fed
rate cuts.
There are storm clouds on the horizon that could lead the consumer to retreat.
Latin America has been pushed into recession by last summer's emerging market
meltdown and could be subject to further pressure if a Brazilian crisis erupts.
Latin America has a larger economic impact on the U.S. than Asia and Russia. A
decline in the stock market could rattle the consumer, although the stock
markets continued resilience means that a sustained downturn is required before
spending would be significantly impacted. Japan is also a big question mark.
Economic activity is now declining there after several years of flat growth.
Despite three rate cuts in the second half of 1998, it would be hard to say the
Fed has adopted an easy monetary policy. Short-term interest rates are still
more than 3% above inflation and are high relative to nominal growth. Credit
market spreads are high and banks are tightening credit standards. These factors
create a downward bias for short-term rates over the long-term, but rates are
likely to remain stable until the consumer slows down.
With the Fed on hold, there will be some upward pressure on long-term rates. But
slow growth outside the U.S. and continued low inflation should prevent rates
from rising too much. The fact that so much of the U.S. Treasury curve trades
below the federal-funds rate is a big factor in the continued high spreads in
the investment grade corporate market. Because of this, spreads should move to
offset the change in U.S. Treasury yields - narrowing when yields rise and
widening when yields fall.
DAVID A. TYSON, CFA, PRESIDENT & CHIEF INVESTMENT OFFICER, TRAVELERS
ASSET MANAGEMENT INTERNATIONAL CORPORATION
SANDIP A. BHAGAT, CFA, PRESIDENT & CHIEF INVESTMENT OFFICER, THE
TRAVELERS INVESTMENT MANAGEMENT COMPANY
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TABLE OF CONTENTS
<TABLE>
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PAGE
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THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT
FOR VARIABLE ANNUITIES........................................................... 5
THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES........................20
THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES........................32
</TABLE>
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THE TRAVELERS
GROWTH AND INCOME
STOCK ACCOUNT
FOR VARIABLE ANNUITIES
The Travelers Growth and Income Stock Account for Variable Annuities ("Account
GIS") is managed by Travelers Asset Management International Corporation
("TAMIC") with The Travelers Investment Management Company ("TIMCO") serving as
subadvisor. Account GIS is managed to provide diversified exposure to the
large-company segment of the U.S. equity market. Stock selection is based on a
quantitative screening process favoring companies that achieve earnings growth
above consensus expectations and whose shares offer attractive relative value.
In order to achieve consistent relative performance, we manage Account GIS to
mirror the overall risk, sector weightings and growth/value style
characteristics of the Standard & Poor's 500 Stock Index ("S&P 500"). The S&P
500 is a value-weighted equity index comprised primarily of large-company
stocks.
For the twelve months ending December 31, 1998, Account GIS achieved a total
return of 31.0%, before fees and expenses, ahead of the S&P 500 return of 28.6%.
Net of fees and expenses, Account GIS's total return of 28.7% for the year
compared favorably to the 15.6% average return for variable annuity stock
accounts in the Lipper Growth & Income category.
During the third quarter of 1998, stock selection in the Consumer Discretionary,
Financial Services and Producer Durables sectors had an adverse impact on
relative performance. Media stocks such as New York Times, Meredith Corp. and
Clear Channel Communications and our holdings in the retail sector such as Jones
Apparel and General Nutrition sold off sharply on concerns of future earnings
weakness resulting from a possible recession. The prospect of a slower economy
also hurt Producer Durable stocks like United Technologies and Deere Corp. where
we had a modest overweight position. Trading and lending losses during the third
quarter devastated the Financial Services sector. Our overweight positions in
BankBoston, Equitable Companies, Morgan Stanley Dean Witter and Merrill Lynch
hurt performance.
Our stock selection in the Technology and Energy sectors contributed positively
to performance in the third quarter. Our positions in higher growth Technology
stocks such as Cisco Systems, EMC Corp. and Symbol Technologies performed well
in the third quarter. Being underweight in several poorly performing stocks such
as Computer Associates, Parametric Technologies and 3Com Corp. also helped. In
the Energy sector, we gained from underweight positions in stocks such as Royal
Dutch and Occidental Petroleum.
During the fourth quarter of 1998, stock selection was favorable in most
sectors. The biggest contributions to relative performance came from the
Technology, Health Care, Consumer Discretionary, Producer Durables and Utilities
sectors. In the Technology sector, a number of our overweight position in stable
growth companies with rising earnings estimates such as Cisco Systems, Symbol
Technologies, EMC Corp., Dell Computers and Lucent Technologies performed well.
The biggest gain, however, came from America Online which rose by 70% in
December alone on the heels of a frenzied pursuit of Internet stocks and its
inclusion into the S&P 500 on the last day of the year. Guidant Corp., a leading
manufacturer of cardiological equipment, and Amgen, the world's largest
biotechnology company, were our top stock picks in the Health Care sector. Both
stocks rose by almost 50% in the fourth quarter on strong revenue growth and
positive earnings surprises.
A strong recovery in retail and media stocks from their lows in the third
quarter helped performance in the Consumer Discretionary sector. Our retail
holdings in Dayton Hudson, Staples Inc. and CVS Corp. performed well and media
stocks such as New York Times and Clear Channel Communications recovered from
near-recession levels as investors felt reassured about economic prospects after
the Federal Reserve Board action to cut interest rates.
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Our good performance in the Producer Durables sector was achieved from a
combination of picking the winners in the sector and avoiding the losers. Our
emphasis on Tyco International, a world leader in security systems, paid off
while we avoided some of the bigger losers within the sector such as Minnesota
Mining and Lockheed Martin.
In the Utilities sector, we have been emphasizing long-distance and cellular
telephone companies such as Airtouch Communications, Sprint PCS and MCI
Worldcomm at the expense of the regional telephone companies and the electric
utilities group. We were rewarded in these positions as investors paid a premium
for the higher growth prospects of these companies within a relatively low
growth sector.
With earnings growth slowing down, the market price-to-earnings ratio has now
reached 23 times 1998 earnings. It appears that the biggest risk to the stock
market still remains on the earnings front. Earnings estimates for 1999 remain
high and it is quite likely that these earnings forecasts will be revised down.
Despite the overhang of possible downward earnings revisions, we believe that
support from low interest rates should limit an excessive downside.
In our disciplined approach to stock selection, we screen our research universe
of over 1,000 large-cap securities for companies that offer improving earnings
fundamentals at discounted stock valuations. A small sample of our current
holdings is presented here to illustrate our investment approach. In the
Technology sector, we focus on higher growth industries like networking and
software through our positions in Symbol Technologies, EMC Corp., Cisco Systems
and Oracle which are still trading at reasonable valuations. Our emphasis on
Amgen and Guidant Corp., leaders in the biotechnology and medical devices
industries respectively, also seeks growth at a reasonable price.
PORTFOLIO MANAGER: SANDIP A. BHAGAT, CFA
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THE TRAVELERS
GROWTH AND INCOME
STOCK ACCOUNT
FOR VARIABLE ANNUITIES
[CHART]
This is a comparison of The Travelers Growth and Income Stock Account for
Variable Annuities ("Account GIS") versus Lipper Analytical Services' variable
annuity composite index, which provides the average performance of variable
annuity funds with similar objectives as of December 31, 1998. Lipper Analytical
Services is a leading independent Variable Insurance Product Performance
Analysis Service. The performance of the composite is net of all asset based
fees such as mortality and expense charges and investment management fees.
Performance reflects the charges associated with Universal Annuity, which became
available on May 16, 1983. Contracts issued prior to May 16, 1983 have different
contract charges that result in different performance than presented above.
Account GIS performance information is net of: 1) the 1.25% annual mortality and
expense risk charge, and 2) investment management fees. The deduction of the $15
semi-annual administrative charge and the contingent deferred sales charge (5%
maximum) is not reflected. The deduction of those charges would reduce any
percentage increase or make greater any percentage decrease. Performance data
quoted represents past performance. Investment return and principal value of an
investment will fluctuate so that an investor's units, when redeemed, may be
worth more or less than their original cost.
The following is the performance data required by SEC rules governing uniform
performance reporting: one year 23.57%, five year 21.73% and ten year 14.37%.
This performance is based on a $1,000 hypothetical investment and reflects
deductions of all fees and charges including the semi-annual administrative
charge and the maximum deferred sales charge of 5%.
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THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT
FOR VARIABLE ANNUITIES
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
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ASSETS:
Investment securities, at market value (cost $581,986,486)....................... $ 895,436,085
Cash............................................................................. 98,146
Receivables:
Dividends.................................................................... 861,062
Investment securities sold................................................... 2,059,940
Purchase payments and transfers from other Travelers accounts................ 641,719
Other assets..................................................................... 107,146
----------------
Total Assets.............................................................. 899,204,098
----------------
LIABILITIES:
Payables:
Investment securities purchased.............................................. 2,145,795
Contract surrenders and transfers to other Travelers accounts................ 1,608,530
Investment management and advisory fees...................................... 118,487
Accrued liabilities.............................................................. 255,264
----------------
Total Liabilities......................................................... 4,128,076
----------------
NET ASSETS:.......................................................................... $ 895,076,022
================
</TABLE>
See Notes to Financial Statements
-8-
<PAGE> 11
THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT
FOR VARIABLE ANNUITIES
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME:
Dividends ............................................................. $ 10,314,857
Interest ............................................................... 552,622
-----------------
Total income........................................................ $ 10,867,479
EXPENSES:
Investment management and advisory fees................................. 4,368,784
Insurance charges....................................................... 9,084,753
-----------------
Total expenses...................................................... 13,453,537
----------------
Net investment loss.............................................. (2,586,058)
----------------
REALIZED GAIN AND CHANGE IN UNREALIZED GAIN ON
INVESTMENT SECURITIES:
Realized gain from investment security transactions:
Proceeds from investment securities sold............................ 436,016,135
Cost of investment securities sold.................................. 340,361,004
-----------------
Net realized gain................................................ 95,655,131
Change in unrealized gain on investment securities:
Unrealized gain at December 31, 1997................................ 208,374,317
Unrealized gain at December 31, 1998................................ 313,449,599
-----------------
Net change in unrealized gain for the year....................... 105,075,282
----------------
Net realized gain and change in unrealized gain ............. 200,730,413
----------------
Net increase in net assets resulting from operations.................... $ 198,144,355
================
</TABLE>
See Notes to Financial Statements
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THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT
FOR VARIABLE ANNUITIES
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
OPERATIONS:
Net investment income (loss)............................................... $ (2,586,058) $ 515,301
Net realized gain from investment security transactions.................... 95,655,131 80,067,798
Net change in unrealized gain on investment securities..................... 105,075,282 80,794,664
----------------- ----------------
Net increase in net assets resulting from operations................... 198,144,355 161,377,763
----------------- ----------------
UNIT TRANSACTIONS:
Participant purchase payments
(applicable to 3,313,169 and 3,027,691 units, respectively)............ 55,597,200 40,692,594
Participant transfers from other Travelers accounts
(applicable to 5,422,153 and 5,078,380 units, respectively)............ 90,631,767 68,355,384
Administrative charges
(applicable to 29,915 and 30,500 units, respectively).................. (549,312) (428,591)
Contract surrenders
(applicable to 3,114,020 and 3,044,510 units, respectively)............ (53,155,177) (41,682,919)
Participant transfers to other Travelers accounts
(applicable to 4,220,307 and 4,257,243 units, respectively)............ (70,289,825) (56,815,055)
Other payments to participants
(applicable to 164,728 and 166,399 units, respectively)................ (2,822,777) (2,235,718)
----------------- ----------------
Net increase in net assets resulting from unit transactions............ 19,411,876 7,885,695
----------------- ----------------
Net increase in net assets.......................................... 217,556,231 169,263,458
NET ASSETS:
Beginning of year.......................................................... 677,519,791 508,256,333
----------------- ----------------
End of year................................................................ $ 895,076,022 $ 677,519,791
================= ================
</TABLE>
See Notes to Financial Statements
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<PAGE> 13
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Travelers Growth and Income Stock Account for Variable Annuities ("Account
GIS") is a separate account of The Travelers Insurance Company ("The
Travelers"), an indirect wholly owned subsidiary of Citigroup Inc. (formerly
Travelers Group Inc.), and is available for funding certain variable annuity
contracts issued by The Travelers. Account GIS is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company.
The following is a summary of significant accounting policies consistently
followed by Account GIS in the preparation of its financial statements.
SECURITY VALUATION. Investments in securities traded on a national securities
exchange are valued at the 4:00 p.m. eastern standard time closing price of the
New York Stock Exchange on the last business day of the year; 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 for which there is no reliable quoted market
price are valued at amortized cost which approximates market.
SECURITY TRANSACTIONS. Security transactions are accounted for on the
trade date. Dividend income is recorded on the ex-dividend date. Interest
income is recorded on the accrual basis. Premiums and discounts are amortized
to interest income utilizing the constant yield method.
FUTURES CONTRACTS. Account GIS may use stock index futures contracts as a
substitute for the purchase or sale of individual securities. When Account GIS
enters into a futures contract, it agrees to buy or sell a specified index of
stocks at a future time for a fixed price, unless the contract is closed prior
to expiration. Account GIS is obligated to deposit with a broker an "initial
margin" equivalent to a percentage of the face, or notional value of the
contract.
It is Account GIS's practice to hold cash and cash equivalents in an amount at
least equal to the notional value of outstanding purchased futures contracts,
less the initial margin. Cash and cash equivalents include cash on hand,
securities segregated under federal and brokerage regulations, and short-term
highly liquid investments with maturities generally three months or less when
purchased. Generally, futures contracts are closed prior to expiration.
Futures contracts purchased by Account GIS are priced and settled daily;
accordingly, changes in daily prices are recorded as realized gains or losses
and no asset is recorded in the Statement of Investments. However, when Account
GIS holds open futures contracts, it assumes a market risk generally equivalent
to the underlying market risk of change in the value of the specified indexes
associated with the futures contract.
OPTIONS. Account GIS may purchase index or individual equity put or call
options, thereby obtaining the right to sell or buy a fixed number of shares of
the underlying asset at the stated price on or before the stated expiration
date. Account GIS may sell the options before expiration. Options held by
Account GIS are listed on either national securities exchanges or on
over-the-counter markets and are short-term contracts with a duration of less
than nine months. The market value of the options will be the latest sale price
as of the close of business of the New York Stock Exchange, or in the absence of
such sale, the latest bid quotation.
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<PAGE> 14
NOTES TO FINANCIAL STATEMENTS - CONTINUED
REPURCHASE AGREEMENTS. When Account GIS enters into a repurchase agreement (a
purchase of securities whereby the seller agrees to repurchase the securities at
a mutually agreed upon date and price), the repurchase price of the securities
will generally equal the amount paid by Account GIS plus a negotiated interest
amount. The seller under the repurchase agreement will be required to provide to
Account GIS securities (collateral) whose market value, including accrued
interest, will be at least equal to 102% of the repurchase price. Account GIS
monitors the value of collateral on a daily basis. Repurchase agreements will be
limited to transactions with national banks and reporting broker dealers
believed to present minimal credit risks. Account GIS's custodian will take
actual or constructive receipt of all securities underlying repurchase
agreements until such agreements expire.
FEDERAL INCOME TAXES. The operations of Account GIS form a part of the total
operations of The Travelers and are not taxed separately. The Travelers is taxed
as a life insurance company under the Internal Revenue Code of 1986, as amended
(the "Code"). Under existing federal income tax law, no taxes are payable on the
investment income and capital gains of Account GIS. Account GIS is not taxed as
a "regulated investment company" under Subchapter M of the Code.
OTHER. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. INVESTMENTS
The aggregate costs of purchases and proceeds from sales of investments (other
than short-term securities), were $414,966,535 and $385,876,369, respectively;
the costs of purchases and proceeds from sales of direct and indirect U.S.
government securities were $3,899,294 and $1,143,321, respectively, for the year
ended December 31, 1998. Realized gains and losses from investment security
transactions are reported on an identified cost basis.
Account GIS placed a portion of its security transactions with brokerage firms
which are affiliates of The Travelers. The commissions paid to these affiliated
firms were $97,735 and $94,251 for the years ended December 31, 1998 and 1997,
respectively.
Net realized gains resulting from futures contracts were $2,690,651 and $113,394
for the years ended December 31, 1998 and 1997, respectively. These gains are
included in the net realized gain from investment security transactions on both
the Statement of Operations and the Statement of Changes in Net Assets.
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<PAGE> 15
NOTES TO FINANCIAL STATEMENTS - CONTINUED
3. CONTRACT CHARGES
Effective May 1, 1998, investment management and advisory fees are calculated
daily at annual rates which start at 0.65% and decrease, as net assets increase,
to 0.40% of Account GIS's average net assets. These fees are paid to Travelers
Asset Management International Corporation ("TAMIC"), an indirect wholly owned
subsidiary of Citigroup Inc. Pursuant to a subadvisory agreement between TAMIC
and The Travelers Investment Management Company ("TIMCO"), an indirect wholly
owned subsidiary of Citigroup Inc., TAMIC pays TIMCO a subadvisory fee
calculated daily at annual rates which start at 0.45% and decrease, as net
assets increase, to 0.20% of Account GIS's average net assets.
Prior to May 1, 1998, investment management and advisory fees were calculated
daily at an annual rate of 0.45% of Account GIS's average net assets. These fees
were paid to TIMCO.
Insurance charges are paid for the mortality and expense risks assumed by The
Travelers. On contracts issued prior to May 16, 1983, these charges are
equivalent to 1.0017% of the average net assets of Account GIS on an annual
basis. On contracts issued on or after May 16, 1983, the charges for mortality
and expense risks are equivalent to 1.25% of the average net assets of Account
GIS on an annual basis. Additionally, for certain contracts in the accumulation
phase, a semi-annual charge of $15 (prorated for partial periods) is deducted
from participant account balances and paid to The Travelers to cover
administrative charges.
On contracts issued prior to May 16, 1983, The Travelers retained from Account
GIS sales charges of $24,080 and $30,718 for the years ended December 31, 1998
and 1997, respectively. The Travelers generally assesses a 5% contingent
deferred sales charge if a participant's purchase payment is surrendered within
five years of its payment date. Contract surrender payments include $246,946 and
$143,351 of contingent deferred sales charges for the years ended December 31,
1998 and 1997, respectively.
4. NET ASSETS HELD ON BEHALF OF AN AFFILIATE
Approximately $21,175,000 and $17,568,000 of the net assets of Account GIS were
held on behalf of an affiliate of The Travelers as of December 31, 1998 and
1997, respectively. Transactions with this affiliate during the years ended
December 31, 1998 and 1997, were comprised of participant purchase payments of
approximately $675,000 and $425,000 and contract surrenders of approximately
$1,930,000 and $466,000, respectively.
5. NET CONTRACT OWNERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------------------------
UNIT NET
UNITS VALUE ASSETS
<S> <C> <C> <C>
Accumulation phase of contracts issued prior to May 16, 1983.................. 13,565,168 $ 20.017 $ 271,499,729
Annuity phase of contracts issued prior to May 16, 1983....................... 329,222 20.017 6,589,212
Accumulation phase of contracts issued on or after May 16, 1983............... 31,983,964 19.253 615,702,541
Annuity phase of contracts issued on or after May 16, 1983.................... 66,728 19.253 1,284,540
---------------
Net Contract Owners' Equity........................................................................... $ 895,076,022
===============
</TABLE>
-13-
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS - CONTINUED
6. SUPPLEMENTARY INFORMATION
(Selected data for a unit outstanding throughout each year.)
Contracts issued prior to May 16, 1983
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SELECTED PER UNIT DATA:
Total investment income................................... $ .243 $ .233 $ .216 $ .208 $ .192
Operating expenses........................................ .272 .201 .154 .123 .100
---------- ---------- ---------- --------- ---------
Net investment income (loss).............................. (.029) .032 .062 .085 .092
Unit value at beginning of year........................... 15.510 11.763 9.668 7.120 7.194
Net realized and change in unrealized gains (losses)...... 4.536 3.715 2.033 2.463 (.166)
---------- ---------- ---------- --------- ---------
Unit value at end of year................................. $ 20.017 $ 15.510 $ 11.763 $ 9.668 $ 7.120
========== ========== ========== ========= =========
SIGNIFICANT RATIOS AND ADDITIONAL DATA:
Net increase (decrease) in unit value..................... $ 4.51 $ 3.75 $ 2.10 $ 2.55 $ (.07)
Ratio of operating expenses to average net assets......... 1.56% 1.45% 1.45% 1.45% 1.41%
Ratio of net investment income (loss) to average net
assets ................................................... (.16)% .24% .60% 1.02% 1.30%
Number of units outstanding at end of year (thousands).... 13,894 15,194 16,554 17,896 19,557
Portfolio turnover rate................................... 50% 64% 85% 96% 103%
</TABLE>
Contracts issued on or after May 16, 1983
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SELECTED PER UNIT DATA:
Total investment income................................... $ .234 $ .228 $ .212 $ .205 $ .189
Operating expenses........................................ .303 .228 .175 .140 .115
---------- ---------- ---------- ---------- -----------
Net investment income (loss).............................. (.069) .000 .037 .065 .074
Unit value at beginning of year........................... 14.955 11.371 9.369 6.917 7.007
Net realized and change in unrealized gains (losses)...... 4.367 3.584 1.965 2.387 (.164)
---------- ---------- ---------- --------- -----------
Unit value at end of year................................. $ 19.253 $ 14.955 $ 11.371 $ 9.369 $ 6.917
========== ========== ========== ========= ===========
SIGNIFICANT RATIOS AND ADDITIONAL DATA:
Net increase (decrease) in unit value..................... $ 4.30 $ 3.58 $ 2.00 $ 2.45 $ (.09)
Ratio of operating expenses to average net assets......... 1.81% 1.70% 1.70% 1.70% 1.65%
Ratio of net investment income (loss) to average net
assets ................................................... (.41)% .00% .36% .79% 1.05%
Number of units outstanding at end of year (thousands).... 32,051 29,545 27,578 26,688 26,692
Portfolio turnover rate................................... 50% 64% 85% 96% 103%
</TABLE>
-14-
<PAGE> 17
THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT
FOR VARIABLE ANNUITIES
STATEMENT OF INVESTMENTS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
NO. OF MARKET
SHARES VALUE
--------------- ---------------
<S> <C> <C>
COMMON STOCKS (99.6%)
AEROSPACE (0.5%)
Boeing Co. 75,630 $ 2,467,429
General Dynamics Corp. 40,400 2,368,450
--------------
4,835,879
--------------
AIRLINES (0.1%)
AMR Corp. (A) 15,480 919,125
--------------
AUTOMOTIVE (1.8%)
Daimlerchrysler AG (A) 15,338 1,473,407
Ford Motor Co. 135,100 7,928,681
General Motors Corp. 40,200 2,876,812
Lear Corp. (A) 39,800 1,532,300
Navistar International Corp. 78,700 2,242,950
(A)
--------------
16,054,150
--------------
BANKING (7.4%)
Bank One Corp. 56,664 2,893,405
BankAmerica Corp. 176,424 10,607,493
BankBoston Corp. 64,200 2,499,788
Capital One Financial Corp. 14,800 1,702,000
Chase Manhattan Corp. 93,504 6,364,116
Comerica, Inc. 35,450 2,417,247
Fifth Third Bancorp 34,800 2,482,761
First Union Corp. 25,000 1,520,312
Fleet Financial Group Inc. 81,600 3,646,500
Golden West Financial Corp. 23,500 2,154,656
M & T Bank Corp. 2,731 1,417,218
J.P. Morgan & Company 20,200 2,122,262
National City Corp. 52,200 3,784,500
PNC Bank Corp. 24,400 1,320,650
Republic New York Corp. 45,000 2,050,312
State Street Corp. 35,500 2,469,469
Summit Bancorp. 60,500 2,643,094
SunTrust Banks, Inc. 51,400 3,932,100
Washington Mutual, Inc. 50,600 1,932,288
Wells Fargo & Co. 197,830 7,900,836
--------------
65,861,007
---------------
BEVERAGE (3.0%)
Adolph Coors Co. 63,300 3,574,469
Anheuser-Busch Cos. 40,100 2,631,563
Coca-Cola Co. 208,400 13,936,750
PepsiCo, Inc. 164,600 6,738,312
----------------
26,881,094
----------------
BROKERAGE (2.0%)
Lehman Brothers Holdings, Inc. 73,900 3,256,219
Marsh & McLennan Cos. 42,300 2,471,906
Merrill Lynch & Co. 81,400 5,433,450
Morgan Stanley Dean Witter & Co. 94,725 6,725,475
----------------
17,887,050
----------------
BUILDING MATERIALS (0.3%)
Masco Corp. 100,500 2,889,375
----------------
</TABLE>
<TABLE>
<CAPTION>
NO. OF MARKET
SHARES VALUE
-------------- ----------------
<S> <C> <C>
CAPITAL GOODS (5.8%)
Applied Materials, Inc. (A) 54,500 $ 2,328,169
Cordant Technologies, Inc. 44,200 1,657,500
Crane Co. 75,291 2,272,847
Deere & Co. 47,400 1,570,125
Emerson Electric Co. 34,000 2,127,125
General Electric Co. 298,700 30,486,069
Honeywell, Inc. 26,200 1,973,188
Pitney Bowes, Inc. 22,500 1,486,406
Tellabs, Inc. (A) 16,500 1,131,281
TRW, Inc. 41,700 2,343,019
United Technologies Corp. 43,600 4,741,500
---------------
52,117,229
---------------
CHEMICALS (1.4%)
Crompton & Knowles Corp. 70,600 1,460,537
Dow Chemical Co. 18,800 1,709,625
E.I. Dupont de Nemours & Co. 83,800 4,446,638
Lyondell Petrochemical Co. 49,100 883,800
Monsanto Co. 44,800 2,128,000
Praxair, Inc. 51,600 1,818,900
---------------
12,447,500
---------------
CONSTRUCTION MACHINE (0.5%)
Caterpillar, Inc. 31,200 1,435,200
Ingersoll-Rand Co. 55,600 2,609,725
---------------
4,044,925
---------------
CONSUMER (3.7%)
Clorox Co. 31,400 3,667,913
Colgate-Palmolive Co. 24,900 2,312,588
Eastman Kodak Co. 26,280 1,892,160
Gillette Co. 58,984 2,849,664
Kimberly Clark Corp. 42,560 2,319,520
Maytag Corp. 41,600 2,589,600
Meredith Corp. 57,000 2,158,875
Procter & Gamble Co. 119,500 10,911,844
Unilever N.V. 56,600 4,694,262
---------------
33,396,426
---------------
DEFENSE (0.2%)
Raytheon Co. 31,500 1,677,375
---------------
ENTERTAINMENT (0.6%)
Viacom, Inc. (A) 28,313 2,095,162
Walt Disney Co. 123,965 3,718,950
---------------
5,814,112
---------------
FINANCE (2.1%)
American Express Co. 58,200 5,950,950
Associates First Capital Corp. 71,020 3,009,472
Countrywide Credit Industries, Inc. 38,300 1,922,181
Household International 91,700 3,633,613
Pulte Corp. 62,300 1,732,719
Transamerica Corp. 20,000 2,310,000
---------------
18,558,935
---------------
</TABLE>
-15-
<PAGE> 18
STATEMENT OF INVESTMENTS - CONTINUED
<TABLE>
<CAPTION>
NO. OF MARKET
SHARES VALUE
---------- ------------
<S> <C> <C>
FOOD (2.0%)
Campbell Soup Co. 39,300 $ 2,161,500
H .J. Heinz Co. 63,000 3,567,375
Interstate Bakeries Corp. 59,400 1,570,388
Kellogg Co. 32,000 1,092,000
Sara Lee Corp. 156,400 4,408,525
Suiza Foods Corp. (A) 51,500 2,623,281
Sysco Corp. 106,000 2,908,375
--------------
18,331,444
--------------
HOME CONSTRUCTION (0.2%)
Kaufman & Broad Home Corp. 54,300 1,561,125
--------------
HEALTHCARE (1.6%)
Abbott Laboratories 127,900 6,267,100
Guidant Corp. 36,500 4,024,125
Healthsouth Rehabilitation
Corp. (A) 136,300 2,104,131
Wellpoint Health Networks,
Inc. (A) 20,200 1,757,400
--------------
14,152,756
--------------
INDEPENDENT ENERGY (0.5%)
Burlington Resources, Inc. 44,000 1,575,750
Entergy Corp. 63,300 1,970,213
Halliburton Co. 21,200 628,050
--------------
4,174,013
--------------
INDUSTRIAL (1.7%)
CBS Corp. 104,600 3,425,650
Mercury General Corp. 24,900 1,090,931
Sealed Air Corp. (A) 43,300 2,211,006
Tyco International Ltd. 87,300 6,585,694
Waste Management, Inc. 47,400 2,210,025
--------------
15,523,306
--------------
INSURANCE (3.0%)
Allstate Corp. 110,550 4,269,994
Ambac Financial Group, Inc. 28,100 1,691,269
American International Group 112,187 10,840,069
Everest Reinsurance Holdings 43,900 1,709,356
Hartford Financial Services Group 46,000 2,524,250
SunAmerica, Inc. 43,050 3,492,431
Transatlantic Holdings, Inc. 16,440 1,242,248
20th Century Industries 50,200 1,164,012
--------------
26,933,629
--------------
INTEGRATED ENERGY (5.1%)
Amoco Corp. 79,800 4,817,925
Atlantic Richfield Co. 48,800 3,184,200
Chevron Corp. 49,900 4,138,581
Exxon Corp. 204,800 14,976,000
Mobil Corp. 70,100 6,107,463
Royal Dutch Petroleum Co. 134,500 6,439,188
Texaco, Inc. 69,900 3,695,962
Union Pacific Resource Group Inc. 1 9
Unocal Corp. 84,700 2,472,181
--------------
45,831,509
--------------
</TABLE>
<TABLE>
<CAPTION>
NO. OF MARKET
SHARES VALUE
---------- ------------
<S> <C> <C>
MEDIA (2.5%)
Clear Channel
Communications, Inc. (A) 68,130 3,713,085
Comcast Corp. 66,800 $ 3,922,409
Gannett Company, Inc. 44,000 2,912,250
New York Times Co. 55,600 1,928,625
Tele-Communications, Inc. (A) 39,300 2,175,007
Time Warner, Inc. 87,800 5,449,088
Times Mirror Co. 33,000 1,848,000
--------------
21,948,464
--------------
METALS (0.5%)
Aluminum Company of
America, Inc. 48,286 3,600,325
Bethlehem Steel Corp. (A) 123,600 1,035,150
--------------
4,635,475
--------------
NATURAL GAS PIPELINE (0.8%)
Columbia Energy Group 29,500 1,703,625
Enron Corp. 24,500 1,398,031
Sonat, Inc. 36,200 979,663
Williams Cos. 103,500 3,227,906
--------------
7,309,225
--------------
OIL FIELD (0.2%)
Schlumberger Ltd. 37,200 1,715,850
--------------
PAPER (0.8%)
Georgia-Pacific Group 36,600 2,143,388
International Paper Co. 22,700 1,017,244
Mead Corp. 45,050 1,320,528
Weyerhaeuser Co. 15,300 777,431
Willamette Industries, Inc. 46,800 1,567,800
--------------
6,826,391
--------------
PHARMACEUTICALS (10.7%)
American Home Products Corp. 136,300 7,675,394
Amgen, Inc. (A) 42,900 4,483,050
Baxter International, Inc. 50,000 3,215,625
Bristol-Myers Squibb Co. 81,500 10,905,719
CVS Corp. 86,700 4,768,500
Eli Lilly & Co. 91,700 8,149,837
Johnson & Johnson 123,600 10,366,950
Merck & Co. 99,700 14,724,443
Pfizer, Inc. 110,430 13,852,063
Pharmacia & Upjohn, Inc. 41,300 2,338,613
Schering-Plough Corp. 123,400 6,817,850
Warner-Lambert Co. 90,600 6,811,987
Watson Pharmaceuticals, Inc. (A) 26,100 1,641,038
--------------
95,751,069
--------------
RAILROADS (0.3%)
CSX Corp. 40,300 1,672,450
Union Pacific Corp. 16,500 743,531
--------------
2,415,981
--------------
</TABLE>
-16-
<PAGE> 19
STATEMENT OF INVESTMENTS - CONTINUED
<TABLE>
<CAPTION>
NO. OF MARKET
SHARES VALUE
------------ ------------
<S> <C> <C>
RETAILERS (6.0%)
Costco Cos. (A) 42,100 $ 3,045,670
Dayton Hudson Corp. 86,900 4,714,325
Gap, Inc. 50,700 2,851,875
Home Depot, Inc. 155,798 9,532,890
KMart Corp. (A) 119,600 1,831,375
May Department Stores Co. 19,300 1,165,237
McDonalds Corp. 55,200 4,229,700
Nordstrom, Inc. 51,700 1,796,575
J.C. Penney Company, Inc. 20,800 975,000
Rite Aid Corp. 55,900 2,770,544
Staples, Inc. (A) 73,000 3,191,465
TJX Companies, Inc. 100,600 2,917,400
Wal-Mart Stores, Inc. 178,000 14,495,875
--------------
53,517,931
--------------
SERVICES (4.5%)
HBO & Co. 104,000 2,986,745
Medtronic, Inc. 64,600 4,796,550
Microsoft Corp. (A) 233,000 32,277,769
--------------
40,061,064
--------------
SUPERMARKETS (0.8%)
Kroger Co. (A) 50,000 3,025,000
Safeway, Inc. (A) 72,030 4,389,328
--------------
7,414,328
--------------
TECHNOLOGY (12.8%)
America Online, Inc. (A) 27,500 4,265,937
Ceridian Corp. (A) 32,300 2,254,944
Cisco Systems, Inc. (A) 163,975 15,224,046
Compaq Computer Corp. 144,569 6,062,841
Computer Sciences Corp. (A) 40,300 2,596,831
Compuware Corp. (A) 30,600 2,389,667
Dell Computer Corp. (A) 137,500 10,067,571
EG&G, Inc. 78,800 2,191,625
EMC Corp. (A) 64,700 5,499,500
Gateway 2000, Inc. (A) 13,800 706,388
Hewlett-Packard Co. 72,700 4,966,319
International Business
Machines Corp. 94,000 17,366,500
Intel Corp. 172,900 20,494,044
Motorola, Inc. 48,600 2,967,638
Oracle Corp. (A) 108,425 4,679,211
Sun Microsystems, Inc. (A) 18,900 1,617,131
Symbol Technologies, Inc. 29,800 1,905,338
Texas Instruments, Inc. 34,800 2,977,575
3Com Corp. (A) 69,800 3,130,090
Xerox Corp. 25,900 3,056,200
--------------
114,419,396
--------------
</TABLE>
<TABLE>
<CAPTION>
NO. OF MARKET
SHARES VALUE
----------- ------------
<S> <C> <C>
TELECOMMUNICATIONS (10.7%)
AirTouch Communications, Inc (A) 89,400 $ 6,447,975
Ameritech Corp. 86,700 5,494,612
AT&T Corp. 154,200 11,603,550
Bell Atlantic Corp. 138,158 7,849,101
BellSouth Corp. 157,000 7,830,375
GTE Corp. 65,200 4,396,925
Lucent Technologies Inc. 131,774 14,495,140
MCI WorldCom, Inc. (A) 201,651 14,474,751
MediaOne Group, Inc. (A) 74,900 3,520,300
Nextel Communications, Inc. (A) 102,900 2,434,223
SBC Communications, Inc. 152,420 8,173,523
Sprint Corp. - Fon Group 38,206 3,214,080
Sprint Corp. - PCS Group (A) 141,953 3,282,663
US West, Inc. 36,670 2,369,799
--------------
95,587,017
--------------
TEXTILE (0.1%)
Fruit of the Loom (A) 71,400 986,213
--------------
TOBACCO (1.7%)
Loews Corp. 19,700 1,935,525
Philip Morris Cos. 254,900 13,637,150
--------------
15,572,675
--------------
U.S. AGENCY (1.3%)
Federal Home Loan
Mortgage Corp. 58,500 3,769,594
Federal National
Mortgage Association 109,600 8,110,400
--------------
11,879,994
--------------
UTILITIES (2.4%)
AES Corp. (A) 64,700 3,065,162
Alltel Corp. 53,700 3,211,931
Central & South West Corp. 101,100 2,773,931
Edison International 95,200 2,653,700
FPL Group, Inc. 40,900 2,520,462
Houston Industries 20,500 658,563
PP&L Resources, Inc. 73,500 2,048,813
Southern Co. 52,800 1,534,500
Texas Utilities Co. 73,700 3,440,869
--------------
21,907,931
--------------
TOTAL COMMON STOCKS
(COST $578,392,457) 891,840,968
--------------
</TABLE>
-17-
<PAGE> 20
STATEMENT OF INVESTMENTS - CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
----------- ---------------
<S> <C> <C>
SHORT-TERM INVESTMENTS (0.4%)
COMMERCIAL PAPER (0.2%)
Household Finance Corp.,
5.12% due January 4, 1999 $ 2,147,000 $ 2,145,781
----------------
U.S. TREASURY (0.2%)
United States of America
Treasury,
4.67% due May 27, 1999 1,475,000 1,449,336
----------------
TOTAL SHORT-TERM
INVESTMENTS (COST $3,594,029) 3,595,117
----------------
TOTAL INVESTMENTS (100%)
(COST $581,986,486) (B) $ 895,436,085
================
</TABLE>
NOTES
(A) Non-income Producing Security.
(B) At December 31, 1998, net unrealized appreciation for all securities was
$313,449,599. This consisted of aggregate gross unrealized appreciation
for all securities in which there was an excess of market value over cost
of $330,317,410 and aggregate gross unrealized depreciation for all
securities in which there was an excess of cost over market value of
$16,867,811.
See Notes to Financial Statements
-18-
<PAGE> 21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Managers and Owners of Variable Annuity Contracts of
The Travelers Growth and Income Stock Account for Variable Annuities
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, as of December 31, 1998, and the related statement
of operations for the year then ended, the statement of changes in net assets
for each of the two years in the period then ended, and the selected per unit
data and ratios for each of the five years in the period then ended present
fairly, in all material respects, the financial position of The Travelers Growth
and Income Stock Account for Variable Annuities at December 3l, 1998, and the
results of their operations for the year then ended in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit, which included
confirmation of securities as of December 31, 1998, by correspondence with the
custodian, provides a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Hartford, Connecticut
February 15, 1999
-19-
<PAGE> 22
THE TRAVELERS
QUALITY BOND ACCOUNT
FOR VARIABLE ANNUITIES
The year 1998 began with economic momentum continuing from the year before. It
seemed the next move by the Federal Reserve Board ("Fed") would be to increase
rates. Asian turmoil had not yet infected our economy. Credit spreads were
amongst the tightest ever, and the stock market was poised for another terrific
year.
This backdrop got us to July, but in early August the world changed as Russia
defaulted on its foreign debt. This triggered a massive deleveraging among fixed
income hedge funds, most notably Long Term Capital Management and D.E. Shaw &
Co. Long Term Capital Management needed an additional $3.6 billion from a group
of twelve major Wall Street investment and commercial banks to shore up its
balance sheet. D.E. Shaw was absorbed by BankAmerica but not before they had to
write down well over $1 billion of its investment. Most Wall Street firms also
took significant trading losses.
Responding to the disarray in the marketplace, the Fed cut interest rates 25
basis points on September 29, 1998. Sensing this was not enough to calm market
fears, the Fed again lowered the base rate 25 basis points on October 15,1998.
This was the first time the Fed decreased the rate twice between regularly
scheduled meetings in more than five years, indicating the Fed's concern about a
global financial meltdown. One last rate cut occurred on November 17, 1998 to
get the Federal Funds rate down to the 4.75% at year-end.
The Dow Jones Industrial Average declined by almost 2,000 points from July's
then record highs to the mid-October lows. Corporate bond spreads almost doubled
and new issuance came to a complete halt during this period.
By the end of October, a nervous calm came into the market place. Corporate bond
issuance began again, but at sharply discounted spreads. November, interestingly
enough set a record pace for new issues with over $40 billion coming to market.
Confidence that the worst was over and that the Fed would provide liquidity set
the stage for a partial rebound of spread tightening.
The fourth quarter performance for The Travelers Quality Bond Account for
Variable Annuities ("Account QB") was 1.15% versus a .29% return for the Lehman
Government/Corporate Bond Index (The Lehman Government/Corporate Bond Index is a
combination of publicly issued intermediate and long - term U.S. Government
Bonds and Corporate Bonds). Account QB outperformed the index by 86 basis
points. Our duration was modestly long for most of the quarter. We also traded
securities more actively than normal as high volumes of new corporate issuance
provided many attractive purchase opportunities.
PORTFOLIO MANAGER: F. DENNEY VOSS
-20-
<PAGE> 23
THE TRAVELERS
QUALITY BOND ACCOUNT
FOR VARIABLE ANNUITIES
[CHART]
This is a comparison of The Travelers Quality Bond Account for Variable
Annuities ("Account QB") versus Lipper Analytical Services' variable annuity
composite index, which provides the average performance of variable annuity
funds with similar objectives as of December 31, 1998. Lipper Analytical
Services is a leading independent Variable Insurance Product Performance
Analysis Service. The performance of the composite is net of all asset based
fees such as mortality and expense charges and investment management fees.
Performance reflects the charges associated with Universal Annuity, which became
available on May 16, 1983. Contracts issued prior to May 16, 1983 have different
contract charges that result in different performance than presented above.
Account QB performance information is net of: 1) the 1.25% annual mortality and
expense risk charge, and 2) investment management fees. The deduction of the $15
semi-annual administrative charge and the contingent deferred sales charge (5%
maximum) is not reflected. The deduction of those charges would reduce any
percentage increase or make greater any percentage decrease. Performance data
quoted represents past performance. Investment return and principal value of an
investment will fluctuate so that an investor's units, when redeemed, may be
worth more or less than their original cost.
The following is the performance data required by SEC rules governing uniform
performance reporting: one year 1.75%, five year 4.63% and ten year 7.70%. This
performance is based on a $1,000 hypothetical investment and reflects deductions
of all fees and charges including the semi-annual administrative charge and the
maximum deferred sales charge of 5%.
-21-
<PAGE> 24
THE TRAVELERS QUALITY BOND ACCOUNT
FOR VARIABLE ANNUITIES
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investment securities, at market value (cost $162,402,736).................... $ 162,396,475
Cash.......................................................................... 180,812
Receivables:
Interest.................................................................. 1,653,452
Investment securities sold................................................ 2,806,000
Purchase payments and transfers from other Travelers accounts............. 42,751
Other assets.................................................................. 2,305
----------------
Total Assets........................................................... 167,081,795
----------------
LIABILITIES:
Payables:
Investment securities purchased........................................... 2,984,324
Contract surrenders and transfers to other Travelers accounts............. 290,589
Investment management and advisory fees................................... 11,613
Accrued liabilities........................................................... 42,557
----------------
Total Liabilities...................................................... 3,329,083
----------------
NET ASSETS:....................................................................... $ 163,752,712
================
</TABLE>
See Notes to Financial Statements
-22-
<PAGE> 25
THE TRAVELERS QUALITY BOND ACCOUNT
FOR VARIABLE ANNUITIES
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME:
Interest................................................................ $ 10,019,923
EXPENSES:
Investment management and advisory fees................................. $ 518,262
Insurance charges....................................................... 1,888,900
-----------------
Total expenses...................................................... 2,407,162
----------------
Net investment income............................................ 7,612,761
----------------
REALIZED GAIN AND CHANGE IN UNREALIZED GAIN (LOSS) ON
INVESTMENT SECURITIES:
Realized gain from investment security transactions:
Proceeds from investment securities sold............................ 716,260,295
Cost of investment securities sold.................................. 711,436,990
-----------------
Net realized gain................................................ 4,823,305
Change in unrealized gain (loss) on investment securities:
Unrealized gain at December 31, 1997................................ 1,695,113
Unrealized loss at December 31, 1998................................ (6,261)
-----------------
Net change in unrealized gain (loss) for the year................ (1,701,374)
----------------
Net realized gain and change in unrealized gain (loss)....... 3,121,931
----------------
Net increase in net assets resulting from operations.................... $ 10,734,692
================
</TABLE>
See Notes to Financial Statements
-23-
<PAGE> 26
THE TRAVELERS QUALITY BOND ACCOUNT
FOR VARIABLE ANNUITIES
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
PERATIONS:
Net investment income...................................................... $ 7,612,761 $ 8,282,982
Net realized gain from investment security transactions.................... 4,823,305 692,660
Net change in unrealized gain (loss) on investment securities.............. (1,701,374) 1,496,038
----------------- ----------------
Net increase in net assets resulting from operations................... 10,734,692 10,471,680
----------------- ----------------
UNIT TRANSACTIONS:
Participant purchase payments
(applicable to 2,278,275 and 2,595,588 units, respectively)............ 12,701,859 13,459,247
Participant transfers from other Travelers accounts
(applicable to 3,679,128 and 1,981,335 units, respectively)............ 20,644,939 10,315,973
Administrative charges
(applicable to 17,717 and 21,863 units, respectively).................. (100,331) (116,102)
Contract surrenders
(applicable to 2,743,477 and 2,897,282 units, respectively)............ (15,435,681) (15,167,293)
Participant transfers to other Travelers accounts
(applicable to 4,063,248 and 5,631,496 units, respectively)............ (22,650,450) (29,216,683)
Other payments to participants
(applicable to 206,656 and 175,168 units, respectively)................ (1,173,615) (923,875)
----------------- ----------------
Net decrease in net assets resulting from unit transactions............ (6,013,279) (21,648,733)
----------------- ----------------
Net increase (decrease) in net assets............................... 4,721,413 (11,177,053)
NET ASSETS:
Beginning of year.......................................................... 159,031,299 170,208,352
----------------- ----------------
End of year................................................................ $ 163,752,712 $ 159,031,299
================= ================
</TABLE>
See Notes to Financial Statements
-24-
<PAGE> 27
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Travelers Quality Bond Account for Variable Annuities ("Account QB") is a
separate account of The Travelers Insurance Company ("The Travelers"), an
indirect wholly owned subsidiary of Citigroup Inc. (formerly Travelers Group
Inc.), and is available for funding certain variable annuity contracts issued by
The Travelers. Account QB is registered under the Investment Company Act of
1940, as amended, as a diversified, open-end management investment company.
The following is a summary of significant accounting policies consistently
followed by Account QB in the preparation of its financial statements.
SECURITY VALUATION. Investments in securities traded on a national securities
exchange are valued at the 4:00 p.m. eastern standard time closing price of the
New York Stock Exchange on the last business day of the year; 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.
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 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 valued 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.
SECURITY TRANSACTIONS. Security transactions are accounted for on the
trade date. Interest income is recorded on the accrual basis. Premiums and
discounts are amortized to interest income utilizing the constant yield
method.
FUTURES CONTRACTS. Account QB may use interest rate futures contracts as a
substitute for the purchase or sale of individual securities. When Account QB
enters into a futures contract, it agrees to buy or sell specified debt
securities at a future time for a fixed price, unless the contract is closed
prior to expiration. Account QB is obligated to deposit with a broker an
"initial margin" equivalent to a percentage of the face, or notional value of
the contract.
It is Account QB's practice to hold cash and cash equivalents in an amount at
least equal to the notional value of outstanding purchased futures contracts,
less the initial margin. Cash and cash equivalents include cash on hand,
securities segregated under federal and brokerage regulations, and short-term
highly liquid investments with maturities generally three months or less when
purchased. Generally, futures contracts are closed prior to expiration.
Futures contracts purchased by Account QB are priced and settled daily;
accordingly, changes in daily prices are recorded as realized gains or losses
and no asset is recorded in the Statement of Investments. However, when Account
QB holds open futures contracts, it assumes a market risk generally equivalent
to the underlying market risk of change in the value of the debt securities
associated with the futures contract.
REPURCHASE AGREEMENTS. When Account QB enters into a repurchase agreement (a
purchase of securities whereby the seller agrees to repurchase the securities at
a mutually agreed upon date and price), the repurchase price of the securities
will generally equal the amount paid by Account QB plus a negotiated interest
amount. The seller under the repurchase agreement will be required to provide to
Account QB securities (collateral) whose market value, including accrued
interest, will be at least equal to 102% of the repurchase price. Account QB
monitors the value of collateral on a daily basis. Repurchase agreements will be
limited to transactions with national banks and reporting broker dealers
believed to present minimal credit risks. Account QB's custodian will take
actual or constructive receipt of all securities underlying repurchase
agreements until such agreements expire.
-25-
<PAGE> 28
NOTES TO FINANCIAL STATEMENTS - CONTINUED
FEDERAL INCOME TAXES. The operations of Account QB form a part of the total
operations of The Travelers and are not taxed separately. The Travelers is taxed
as a life insurance company under the Internal Revenue Code of 1986, as amended
(the "Code"). Under existing federal income tax law, no taxes are payable on the
investment income and capital gains of Account QB. Account QB is not taxed as a
"regulated investment company" under Subchapter M of the Code.
OTHER. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. INVESTMENTS
The aggregate costs of purchases and proceeds from sales of investments (other
than short-term securities) were $641,925,937 and $653,531,313, respectively;
the costs of purchases and proceeds from sales of direct and indirect U.S.
government securities were $332,913,812 and $322,406,151, respectively, for the
year ended December 31, 1998. Realized gains and losses from investment security
transactions are reported on an identified cost basis.
3. CONTRACT CHARGES
Investment management and advisory fees are calculated daily at an annual rate
of 0.3233% of Account QB's average net assets. These fees are paid to Travelers
Asset Management International Corporation, an indirect wholly owned subsidiary
of Citigroup Inc.
Insurance charges are paid for the mortality and expense risks assumed by The
Travelers. On contracts issued prior to May 16, 1983, these charges are
equivalent to 1.0017% of the average net assets of Account QB on an annual
basis. On contracts issued on or after May 16, 1983, the charges for mortality
and expense risks are equivalent to 1.25% of the average net assets of Account
QB on an annual basis. Additionally, for certain contracts in the accumulation
phase, a semi-annual charge of $15 (prorated for partial periods) is deducted
from participant account balances and paid to The Travelers to cover
administrative charges.
On contracts issued prior to May 16, 1983, The Travelers retained from Account
QB sales charges of $8,940 and $12,423 for the years ended December 31, 1998 and
1997, respectively. The Travelers generally assesses a 5% contingent deferred
sales charge if a participant's purchase payment is surrendered within five
years of its payment date. Contract surrender payments include $70,717 and
$86,884 of contingent deferred sales charges for the years ended December 31,
1998 and 1997, respectively.
-26-
<PAGE> 29
NOTES TO FINANCIAL STATEMENTS - CONTINUED
4. NET ASSETS HELD ON BEHALF OF AN AFFILIATE
Approximately $457,000 and $966,000 of the net assets of Account QB were held on
behalf of an affiliate of The Travelers as of December 31, 1998 and 1997,
respectively. Transactions with this affiliate during the years ended December
31, 1998 and 1997, were comprised of participant purchase payments of
approximately $112,000 and $106,000 and contract surrenders of approximately
$74,000 and $120,000, respectively.
5. NET CONTRACT OWNERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------------------------
UNIT NET
UNITS VALUE ASSETS
<S> <C> <C> <C>
Accumulation phase of contracts issued prior to May 16, 1983............... 6,747,213 $ 5.994 $ 40,442,990
Annuity phase of contracts issued prior to May 16, 1983.................... 132,358 5.994 793,361
Accumulation phase of contracts issued on or after May 16, 1983............ 21,242,577 5.765 122,466,909
Annuity phase of contracts issued on or after May 16, 1983................. 8,578 5.765 49,452
---------------
Net Contract Owners' Equity.......................................................................... $ 163,752,712
===============
</TABLE>
-27-
<PAGE> 30
NOTES TO FINANCIAL STATEMENTS - CONTINUED
6. SUPPLEMENTARY INFORMATION
(Selected data for a unit outstanding throughout each year.)
Contracts issued prior to May 16, 1983
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SELECTED PER UNIT DATA:
Total investment income.............................. $ .363 $ .353 $ .379 $ .328 $ .318
Operating expenses................................... .076 .071 .067 .063 .059
---------- ----------- ---------- ---------- -----------
Net investment income................................ .287 .282 .312 .265 .259
Unit value at beginning of year...................... 5.593 5.234 5.050 4.400 4.498
Net realized and change in unrealized gains (losses). .114 .077 (.128) .385 (.357)
---------- ----------- ---------- ---------- -----------
Unit value at end of year............................ $ 5.994 $ 5.593 $ 5.234 $ 5.050 $ 4.400
========== =========== ========== ========== ===========
SIGNIFICANT RATIOS AND ADDITIONAL DATA:
Net increase (decrease) in unit value................ $ .40 $ .36 $ .18 $ .65 $ (.10)
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. 4.96% 5.25% 6.12% 5.54% 5.87%
Number of units outstanding at end of year
(thousands).......................................... 6,880 7,683 8,549 9,325 10,694
Portfolio turnover rate.............................. 438% 196% 176% 138% 27%
</TABLE>
Contracts issued on or after May 16, 1983
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SELECTED PER UNIT DATA:
Total investment income.............................. $ .350 $ .342 $ .368 $ .319 $ .310
Operating expenses................................... .088 .082 .078 .073 .069
---------- ---------- ---------- ----------- -----------
Net investment income................................ .262 .260 .290 .246 .241
Unit value at beginning of year...................... 5.393 5.060 4.894 4.274 4.381
Net realized and change in unrealized gains (losses). .110 .073 (.124) .374 (.348)
---------- ---------- ---------- ----------- -----------
Unit value at end of year............................ $ 5.765 $ 5.393 $ 5.060 $ 4.894 $ 4.274
========== ========== ========== =========== ===========
SIGNIFICANT RATIOS AND ADDITIONAL DATA:
Net increase (decrease) in unit value................ $ .37 $ .33 $ .17 $ .62 $ (.11)
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. 4.71% 5.00% 5.87% 5.29% 5.62%
Number of units outstanding at end of year
(thousands).......................................... 21,251 21,521 24,804 27,066 27,033
Portfolio turnover rate.............................. 438% 196% 176% 138% 27%
</TABLE>
-28-
<PAGE> 31
THE TRAVELERS QUALITY BOND ACCOUNT
FOR VARIABLE ANNUITIES
STATEMENT OF INVESTMENTS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
------------- --------------
<S> <C> <C>
BONDS (59.5%)
AIRLINES (1.0%)
Delta Air Lines, Inc.,
9.25% Sinking Fund, 2007 (A) $ 1,673,236 $ 1,677,318
--------------
BANKING (2.0%)
Popular, Inc.,
6.38% Debentures, 2003 3,200,000 3,182,851
--------------
DEFENSE (4.6%)
Raytheon Co.,
6.00% Debentures, 2010 7,500,000 7,509,503
--------------
FOREIGN AGENCY (3.1%)
Province of Ontario,
5.50% Bonds, 2008 5,000,000 5,036,000
--------------
FINANCE (9.3%)
Finova Capital Corp.,
6.25% Debentures, 2002 7,500,000 7,525,567
Marlin Water Trust,
7.09% Debentures, 2001 7,500,000 7,540,838
--------------
15,066,405
--------------
HEALTHCARE (4.5%)
Columbia HCA/Healthcare Corp.,
8.70% Debentures, 2010 2,250,000 2,430,169
Columbia HCA/Healthcare Corp.,
6.87% Debentures, 2003 5,000,000 4,917,080
--------------
7,347,249
--------------
INDUSTRIAL (3.1%)
Halliburton Co.,
5.63% Debentures, 2008 5,000,000 5,064,410
--------------
INTERGRATED ENERGY (4.6%)
Noram Energy Corp.,
7.50% Debentures, 2000 7,250,000 7,485,654
--------------
OIL FIELD (4.3%)
Petroleum Geo-Services, Inc.,
6.25% Debentures, 2003 7,000,000 6,976,102
--------------
PAPER (2.5%)
Noranda Forest, Inc.,
8.88% Debentures, 1999 4,000,000 4,040,799
--------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
------------- --------------
<S> <C> <C>
REAL ESTATE (7.3%)
CarrAmerica Realty Corp.,
6.63% Debentures, 2000 $ 5,200,000 $ 5,159,258
Nationwide Health Properties, Inc.
6.90% Debentures, 2037 7,000,000 6,731,123
--------------
11,890,381
--------------
TELECOMMUNICATIONS (4.7%)
Telecom New Zealand
Finance Corp.,
6.25% Debentures, 2003 7,500,000 7,640,040
--------------
TOBACCO (4.9%)
Nabisco, Inc.,
6.70% Debentures, 2002 7,800,000 7,905,261
--------------
UTILITIES (3.6%)
Indiana Michigan Power,
6.45% Debentures, 2008 5,750,000 5,858,008
--------------
TOTAL BONDS
(COST $96,479,524) 96,679,981
--------------
U.S. GOVERNMENT AGENCY
SECURITIES (12.2%)
Federal Home Loan
Mortgage Corp.,
4.75% Debentures, 2001 20,000,000 19,832,480
--------------
TOTAL U.S. GOVERNMENT
AGENCY SECURITIES
(COST $19,968,507) 19,832,480
--------------
U.S. GOVERNMENT
SECURITIES (17.9%)
United States of America
Treasury, 6.63% Notes, 2002 16,000,000 16,934,992
United States of America
Treasury, 5.88% Notes, 2002 5,000,000 5,200,000
United States of America
Treasury, 5.88% Notes, 2005 6,500,000 6,936,715
--------------
TOTAL U.S. GOVERNMENT
SECURITIES
(COST $29,141,216) 29,071,707
--------------
</TABLE>
-29-
<PAGE> 32
STATEMENT OF INVESTMENTS - CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
------------ ------------
<S> <C> <C>
SHORT-TERM INVESTMENTS (10.4%)
COMMERCIAL PAPER (10.4%)
E.I. Dupont de Nemours & Co.,
5.12% due February 25, 1999 $ 2,205,000 $ 2,187,949
GE Capital Corp.,
6.11% due January 7, 1999 6,000,000 5,994,060
Household Finance Corp.,
5.12% due January 4, 1999 2,986,000 2,984,304
Prudential Funding Corp.,
5.39% due January 5, 1999 5,650,000 5,645,994
-------------
TOTAL SHORT-TERM
INVESTMENTS (COST $16,813,489) 16,812,307
-------------
TOTAL INVESTMENTS (100%)
(COST $162,402,736) $ 162,396,475
=============
</TABLE>
NOTES
(A) Restricted Security.
(B) At December 31, 1998, net unrealized depreciation for all securities was
$6,261. This consisted of aggregate gross unrealized appreciation for all
securities in which there was an excess of market value over cost of
$535,063 and aggregate gross unrealized depreciation for all securities in
which there was an excess of cost over market value of $541,324.
See Notes to Financial Statements
-30-
<PAGE> 33
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Managers and Owners of Variable Annuity Contracts of
The Travelers Quality Bond Account for Variable Annuities
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, as of December 31, 1998, and the related statement
of operations for the year then ended, the statement of changes in net assets
for each of the two years in the period then ended, and the selected per unit
data and ratios for each of the five years in the period then ended present
fairly, in all material respects, the financial position of The Travelers
Quality Bond Account for Variable Annuities at December 3l, 1998, and the
results of their operations for the year then ended in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit, which included
confirmation of securities as of December 31, 1998, by correspondence with the
custodian, provides a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Hartford, Connecticut
February 15, 1999
-31-
<PAGE> 34
THE TRAVELERS
MONEY MARKET ACCOUNT
FOR VARIABLE ANNUITIES
The year 1998 was turbulent for the global financial markets as Asian economies
and currencies imploded, other emerging markets were badly shaken, and fears
spread that a global recession was underway. By year-end however, the Asian
turmoil had lessened and the United States and European economies had weathered
the storm. In fact, it is estimated that the U.S. will have experienced Gross
Domestic Product growth of 3.75%.
The year ended with the 30-year Treasury Bond yield at 5.09% and the Federal
Reserve Board ("Fed") funds rate at 4.75%. The 30-year Treasury Bond was up 12
basis points from the September 30th level of 4.97%, but down 81 basis points
from the beginning of the year. During the fourth quarter, the Fed lowered the
federal funds rate twice by 25 basis points each time, the first time on October
15, 1998 in between it's meetings and the second time at the November 17, 1998
meeting. Further decreases in the Federal funds rate appear unlikely in the
first quarter of 1999, as the Fed changed its stance to neutral at the meeting.
The strategy in management of The Travelers Money Market Account for Variable
Annuities, will be to extend maturities from the current average life of 31
days, to between 60 and 90 days. At December 31, 1998, the asset size of the
portfolio was $103.1 million, with an average yield of 5.20%.
PORTFOLIO MANAGER: EMIL J. MOLINARO JR.
[
-32-
<PAGE> 35
THE TRAVELERS
MONEY MARKET ACCOUNT
FOR VARIABLE ANNUITIES
[CHART]
This is a comparison of The Travelers Money Market Account for Variable
Annuities ("Account MM") versus Lipper Analytical Services' variable annuity
composite index, which provides the average performance of variable annuity
funds with similar objectives as of December 31, 1998. Lipper Analytical
Services is a leading independent Variable Insurance Product Performance
Analysis Service. The performance of the composite is net of all asset based
fees such as mortality and expense charges and investment management fees.
Performance reflects the charges associated with Universal Annuity, which became
available on May 16, 1983. Contracts issued prior to May 16, 1983, have
different contract charges that result in different performance than presented
above.
Account MM performance information is net of: 1) the 1.25% annual mortality and
expense risk charge, and 2) investment management fees. The deduction of the $15
semi-annual administrative charge and the contingent deferred sales charge (5%
maximum) is not reflected. The deduction of those charges would reduce any
percentage increase or make greater any percentage decrease. Performance data
quoted represents past performance. Investment return and principal value of an
investment will fluctuate so that an investor's units, when redeemed, may be
worth more or less than their original cost. An investment in The Travelers
Money Market Account for Variable Annuities is neither insured nor guaranteed by
the U.S. Government.
The following is the performance data required by SEC rules governing uniform
performance reporting: one year -1.12%, five year 2.78% and ten year 4.58%. This
performance is based on a $1,000 hypothetical investment and reflects deductions
of all fees and charges including the semi-annual administrative charge and the
maximum deferred sales charge of 5%.
-33-
<PAGE> 36
THE TRAVELERS MONEY MARKET ACCOUNT
FOR VARIABLE ANNUITIES
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investment securities, at market value (cost $103,064,491)......................... $ 103,060,851
Cash............................................................................... 1,515,722
Receivables:
Interest....................................................................... 17,879
Investments securities sold.................................................... 4,119,000
Purchase payments and transfers from other Travelers accounts.................. 837,913
Other assets....................................................................... 249
----------------
Total Assets................................................................ 109,551,614
----------------
LIABILITIES:
Payables:
Investments securities purchased............................................... 5,632,754
Contract surrenders and transfers to other Travelers accounts.................. 1,747,536
Investment management and advisory fees........................................ 7,349
Accrued liabilities................................................................ 28,439
----------------
Total Liabilities........................................................... 7,416,078
----------------
NET ASSETS:............................................................................ $ 102,135,536
================
</TABLE>
See Notes to Financial Statements
-34-
<PAGE> 37
THE TRAVELERS MONEY MARKET ACCOUNT
FOR VARIABLE ANNUITIES
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest................................................................ $ 5,521,001
EXPENSES:
Investment management and advisory fees................................. $ 324,122
Insurance charges....................................................... 1,246,712
-----------------
Total expenses...................................................... 1,570,834
----------------
Net investment income............................................ 3,950,167
----------------
Net increase in net assets resulting from operations.................... $ 3,950,167
================
</TABLE>
See Notes to Financial Statements
-35-
<PAGE> 38
THE TRAVELERS MONEY MARKET ACCOUNT
FOR VARIABLE ANNUITIES
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
OPERATIONS:
Net investment income...................................................... $ 3,950,167 $ 3,600,931
---------------- ---------------
Net increase in net assets resulting from operations................... 3,950,167 3,600,931
---------------- ---------------
UNIT TRANSACTIONS:
Participant purchase payments
(applicable to 6,095,251 and 14,166,450 units, respectively)........... 14,649,623 32,465,312
Participant transfers from other Travelers accounts
(applicable to 118,152,715 and 94,992,947 units, respectively)......... 284,523,651 219,247,840
Administrative charges
(applicable to 37,011 and 37,992 units, respectively).................. (89,783) (88,495)
Contract surrenders
(applicable to 8,681,249 and 6,094,352 units, respectively)............ (20,899,693) (14,060,055)
Participant transfers to other Travelers accounts
(applicable to 109,964,438 and 104,773,969 units, respectively)........ (265,042,626) (241,734,934)
Other payments to participants
(applicable to 143,957 and 170,332 units, respectively)................ (346,736) (395,081)
---------------- ---------------
Net increase (decrease) in net assets resulting from unit transactions. 12,794,436 (4,565,413)
---------------- ---------------
Net increase (decrease) in net assets............................... 16,744,603 (964,482)
NET ASSETS:
Beginning of year.......................................................... 85,390,933 86,355,415
---------------- ---------------
End of year................................................................ $ 102,135,536 $ 85,390,933
================ ===============
</TABLE>
See Notes to Financial Statements
-36-
<PAGE> 39
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Travelers Money Market Account for Variable Annuities ("Account MM") is a
separate account of The Travelers Insurance Company ("The Travelers"), an
indirect wholly owned subsidiary of Citigroup Inc. (formerly Travelers Group
Inc.), and is available for funding certain variable annuity contracts issued by
The Travelers. Account MM is registered under the Investment Company Act of
1940, as amended, as a diversified, open-end management investment company.
The following is a summary of significant accounting policies consistently
followed by Account MM in the preparation of its financial statements.
SECURITY VALUATION. 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.
SECURITY TRANSACTIONS. Security transactions are accounted for on the
trade date. Interest income is recorded on the accrual basis. Premiums and
discounts are amortized to interest income utilizing the constant yield
method.
REPURCHASE AGREEMENTS. When Account MM enters into a repurchase agreement (a
purchase of securities whereby the seller agrees to repurchase the securities at
a mutually agreed upon date and price), the repurchase price of the securities
will generally equal the amount paid by Account MM plus a negotiated interest
amount. The seller under the repurchase agreement will be required to provide to
Account MM securities (collateral) whose market value, including accrued
interest, will be at least equal to 102% of the repurchase price. Account MM
monitors the value of collateral on a daily basis. Repurchase agreements will be
limited to transactions with national banks and reporting broker dealers
believed to present minimal credit risks. Account MM's custodian will take
actual or constructive receipt of all securities underlying repurchase
agreements until such agreements expire.
FEDERAL INCOME TAXES. The operations of Account MM form a part of the total
operations of The Travelers and are not taxed separately. The Travelers is taxed
as a life insurance company under the Internal Revenue Code of 1986, as amended
(the "Code"). Under existing federal income tax law, no taxes are payable on the
investment income and capital gains of Account MM. Account MM is not taxed as a
"regulated investment company" under Subchapter M of the Code.
OTHER. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
-37-
<PAGE> 40
NOTES TO FINANCIAL STATEMENTS - CONTINUED
2. CONTRACT CHARGES
Investment management and advisory fees are calculated daily at an annual rate
of 0.3233% of Account MM's average net assets. These fees are paid to Travelers
Asset Management International Corporation, an indirect wholly owned subsidiary
of Citigroup Inc.
Insurance charges are paid for the mortality and expense risks assumed by The
Travelers. On contracts issued prior to May 16, 1983, these charges are
equivalent to 1.0017% of the average net assets of Account MM on an annual
basis. On contracts issued on or after May 16, 1983, the charges for mortality
and expense risks are equivalent to 1.25% of the average net assets of Account
MM on an annual basis. Additionally, for certain contracts in the accumulation
phase, a semi-annual charge of $15 (prorated for partial periods) is deducted
from participant account balances and paid to The Travelers to cover
administrative charges.
The Travelers assesses a 5% contingent deferred sales charge if a participant's
purchase payment is surrendered within five years of its payment date. Contract
surrender payments include $153,043 and $90,325 of contingent deferred sales
charges for the years ended December 31, 1998 and 1997, respectively.
3. NET ASSETS HELD ON BEHALF OF AN AFFILIATE
Approximately $3,434,000 and $2,883,000 of the net assets of Account MM were
held on behalf of an affiliate of The Travelers as of December 31, 1998 and
1997, respectively. Transactions with this affiliate during the years ended
December 31, 1998 and 1997, were comprised of participant purchase payments of
approximately $2,874,000 and $320,000 and contract surrenders of approximately
$2,269,000 and $1,367,000, respectively.
4. NET CONTRACT OWNERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------
UNIT NET
UNITS VALUE ASSETS
<S> <C> <C> <C>
Accumulation phase of contracts issued prior to May 16, 1983.................. 23,994 $ 2.548 $ 61,152
Annuity phase of contracts issued prior to May 16, 1983....................... 67,130 2.548 171,086
Accumulation phase of contracts issued on or after May 16, 1983............... 41,453,984 2.450 101,620,194
Annuity phase of contracts issued on or after May 16, 1983.................... 115,487 2.450 283,104
---------------
Net Contract Owners' Equity........................................................................... $ 102,135,536
===============
</TABLE>
-38-
<PAGE> 41
NOTES TO FINANCIAL STATEMENTS - CONTINUED
5. SUPPLEMENTARY INFORMATION
(Selected data for a unit outstanding throughout each year.)
Contracts issued prior to May 16, 1983
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SELECTED PER UNIT DATA:
Total investment income.............................. $ .138 $ .134 $ .125 $ .130 $ .091
Operating expenses................................... .033 .032 .030 .030 .028
---------- ---------- --------- --------- ----------
Net investment income................................ .105 .102 .095 .100 .063
Unit value at beginning of year...................... 2.443 2.341 2.246 2.146 2.083
---------- ---------- --------- --------- ----------
Unit value at end of year............................ $ 2.548 $ 2.443 $ 2.341 $ 2.246 $ 2.146
========== ========== ========= ========= ==========
SIGNIFICANT RATIOS AND ADDITIONAL DATA:
Net increase in unit value........................... $ .11 $ .10 $ .10 $ .10 $ .06
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. 4.20% 4.27% 4.10% 4.61% 2.98%
Number of units outstanding at end of year
(thousands).......................................... 91 105 112 206 206
</TABLE>
Contracts issued on or after May 16, 1983
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SELECTED PER UNIT DATA:
Total investment income.............................. $ .133 $ .128 $ .121 $ .127 $ .087
Operating expenses................................... .038 .036 .035 .034 .032
---------- ---------- --------- --------- ----------
Net investment income................................ .095 .092 .086 .093 .055
Unit value at beginning of year...................... 2.355 2.263 2.177 2.084 2.029
----------
---------- --------- --------- ----------
Unit value at end of year............................ $ 2.450 $ 2.355 $ 2.263 $ 2.177 $ 2.084
========== ========== ========= ========= ==========
SIGNIFICANT RATIOS AND ADDITIONAL DATA:
Net increase in unit value........................... $ .10 $ .09 $ .09 $ .09 $ .06
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. 3.95% 4.02% 3.84% 4.36% 2.72%
Number of units outstanding at end of year
(thousands).............................................. 41,570 36,134 38,044 35,721 39,675
</TABLE>
-39-
<PAGE> 42
THE TRAVELERS MONEY MARKET ACCOUNT
FOR VARIABLE ANNUITIES
STATEMENT OF INVESTMENTS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
------------ ------------
<S> <C> <C>
SHORT-TERM INVESTMENTS (100%)
COMMERCIAL PAPER (100%)
AC Acquisition Holding Co.,
5.18% due January 14, 1999 $ 6,400,000 $ 6,387,417
Asset Securitization Corp.,
5.86% due January 19, 1999 5,300,000 5,285,918
Chrysler Financial Corp.,
5.33% due January 8, 1999 5,000,000 4,994,345
Coca-Cola Co.,
5.18% due February 5, 1999 5,200,000 5,174,109
E.I. Dupont de Nemours & Co.,
5.40% due January 12, 1999 3,466,000 3,460,146
Eastman Kodak Co.,
5.30% due February 8, 1999 3,000,000 2,983,824
Eaton Corp.,
5.38% due January 22, 1999 5,200,000 5,184,046
Ford Motor Credit Co.,
5.25% due June 1, 1999 1,000,000 1,001,231
GE Capital Corp.,
5.44% due January 15, 1999 5,000,000 4,989,475
Gillette Co.,
5.38% due January 4, 1999 3,000,000 2,998,296
H.J. Heinz Co.,
5.21% due February 3, 1999 5,000,000 4,976,485
Household Finance Corp.,
5.12% due January 4, 1999 2,636,000 2,634,503
J.C. Penney Company, Inc.,
5.35% due February 19, 1999 5,500,000 5,462,006
Johnson & Johnson,
5.21% due January 20, 1999 5,900,000 5,883,515
Marsh & McLennan Cos.,
5.22% due January 28, 1999 6,000,000 5,976,696
National Rural Utilities Coop
Finance Corp.,
5.14% due March 17, 1999 5,200,000 5,145,556
PepsiCo, Inc.,
5.65% due August 19, 1999 2,000,000 1,997,452
Procter & Gamble Co.,
5.22% due February 26, 1999 1,200,000 1,190,555
Progress Capital Holdings, Inc.
5.39% due January 26, 1999 5,200,000 5,181,212
Prudential Funding Corp.,
5.13% due March 12, 1999 3,000,000 2,970,639
Prudential Funding Corp.,
5.15% due March 15, 1999 2,285,000 2,261,700
Rubbermaid, Inc.,
5.29% due January 21, 1999 4,660,000 4,646,342
Transamerica Financial Corp.,
5.11% due February 22, 1999 6,000,000 5,956,074
Xerox Corp.,
5.08% due January 12, 1999 6,330,000 6,319,309
-------------
TOTAL INVESTMENTS (100%)
(COST $103,064,491) $ 103,060,851
=============
</TABLE>
See Notes to Financial Statements
-40-
<PAGE> 43
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Managers and Owners of Variable Annuity Contracts of
The Travelers Money Market Account for Variable Annuities
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, as of December 31, 1998, and the related statement
of operations for the year then ended, the statement of changes in net assets
for each of the two years in the period then ended, and the selected per unit
data and ratios for each of the five years in the period then ended present
fairly, in all material respects, the financial position of The Travelers Money
Market Account for Variable Annuities at December 3l, 1998, and the results of
their operations for the year then ended in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit, which included
confirmation of securities as of December 31, 1998, by correspondence with the
custodian, provides a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Hartford, Connecticut
February 15, 1999
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<PAGE> 47
Investment Adviser
------------------
THE TRAVELERS ASSET MANAGEMENT INTERNATIONAL CORPORATION
Hartford, Connecticut
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
Investment Sub-Adviser
----------------------
THE TRAVELERS INVESTMENT MANAGEMENT COMPANY
Hartford, Connecticut
THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES
Independent Accountants
-----------------------
PRICEWATERHOUSECOOPERS LLP
Hartford, Connecticut
Custodian
---------
THE CHASE MANHATTAN BANK, N.A.
New York, New York
This report is prepared for the general information of contract owners and is
not an offer of units of The Travelers Growth and Income Stock Account for
Variable Annuities, The Travelers Quality Bond Account for Variable Annuities or
The Travelers Money Market Account for Variable Annuities. It should not be used
in connection with any offer except in conjunction with the Universal Annuity
Prospectus which contains all pertinent information, including the applicable
sales commissions.
-45-
