-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SGp/g3eOFxJfFcmd7A8YldviG3sYFrr6Tabg7UPsmBhlsHMy8HR/r2qb5Y4t29Oo zUk3dPOUy5XkgPHU94eP7A== 0000950123-99-003706.txt : 19990427 0000950123-99-003706.hdr.sgml : 19990427 ACCESSION NUMBER: 0000950123-99-003706 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19990426 EFFECTIVENESS DATE: 19990501 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRAVELERS FUND BD II FOR VARIABLE ANNUITIES CENTRAL INDEX KEY: 0000941729 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 060904249 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 033-58131 FILM NUMBER: 99600717 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 811-07259 FILM NUMBER: 99600718 BUSINESS ADDRESS: STREET 1: FINANCIAL SERVICES LEGAL DIVISION STREET 2: ONE TOWER SQUARE CITY: HARTFORD STATE: CT ZIP: 06183 BUSINESS PHONE: 2032777379 MAIL ADDRESS: STREET 1: FINANCIAL SERVICES LEGAL DIVISION STREET 2: ONE TOWER SQUARE CITY: HARTFORD STATE: CT ZIP: 06183 485BPOS 1 TRAVELERS FUND BD II FOR VARIABLE ANNUITIES 1 Registration No. 33-58131 811-7259 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM N-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Post-Effective Amendment No. 4 and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 Amendment No. 4 THE TRAVELERS FUND BD II FOR VARIABLE ANNUITIES ----------------------------------------------- (Exact Name of Registrant) THE TRAVELERS LIFE AND ANNUITY COMPANY -------------------------------------- (Name of Depositor) ONE TOWER SQUARE, HARTFORD, CONNECTICUT 06183 --------------------------------------------- (Address of Depositor's Principal Executive Offices) Depositor's Telephone Number, including area code: (860) 277-0111 -------------- ERNEST J. WRIGHT Secretary The Travelers Life and Annuity Company One Tower Square Hartford, Connecticut 06183 --------------------------- (Name and Address of Agent for Service) Approximate Date of Proposed Public Offering: _____________________ It is proposed that this filing become effective (check appropriate box) immediately upon filing pursuant to paragraph (b) of Rule 485. - ---- X on May 1, 1999 pursuant to paragraph (b) of Rule 485. - ---- 60 days after filing pursuant to paragraph (a)(1) of Rule 485. - ---- on ___________ pursuant to paragraph (a)(1) of Rule 485. - ---- If appropriate, check the following box: this post-effective amendment designates a new effective date for a - ---- previously filed post-effective amendment. 2 PART A Information Required in a Prospectus 3 TRAVELERS VINTAGE PROSPECTUS This prospectus describes Travelers VINTAGE, a flexible premium variable annuity contract (the "Contract") issued by The Travelers Life and Annuity Company (the "Company", "we" or "our"). The Contract is available in connection with certain retirement plans that qualify for special federal income tax treatment ("qualified Contracts") as well as those that do not qualify for such treatment ("nonqualified Contracts"). Vintage may be issued as an individual Contract or as a group Contract. In states where only group Contracts are available, you will be issued a certificate summarizing the provisions of the group Contract. For convenience, this prospectus refers to both Contracts and certificates as "Contracts." You can choose to have your premiums ("purchase payments") accumulate on a fixed and/or a variable basis. Your contract value will vary daily to reflect the investment experience of the subaccounts ("funding options") you select and any interest credited to the Fixed Account. The variable funding options currently available are: DREYFUS VARIABLE INVESTMENT FUND Small Cap Portfolio GREENWICH STREET SERIES FUND Equity Index Portfolio Class II Total Return Portfolio SALOMON BROTHERS VARIABLE SERIES FUNDS, INC. Salomon Brothers Variable Investors Fund Salomon Brothers Variable Total Return Fund SMITH BARNEY CONCERT ALLOCATION SERIES, INC. Concert Select Balanced Portfolio Concert Select Growth Portfolio TRAVELERS SERIES FUND, INC. AIM Capital Appreciation Portfolio Alliance Growth Portfolio G.T. Global Strategic Income Portfolio MFS Total Return Portfolio Putnam Diversified Income Portfolio Smith Barney High Income Portfolio Smith Barney International Equity Portfolio Smith Barney Large Capitalization Growth Portfolio Smith Barney Large Cap Value Portfolio Smith Barney Money Market Portfolio Smith Barney Pacific Basin Portfolio Travelers Managed Income Portfolio* Van Kampen Enterprise Portfolio THE TRAVELERS SERIES TRUST Convertible Bond Portfolio Disciplined Mid Cap Stock Portfolio Disciplined Small Cap Stock Portfolio MFS Emerging Growth Portfolio MFS Research Portfolio Strategic Stock Portfolio * Formerly TBC Managed Income Portfolio The Fixed Account is described in Appendix B. The contracts and/or some of the funding options may not be available in all states. THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUSES FOR THE VARIABLE FUNDING OPTIONS. THESE PROSPECTUSES SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE. This Prospectus provides the information that you should know before investing in the Contract. You can receive additional information about The Travelers Fund BD II for Variable Annuities ("Fund BD II") by requesting a copy of the Statement of Additional Information ("SAI") dated May 1, 1999. The SAI has been filed with the Securities and Exchange Commission ("SEC") and is incorporated by reference into this Prospectus. To request a copy, write to The Travelers Life and Annuity Company, Annuity Investor Services, One Tower Square, Hartford, Connecticut 06183-9061, call 1-800-842-8573, or access the SEC's Website (http://www.sec.gov). The Table of Contents of the SAI appears in Appendix D of this Prospectus. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. VARIABLE ANNUITY CONTRACTS ARE NOT DEPOSITS OF ANY BANK, NOR ARE THEY GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. PROSPECTUS DATED MAY 1, 1999 4 TABLE OF CONTENTS Index of Special Terms............... 2 Summary.............................. 3 Fee Table............................ 6 Condensed Financial Information...... 9 The Annuity Contract................. 10 Contract Owner Inquiries........ 10 Purchase Payments............... 10 Accumulation Units.............. 10 The Funding Options............. 10 Charges and Deductions............... 13 General......................... 13 Withdrawal Charge............... 14 Free Withdrawal Allowance....... 14 Administrative Charges.......... 14 Mortality and Expense Risk Charge........................ 15 Funding Option Expenses......... 15 Premium Tax..................... 15 Changes in Taxes Based Upon Premium or Value.............. 15 Transfers............................ 15 Dollar Cost Averaging........... 15 Access to Your Money................. 16 Systematic Withdrawals.......... 17 Loans........................... 17 Ownership Provisions................. 17 Types of Ownership.............. 17 Beneficiary..................... 18 Annuitant....................... 18 Death Benefit........................ 18 Death Proceeds Before the Maturity Date................. 18 Death Proceeds After the Maturity Date................. 20 Payment of Proceeds............. 20 The Annuity Period................... 21 Maturity Date................... 21 Allocation of Annuity........... 21 Variable Annuity................ 21 Fixed Annuity................... 22 Payment Options...................... 22 Election of Options............. 22 Annuity Options................. 22 Income Options.................. 23 Miscellaneous Contract Provisions.... 24 Right to Return................. 24 Termination..................... 24 Required Reports................ 24 Suspension of Payments.......... 24 Transfers of Contract Values to Other Annuities............... 24 The Separate Account................. 24 Performance Information......... 25 Federal Tax Considerations........... 26 General Taxation of Annuities... 26 Types of Contracts: Qualified or Nonqualified.................. 26 Nonqualified Annuity Contracts..................... 26 Qualified Annuity Contracts..... 27 Penalty Tax for Premature Distributions................. 27 Diversification Requirements for Variable Annuities............ 27 Ownership of the Investments.... 27 Mandatory Distributions for Qualified Plans............... 28 Other Information.................... 28 The Insurance Company........... 28 Financial Statements............ 28 IMSA............................ 28 Year 2000 Compliance............ 28 Distribution of Variable Annuity Contracts..................... 29 Conformity with State and Federal Laws.................. 29 Voting Rights................... 29 Legal Proceedings And Opinions...................... 29 Appendix A: Condensed Financial Information........................ A-1 Appendix B: The Fixed Account........ B-1 Appendix C........................... C-1 Appendix D: Contents of the Statement of Additional Information.......... D-1
INDEX OF SPECIAL TERMS The following terms are italicized throughout the prospectus. Refer to the page listed for an explanation of each term. Accumulation Unit.................... 10 Annuitant............................ 18 Annuity Payments..................... 21 Annuity Unit......................... 21 Cash Surrender Value................. 16 Contract Date........................ 10 Contract Owner (You, Your)........... 17 Contract Value....................... 10 Contract Year........................ 10 Death Report Date.................... 18 Fixed Account........................ B-1 Funding Option(s).................... 10 Maturity Date........................ 21 Purchase Payment..................... 10 Written Request...................... 10
2 5 SUMMARY: TRAVELERS VINTAGE VARIABLE ANNUITY THIS SUMMARY DETAILS SOME OF THE MORE IMPORTANT POINTS THAT YOU SHOULD KNOW AND CONSIDER BEFORE PURCHASING THE CONTRACT. PLEASE READ THE ENTIRE PROSPECTUS CAREFULLY. CAN YOU GIVE ME A GENERAL DESCRIPTION OF THE VARIABLE ANNUITY CONTRACT? The Contract offered by The Travelers Life and Annuity Company is a variable annuity that is intended for retirement savings or other long-term investment purposes. The Contract provides a death benefit as well as guaranteed income options. Under a qualified Contract, you can make one or more payments, as you choose, on a tax-deferred basis. Under a nonqualified Contract, you can make one or more payments with after-tax dollars. You direct your payment(s) to one or more of the variable funding options, and/or to the Fixed Account. We guarantee money directed to the Fixed Account as to principal and interest. The variable funding options are designed to produce a higher rate of return than the Fixed Account; however, this is not guaranteed. You may also lose money in the variable funding options. The Contract, like all deferred variable annuity contracts, has two phases: the accumulation phase and the payout phase. During the accumulation phase generally, under a qualified contract, your pre-tax contributions accumulate on a tax-deferred basis and are taxed as income when you make a withdrawal, presumably when you are in a lower tax bracket. During the accumulation phase, under a nonqualified contract, earnings on your after-tax contributions accumulate on a tax-deferred basis and are taxed as income when you make a withdrawal. The payout phase occurs when you begin receiving payments from your Contract. The amount of money you accumulate in your Contract determines the amount of income (annuity payments) you receive during the payout phase. During the payout phase, you may chose to receive annuity payments from the Fixed Account or the variable funding options. If you want to receive scheduled payments from your annuity, you can choose from a number of annuity options or income options. Once you make an election of an annuity option and begin to receive payments, it cannot be changed. During the payout phase, you have the same investment choices you had during the accumulation phase. If amounts are directed to the variable funding options, the dollar amount of your payments may increase or decrease. WHO SHOULD PURCHASE THIS CONTRACT? The Contract is currently available for use in connection with (1) individual nonqualified purchases; (2) rollovers from Individual Retirement Annuities (IRAs); and (3) rollovers from other qualified retirement plans. Qualified contracts include contracts qualifying under Section 401(a), 403(b), or 408(b) of the Internal Revenue Code of 1986, as amended. You may purchase the Contract with an initial payment of at least $5,000. You may make additional payments of at least $500 at any time during the accumulation phase. (In some states, additional payments are not allowed.) IS THERE A RIGHT TO RETURN PERIOD? If you cancel the Contract within twenty days after you receive it, you will receive a full refund of the Contract Value (including charges). Where state law requires a longer right to return period, or the return of purchase payments, the Company will comply. You bear the investment risk during the right to return period; therefore, the Contract Value returned may be greater or less than your purchase payment. If the Contract is purchased as an Individual Retirement Annuity, and is returned within the first seven days after delivery, your full purchase payment will be refunded; during the remainder of the right to return period, the Contract Value (including charges) will be refunded. The Contract Value will be determined at the close of business on the day we receive a written request for a refund. 3 6 WHAT TYPES OF INVESTMENT OPTIONS ARE AVAILABLE? You can direct your money into the Fixed Account or any or all of the variable funding options shown on the cover page. The funding options are described in the accompanying fund prospectuses. Depending on market conditions, you may make or lose money in any of these options. The value of the Contract will vary depending upon the investment performance of the funding options you choose. Past performance is not a guarantee of future results. Standard and nonstandard performance is shown in the Statement of Additional Information that you may request free of charge. You can transfer between the variable funding options as frequently as you wish without any current tax implications. Currently there is no charge for transfers, nor a limit to the number of transfers allowed. We may, in the future, charge a fee for any transfer requests, or may limit the number of transfers allowed. We, at the minimum, would always allow one transfer every six months. You may transfer between the Fixed Account and the variable funding options twice a year (during the 30 days after the six-month contract date anniversary). WHAT EXPENSES WILL BE ASSESSED UNDER THE CONTRACT? The Contract has insurance features and investment features, and there are costs related to each. For Contracts with a value of less than $40,000, the Company deducts an annual administrative charge of $30. The annual insurance charge varies depending on which death benefit you choose. For the standard death benefit, the insurance charge is 1.02% of the amounts you direct to the funding options; for the enhanced death benefit, (if available) the insurance charge is 1.30%. The sub-account administrative charge is .15% annually, regardless of which death benefit is selected. Each funding option also charges for management and other expenses. Please refer to the Fee Table for more information about the charges. We may deduct a withdrawal charge equal to a percentage of the purchase payments withdrawn from the Contract. If you withdraw all amounts under the contract, or if you begin receiving annuity payments, the Company may be required by your state to deduct a premium tax. HOW WILL MY CONTRIBUTIONS AND WITHDRAWALS BE TAXED? Generally, the payments you make to a qualified Contract during the accumulation phase are made with before-tax dollars. You will be taxed on your purchase payments and on any earnings when you make a withdrawal or begin receiving annuity payments. Under a nonqualified Contract, payments to the Contract are made with after-tax dollars, and any earnings will accumulate tax-deferred. You will be taxed on these earnings when they are withdrawn from the Contract. For owners of qualified Contracts, if you reach a certain age, you may be required by federal tax laws to begin receiving payments from your annuity or risk paying a penalty tax. In those cases, we can calculate and pay you the minimum required distribution amounts. If you are younger than 59 1/2 when you take money out, you may be charged a 10% federal penalty tax on the amount withdrawn. HOW MAY I ACCESS MY MONEY? You can take withdrawals any time during the accumulation phase. A withdrawal charge may apply. The amount of the charge depends on a number of factors, including the length of time since the purchase payment was made (6% maximum, gradually decreasing to 0% for payments held by the Company for 7 years or more). After the first contract year, you may withdraw up to 15% of the contract value (as of the end of the previous contract year) without a withdrawal charge. Of course, you may also have to pay income taxes and a tax penalty on taxable amounts you withdraw. WHAT IS THE DEATH BENEFIT UNDER THE CONTRACT? The death benefit applies upon the first death of the owner, joint owner or annuitant. Assuming you are the annuitant, if you die before you move to the income phase, the person you have chosen as your beneficiary will receive a death benefit. The death benefit paid depends on your age at the time of your death. The death benefit value is 4 7 calculated at the close of the business day on which the Company's Administrative Office receives due proof of death and written distribution instructions. Please refer to the Death Benefit section in the prospectus for details. ARE THERE ANY ADDITIONAL FEATURES? This Contract has other features you may be interested in. These include: - DOLLAR COST AVERAGING. This is a program that allows you to invest a fixed amount of money in funding options each month, theoretically giving you a lower average cost per unit over time than a single one-time purchase. Dollar Cost Averaging requires regular investments regardless of fluctuating price levels and does not guarantee profits or prevent losses in a declining market. Potential investors should consider their financial ability to continue purchases through periods of low price levels. - SYSTEMATIC WITHDRAWAL OPTION. Before the maturity date, you can arrange to have money sent to you at set intervals throughout the year. Of course any applicable income and penalty taxes will apply on amounts withdrawn. - AUTOMATIC REBALANCING. You may elect to have the Company periodically reallocate the values in your contract to match your original (or your latest) funding option allocation request. 5 8 FEE TABLE - -------------------------------------------------------------------------------- CONTRACT OWNER TRANSACTION EXPENSES WITHDRAWAL CHARGE (as a percentage of purchase payments withdrawn): LENGTH OF TIME FROM PURCHASE PAYMENT
(NUMBER OF YEARS) CHARGE 1 6% 2 6% 3 6% 4 3% 5 2% 6 1% 7 and over 0%
ANNUAL CONTRACT ADMINISTRATIVE CHARGE $30 (Waived if contract value is $40,000 or more)
ANNUAL SEPARATE ACCOUNT CHARGES: (as a percentage of the average daily net assets of the Separate Account)
STANDARD ENHANCED DEATH BENEFIT DEATH BENEFIT - --------------------------------------------------------------------------------------------- Mortality and Expense Risk Charge.................... 1.02% 1.30% Administrative Expense Charge........................ 0.15% 0.15% ----- ----- Total Separate Account Charges..................... 1.17% 1.45% FUNDING OPTION EXPENSES: (as a percentage of average daily net assets of the funding option as of December 31, 1998, unless otherwise noted.)
TOTAL ANNUAL OPERATING MANAGEMENT FEE OTHER EXPENSES EXPENSES (AFTER EXPENSE (AFTER EXPENSE (AFTER EXPENSE UNDERLYING FUNDING OPTIONS: REIMBURSEMENT) 12B-1 FEES REIMBURSEMENT) REIMBURSEMENT) - --------------------------------------------------------------------------------------------------------------- DREYFUS VARIABLE INVESTMENT FUND Small Cap Portfolio.................... 0.75% 0.02% 0.77% GREENWICH STREET SERIES FUND Equity Index Portfolio Class II........ 0.21% 0.25% 0.09% 0.55%(1) Total Return Portfolio................. 0.75% 0.04% 0.79% SALOMON BROTHERS VARIABLE SERIES FUNDS, INC. Salomon Brothers Variable Total Return Fund................................. 0.80% 0.20% 1.00%(2) Salomon Brothers Variable Investors Fund................................. 0.70% 0.30% 1.00%(2) SMITH BARNEY CONCERT ALLOCATION SERIES, INC. Concert Select Balanced Portfolio...... 0.00% 0.35% 0.35%(4) Concert Select Conservative Portfolio(3)......................... 0.00% 0.35% 0.35%(4) Concert Select Growth Portfolio........ 0.00% 0.35% 0.35%(4) Concert Select High Growth Portfolio(3)......................... 0.00% 0.35% 0.35%(4) Concert Select Income Portfolio(3)..... 0.00% 0.35% 0.35%(4) TRAVELERS SERIES FUND, INC. AIM Capital Appreciation Portfolio..... 0.80% 0.05% 0.85%(5) Alliance Growth Portfolio.............. 0.80% 0.02% 0.82%(5) G.T. Global Strategic Income Portfolio............................ 0.80% 0.23% 1.03%(5) MFS Total Return Portfolio............. 0.80% 0.04% 0.84%(5) Putnam Diversified Income Portfolio.... 0.75% 0.12% 0.87%(5) Smith Barney High Income Portfolio..... 0.60% 0.07% 0.67%(5) Smith Barney International Equity Portfolio............................ 0.90% 0.10% 1.00%(5) Smith Barney Large Capitalization Growth Portfolio..................... 0.75% 0.25% 1.00%(6)
6 9
TOTAL ANNUAL OPERATING MANAGEMENT FEE OTHER EXPENSES EXPENSES (AFTER EXPENSE (AFTER EXPENSE (AFTER EXPENSE UNDERLYING FUNDING OPTIONS: (CONTINUED) REIMBURSEMENT) 12B-1 FEES REIMBURSEMENT) REIMBURSEMENT) - --------------------------------------------------------------------------------------------------------------- Smith Barney Large Cap Value Portfolio (formerly Smith Barney Income and Growth Portfolio).................. 0.65% 0.03% 0.68%(5) Smith Barney Money Market Portfolio.... 0.50% 0.14% 0.64%(5) Smith Barney Pacific Basin Portfolio... 0.90% 0.66% 1.56%(5) Travelers Managed Income Portfolio..... 0.65% 0.19% 0.84%(5) Van Kampen Enterprise Portfolio........ 0.70% 0.03% 0.73%(5) THE TRAVELERS SERIES TRUST Convertible Bond Portfolio............. 0.60% 0.20% 0.80%(7) Disciplined Mid Cap Stock Portfolio.... 0.70% 0.25% 0.95%(8) Disciplined Small Cap Stock Portfolio............................ 0.80% 0.20% 1.00%(7) MFS Emerging Growth Portfolio.......... 0.75% 0.14% 0.89% MFS Research Portfolio................. 0.80% 0.20% 1.00%(7) Strategic Stock Portfolio.............. 0.60% 0.30% 0.90%(7)
NOTES: The purpose of the Fee Table is to assist Contract Owners in understanding the various costs and expenses that a Contract Owner will bear, directly or indirectly. See "Charges and Deductions" in this prospectus for additional information. Expenses shown do not include premium taxes, which may be applicable. "Other Expenses" include operating costs of the fund. These expenses are reflected in each funding option's net asset value and are not deducted from the account value under the Contract. (1) Other expenses for the EQUITY INDEX PORTFOLIO have been restated to reflect the current expense reimbursement arrangement whereby the adviser has agreed to reimburse the Portfolio for the amount by which expenses exceed 0.30%. Without such arrangement, Total Annual Operating Expenses would have been 0.42%. In addition, the Portfolio Management Fee includes 0.06% for fund administration. Class 2 of this fund has a distribution plan or "Rule 12b-1 plan". (2) SBAM has waived all of its Management Fees for the following Salomon Brothers Funds for the period ended December 31, 1998. If such fees were not waived or expenses reimbursed, the actual annualized Total Annual Operating Expenses for the INVESTORS FUND and the TOTAL RETURN FUND would have been 2.07% and 2.90%, respectively. (3) Not available to new contract owners after May 1, 1998 in most states. (4) The CONCERT ALLOCATION SERIES SELECT PORTFOLIOS (a "fund of funds") invest in the shares of other mutual funds. Their management fee is 0.35% and they have no expenses. The other expenses shown are based on the expected weighted average of underlying fund expense ratios (which include a management fee and other expenses) as of January 31, 1998, the underlying funds' fiscal year end. See the Fund prospectus for information regarding the equity/fixed income (including money market) investment target and range for each portfolio, and for the expense ratios for the underlying funds. Such ratios range from 0.50% to 1.29%. (5) Expenses are as of October 31, 1998 (the Fund's fiscal year end). There were no fees waived or expenses reimbursed for these funds in 1998. (6) The Manager waived all or part of its fees for the period ended October 31, 1998. If such fees were not waived, the annualized Total Annual Operating Expenses for the SMITH BARNEY LARGE CAPITALIZATION GROWTH PORTFOLIO would have been 1.77%. (7) Travelers Insurance has agreed to reimburse the CONVERTIBLE BOND PORTFOLIO, the STRATEGIC STOCK PORTFOLIO, the DISCIPLINED SMALL CAP STOCK PORTFOLIO, the MFS MID CAP GROWTH PORTFOLIO, and the MFS RESEARCH PORTFOLIO for expenses for the period ended December 31, 1998. If such expenses were not reimbursed, the actual annualized Total Annual Operating Expenses would have been 1.86%, 1.51%, 2.98%, 1.62%, and 1.37%, respectively. (8) Other Expenses reflect the current expense reimbursement arrangement with Travelers where Travelers has agreed to reimburse the Portfolios for the amount by which their aggregate expenses (including management fees, but excluding brokerage commissions, interest charges and taxes) exceeds 0.95%. Without such arrangements, the annualized Total Annual Operating Expenses for the Portfolios would have been 1.22% for the TRAVELERS DISCIPLINED MID CAP STOCK PORTFOLIO. 7 10 EXAMPLE*: STANDARD DEATH BENEFIT Assuming a 5% annual return on assets, a $1,000 investment would be subject to the following expenses:
- ------------------------------------------------------------------------------------------------------------------ IF CONTRACT IS SURRENDERED AT THE IF CONTRACT IS NOT SURRENDERED OR END OF PERIOD SHOWN: ANNUITIZED AT END OF PERIOD SHOWN: ------------------------------------- ------------------------------------- UNDERLYING FUNDING OPTION 1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS - ------------------------------------------------------------------------------------------------------------------ DREYFUS VARIABLE INVESTMENT FUND Small Cap Portfolio............ $80 $121 $125 $227 $20 $61 $105 $227 GREENWICH STREET SERIES FUND Equity Index Portfolio Class II........................... 78 114 114 204 18 54 94 204 Total Return Portfolio......... 80 122 126 229 20 62 106 229 SALOMON BROTHERS VARIABLE SERIES FUNDS, INC. Salomon Brothers Variable Total Return Fund.................. 80 122 126 229 20 62 106 229 Salomon Brothers Variable Investors Fund............... 82 128 137 251 22 68 117 251 SMITH BARNEY CONCERT ALLOCATION SERIES, INC. Concert Select Balanced Portfolio.................... 76 108 103 182 16 48 83 182 Concert Select Conservative Portfolio***................. 76 108 103 182 16 48 83 182 Concert Select Growth Portfolio.................... 76 108 103 182 16 48 83 182 Concert Select High Growth Portfolio***................. 76 108 103 182 16 48 83 182 Concert Select Income Portfolio***................. 76 108 103 182 16 48 83 182 TRAVELERS SERIES FUND, INC. AIM Capital Appreciation Portfolio.................... 81 124 129 236 21 64 109 236 Alliance Growth Portfolio...... 80 123 128 233 20 63 108 233 G.T. Global Strategic Income Portfolio.................... 82 129 138 254 22 69 118 254 MFS Total Return Portfolio..... 80 123 129 235 20 63 109 235 Putnam Diversified Income Portfolio.................... 81 124 130 238 21 64 110 238 Smith Barney High Income Portfolio.................... 79 118 120 217 19 58 100 217 Smith Barney International Equity Portfolio............. 82 128 137 251 22 68 117 251 Smith Barney Large Capitalization Growth Portfolio.................... 82 128 137 251 22 68 117 251 Smith Barney Large Cap Value Portfolio.................... 79 118 121 218 19 58 101 218 Smith Barney Money Market Portfolio.................... 78 117 118 214 18 57 98 214 Smith Barney Pacific Basin Portfolio.................... 88 145 165 307 28 85 145 307 Travelers Managed Income Portfolio.................... 80 123 129 235 20 63 109 235 Van Kampen Enterprise Portfolio.................... 79 120 123 223 19 60 103 223 THE TRAVELERS SERIES TRUST Convertible Bond Portfolio..... 80 122 127 231 20 62 107 231 Disciplined Mid Cap Stock Portfolio.................... 82 127 134 246 22 67 114 246 Disciplined Small Cap Stock Portfolio.................... 82 128 137 251 22 68 117 251 MFS Emerging Growth Portfolio.. 81 125 131 240 21 65 111 240 MFS Research Portfolio......... 82 128 137 251 22 68 117 251 Strategic Stock Portfolio...... 81 125 132 241 21 65 112 241
* THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THE EXAMPLE REFLECTS THE $30 ANNUAL CONTRACT ADMINISTRATIVE CHARGE AS AN ANNUAL CHARGE OF 0.009% OF ASSETS. ** The Withdrawal Charge is waived if annuity payout has begun or if an income option of at least five years' duration is begun after the first Contract Year. (See "Charges and Deductions.") *** Not available to new contract owners after May 1, 1998 in most states. 8 11 EXAMPLE*: ENHANCED DEATH BENEFIT Assuming a 5% annual return on assets, a $1,000 investment would be subject to the following expenses:
- ------------------------------------------------------------------------------------------------------------------ IF CONTRACT IS SURRENDERED AT THE IF CONTRACT IS NOT SURRENDERED OR END OF PERIOD SHOWN: ANNUITIZED AT END OF PERIOD SHOWN: ------------------------------------- ------------------------------------- UNDERLYING FUNDING OPTION 1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS - ------------------------------------------------------------------------------------------------------------------ DREYFUS VARIABLE INVESTMENT FUND Small Cap Portfolio............ $83 $130 $139 $256 $23 $70 $119 $ 256 GREENWICH STREET SERIES FUND Equity Index Portfolio Class II........................... 80 123 128 234 20 63 108 234 Total Return Portfolio......... 83 130 140 258 23 70 120 258 SALOMON BROTHERS VARIABLE SERIES FUNDS, INC. Salomon Brothers Variable Total Return Fund.................. 85 137 151 280 25 77 131 280 Salomon Brothers Variable Investors Fund............... 85 137 151 280 25 77 131 280 SMITH BARNEY CONCERT ALLOCATION SERIES, INC. Concert Select Balanced Portfolio.................... 78 117 118 213 18 57 98 213 Concert Select Conservative Portfolio***................. 78 117 118 213 18 57 98 213 Concert Select Growth Portfolio.................... 78 117 118 213 18 57 98 213 Concert Select High Growth Portfolio***................. 78 117 118 213 18 57 98 213 Concert Select Income Portfolio***................. 78 117 118 213 18 57 98 213 TRAVELERS SERIES FUND, INC. AIM Capital Appreciation Portfolio.................... 83 132 143 264 23 72 123 2646 Alliance Growth Portfolio...... 83 131 142 261 23 71 122 2621 G.T. Global Strategic Income Portfolio.................... 85 138 153 282 25 78 133 282 MFS Total Return Portfolio..... 83 132 143 263 23 72 123 263 Putnam Diversified Income Portfolio.................... 84 133 144 266 24 73 124 266 Smith Barney High Income Portfolio.................... 82 127 134 246 22 67 114 246 Smith Barney International Equity Portfolio............. 85 137 151 280 25 77 131 280 Smith Barney Large Capitalization Growth Portfolio.................... 85 137 151 280 25 77 131 280 Smith Barney Large Cap Value Portfolio.................... 82 127 135 247 22 67 115 247 Smith Barney Money Market Portfolio.................... 81 126 133 243 21 66 113 243 Smith Barney Pacific Basin Portfolio.................... 90 153 179 334 30 93 159 334 Travelers Managed Income Portfolio.................... 83 132 143 263 23 72 123 263 Van Kampen Enterprise Portfolio.................... 82 128 137 252 22 68 117 252 THE TRAVELERS SERIES TRUST Convertible Bond Portfolio..... 83 131 141 259 23 71 121 259 Disciplined Mid Cap Stock Portfolio.................... 84 135 148 275 24 75 128 275 Disciplined Small Cap Stock Portfolio.................... 85 137 151 280 25 77 131 280 MFS Emerging Growth Portfolio.. 84 133 145 269 24 73 125 269 MFS Research Portfolio......... 85 137 151 280 25 77 131 280 Strategic Stock Portfolio...... 84 134 146 270 24 74 126 270
* THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THE EXAMPLE REFLECTS THE $30 ANNUAL CONTRACT ADMINISTRATIVE CHARGE AS AN ANNUAL CHARGE OF 0.009% OF ASSETS. ** The Withdrawal Charge is waived if annuity payout has begun or if an income option of at least five years' duration is begun after the first Contract Year. (See "Charges and Deductions.") *** Not available to new contract owners after May 1, 1998 in most states. CONDENSED FINANCIAL INFORMATION - -------------------------------------------------------------------------------- See Appendix A. 9 12 THE ANNUITY CONTRACT - -------------------------------------------------------------------------------- Travelers Vintage Annuity is a contract between you (the contract owner) and Travelers Life and Annuity Company ("us" or the "Company"). Under this contract, you make purchase payments to us and we credit them to your Contract. The Company promises to pay you an income, in the form of annuity or income payments, beginning on a future date that you choose, the maturity date. The purchase payments accumulate tax deferred in the funding options of your choice. You assume the risk of gain or loss according to the performance of the funding options. The contract value is the amount of purchase payments, plus or minus any investment experience or interest. The contract value also reflects all surrenders made and charges deducted. There is generally no guarantee that at the maturity date the contract value will equal or exceed the total purchase payments made under the Contract. The date the Contract and its benefits became effective is referred to as the contract date. Each 12-month period following the contract date is called a contract year. Certain changes and elections must be made in writing to the Company. Where the term "written request" is used, it means that written information must be sent to the Company's Home Office in a form and content satisfactory to us. CONTRACT OWNER INQUIRIES Any questions you have about your contract should be directed to the Company's Home Office at 1-800-842-8573. PURCHASE PAYMENTS The initial purchase payment must be at least $5,000. Additional payments of at least $500 may be made under the Contract at any time. Under certain circumstances, we may waive the minimum purchase payment requirement. Purchase payments over $1,000,000 may be made with our prior consent. In some states, we do not accept additional purchase payments. The initial purchase payment is due and payable before the Contract becomes effective. We will apply the initial purchase payment within two business days after we receive it at our Home Office. Subsequent purchase payments will be credited to a Contract within one business day. Our business day ends when the New York Stock Exchange closes, usually 4:00 p.m. Eastern time. ACCUMULATION UNITS An accumulation unit is used to calculate the value of a Contract. An accumulation unit works like a share of a mutual fund. Each funding option has a corresponding accumulation unit value. The accumulation units are valued each business day and may increase or decrease from day to day. The number of accumulation units we will credit to your Contract once we receive a purchase payment is determined by dividing the amount directed to each funding option by the value of the accumulation unit. We calculate the value of an accumulation unit for each funding option each day after the New York Stock Exchange closes. After the value is calculated, your account is credited. During the annuity period (i.e., after the maturity date), you are credited with annuity units. THE FUNDING OPTIONS You choose which of the following variable funding options to have your purchase payments allocated to. These funding options are subsections of a Separate Account, which invest in the underlying mutual funds. You are not investing directly in the underlying mutual fund. You will find detailed information about the options and their inherent risks in the current prospectuses for the funding options which must accompany this prospectus. Since each option has varying degrees of risk, please read the prospectuses carefully before investing. Additional copies of the 10 13 prospectuses may be obtained by contacting your registered representative or by calling 1-800-842-8573. If any of the funding options should become unavailable for allocating purchase payments, or if we believe that further investment in a funding option becomes inappropriate for the purposes of the Contract, we may substitute another funding option. However, we will not make any substitutions without notifying you and obtaining any applicable state and SEC approval. From time to time we may make new funding options available. The current funding options are listed below, along with their investment advisers and any subadviser:
INVESTMENT FUNDING OPTION OBJECTIVE INVESTMENT ADVISER/SUBADVISER - -------------------------------------------------------------------------------------------------------------------- DREYFUS VARIABLE INVESTMENT FUND Small Cap Portfolio Seeks to maximize capital appreciation. The Dreyfus Corporation GREENWICH STREET SERIES FUND Total Return Portfolio An equity portfolio that seeks to provide total SSBC Fund Management Inc., return, consisting of long-term capital ("SSBC") appreciation and income. The Portfolio will invest primarily in a diversified portfolio of dividend-paying common stocks. SALOMON BROTHERS VARIABLE SERIES FUND, INC. Salomon Brothers Variable Seeks long-term growth of capital. Current income Salomon Brothers Asset Investors Fund is a secondary objective. Management ("SBAM") Salomon Brothers Variable Seeks above-average income (compared to a portfo- SBAM Total Return Fund lio invested entirely in equity securities). Secondarily, seeks opportunities for growth of capital and income. SMITH BARNEY CONCERT ALLOCATION SERIES, INC. Concert Select Balanced Seeks a balance of growth of capital and income by Travelers Investment Advisers Portfolio investing in a select group of mutual funds. ("TIA") Concert Select Growth Seeks long-term growth of capital by investing in TIA Portfolio a select group of mutual funds. TRAVELERS SERIES FUND, INC. AIM Capital Appreciation Seeks capital appreciation by investing TIA Portfolio principally in common stock, with emphasis on Subadviser: AIM Capital medium-sized and smaller emerging growth Management Inc. companies. Alliance Growth Portfolio Seeks long-term growth of capital by investing TIA predominantly in equity securities of companies Subadviser: Alliance Capital with a favorable outlook for earnings and whose Management L.P. rate of growth is expected to exceed that of the U.S. economy over time. Current income is only an incidental consideration. G.T. Global Strategic Seeks primarily high current income and, TIA Income Portfolio secondarily, capital appreciation. The Portfolio Subadviser: Chancellor LGT allocates its assets among debt securities of Asset Management, Inc. issuers in the U.S., developed foreign countries, and emerging markets. MFS Total Return Portfolio Seeks to obtain above-average income (compared to TIA a portfolio entirely invested in equity Subadviser: Massachusetts securities) consistent with the prudent employment Financial Services Company of capital. Generally, at least 40% of the ("MFS") Portfolio's assets will be invested in equity securities. Putnam Diversified Income Seeks high current income consistent with TIA Portfolio preservation of capital. The Portfolio will Subadviser: Putnam Investment allocate its investments among the U.S. Government Management, Inc. Sector, the High Yield Sector, and the International Sector of the fixed income securities markets.
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INVESTMENT FUNDING OPTION OBJECTIVE INVESTMENT ADVISER/SUBADVISER - -------------------------------------------------------------------------------------------------------------------- TRAVELERS SERIES FUND, INC., CONT. Smith Barney High Income Seeks high current income. Capital appreciation is SSBC Portfolio a secondary objective. The Portfolio will invest at least 65% of its assets in high-yielding corporate debt obligations and preferred stock. Smith Barney International Seeks total return on assets from growth of SSBC Equity Portfolio capital and income by investing at least 65% of its assets in a diversified portfolio of equity securities of established non-U.S. issuers. Smith Barney Large Seeks long-term growth of capital by investing in SSBC Capitalization Growth equity securities of companies with large market Portfolio capitalizations. Smith Barney Large Cap Seeks current income and long-term growth of SSBC Value Portfolio (formerly income and capital by investing primarily, but not "Smith Barney Income exclusively, in common stocks. and Growth Portfolio") Smith Barney Money Market Seeks maximum current income and preservation of SSBC Portfolio capital by investing in high quality, short-term money market instruments. An investment in this fund is neither insured not guaranteed by the U.S. Government, and there is no assurance that a stable $1 value per share will be maintained. Smith Barney Pacific Basin Seeks long-term capital appreciation, through SSBC Portfolio investment primarily in equity securities of companies in Asian Pacific Countries. Travelers Managed Income Seeks high current income consistent with prudent TIA Portfolio risk of capital through investments in corporate debt obligations, preferred stocks, and obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities. Van Kampen Enterprise Seeks capital appreciation through investment in SSBC Portfolio securities believed to have above-average Subadviser: Van Kampen Asset potential for capital appreciation. Any income Management Inc. received on such securities is incidental to the objective of capital appreciation. THE TRAVELERS SERIES TRUST Convertible Bond Portfolio Seeks current income and capital appreciation by Travelers Asset Management investing in convertible securities and in International Corporation combinations of nonconvertible fixed-income ("TAMIC") securities and warrants or call options that together resemble convertible securities. Disciplined Mid Cap Stock Seeks growth of capital by investing primarily in TAMIC Portfolio a broadly diversified portfolio of common stocks. Subadviser: Travelers Investment Management Company ("TIMCO") Disciplined Small Cap Stock Seeks long term capital appreciation by investing TAMIC Portfolio primarily (at least 65% of its total assets) in Subadviser: TIMCO the common stocks of U.S. Companies with relatively small market capitalizations at the time of investment. MFS Emerging Growth Seeks long-term growth of capital. Dividend and TAMIC Portfolio interest income from portfolio securities, if any, Subadviser: MFS is incidental. MFS Research Portfolio Seeks to provide long-term growth of capital and TAMIC future income. Subadviser: MFS
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INVESTMENT FUNDING OPTION OBJECTIVE INVESTMENT ADVISER/SUBADVISER - -------------------------------------------------------------------------------------------------------------------- THE TRAVELERS SERIES TRUST, CONT. Strategic Stock Portfolio Seeks to provide an above-average total return TAMIC through a combination of potential capital, Subadviser: TIMCO appreciation and dividend income by investing primarily in high dividend yielding stocks periodically selected from the companies included in (i) the Dow Jones Industrial Average and (ii) a subset of the Standard & Poor's Industrial Index.
CHARGES AND DEDUCTIONS - -------------------------------------------------------------------------------- GENERAL We deduct the charges described below. The charges are for the service and benefits we provide, costs and expenses we incur, and risks we assume under the Contracts. Services and benefits we provide include: - the ability for you to make withdrawals and surrenders under the Contracts; - the death benefit paid on the death of the contract owner, annuitant, or first of the joint contract owners, - the available funding options and related programs (including dollar-cost averaging, portfolio rebalancing, and systematic withdrawal programs); - administration of the annuity options available under the Contracts; and - the distribution of various reports to contract owners. Costs and expenses we incur include: - losses associated with various overhead and other expenses associated with providing the services and benefits provided by the Contracts, - sales and marketing expenses, and - other costs of doing business. Risks we assume include: - risks that annuitants may live longer than estimated when the annuity factors under the Contracts were established, - that the amount of the death benefit will be greater than the contract value, and - that the costs of providing the services and benefits under the Contracts will exceed the charges deducted. We may also deduct a charge for taxes. Unless otherwise specified, charges are deducted proportionately from all funding options in which you are invested. We may reduce or eliminate the withdrawal charge, the administrative charges, the mortality and expense risk charge, and the distribution charge under the Contract when certain sales or administration of the Contract result in savings or reduced expenses and/or risks. For certain trusts, we may change the order in which purchase payments and earnings are withdrawn in order to determine the withdrawal charge. In no event will we reduce or eliminate the withdrawal charge or the administrative charge where such reduction or elimination would be unfairly discriminatory to any person. 13 16 WITHDRAWAL CHARGE We do not deduct a sales charge from purchase payments when they are applied under the Contract. However, a withdrawal charge will be deducted if any or all of the contract value is withdrawn during the first six years following a purchase payment. The length of time from when we receive the purchase payment to the time of withdrawal determines the amount of the charge. We will deduct the withdrawal charge from the total amount requested unless you instruct us to deduct it from the remaining contract value. The withdrawal charge is equal to a percentage of purchase payments withdrawn from the Contract and is calculated as follows:
LENGTH OF TIME FROM PURCHASE PAYMENT WITHDRAWAL (NUMBER OF YEARS) CHARGE 1 6% 2 6% 3 6% 4 3% 5 2% 6 1% 7 and over 0%
For purposes of the withdrawal charge calculation, we will make withdrawals in the following order: (1) first from any purchase payments to which no withdrawal charge is applicable; (2) next from any remaining free withdrawal allowance (as described below) after reduction by the amount of (a); (3) next from any purchase payments to which withdrawal charges are applicable (on a first-in, first-out basis); and, finally (4) then from any Contract earnings. NOTE: Any free withdrawals taken will not reduce purchase payments still subject to a withdrawal charge. We will not deduct a withdrawal charge: (1) from payments we make due to the distribution of death proceeds; (2) if an annuity payout has begun; (3) due to a minimum distribution under our minimum distribution rules then in effect; or (4) if an income option of at least five year's duration is begun after the first contract year. FREE WITHDRAWAL ALLOWANCE After the first contract year, you may withdraw up to 15% of the contract value annually, without a withdrawal charge. (If you have purchase payments no longer subject to a withdrawal charge, the maximum you may withdraw without a withdrawal charge is the greater of (a) the free withdrawal allowance, or (b) the total amount of purchase payments no longer subject to a withdrawal charge. Note: Any free withdrawal taken will reduce purchase payments no longer subject to a withdrawal charge.) The available amount will be calculated as of the end of the previous contract year. The free withdrawal allowance applies to any partial withdrawals and to full withdrawals, except those transferred directly to annuity contracts issued by other financial institutions. In Washington state, the free withdrawal provision applies to all withdrawals. ADMINISTRATIVE CHARGES We deduct a Contract administrative charge of $30 annually. This charge compensates us for expenses incurred in establishing and maintaining the Contract. This charge is deducted on the fourth Friday of each August by canceling accumulation units from each funding option on a pro rata basis. This charge will be prorated from the date of purchase to the next charge deduction 14 17 date. A prorated charge will also be made if the Contract is completely withdrawn or terminated. We will not deduct a contract administrative charge: (1) from the distribution of death proceeds; (2) after an annuity payout has begun, or if the contract value on the date of assessment is equal to or greater than $40,000. An administrative expense charge (sometimes called "sub-account administrative charge") is deducted on each business day from amounts allocated to the variable funding options. This charge compensates us for certain related administrative and operating expenses. The charge equals, on an annual basis, 0.15% of the daily net asset value allocated to each of the variable funding options. MORTALITY AND EXPENSE RISK CHARGE Each business day, the Company deducts a mortality and expense risk ("m & e") charge from amounts held in the variable funding options. The deduction is reflected in our calculation of accumulation and annuity unit values. For those contract owners who have elected a standard death benefit, the m & e charge equals, on an annual basis, 1.02% of the amounts held in each funding option. For those who have elected the enhanced death benefit, the m & e equals 1.30%. We reserve the right to lower this charge at any time. FUNDING OPTION EXPENSES The charges and expenses of the various funding options are summarized in the fee table and are described in the accompanying prospectuses. PREMIUM TAX Certain state and local governments charge premium taxes ranging from 0% to 5%, depending upon jurisdiction. The Company is responsible for paying these taxes and will determine the method used to recover premium tax expenses incurred. Where required, the Company will deduct any applicable premium taxes from the contract value either upon death, surrender, annuitization, or at the time purchase payments are made to the Contract, but no earlier than when the Company has a tax liability under state law. CHANGES IN TAXES BASED UPON PREMIUM OR VALUE If there is any change in a law assessing taxes against the Company based upon the premiums, contract gains or value of the contract, we reserve the right to charge you proportionately for this tax. TRANSFERS - -------------------------------------------------------------------------------- Up to 30 days before the maturity date, you may transfer all or part of the contract value between variable funding options. There are no charges or restrictions on the amount or frequency of transfers currently; however, we reserve the right to charge a fee for any transfer request, and to limit the number of transfers to one in any six-month period. Since different funding options have different expenses, a transfer of contract values from one funding option to another could result in your investment becoming subject to higher or lower expenses. After the maturity date, you may make transfers between funding options only with our consent. Please refer to Appendix B for information regarding the transfer of funds between the Fixed Account and variable funding options. DOLLAR COST AVERAGING Dollar cost averaging or the pre-authorized transfer program (the "DCA Program") allows you to transfer a set dollar amount to other funding options on a monthly or quarterly basis during the 15 18 accumulation phase of the Contract so that more accumulation units are purchased in a funding option if the value per unit is low and fewer accumulation units are purchased if the value per unit is high. Therefore, a lower-than-average cost per unit may be achieved over the long run. You may elect the DCA Program through written request or other method acceptable to the Company. You must have a minimum total contract value of $5,000 to enroll in the DCA Program. The minimum amount that may be transferred through this program is $100. You may establish pre-authorized transfers of contract values from the Fixed Account, subject to certain restrictions. Under the DCA Program, automated transfers from the Fixed Account may not deplete your Fixed Account Value in less than twelve months from your enrollment in the DCA Program. In addition to the DCA Program, Travelers may credit increased interest rates to contract owners under an administrative Special DCA Program established at the discretion of Travelers, depending on availability and state law. Under this program, the contract owner may pre-authorize level transfers to any of the funding options under either a 6 Month Program or 12 Month Program. The 6 Month Program and the 12 Month Program will generally have different credited interest rates. Under the 6 Month Transfer Program, the interest rate can accrue up to 6 months on funds in the Special DCA Program and all purchase payments and accrued interest must be transferred on a level basis to the selected funding option in 6 months. Under the 12 Month Program, the interest rate can accrue up to 12 months on funds in the Special DCA Program and all purchase payments and accrued interest in this Program must be transferred on a level basis to the selected funding options in 12 months. The pre-authorized transfers will begin after the initial Program purchase payment and complete enrollment instructions are received by Travelers. If complete Program enrollment instructions are not received by the Company within 15 days of receipt of the initial Program purchase payment, the entire balance in the Program will be credited with the non-Program interest rate then in effect for the Fixed Account. You may start or stop participation in the DCA Program at any time, but you must give the Company at least 30 days' notice to change any automated transfer instructions that are currently in place. If you stop the Special DCA Program and elect to remain in the Fixed Account, your contract value will be credited for the remainder of 6 or 12 months with the interest rate for non-Program funds. A contract owner may only have one DCA Program or Special DCA Program in place at one time. Any subsequent purchase payments received by the Company within the Program period selected will be allocated to the current funding options over the remainder of that Program transfer period, unless otherwise directed by the contract owner. All provisions and terms of the Contract apply to the DCA and Special DCA Programs, including provisions relating to the transfer of money between investment options. We reserve the right to suspend or modify transfer privileges at any time and to assess a processing fee for this service. ACCESS TO YOUR MONEY - -------------------------------------------------------------------------------- Any time before the maturity date, you may redeem all or any portion of the cash surrender value, that is, the contract value, less any withdrawal charge and any premium tax not previously deducted. You must submit a written request specifying the fixed or variable funding option(s) from which amounts are to be withdrawn. The cash surrender value will be determined as of the close of business after we receive your surrender request at the Home Office. The cash surrender value may be more or less than the purchase payments made depending on the contract value at the time of surrender. For information about withdrawals from your payout option after the Maturity Date (with no life contingency), refer to the Statement of Additional Information. 16 19 We may defer payment of any cash surrender value for up to seven days after the request is received, but it is our intent to pay as soon as possible. We cannot process withdrawal requests that are not in good order. We will contact you if there is a deficiency causing a delay and will advise what is needed to act upon the withdrawal request. SYSTEMATIC WITHDRAWALS Before the maturity date, you may choose to withdraw a specified dollar amount (at least $100) on a monthly, quarterly, semiannual or annual basis. Any applicable withdrawal charges (in excess of the free withdrawal allowance) and any applicable premium taxes will be deducted. To elect systematic withdrawals, you must have a minimum contract value of $15,000. We will surrender accumulation units pro rata from all funding options in which you have an interest, unless you instruct us otherwise. You may begin or discontinue systematic withdrawals at any time by notifying us in writing, but at least 30 days' notice must be given to change any systematic withdrawal instructions that are currently in place. We reserve the right to discontinue offering systematic withdrawals or to assess a processing fee for this service upon 30 days' written notice to contract owners (where allowed by state law). Each systematic withdrawal is subject to federal income taxes on the taxable portion. In addition, a 10% federal penalty tax may be assessed on systematic withdrawals if the contract owner is under age 59 1/2. You should consult with your tax adviser regarding the tax consequences of systematic withdrawals. LOANS Loans may be available under your Contract. If available, all loan provisions are described in your Contract or loan agreement. OWNERSHIP PROVISIONS - -------------------------------------------------------------------------------- TYPES OF OWNERSHIP CONTRACT OWNER ("you"). The Contract belongs to the contract owner named in the contract (on the Specifications page), or to any other person to whom the Contract is subsequently assigned. An assignment of ownership or a collateral assignment may be made only for nonqualified contracts. You have sole power during the annuitant's lifetime to exercise any rights and to receive all benefits given in the contract, provided you have not named an irrevocable beneficiary and provided the Contract is not assigned. You receive all payments while the annuitant is alive unless you direct them to an alternate recipient. An alternate recipient does not become the contract owner. JOINT OWNER. For nonqualified contracts only, joint owners (i.e., spouses) may be named in a written request before the Contract is in effect. Joint owners may independently exercise transfers allowed under the Contract. All other rights of ownership must be exercised by both owners. Joint owners own equal shares of any benefits accruing or payments made to them. All rights of a joint owner end at death if the other joint owner survives. If the first joint owner to die is also the annuitant, the death benefit will be paid to the beneficiary if there is no contingent annuitant. If the first joint owner to die is not the annuitant, the entire interest of the deceased joint owner in the Contract will pass to the surviving joint owner. SUCCEEDING OWNER. For nonqualified contracts only, if joint owners are not named, the contract owner may name a succeeding owner in a written request. The succeeding owner becomes the contract owner if living when the contract owner dies. The succeeding owner has no interest in the 17 20 Contract before then. The contract owner may change or delete a succeeding owner by written request. BENEFICIARY You name the beneficiary in a written request. The beneficiary has the right to receive any remaining contractual benefits upon the death of the annuitant or the contract owner. If more than one beneficiary survives the annuitant, they will share equally in benefits unless the Company receives other instructions by written request before the death of the annuitant or contract owner. With nonqualified contracts, as discussed under "Death Benefit," the beneficiary named in the Contract may differ from the designated beneficiary. (For example, the designated beneficiary may be the joint owner.) In such cases, the designated beneficiary receives the contract (rather than the beneficiary) upon your death. Unless an irrevocable beneficiary has been named, you have the right to change any beneficiary by written request during the lifetime of the annuitant and while the Contract continues. ANNUITANT The annuitant is designated in the contract (on the Specifications page), and is the individual on whose life the maturity date and the amount of the monthly annuity payments depend. The annuitant may not be changed after the Contract is in effect. For nonqualified Contracts only, where the owner and annuitant are not the same person, the contract owner may also name one Individual as a contingent annuitant by written request before the Contract becomes effective. If the annuitant dies before the maturity date while the owner is still living and a contingent annuitant has been named, the contingent annuitant becomes the annuitant, and the contract continues. However, if the annuitant who is also the owner dies before the maturity date, the death benefit is paid to the beneficiary. The contingent annuitant does not become the annuitant and is not entitled to receive any contract benefits. A contingent annuitant may not be changed, deleted or added after the Contract becomes effective. DEATH BENEFIT - -------------------------------------------------------------------------------- Before the maturity date, where there is no contingent annuitant, a death benefit is payable when either the annuitant or a contract owner dies. Two different types of death benefits are available under the Contract: a Standard Death Benefit and an Enhanced Death Benefit (the Enhanced Death Benefit may not be available in all jurisdictions). The death benefit is calculated at the close of the business day on which the Company's Home Office receives due proof of death and written payment instructions (the death report date). DEATH PROCEEDS BEFORE THE MATURITY DATE STANDARD DEATH BENEFIT DEATH OF ANY OWNER OR THE ANNUITANT BEFORE AGE 75. The Company will pay to the beneficiary a death benefit in an amount equal to the greatest of (1), (2) or (3) below, each reduced by any applicable premium tax or outstanding loans : 1) the contract value; 2) the total purchase payments made under the Contract; or 3) the contract value on the latest fifth contract year anniversary immediately preceding the date on which the Company receives due proof of death. 18 21 DEATH OF ANY OWNER OR THE ANNUITANT ON OR AFTER AGE 75, BUT BEFORE AGE 85 (AGE 90 IN FLORIDA). The Company will pay to the Beneficiary a death benefit in an amount equal to the greatest of (1), (2) or (3) below, each reduced by any applicable premium tax or outstanding loans. 1) the contract value; 2) the total purchase payments made under the Contract; or 3) the contract value on the latest fifth contract year anniversary occurring on or before the annuitant's 75th birthday. DEATH OF ANY OWNER OR THE ANNUITANT ON OR AFTER AGE 85. The Company will pay to the beneficiary a death benefit in an amount equal to the contract value, less any applicable premium tax or outstanding loans. ENHANCED DEATH BENEFIT DEATH OF ANY OWNER OR THE ANNUITANT BEFORE AGE 80 AND BEFORE THE MATURITY DATE. The Company will pay to the beneficiary the greatest of (1), (2) or (3) below, each reduced by any applicable premium tax or outstanding loans. 1) the contract value; 2) the Roll-Up Death Benefit Value (as described below) available at the Death Report Date; or 3) the maximum of all Step-Up Death Benefit Values (as described below) in effect on the Death Report Date. DEATH OF ANY OWNER OR THE ANNUITANT ON OR AFTER AGE 80, BUT BEFORE AGE 90. The Company will pay to the beneficiary the greatest of (1), (2) or (3) below, each reduced by any applicable premium tax or outstanding loans. 1) the contract value; 2) the Roll-Up Death Benefit Value (as described below) available at the annuitant's 80th birthday, plus any additional purchase payments and less any Partial Surrender Reductions (as described below) which occur after the annuitant's 80th birthday; or 3) the maximum of all Step-Up Death Benefit Values (as described below) in effect on the Death Report Date which are associated with any contract date anniversary occurring on or before the annuitant's 80th birthday. DEATH OF ANY OWNER OR THE ANNUITANT ON OR AFTER AGE 90. The death benefit payable as of the Death Report Date will be the Contract Value, less any applicable premium tax or outstanding loans. THE 5% ROLL-UP DEATH BENEFIT VALUE. On the contract date, the Roll-Up Death Benefit Value is equal to the Purchase Payment. On each contract date anniversary, the Roll-Up Death Benefit Value will be recalculated as follows: a) the Roll-Up Death Benefit Value as of the previous contract date anniversary; b) plus any purchase payments during the previous contract year; c) minus any Partial Surrender Reductions (as described below) during the previous contract year; d) the sum of (a) through (c) increased by 5% equals the new Roll-Up Death Benefit Value. On dates other than the contract date anniversary, the Roll-Up Death Benefit Value equals: a) the Roll-Up Death Benefit Value on the previous contract date anniversary; b) plus any Purchase Payments made since the previous contract date anniversary; c) minus any Partial Surrender Reductions (as described below) since the previous contract date anniversary. 19 22 The maximum Roll-Up Death Benefit payable equals 200% of the difference between all purchase payments and all Partial Surrender Reductions (as described below). ANNUAL STEP-UP DEATH BENEFIT VALUE. A separate Step-Up Death Benefit Value will be established on each anniversary of the contract date which occurs on or prior to the Death Report Date and will initially equal the contract value on that anniversary. After a Step-Up Death Benefit Value has been established, it will be recalculated each time a Purchase Payment is made or a partial surrender is taken until the Death Report Date. Step-Up Death Benefit Values will be recalculated by increasing them by the amount of each applicable Purchase Payment and by reducing them by a Partial Surrender Reduction (as described below) for each applicable partial surrender. Recalculations of Step-Up Death Benefit Values related to any Purchase Payments or any partial surrenders will be made in the order that such Purchase Payments or partial surrenders occur. THE PARTIAL SURRENDER REDUCTION referenced above is equal to (1) the amount of a Death Benefit Value (Step-Up or Roll-Up) immediately prior to the reduction for the partial surrender, multiplied by (2) the amount of the partial surrender divided by the contract value immediately prior to the partial surrender. ENHANCED DEATH BENEFIT FOR CONTRACTS ISSUED PRIOR TO JUNE 1, 1997 (SEE APPENDIX C) PAYMENT OF PROCEEDS The process of paying death benefit proceeds under various situations is described below. Generally, the person(s) receiving the benefit may request that the proceeds be paid in a lump sum, or be applied to one of the settlement options available under the Contract. DEATH OF ANNUITANT WHO IS THE CONTRACT OWNER. The Company will pay the proceeds to the beneficiary(ies), or if none, to the contract owner's estate. Under a nonqualified contract, the death benefit proceeds must be distributed to the beneficiary within five years of the contract owner's death. Or, the beneficiary may elect to receive payments from an annuity which begins within one year of the contract owner's death and is payable over the life of the beneficiary or over a period not exceeding the beneficiary's life expectancy. Under a nonqualified contract, if the beneficiary is the contract owner's spouse, he or she may elect to continue the contract as the new contract owner rather than receiving the distribution. In such case, the distribution rules applicable when a contract owner dies generally will apply when that spouse, as contract owner, dies. DEATH OF ANNUITANT WHO IS NOT THE CONTRACT OWNER (NONQUALIFIED CONTRACTS ONLY). If there is no contingent annuitant, the Company will pay the death proceeds to the beneficiary. However, if there is a contingent annuitant, he or she becomes the annuitant and the Contract continues in effect (generally using the original maturity date). The proceeds described above will be paid upon the death of the last surviving contingent annuitant. DEATH OF CONTRACT OWNER WHO IS NOT THE ANNUITANT (NONQUALIFIED CONTRACTS ONLY). The Company will pay the proceeds to any surviving joint owner, or if none, to the beneficiary(ies), or if none, to the contract owner's estate. If the surviving joint owner (or if none, the beneficiary) is the Contract Owner's spouse, he or she may elect to continue the contract as the new contract owner rather than receiving the distribution. ENTITY AS OWNER. In the case of a nonqualified Contract owned by a nonnatural person (e.g. a trust or another entity), the death benefit will be paid only upon the death of the annuitant. DEATH PROCEEDS AFTER THE MATURITY DATE If the owner or annuitant dies on or after the maturity date, the Company will pay the beneficiary a death benefit consisting of any benefit remaining under the annuity or income option then in effect. 20 23 THE ANNUITY PERIOD - -------------------------------------------------------------------------------- MATURITY DATE Under the Contract, you can receive scheduled annuity payments. You can choose the month and the year in which those payments begin (maturity date). You can also choose among income plans (annuity or income options). While the annuitant is alive, you can change your selection any time up to the maturity date. Annuity or income payments will begin on the maturity date stated in the Contract unless the Contract has been fully surrendered or the proceeds have been paid to the beneficiary before that date. Annuity payments are a series of periodic payments (a) for life; (b) for life with either a minimum number of payments or a specific amount assured; or (c) for the joint lifetime of the annuitant and another person, and thereafter during the lifetime of the survivor. We may require proof that the annuitant is alive before annuity payments are made. Unless you elect otherwise, the maturity date will be the annuitant's 70th birthday for qualified contracts, or, for nonqualified contracts, the annuitant's 75th birthday or ten years after the effective date of the contract, if later. (For Contracts issued in Florida, the maturity date elected may not be later than the annuitant's 90th birthday.) For nonqualified Contracts, at least 30 days before the original maturity date, a contract owner may elect to extend the maturity date to any time prior to the annuitant's 85th birthday or, for qualified Contracts, to a later date with the Company's consent. Certain annuity options taken at the maturity date may be used to meet the minimum required distribution requirements of federal tax law, or a program of partial surrenders may be used instead. These mandatory distribution requirements take effect generally upon the death of the contract owner, or with qualified contracts upon the later of the April 1 following the contract owner's attainment of age 70 1/2 or the year of retirement; or upon the death of the contract owner. Independent tax advice should be sought regarding the election of minimum required distributions. ALLOCATION OF ANNUITY When an annuity option is elected, it may be elected as a variable annuity, a fixed annuity, or a combination of both. (Variable payouts may not be available in all states. Refer to your contract.) If, at the time annuity payments begin, no election has been made to the contrary, the cash surrender value shall be applied to provide an annuity funded by the same funding options selected during the accumulation period. At least 30 days prior to the maturity date, you may transfer your contract value among the funding options in order to change the basis on which annuity payments will be determined. (See "Transfers.") VARIABLE ANNUITY You may choose to receive annuity payments that are based on the performance of one or more of the variable funding options. This is called a variable payout because the amount you receive each month will increase or decrease depending on how the variable funding options perform. When you annuitize, we will credit you with annuity units. An annuity unit measures the dollar value of the annuity payment. We determine the number of annuity units to credit you with by dividing the first monthly annuity payment for each funding option by the accumulation unit value for that funding option as of 14 days before the annuity payments begin. The number of annuity units (but not their value) remains fixed during the annuity period. HOW WE DETERMINE THE FIRST ANNUITY PAYMENT. The Contract contains tables used to determine the first monthly annuity payment. If a variable annuity is elected, the amount applied to it will be the value of the funding options as of 14 days before the annuity payments begin less any premium taxes due. The first monthly payment amount depends on the annuity option elected and the annuitant's adjusted age. The Contract contains a formula for determining the adjusted age. We calculate the 21 24 first monthly payment by multiplying the benefit per $1,000 applied, shown in the Contract tables, by the number of thousands of dollars of Contract value applied to the annuity option. We also factor in an assumed daily net investment factor of 3%. This assumed daily net investment factor is used to determine the guaranteed payout rates shown. If net investment rates are higher at the time annuitization is selected, payout rates will be higher than those shown. Payout rates will not be lower than those shown. We reserve the right to require satisfactory proof of an annuitant's age before we make the first annuity payment. HOW WE DETERMINE THE PAYMENTS AFTER THE FIRST. The dollar amount of all annuity payments after the first will change from month to month based on the investment performance of the applicable funding options. The total amount of each annuity payment will equal the sum of the basic payments in each funding option. The actual amounts of these payments are determined by multiplying the number of annuity units credited to each funding option by the corresponding annuity unit value as of the date 14 days before the payment is due. FIXED ANNUITY You may choose a fixed annuity that provides payments which do not vary during the annuity period. We will calculate the dollar amount of the first fixed annuity payment as described under "Variable Annuity" above, except that the amount applied to effect the annuity will be the cash surrender value, determined as of the date annuity payments begin. If it would produce a larger payment, the first fixed annuity payment will be determined using the Life Annuity Tables in effect on the maturity date. PAYMENT OPTIONS - -------------------------------------------------------------------------------- ELECTION OF OPTIONS While the annuitant is alive, you can change your annuity or income option selection any time up to the maturity date. Income options differ from annuity options in that the amount of the payments made under income options are not based upon the life of any person. Therefore, the annuitant may outlive the payment period. Once annuity or income payments have begun, no further elections are allowed. During the annuitant's lifetime, if you do not elect otherwise before the maturity date, we will pay you (or another designated payee) the first of a series of monthly annuity payments based on the life of the annuitant, in accordance with Annuity Option 2 (Life Annuity with 120 monthly payments assured). For certain qualified contracts, Annuity Option 4 (Joint and Last Survivor joint Life Annuity -- Annuity Reduced on Death of Primary Payee) will be the automatic option as described in the contract. The minimum amount that can be placed under an annuity or income option will be $2,000 unless we agree to a lesser amount. If any monthly periodic payment due is less than $100, the Company reserves the right to make payments at less frequent intervals, or to pay the cash surrender value in a lump sum. On the maturity date, we will pay the amount due under the Contract in one lump sum (except in states where this is not permitted), or in accordance with the payment option that you select. You must elect an option in writing, in a form satisfactory to the Company. Any election made during the lifetime of the annuitant must be made by the contract owner. ANNUITY OPTIONS Subject to the conditions described in "Election of Options" above, all or any part of the cash surrender value of the Contract may be paid under one or more of the following annuity options. 22 25 Payments under the annuity options may be elected on a monthly, quarterly, semiannual or annual basis. We may offer additional options. Option 1 -- Life Annuity -- No Refund. The Company will make annuity payments during the lifetime of the annuitant, terminating with the last payment preceding death. This option offers the maximum periodic payment, since there is no assurance of a minimum number of payments or provision for a death benefit for beneficiaries. Option 2 -- Life Annuity with 120, 180 or 240 Monthly Payments Assured. The Company will make monthly annuity payments during the lifetime of the annuitant, with the agreement that if, at the death of that person, payments have been made for less than 120, 180 or 240 months, as elected, payments will be continued during the remainder of the period to the beneficiary. Option 3 -- Joint and Last Survivor Life Annuity -- No Refund. The Company will make annuity payments during the joint lifetime of the two persons on whose lives payments are based, and during the lifetime of the survivor. No further payments will be made following the death of the survivor. Option 4 -- Joint and Last Survivor Life Annuity -- Annuity Reduced on Death of Primary Payee. The Company will make annuity payments during the lifetime of the annuitant and a second person. One will be designated as the primary payee, the other will be designated as the secondary payee. On the death of the secondary payee, the Company will continue to make annuity payments to the primary payee in the same amount that would have been payable during the joint lifetime of the two persons. On the death of the primary payee, the Company will continue to make annuity payments to the secondary payee in an amount equal to 50% of the payments which would have been made during the lifetime of the primary payee. No further payments will be made once both payees have died. Option 5 -- Other Annuity Options. The Company will make any other arrangements for annuity payments as may be mutually agreed upon. INCOME OPTIONS Instead of one of the annuity options described above, and subject to the conditions described under "Election of Options," all or part of the Contract's cash surrender value (or, if required by state law, contract value) may be paid under one or more of the following income options, provided that they are consistent with federal tax law qualification requirements. Payments under the income options may be elected on a monthly, quarterly, semiannual or annual basis: Option 1 -- Payments of a Fixed Amount. The Company will make equal payments of the amount elected until the cash surrender value applied under this option has been exhausted. The first payment and all later payments will be paid from each funding option or the Fixed Account in proportion to the cash surrender value attributable to each funding option and/or Fixed Account. The final payment will include any amount insufficient to make another full payment. Option 2 -- Payments for a Fixed Period. The Company will make payments for the period selected. The amount of each payment will be equal to the remaining cash surrender value applied under this option divided by the number of remaining payments. Option 3 -- Other Income Options. The Company will make any other arrangements for Income Payments as may be mutually agreed upon. 23 26 MISCELLANEOUS CONTRACT PROVISIONS - -------------------------------------------------------------------------------- RIGHT TO RETURN You may return the Contract for a full refund of the contract value (including charges) within twenty days after you receive it (the "right to return period"). You bear the investment risk during the right to return period; therefore, the contract value returned may be greater or less than your purchase payment. If the Contract is purchased as an Individual Retirement Annuity and is returned within the first seven days after delivery, your purchase payment will be refunded in full; during the remainder of the right to return period, the contract value (including charges) will be refunded. The contract value will be determined following the close of the business day on which we receive a written request for a refund. Where state law requires a longer period, or the return of purchase payments or other variation of this provision, the Company will comply. Refer to your contract for any state-specific information. TERMINATION You do not need to make any purchase payments after the first to keep the Contract in effect. However, the Company reserves the right to terminate the Contract on any business day if the contract value as of that date is less than $1,000 and no purchase payments have been made for at least two years, unless otherwise specified by state law. Termination will not occur until 31 days after the Company has mailed notice of termination to the contract owner at his or her last known address and to any assignee of record. If the Contract is terminated, the Company will pay to the contract owner the cash surrender value (contract value, in the states that so require), less any applicable charges and any outstanding loans. REQUIRED REPORTS As often as required by law, but at least once in each contract year before the due date of the first annuity payment, we will furnish a report showing the number of accumulation units credited to the Contract and the corresponding accumulation unit value(s) as of the date of the report for each funding option to which the contract owner has allocated amounts during the applicable period. The Company will keep all records required under federal or state laws. SUSPENSION OF PAYMENTS The Company reserves the right to suspend or postpone the date of any payment or determination of values on any business day (1) when the New York Stock Exchange ("Exchange") is closed; (2) when trading on the Exchange is restricted; (3) when an emergency exists as determined by the SEC so the sale of securities held in the Separate Account may not reasonably occur or so that the Company may not reasonably determine the value of the Separate Account's net assets; or (4) during any other period when the SEC, by order, so permits for the protection of security holders. TRANSFERS OF CONTRACT VALUES TO OTHER ANNUITIES We may permit contract owners to transfer their contract values into other annuities offered by us or our affiliated insurance companies under rules then in effect. THE SEPARATE ACCOUNT - -------------------------------------------------------------------------------- The Travelers Fund BD II for Variable Annuities ("Fund BD II") was established on February 22, 1995 and is registered with the SEC as a unit investment trust ("Separate Account") under the Investment Company Act of 1940, as amended (the "1940 Act"). The assets of Fund BD II will be invested exclusively in the shares of the variable funding options. 24 27 The assets of Fund BD II are held for the exclusive benefit of the owners of this Separate Account, according to the laws of Connecticut. Income, gains and losses, whether or not realized, from assets allocated to Fund BD II are, in accordance with the Contracts, credited to or charged against Fund BD II without regard to other income, gains and losses of the Company. The assets held by Fund BD II are not chargeable with liabilities arising out of any other business which the Company may conduct. Obligations under the Contract are obligations of the Company. All investment income and other distributions of the funding options are payable to Fund BD II. All such income and/or distributions are reinvested in shares of the respective funding options at net asset value. Shares of the funding options are currently sold only to life insurance company separate accounts to fund variable annuity and variable life insurance contracts. PERFORMANCE INFORMATION From time to time, we may advertise different types of historical performance for the Contract's funding options. We may advertise the "standardized average annual total returns" of the funding option, calculated in a manner prescribed by the SEC, as well as the "non-standardized total returns," as described below. Specific examples of the performance information appear in the SAI. STANDARDIZED METHOD. Quotations of average annual total returns are computed according to a formula in which a hypothetical initial investment of $1,000 is applied to the funding option, and then related to ending redeemable values over one-, five-, and ten-year periods, or for a period covering the time during which the funding option has been in existence, if less. These quotations reflect the deduction of all recurring charges during each period (on a pro rata basis in the case of fractional periods). The deduction for the annual administrative charge is converted to a percentage of assets based on the actual fee collected (or anticipated to be collected, if a new product), divided by the average net assets for Contracts sold (or anticipated to be sold). Each quotation assumes a total redemption at the end of each period with the applicable withdrawal charge deducted at that time. NONSTANDARDIZED METHOD. Nonstandardized "total returns" will be calculated in a similar manner based on the performance of the funding options over a period of time, usually for the calendar year-to-date, and for the past one-, three-, five- and ten-year periods. Nonstandardized total returns will not reflect the deduction of any withdrawal charge or the $30 annual contract administrative charge, which, if reflected, would decrease the level of performance shown. The withdrawal charge is not reflected because the contract is designed for long-term investment. For underlying funds that were in existence prior to the date they became available under the Separate Account, the standardized average annual total return quotations may be accompanied by returns showing the investment performance that such underlying funds would have achieved (reduced by the applicable charges) had they been held under the Contract for the period quoted. The total return quotations are based upon historical earnings and are not necessarily representative of future performance. GENERAL. Within the guidelines prescribed by the SEC and the National Association of Securities Dealers, Inc. ("NASD"), performance information may be quoted numerically or may be presented in a table, graph or other illustration. Advertisements may include data comparing performance to well-known indices of market performance (including, but not limited to, the Dow Jones Industrial Average, the Standard & Poor's (S&P) 500 Index and the S&P 400 Index, the Lehman Brothers Long T-Bond Index, the Russell 1000, 2000 and 3000 Indices, the Value Line Index, and the Morgan Stanley Capital International's EAFE Index). Advertisements may also include published editorial comments and performance rankings compiled by independent organizations (including, but not limited to, Lipper Analytical Services, Inc. and Morningstar, Inc.) and publications that monitor the performance of the Separate Account and the variable funding options. 25 28 FEDERAL TAX CONSIDERATIONS - -------------------------------------------------------------------------------- The following description of the federal income tax consequences under this Contract is not exhaustive and is not intended to cover all situations and is not meant to provide tax advice. Because of the complexity of the law and the fact that the tax results will vary depending on many factors, you should consult your tax advisor regarding your personal situation. For your information, a more detailed discussion is contained in the SAI. GENERAL TAXATION OF ANNUITIES Congress has recognized the value of saving for retirement by providing certain tax benefits, in the form of tax deferral, for money put into an annuity. The Internal Revenue Code (Code) governs how this money is ultimately taxed, depending upon the type of contract, qualified or non-qualified, and the manner in which the money is distributed, as briefly described below. TYPES OF CONTRACTS: QUALIFIED OR NONQUALIFIED If you purchase an annuity contract with proceeds of an eligible rollover distribution from any pension plan, specially sponsored program, or individual retirement annuity (IRA) with pre-tax dollars, your contract is referred to as a qualified contract. Some examples of qualified contracts are: IRAs, 403(b) annuities, pension and profit-sharing plans (including 401(k) plans), and Keogh Plans and certain other qualified deferred compensation plans. An exception to this is a qualified plan called a Roth IRA. Under Roth IRAs, after-tax contributions accumulate until maturity, when amounts (including earnings) may be withdrawn tax-free. If you purchase the contract on an individual basis with after-tax dollars and not under one of the programs described above, your contract is referred to as nonqualified. NONQUALIFIED ANNUITY CONTRACTS As the owner of a nonqualified annuity, you do not receive any tax benefit (deduction or deferral of income) on purchase payments, but you will not be taxed on increases in the value of your contract until a distribution occurs -- either as a withdrawal (distribution made prior to the maturity date), or as annuity payments. When a withdrawal is made, you are taxed on the amount of the withdrawal that is considered earnings. Similarly, when you receive an annuity payment, part of each payment is considered a return of your purchase payments and will not be taxed. The remaining portion of the annuity payment (i.e., any earnings) will be considered ordinary income for tax purposes. If a nonqualified annuity is owned by other than an individual, however, (e.g., by a corporation), increases in the value of the contract attributable to purchase payments made after February 28, 1986 are includable in income annually. Furthermore, for contracts issued after April 22, 1987, if you transfer the contract without adequate consideration, all deferred increases in value will be includable in your income at the time of the transfer. If you make a partial withdrawal, this money will generally be taxed as first coming from earnings, (income in the contract), and then from your purchase payments. These withdrawn earnings are includable in your income. (See "Penalty Tax for Premature Distributions" below). There is income in the contract to the extent the cash value exceeds your investment in the contract. The investment in the contract equals the total purchase payments you paid less any amount received previously which was excludable from gross income. Any direct or indirect borrowing against the value of the contract or pledging of the contract as security for a loan will be treated as a cash distribution under the tax law. Federal tax law requires that nonqualified annuity contracts meet minimum mandatory distribution requirements upon the death of the contract owner, including the first of joint owners. If these 26 29 requirements are not met, the surviving joint owner, or the beneficiary, will have to pay taxes prior to distribution. The distribution required depends, among other things, upon whether an annuity option is elected or whether the new contract owner is the surviving spouse. We will administer Contracts in accordance with these rules and we will notify you when you should begin receiving payments. QUALIFIED ANNUITY CONTRACTS Under a qualified annuity, since amounts paid into the contract have not yet been taxed, the full amount of all distributions, including lump-sum withdrawals and annuity payments, are taxed at the ordinary income tax rates, unless the distribution is transferred to an eligible rollover account or contract. The Contract is available as a vehicle for IRA rollovers and for other qualified contracts. There are special rules which govern the taxation of qualified contracts, including requirements for mandatory distributions and contribution limits. We have provided a more complete discussion in the SAI. PENALTY TAX FOR PREMATURE DISTRIBUTIONS Taxable distributions taken before the contract owner has reached the age of 59 1/2 will be subject to a 10% additional tax penalty unless the distribution is taken in a series of periodic distributions, for life or life expectancy, or unless the distribution follows the death or disability of the contract owner. Other exceptions may be available in certain tax-qualified plans. DIVERSIFICATION REQUIREMENTS FOR VARIABLE ANNUITIES The Code requires that any nonqualified variable annuity contracts based on a separate account shall not be treated as an annuity for any period if investments made in the account are not adequately diversified. Final tax regulations define how separate accounts must be diversified. The Company monitors the diversification of investments constantly and believes that its accounts are adequately diversified. The consequence of any failure is essentially the loss to the Contract Owner of tax deferred treatment. The Company intends to administer all contracts subject to this provision of law in a manner that will maintain adequate diversification. OWNERSHIP OF THE INVESTMENTS Assets in the separate accounts, also referred to as segregated asset accounts must be owned by the Company and not by the Contract Owner for federal income tax purposes. Otherwise, the deferral of taxes is lost and income and gains from the accounts would be includible annually in the Contract Owner's gross income. The Internal Revenue Service has stated in published rulings that a variable contract owner will be considered the owner of the assets of a segregated asset account if the owner possesses an incident of ownership in those assets, such as the ability to exercise investment control over the assets. The Treasury Department announced, in connection with the issuance of temporary regulations concerning investment diversification, that those regulations "do not provide guidance concerning the circumstances in which investor control of the investments of a segregated asset account may cause the investor, rather than the insurance company, to be treated as the owner of the assets of the account." This announcement, dated September 15, 1986, also stated that the guidance would be issued by way of regulations or rulings on the "extent to which policyholders may direct their investments to particular subaccounts [of a segregated asset account] without being treated as owners of the underlying assets." As of the date of this prospectus, no such guidance has been issued. The Company does not know if such guidance will be issued, or if it is, what standards it may set. Furthermore, the Company does not know if such guidance may be issued with retroactive effect. New regulations are generally issued with a prospective-only effect as to future sales or as to future 27 30 voluntary transactions in existing contracts. The Company therefore reserves the right to modify the contract as necessary to attempt to prevent Contract Owners from being considered the owner of the assets of the separate account. MANDATORY DISTRIBUTIONS FOR QUALIFIED PLANS Federal tax law requires that minimum annual distributions begin by April 1st of the calendar year following the calendar year in which an IRA owner attains age 70 1/2. Participants in qualified plans and 403(b) annuities may defer minimum distributions until the later of April 1st of the calendar year following the calendar year in which they attain age 70 1/2 or the year of retirement. Distributions must begin or be continued according to required patterns following the death of the contract owner or annuitant of both qualified and nonqualified annuities. OTHER INFORMATION - -------------------------------------------------------------------------------- THE INSURANCE COMPANY The Travelers Life and Annuity Company is a stock insurance company chartered in 1973 in the State of Connecticut and continuously engaged in the insurance business since that time. The Company is licensed to conduct a life insurance business in a majority of the states of the United States, and intends to seek licensure in the remaining states, except New York. The Company is an indirect wholly owned subsidiary of Citigroup Inc., a bank holding company. The Company's Home Office is located at One Tower Square, Hartford, Connecticut 06183. FINANCIAL STATEMENTS The financial statements for the insurance company are located in the Statement of Additional Information. The financial statements for the separate account will be available through annual reports to shareholders. These reports are accessible through the SEC's website that appears on page 1 of the prospectus. IMSA The Company is a member of the Insurance Marketplace Standards Association ("IMSA"), and as such may use the IMSA logo and IMSA membership in its advertisements. Companies that belong to IMSA subscribe to a set of ethical standards covering the various aspects of sales and service for individually sold life insurance and annuities. IMSA members have adopted policies and procedures that demonstrate a commitment to honesty, fairness and integrity in all customer contracts involving the sale and service of individual life insurance and annuity products. YEAR 2000 COMPLIANCE The Company is highly dependent on computer systems and systems applications for conducting its ongoing business functions. In 1996, the Travelers Insurance Company and its subsidiaries, including the Company, began the process of identifying, assessing and implementing changes to computer programs to address the Year 2000 issue and developed a comprehensive plan that encompasses the Company and its insurance subsidiaries, to address the issue. The issue involves the ability of computer systems that have time sensitive programs to recognize properly the Year 2000. The inability to do so could result in major failures or miscalculations that would disrupt the Company's ability to meet its customer and other obligations on a timely basis. The Company has achieved substantial compliance with respect to its business critical systems in accordance with its Year 2000 plan and is in the process of certification to validate compliance. The Company anticipates completing the certification process by June 30, 1999. An ongoing re-certification process will be put in place for third and fourth quarter 1999 to ensure all systems and products remain compliant. 28 31 The total cost associated with the required modifications and conversions is being expensed as incurred in the period 1996 through 1999. The Company also has third party customers, financial institutions, vendors and others with which it conducts business and has confirmed their plans to address and resolve Year 2000 issues on a timely basis. While it is likely that these efforts by third party vendors and customers will be successful, it is possible that a series of failures by third parties could have a material adverse effect on the Company's results of operations in future periods. In addition, the Company is developing contingency plans to address perceived risks associated with the Year 2000 effort. These include business resumption plans to address the possibility of internal systems failures and the possibility of failure of systems or processes outside the Company's control. As of year-end 1998, the Company has completed initial business resumption contingency plans which would enable business critical units to function beginning January 1, 2000 in the event of an unexpected failure. Business resumption contingency plans are expected to be finalized by June 30, 1999. Preparations for the management of the date change will continue through 1999. DISTRIBUTION OF VARIABLE ANNUITY CONTRACTS The Company intends to sell the Contracts in all jurisdictions where it is licensed to do business and where the Contract is approved. Any sales representative or employee who sells the Contracts will be qualified to sell variable annuities under applicable federal and state laws. Each broker-dealer is registered with the SEC under the Securities Exchange Act of 1934, and all are members of the NASD. The principal underwriter and distributor of the Contracts is CFBDS, Inc., 21 Milk St., Boston, MA. CFBDS, Inc. is not affiliated with the Company or the Separate Account. Up-front compensation paid to sales representatives will not exceed 7.00 % of the purchase payments made under the Contracts. If asset-based compensation is paid, it will not exceed 2% of the average account value annually. From time to time, the Company may pay or permit other promotional incentives, in cash, credit or other compensation. CONFORMITY WITH STATE AND FEDERAL LAWS The Contract is governed by the laws of the state in which it is delivered. Any paid-up annuity, cash surrender value or death benefits that are available under the Contract are not less than the minimum benefits required by the statutes of the state in which the Contract is delivered. We reserve the right to make any changes, including retroactive changes, in the Contract to the extent that the change is required to meet the requirements of any law or regulation issued by any governmental agency to which the company, the Contract or the contract owner is subject. VOTING RIGHTS The Company is the legal owner of the shares of the funding options. However, we believe that when a funding option solicits proxies in conjunction with a vote of shareholders we are required to obtain from you and from other owners instructions on how to vote those shares. When we receive those instructions, we will vote all of the shares we own in proportion to those instructions. This will also include any shares we own on our own behalf. Should we determine that we are no longer required to comply with the above, we will vote on the shares in our own right. LEGAL PROCEEDINGS AND OPINIONS There are no pending material legal proceedings affecting the Separate Account, the Principal Underwriter or the Company. Legal matters in connection with the federal laws and regulations affecting the issue and sale of the Contract described in this Prospectus, as well as the organization of the Company, its authority to issue variable annuity contracts under Connecticut law and the validity of the forms of the variable annuity contracts under Connecticut law, have been passed on by the General Counsel of the Company. 29 32 [CAPTION]
APPENDIX A - --------------------------------------------------------------------------------------------------------------------------------- CONDENSED FINANCIAL INFORMATION THE TRAVELERS FUND BD II FOR VARIABLE ANNUITIES ACCUMULATION UNIT VALUES PERIOD FROM 11/8/95 YEAR ENDED YEAR ENDED YEAR ENDED (EFFECTIVE DATE) TO DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 STANDARD ENHANCED STANDARD ENHANCED STANDARD ENHANCED STANDARD ENHANCED - --------------------------------------------------------------------------------------------------------------------------------- DREYFUS VARIABLE INVESTMENT FUND SMALL CAP PORTFOLIO (5/98) Unit Value at beginning of period..... $ 1.000 $ 1.000 -- -- -- -- -- -- Unit Value at end of period........... 0.852 0.851 -- -- -- -- -- -- Number of units outstanding at end of period (thousands).................. 1,713 252 -- -- -- -- -- -- GREENWICH STREET SERIES FUND: TOTAL RETURN PORTFOLIO (11/95)* Unit Value at beginning of period..... $ 1.790 $ 1.775 $ 1.550 $ 1.541 $ 1.251 $ 1.247 $ 1.010 $ 1.010 Unit Value at end of period........... 1.857 1.836 1.790 1.775 1.550 1.541 1.251 1.247 Number of units outstanding at end of period (thousands).................. 42,830 9,429 33,686 5,975 14,921 2,044 651 149 SALOMON BROTHERS VARIABLE SERIES FUNDS, INC. SALOMON BROTHERS VARIABLE INVESTORS FUND (5/98)* Unit Value at beginning of period..... $ 1.000 $ 1.000 -- -- -- -- -- -- Unit Value at end of period........... 1.014 1.012 -- -- -- -- -- -- Number of units outstanding at end of period (thousands).................. 1,024 199 -- -- -- -- -- -- SALOMON BROTHERS VARIABLE TOTAL RETURN FUND (5/98)* Unit Value at beginning of period..... $ 1.000 $ 1.000 -- -- -- -- -- -- Unit Value at end of period........... 0.997 0.996 -- -- -- -- -- -- Number of units outstanding at end of period (thousands).................. 761 128 -- -- -- -- -- -- SMITH BARNEY CONCERT ALLOCATION SERIES INC.: SELECT HIGH GROWTH PORTFOLIO** (3/97)* Unit Value at beginning of period..... $ 1.090 $ 1.087 $ 0.970 $ 0.969 $ -- $ -- $ -- $ -- Unit Value at end of period........... 1.242 1.236 1.090 1.087 -- -- -- -- Number of units outstanding at end of period (thousands).................. 3,435 622 2,657 391 -- -- -- -- SELECT GROWTH PORTFOLIO (3/97)* Unit Value at beginning of period..... $ 1.099 $ 1.097 $ 1.000 $ 1.000 $ -- $ -- $ -- $ -- Unit Value at end of period........... 1.238 1.232 1.099 1.097 -- -- -- -- Number of units outstanding at end of period (thousands).................. 5,356 2,329 3,396 1,191 -- -- -- -- SELECT BALANCED PORTFOLIO (3/97)* Unit Value at beginning of period..... $ 1.093 $ 1.091 $ 1.000 $ 1.000 $ -- $ -- $ -- $ -- Unit Value at end of period........... 1.183 1.177 1.093 1.091 -- -- -- -- Number of units outstanding at end of period (thousands).................. 7,216 2,594 4,148 1,789 -- -- -- -- SELECT CONSERVATIVE PORTFOLIO** (3/97)* Unit Value at beginning of period..... $ 1.108 $ 1.105 $ 1.000 $ 1.000 $ -- $ -- $ -- $ -- Unit Value at end of period........... 1.162 1.156 1.108 1.105 -- -- -- -- Number of units outstanding at end of period (thousands).................. 1,424 305 863 105 -- -- -- --
A-1 33 [CAPTION]
APPENDIX A - --------------------------------------------------------------------------------------------------------------------------------- CONDENSED FINANCIAL INFORMATION THE TRAVELERS FUND BD II FOR VARIABLE ANNUITIES ACCUMULATION UNIT VALUES (CONTINUED) PERIOD FROM 11/8/95 YEAR ENDED YEAR ENDED YEAR ENDED (EFFECTIVE DATE) TO DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 STANDARD ENHANCED STANDARD ENHANCED STANDARD ENHANCED STANDARD ENHANCED - --------------------------------------------------------------------------------------------------------------------------------- SELECT INCOME PORTFOLIO** (3/97)* Unit Value at beginning of period..... $ 1.106 $ 1.104 $ 1.000 $ 1.000 $ -- $ -- $ -- $ -- Unit Value at end of period........... 1.154 1.148 1.106 1.104 -- -- -- -- Number of units outstanding at end of period (thousands).................. 1,102 76 364 25 -- -- -- -- TRAVELERS SERIES FUND INC. AIM CAPITAL APPRECIATION PORTFOLIO (11/95)* Unit Value at beginning of period..... $ 1.206 $ 1.198 $ 1.088 $ 1.084 $ 0.958 $ 0.957 $ 1.000 $ 1.000 Unit Value at end of period........... 1.397 1.385 1.206 1.198 1.088 1.084 0.958 0.957 Number of units outstanding at end of period (thousands).................. 59,824 11,522 48,942 8,845 29,460 4,246 2,537 908 ALLIANCE GROWTH PORTFOLIO (11/95)* Unit Value at beginning of period..... $ 2.276 $ 2.254 $ 1.785 $ 1.772 $ 1.396 $ 1.390 $ 1.390 $ 1.385 Unit Value at end of period........... 2.903 2.867 2.276 2.254 1.785 1.772 1.396 1.390 Number of units outstanding at end of period (thousands).................. 67,640 13,083 47,935 8,482 24,031 3,613 1,574 453 G.T. GLOBAL STRATEGIC INCOME PORTFOLIO (11/95)* Unit Value at beginning of period..... $ 1.397 $ 1.383 $ 1.316 $ 1.306 $ 1.121 $ 1.116 $ 1.057 $ 1.054 Unit Value at end of period........... 1.359 1.342 1.397 1.383 1.316 1.306 1.121 1.116 Number of units outstanding at end of period (thousands).................. 5,481 973 5,016 954 1,833 463 33 80 MFS TOTAL RETURN PORTFOLIO (11/95)* Unit Value at beginning of period..... $ 1.648 $ 1.632 $ 1.376 $ 1.366 $ 1.216 $ 1.211 $ 0.979 $ 0.977 Unit Value at end of period........... 1.819 1.796 1.648 1.632 1.376 1.366 1.216 1.211 Number of units outstanding at end of period (thousands).................. 58,653 11,646 34,928 6,139 16,651 1,810 913 102 PUTNAM DIVERSIFIED INCOME PORTFOLIO (11/95)* Unit Value at beginning of period..... $ 1.332 $ 1.319 $ 1.252 $ 1.243 $ 1.170 $ 1.165 $ 1.009 $ 1.007 Unit Value at end of period........... 1.326 1.309 1.332 1.319 1.252 1.243 1.170 1.165 Number of units outstanding at end of period (thousands).................. 29,566 7,312 19,504 3,953 10,424 1,461 824 126 SMITH BARNEY HIGH INCOME PORTFOLIO (11/95)* Unit Value at beginning of period..... $ 1.463 $ 1.448 $ 1.300 $ 1.291 $ 1.162 $ 1.157 $ 1.111 $ 1.108 Unit Value at end of period........... 1.452 1.434 1.463 1.448 1.300 1.291 1.162 1.157 Number of units outstanding at end of period (thousands).................. 31,054 4,740 21,213 2,640 7,719 970 243 332 SMITH BARNEY INTERNATIONAL EQUITY PORTFOLIO (11/95)* Unit Value at beginning of period..... $ 1.240 $ 1.228 $ 1.222 $ 1.213 $ 1.050 $ 1.046 $ 0.955 $ 0.954 Unit Value at end of period........... 1.305 1.289 1.240 1.228 1.222 1.213 1.050 1.046 Number of units outstanding at end of period (thousands).................. 38,529 6,199 31,311 4,872 16,855 2,010 556 201 SMITH BARNEY LARGE CAPITALIZATION GROWTH (5/98)* Unit Value at beginning of period..... $ 1.000 $ 1.000 $ -- $ -- $ -- $ -- $ -- $ -- Unit Value at end of period........... 1.237 1.234 -- -- -- -- -- -- Number of units outstanding at end of period (thousands).................. 12,176 1,447 -- -- -- -- -- --
A-2 34 [CAPTION]
APPENDIX A - --------------------------------------------------------------------------------------------------------------------------------- CONDENSED FINANCIAL INFORMATION THE TRAVELERS FUND BD II FOR VARIABLE ANNUITIES ACCUMULATION UNIT VALUES (CONTINUED) PERIOD FROM 11/8/95 YEAR ENDED YEAR ENDED YEAR ENDED (EFFECTIVE DATE) TO DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 STANDARD ENHANCED STANDARD ENHANCED STANDARD ENHANCED STANDARD ENHANCED - --------------------------------------------------------------------------------------------------------------------------------- SMITH BARNEY LARGE CAP VALUE PORTFOLIO(11/95)* (formerly Smith Barney Income and Growth Portfolio) Unit Value at beginning of period..... $ 1.913 $ 1.894 $ 1.528 $ 1.517 $ 1.291 $ 1.285 $ 0.981 $ 0.980 Unit Value at end of period........... 2.076 2.050 1.913 1.894 1.528 1.517 1.291 1.285 Number of units outstanding at end of period (thousands).................. 40,967 8,249 27,117 4,645 11,906 1,606 596 146 SMITH BARNEY MONEY MARKET PORTFOLIO (11/95)* Unit Value at beginning of period..... $ 1.140 $ 1.129 $ 1.098 $ 1.090 $ 1.058 $ 1.054 $ 1.016 $ 1.014 Unit Value at end of period........... 1.184 1.169 1.140 1.129 1.098 1.090 1.058 1.054 Number of units outstanding at end of period (thousands).................. 41,370 6,024 25,661 2,417 22,962 2,362 2,374 820 SMITH BARNEY PACIFIC BASIN PORTFOLIO (11/95)* Unit Value at beginning of period..... $ 0.700 $ 0.693 $ 0.983 $ 0.977 $ 0.910 $ 0.906 $ 0.899 $ 0.898 Unit Value at end of period........... 0.742 0.733 0.700 0.693 0.983 0.977 0.910 0.906 Number of units outstanding at end of period (thousands).................. 5,083 1,023 5,124 862 2,755 467 37 20 TRAVELERS MANAGED INCOME PORTFOLIO (11/95)* Unit Value at beginning of period..... $ 1.261 $ 1.248 $ 1.163 $ 1.154 $ 1.142 $ 1.137 $ 1.097 $ 1.093 Unit Value at end of period........... 1.309 1.293 1.261 1.248 1.163 1.154 1.142 1.137 Number of units outstanding at end of period (thousands).................. 11,544 2,823 4,489 1,001 2,636 266 226 90 VAN KAMPEN ENTERPRISE PORTFOLIO (11/95)* Unit Value at beginning of period..... $ 2.103 $ 2.083 $ 1.655 $ 1.643 $ 1.362 $ 1.356 $ 1.362 $ 1.357 Unit Value at end of period........... 2.601 2.568 2.103 2.083 1.655 1.643 1.362 1.356 Number of units outstanding at end of period (thousands).................. 35,644 6,741 24,635 4,385 11,360 1,644 765 329 TRAVELERS SERIES TRUST: CONVERTIBLE BOND PORTFOLIO (5/98)* Unit Value at beginning of period..... $ 1.000 $ 1.000 $ -- $ -- $ -- $ -- $ -- $ -- Unit Value at end of period........... 1.001 0.999 -- -- -- -- -- -- Number of units outstanding at end of period (thousands).................. 418 22 -- -- -- -- -- -- DISCIPLINED MID CAP STOCK PORTFOLIO (5/98)* Unit Value at beginning of period..... $ 1.000 $ 1.000 $ -- $ -- $ -- $ -- $ -- $ -- Unit Value at end of period........... 1.064 1.063 -- -- -- -- -- -- Number of units outstanding at end of period (thousands).................. 550 28 -- -- -- -- -- -- DISCIPLINED SMALL CAP STOCK PORTFOLIO (5/98)* Unit Value at beginning of period..... $ 1.000 $ 1.000 $ -- $ -- $ -- $ -- $ -- $ -- Unit Value at end of period........... 0.896 0.894 -- -- -- -- -- -- Number of units outstanding at end of period (thousands).................. 365 17 -- -- -- -- -- -- MFS EMERGING GROWTH PORTFOLIO (11/96)* Unit Value at beginning of period..... $ 1.204 $ 1.200 $ 1.005 $ 1.005 $ 1.000 $ 1.000 $ -- $ -- Unit Value at end of period........... 1.599 1.589 1.204 1.200 1.500 1.005 -- -- Number of units outstanding at end of period (thousands).................. 29,937 7,522 17,295 4,256 2,506 466 -- --
A-3 35 [CAPTION]
APPENDIX A - --------------------------------------------------------------------------------------------------------------------------------- CONDENSED FINANCIAL INFORMATION THE TRAVELERS FUND BD II FOR VARIABLE ANNUITIES ACCUMULATION UNIT VALUES (CONTINUED) PERIOD FROM 11/8/95 YEAR ENDED YEAR ENDED YEAR ENDED (EFFECTIVE DATE) TO DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 STANDARD ENHANCED STANDARD ENHANCED STANDARD ENHANCED STANDARD ENHANCED - --------------------------------------------------------------------------------------------------------------------------------- MFS RESEARCH PORTFOLIO (5/98)* Unit Value at beginning of period..... $ 1.000 $ 1.000 $ -- $ -- $ -- $ -- $ -- $ -- Unit Value at end of period........... 1.037 1.035 -- -- -- -- -- -- Number of units outstanding at end of period (thousands).................. 3,295 1,243 -- -- -- -- -- -- STRATEGIC STOCK PORTFOLIO (5/98)* Unit Value at beginning of period..... $ 1.000 $ 1.000 $ -- $ -- $ -- $ -- $ -- $ -- Unit Value at end of period........... 0.936 0.934 -- -- -- -- -- -- Number of units outstanding at end of period (thousands).................. 3,336 44 -- -- -- -- -- --
* Reflects date money was first applied to the funding option through the Separate Account. Condensed Financial Information is shown as of this date. ** Not available to new contract owners after May 1, 1998 in most states. The financial statements of Fund BD II are contained in the Annual Report to Contract Owners, which is incorporated by reference in the Statement of Additional Information. The financial statements of Travelers Life and Annuity are contained in the Statement of Additional Information. Funding options not listed above were not yet available through the Separate Account as of December 31, 1998. "Number of Units outstanding at end of period" may include units for contract owners in the payout phase. A-4 36 APPENDIX B - -------------------------------------------------------------------------------- THE FIXED ACCOUNT The Fixed Account is secured by part of the general assets of the Company. The general assets of the Company include all assets of the Company other than those held in Fund BD II or any other separate account sponsored by the Company or its affiliates. The staff of the SEC does not generally review the disclosure in the prospectus relating to the Fixed Account. Disclosure regarding the Fixed Account and the general account may, however, be subject to certain provisions of the federal securities laws relating to the accuracy and completeness of statements made in the prospectus. Under the Fixed Account, the Company assumes the risk of investment gain or loss, guarantees a specified interest rate, and guarantees a specified periodic annuity payment. The investment gain or loss of Fund BD II or any of the funding options does not affect the Fixed Account portion of the contract owner's contract value, or the dollar amount of fixed annuity payments made under any payout option. We guarantee that, at any time, the Fixed Account contract value will not be less than the amount of the purchase payments allocated to the Fixed Account, plus interest credited, less any applicable premium taxes or prior surrenders. If the contract owner effects a surrender, the amount available from the Fixed Account will be reduced by any applicable withdrawal charge as described under "Charges and Deductions" in this prospectus. Purchase payments allocated to the Fixed Account and any transfers made to the Fixed Account become part of the Company's general account which supports insurance and annuity obligations. Neither the general account nor any interest therein is registered under, nor subject to the provisions of the Securities Act of 1933 or Investment Company Act of 1940. We will invest the assets of the Fixed Account at our discretion. Investment income from such Fixed Account assets will be allocated to us and to the Contracts participating in the Fixed Account. Investment income from the Fixed Account allocated to us includes compensation for mortality and expense risks borne by us in connection with Fixed Account Contracts. The amount of such investment income allocated to the Contracts will vary from year to year in our sole discretion at such rate or rates as the Company prospectively declares from time to time. The initial rate for any allocations into the Fixed Account is guaranteed for one year from the date of such allocation. Subsequent renewal rates will be guaranteed for the calendar quarter. We also guarantee that for the life of the Contract we will credit interest at not less than 3% per year. Any interest credited to amounts allocated to the Fixed Account in excess of 3% per year will be determined in our sole discretion. You assume the risk that interest credited to the Fixed Account may not exceed the minimum guarantee of 3% for any given year. TRANSFERS You may make transfers from the Fixed Account to any other available variable funding option(s) twice a year during the 30 days following the semiannual anniversary of the Contract effective date. The transfers are limited to an amount of up to 15% of the Fixed Account Value on the semiannual Contract effective date anniversary. (This restriction does not apply to transfers from the Dollar Cost Averaging Program.) Amounts previously transferred from the Fixed Account to other funding options may not be transferred back to the Fixed Account for a period of at least 6 months from the date of transfer. We reserve the right to waive either of these restrictions. Automated transfers from the Fixed Account to any of the funding options may begin at any time. Automated transfers from the Fixed Account may not deplete your Fixed Account value in a period of less than twelve months from your enrollment in the Dollar Cost Averaging program. B-1 37 APPENDIX C - -------------------------------------------------------------------------------- ENHANCED DEATH BENEFIT FOR CONTRACTS ISSUED BEFORE JUNE 1, 1997. Under the enhanced death benefit, IF THE ANNUITANT DIES BEFORE AGE 75 AND BEFORE THE MATURITY DATE, the Company will pay to the beneficiary a death benefit equal to the greater of (1) the guaranteed death benefit, or (2) the contract value less any applicable premium tax or outstanding loans. The guaranteed death benefit is equal to the purchase payments made to the Contract (minus surrenders and applicable premium tax) increased by 5% on each contract date anniversary, but not beyond the contract date anniversary following the annuitant's 75th birthday, with a maximum guaranteed death benefit of 200% of the total of purchase payments minus surrenders and outstanding loans and minus applicable premium tax. IF THE ANNUITANT DIES ON OR AFTER AGE 75, BUT BEFORE AGE 85 AND BEFORE THE MATURITY DATE, the Company will pay to the beneficiary a death benefit in an amount equal to the greater of (1) the guaranteed death benefit as of the annuitant's 75th birthday, plus additional purchase payments, minus surrenders and applicable premium tax; or (2) the contract value less any applicable premium tax and outstanding loans. IF THE ANNUITANT DIES ON OR AFTER AGE 85 BUT BEFORE THE MATURITY DATE, the Company will pay to the Beneficiary a death benefit equal to the contract value less any applicable premium tax and outstanding loans. C-1 38 APPENDIX D - -------------------------------------------------------------------------------- CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION The Statement of Additional Information contains more specific information and financial statements relating to The Travelers Life and Annuity Company. A list of the contents of the Statement of Additional Information is set forth below: The Insurance Company Principal Underwriter Distribution and Principal Underwriting Agreement Valuation of Assets Mixed and Shared Funding Performance Information Federal Tax Considerations Independent Accountants Financial Statements - -------------------------------------------------------------------------------- Copies of the Statement of Additional Information dated May 1, 1999 (Form No. L-12540S) are available without charge. To request a copy, please clip this coupon on the dotted line, enter your name and address in the spaces provided below, and mail to: The Travelers Life and Annuity Company, Annuity Investor Services, One Tower Square, Hartford, Connecticut 06183-9061. Name: - -------------------------------------------------------------------------------- Address: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- D-1 39 PART B Information Required in a Statement of Additional Information 40 VINTAGE STATEMENT OF ADDITIONAL INFORMATION dated May 1, 1999 for THE TRAVELERS FUND BD II FOR VARIABLE ANNUITIES ISSUED BY THE TRAVELERS LIFE AND ANNUITY COMPANY This Statement of Additional Information ("SAI") is not a prospectus but relates to, and should be read in conjunction with, the Individual Variable Annuity Contract Prospectus dated May 1, 1999. A copy of the Prospectus may be obtained by writing to The Travelers Life and Annuity Company, Annuity Investor Services, One Tower Square, Hartford, Connecticut 06183-9061, or by calling 1-800-842-8573 or by accessing the Securities and Exchange Commission's website at http://www.sec.gov. This SAI should be read in conjunction with the accompanying 1998 Annual Report for the Fund. TABLE OF CONTENTS THE INSURANCE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . 2 PRINCIPAL UNDERWRITER . . . . . . . . . . . . . . . . . . . . . . . . 2 DISTRIBUTION AND PRINCIPAL UNDERWRITING AGREEMENT . . . . . . . . . . 2 VALUATION OF ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . 3 MIXED AND SHARED FUNDING . . . . . . . . . . . . . . . . . . . . . . . 4 PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . 4 FEDERAL TAX CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . 8 INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . 11 FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . F-1 41 THE INSURANCE COMPANY The Travelers Life and Annuity Company (the "Company") is a stock insurance company chartered in 1973 in Connecticut and continuously engaged in the insurance business since that time. The Company is licensed to conduct a life insurance business in all states, (except New Hampshire and New York) and the District of Columbia and Puerto Rico. The Company's Home Office is located at One Tower Square Hartford, Connecticut 06183 and its telephone number is (860) 277-0111. The Company is a wholly owned subsidiary of The Travelers Insurance Company, which is indirectly owned, through a wholly owned subsidiary, by Citigroup Inc. Citigroup Inc. consists of businesses that produce a broad range of financial services, including asset management, banking and consumer finance, credit and charge cards, insurance, investments, investment banking and trading. Among its businesses are Citibank, Commercial Credit, Primerica Financial Services, Salomon Smith Barney, Salomon Smith Barney Asset Management, and Travelers Property Casualty. STATE REGULATION. The Company is subject to the laws of the state of Connecticut governing insurance companies and to regulation by the Insurance Commissioner of the state of Connecticut (the "Comissioner"). An annual statement covering the operations of the Company for the preceding year, as well as its financial conditions as of December 31 of such year, must be filed with the Commissioner in a prescribed format on or before March 1 of each year. The Company's books and assets are subject to review or examination by the Commissioner or his agents at all times, and a full examination of its operations is conducted at least once every four years. The Company is also subject to the insurance laws and regulations of all other states in which it is licensed to operate. However, the insurance departments of each of these states generally apply the laws of the home state (jurisdiction of domicile) in determining the field of permissible investments. THE SEPARATE ACCOUNT. Fund BD II meets the definition of a separate account under the federal securities laws, and will comply with the provisions of the 1940 Act. Additionally, the operations of Fund BD II are subject to the provisions of Section 38a-433 of the Connecticut General Statutes which authorizes the Commissioner to adopt regulations under it. Section 38a-433 contains no restrictions on the investments of the Separate Account, and the Commissioner has adopted no regulations under the Section that affect the Separate Account. PRINCIPAL UNDERWRITER CFBDS, Inc. serves as principal underwriter for Fund BD II and the Contracts. The offering is continuous. CFBDS's principal executive offices are located at 21 Milk Street, Boston, Massachusetts. CFBDS is not affiliated with the Company or Fund BD II. DISTRIBUTION AND PRINCIPAL UNDERWRITING AGREEMENT Under the terms of the Distribution and Principal Underwriting Agreement among Fund BD II, CFBDS and the Company, CFBDS acts as agent for the distribution of the Contracts and as principal underwriter for the Contracts. The Company reimburses CFBDS for certain sales and overhead expenses connected with sales functions. 2 42 VALUATION OF ASSETS FUNDING OPTIONS: The value of the assets of each Funding Option is determined on each business day as of the close of the New York Stock Exchange. Each security traded on a national securities exchange is valued at the last reported sale price on the business day. If there has been no sale on that day, then the value of the security is taken to be the mean between the reported bid and asked prices on the business day or on the basis of quotations received from a reputable broker or any other recognized source. Any security not traded on a securities exchange but traded in the over-the-counter-market and for which market quotations are readily available is valued at the mean between the quoted bid and asked prices on the business day or on the basis of quotations received from a reputable broker or any other recognized source. Securities traded on the over-the-counter-market and listed securities with no reported sales are valued at the mean between the last reported bid and asked prices or on the basis of quotations received from a reputable broker or other recognized source. Short-term investments for which a quoted market price is available are valued at market. Short-term investments maturing in more than sixty days for which there is no reliable quoted market price are valued by "marking to market" (computing a market value based upon quotations from dealers or issuers for securities of a similar type, quality and maturity.) "Marking to market" takes into account unrealized appreciation or depreciation due to changes in interest rates or other factors which would influence the current fair values of such securities. Short-term investments maturing in sixty days or less for which there is no reliable quoted market price are valued at amortized cost which approximates market. THE CONTRACT VALUE: The value of an Accumulation Unit on any business day is determined by multiplying the value on the preceding business day by the net investment factor for the valuation period just ended. The net investment factor is used to measure the investment performance of a Funding Option from one valuation period to the next. The net investment factor for a Funding Option for any valuation period is equal to the sum of 1.000000 plus the net investment rate (the gross investment rate less any applicable Funding Option deductions during the valuation period relating to the mortality and expense risk charge and the administrative expense charge). The gross investment rate of a Funding Option is equal to (a) minus (b), divided by (c) where: (a)= investment income plus capital gains and losses (whether realized or unrealized); (b)= any deduction for applicable taxes (presently zero); and (c)= the value of the assets of the Funding Option at the beginning of the valuation period. The gross investment rate may be either positive or negative. A Funding Option's investment income includes any distribution whose ex-dividend date occurs during the valuation period. ACCUMULATION UNIT VALUE. The value of the accumulation unit for each Funding Option was initially established at $1.00. The value of an accumulation unit on any business day is determined by multiplying the value on the preceding business day by the net investment factor for the valuation 3 43 period just ended. The net investment factor is calculated for each Funding Option and takes into account the investment performance, expenses and the deduction of certain expenses. ANNUITY UNIT VALUE. The initial Annuity Unit Value applicable to each Funding Option was established at $1.00. An Annuity Unit Value as of any business day is equal to (a) the value of the Annuity Unit on the preceding business day, multiplied by (b) the corresponding net investment factor for the business day just ended, divided by (c) the assumed net investment factor for the valuation period. (For example, the assumed net investment factor based on an annual assumed net investment rate of 3.0% for a valuation period of one day is 1.000081 and, for a period of two days, is 1.000081 x 1.000081.) After the maturity date, withdrawals from the annuity unit value will be permitted only if you have elected a variable payout option for a fixed period which is not based on any lifetime. The maximum withdrawal amount will be calculated by computing the payments at 7% annual interest rate. MIXED AND SHARED FUNDING Certain variable annuity separate accounts and variable life insurance separate accounts may invest in the Funding Options simultaneously (called "mixed" and "shared" funding). It is conceivable that in the future it may be disadvantageous to do so. Although the Company and the Funding Options do not currently foresee any such disadvantages either to variable annuity contract owners or variable life policy owners, each Funding Option's Board of Directors intends to monitor events in order to identify any material conflicts between them and to determine what action, if any, should be taken. If a Board of Directors was to conclude that separate funds should be established for variable life and variable annuity separate accounts, the variable annuity contract owners would not bear any of the related expenses, but variable annuity contract owners and variable life insurance policy owners would no longer have the economies of scale resulting from a larger combined fund. PERFORMANCE INFORMATION From time to time, the Company may advertise several types of historical performance for the Funding Options of Fund BD II. The Company may advertise the "standardized average annual total returns" of the Funding Options available through the Separate Account, calculated in a manner prescribed by the Securities and Exchange Commission, as well as the "nonstandardized total returns," as described below: STANDARDIZED METHOD. Quotations of average annual total returns are computed according to a formula in which a hypothetical initial investment of $1,000 is allocated to a Funding Option, and then related to ending redeemable values over one-, five- and ten-year periods, or for a period covering the time during which the Funding Option has been in existence, if less. If a Funding Option has been in existence for less than one year, the "since inception" total return performance quotations are year-to-date and are not average annual total returns. These quotations reflect the deduction of all recurring charges during each period (on a pro rata basis in the case of fractional periods). The deduction for the annual contract administrative charge is converted to a percentage of assets based on the actual fee collected, divided by the average net assets per contract sold under the Prospectus to which this SAI relates. Each quotation assumes a total redemption at the end of each period with the assessment of any applicable withdrawal charge at that time. 4 44 NONSTANDARDIZED METHOD. Nonstandardized "total returns" will be calculated in a similar manner based on the performance of the Funding Options over a period of time, usually for the calendar year-to-date, and for the past one-, three-, five- and ten-year periods. Nonstandard total returns will not reflect the deduction of the annual contract administrative charge, which, if reflected, would decrease the level of performance shown. The withdrawal charge is not reflected because the Contract is designed for long-term investment. For Funding Options that were in existence prior to the date they became available under Fund BD II, the standardized average annual total return quotations may be accompanied by returns showing the investment performance that such Funding Options would have achieved (reduced by the applicable charges) had they been held available under the Contract for the period quoted. The total return quotations are based upon historical earnings and are not necessarily representative of future performance. GENERAL. Within the guidelines prescribed by the SEC and the National Association of Securities Dealers, Inc. ("NASD"), performance information may be quoted numerically or may be presented in a table, graph or other illustration. Advertisements may include data comparing performance to well-known indices of market performance (including, but not limited to, the Dow Jones Industrial Average, the Standard & Poor's (S&P) 500 Index and the S&P 400 Index, the Lehman Brothers Long T-Bond Index, the Russell 1000, 2000 and 3000 Indices, the Value Line Index, and the Morgan Stanley Capital International's EAFE Index). Advertisements may also include published editorial comments and performance rankings compiled by independent organizations (including, but not limited to, Lipper Analytical Services, Inc. and Morningstar, Inc.) and publications that monitor the performance of Fund BD II and the Funding Options. Average annual total returns for each of the Funding Options available under Fund BD II computed according to the standardized and nonstandardized methods for the period ending December 31, 1998 are set forth in the following table. 5 45 VINTAGE SEC STANDARDIZED PERFORMANCE AS OF 12/31/98
Standard Death Benefit Option Enhanced Death Benefit Option* - ------------------------------------------------------------------------------------------------------------------------------- Inception Date 1 Year Inception 1 Year Inception - ------------------------------------------------------------------------------------------------------------------------------- STOCK ACCOUNTS: - ------------------------------------------------------------------------------------------------------------------------------- AIM Capital Appreciation Portfolio 10/10/95 9.81% 10.15% 9.49% 9.84% - ------------------------------------------------------------------------------------------------------------------------------- Alliance Growth Portfolio 6/20/94 21.51% 26.26% 21.15% 25.91% - ------------------------------------------------------------------------------------------------------------------------------- Dreyfus Small Cap Portfolio 5/6/98 - -19.36% - -19.52% - ------------------------------------------------------------------------------------------------------------------------------- MFS Emerging Growth Portfolio 11/3/96 26.71% 22.06% 26.34% 21.71% - ------------------------------------------------------------------------------------------------------------------------------- MFS Research Portfolio 5/4/98 - -2.38% - -2.57% - ------------------------------------------------------------------------------------------------------------------------------- Salomon Brothers Investors Fund 5/4/98 - -4.64% - -4.83% - ------------------------------------------------------------------------------------------------------------------------------- Smith Barney International Equity Portfolio 6/20/94 -0.78% 5.66% -1.08% 5.36% - ------------------------------------------------------------------------------------------------------------------------------- Smith Barney Large Cap Growth Portfolio 5/6/98 - 17.62% - 17.40% - ------------------------------------------------------------------------------------------------------------------------------- Smith Barney Large Cap Value Portfolio 6/20/94 2.51% 17.19% 2.20% 16.86% - ------------------------------------------------------------------------------------------------------------------------------- Smith Barney Pacific Basin Portfolio 6/21/94 0.03% -6.82% -0.27% -7.08% - ------------------------------------------------------------------------------------------------------------------------------- Smith Barney Total Return Portfolio 8/31/95 -2.30% 13.14% -2.59% 12.81% - ------------------------------------------------------------------------------------------------------------------------------- Strategic Stock Portfolio 5/6/98 - -12.09% - -12.25% - ------------------------------------------------------------------------------------------------------------------------------- Travelers Disciplined Mid Cap Stock Portfolio 5/18/98 - 0.40% - 0.21% - ------------------------------------------------------------------------------------------------------------------------------- Travelers Disciplined Small Cap Stock Portfolio 5/8/98 - -15.85% - -16.00% - ------------------------------------------------------------------------------------------------------------------------------- Van Kampen Enterprise Portfolio 6/21/94 17.63% 23.23% 17.28% 22.89% - ------------------------------------------------------------------------------------------------------------------------------- BOND ACCOUNTS: - ------------------------------------------------------------------------------------------------------------------------------- G.T. Global Strategic Income Portfolio 6/21/94 -8.56% 6.62% -8.82% 6.32% - ------------------------------------------------------------------------------------------------------------------------------- Putnam Diversified Income Portfolio 6/20/94 -6.51% 6.02% -6.77% 5.72% - ------------------------------------------------------------------------------------------------------------------------------- Smith Barney High Income Portfolio 6/22/94 -6.72% 8.21% -6.98% 7.90% - ------------------------------------------------------------------------------------------------------------------------------- Travelers Convertible Bond Portfolio 5/8/98 - -5.92% - -6.09% - ------------------------------------------------------------------------------------------------------------------------------- Travelers Managed Income Portfolio 6/28/94 -2.19% 5.75% -2.48% 5.45% - ------------------------------------------------------------------------------------------------------------------------------- BALANCED ACCOUNTS: - ------------------------------------------------------------------------------------------------------------------------------- MFS Total Return Portfolio 6/20/94 4.33% 13.79% 4.02% 13.47% - ------------------------------------------------------------------------------------------------------------------------------- Salomon Brothers Total Return Fund 5/6/98 - -6.27% - -6.44% - ------------------------------------------------------------------------------------------------------------------------------- Smith Barney Concert Select Balanced Portfolio 3/10/97 2.21% 6.59% 1.90% 6.28% - ------------------------------------------------------------------------------------------------------------------------------- Smith Barney Concert Select Growth Portfolio 3/11/97 6.58% 9.45% 6.27% 9.12% - ------------------------------------------------------------------------------------------------------------------------------- MONEY MARKET ACCOUNTS: - ------------------------------------------------------------------------------------------------------------------------------- Smith Barney Money Market Portfolio 6/20/94 -2.21% 3.36% -2.50% 3.07% - -------------------------------------------------------------------------------------------------------------------------------
The inception date used to calculate standarized performance is based on the date that the investment option became active under the product. Returns for periods less than one year are cumulative. * Enchanced Death Benefit Option currently not available in all states. 6 46 VINTAGE NONSTANDARDIZED PERFORMANCE AS OF 12/31/98
Standard Death Benefit Option - ------------------------------------------------------------------------------------------------------ Inception Since Date YTD 1 Year 3 Year Inception - ------------------------------------------------------------------------------------------------------ STOCK ACCOUNTS: - ------------------------------------------------------------------------------------------------------ AIM Capital Appreciation Portfolio 10/10/95 15.85% 15.85% 13.39% 10.92% - ------------------------------------------------------------------------------------------------------ Alliance Growth Portfolio 6/20/94 27.55% 27.55% 27.62% 26.50% - ------------------------------------------------------------------------------------------------------ Dreyfus Small Cap Portfolio 8/31/90 -4.59% -4.59% 8.26% 24.99% - ------------------------------------------------------------------------------------------------------ MFS Emerging Growth Portfolio 8/30/96 32.76% 32.76% - 24.85% - ------------------------------------------------------------------------------------------------------ MFS Research Portfolio 3/23/98 - - - 4.97% - ------------------------------------------------------------------------------------------------------ Salomon Brothers Investors Fund 2/17/98 - - - 9.45% - ------------------------------------------------------------------------------------------------------ Smith Barney International Equity Portfolio 6/20/94 5.25% 5.25% 7.51% 6.05% - ------------------------------------------------------------------------------------------------------ Smith Barney Large Cap Growth Portfolio 5/1/98 - - - 23.66% - ------------------------------------------------------------------------------------------------------ Smith Barney Large Cap Value Portfolio 6/20/94 8.55% 8.55% 17.14% 17.48% - ------------------------------------------------------------------------------------------------------ Smith Barney Pacific Basin Portfolio 6/21/94 6.07% 6.07% -6.58% -6.37% - ------------------------------------------------------------------------------------------------------ Smith Barney Total Return Portfolio 12/3/93 3.74% 3.74% 14.08% 14.57% - ------------------------------------------------------------------------------------------------------ Strategic Stock Portfolio 5/1/98 - - - -6.44% - ------------------------------------------------------------------------------------------------------ Travelers Disciplined Mid Cap Stock Portfolio 4/1/97 15.56% 15.56% - 27.95% - ------------------------------------------------------------------------------------------------------ Travelers Disciplined Small Cap Stock Portfolio 5/1/98 - - - -11.71% - ------------------------------------------------------------------------------------------------------ Van Kampen Enterprise Portfolio 6/21/94 23.67% 23.67% 24.04% 23.49% - ------------------------------------------------------------------------------------------------------ BOND ACCOUNTS: - ------------------------------------------------------------------------------------------------------ G.T. Global Strategic Income Portfolio 6/21/94 -2.69% -2.69% 6.64% 7.01% - ------------------------------------------------------------------------------------------------------ Putnam Diversified Income Portfolio 6/20/94 -0.50% -0.50% 4.24% 6.41% - ------------------------------------------------------------------------------------------------------ Smith Barney High Income Portfolio 6/22/94 -0.73% -0.73% 7.69% 8.58% - ------------------------------------------------------------------------------------------------------ Travelers Convertible Bond Portfolio 5/1/98 - - - 0.12% - ------------------------------------------------------------------------------------------------------ Travelers Managed Income Portfolio 6/28/94 3.85% 3.85% 4.66% 6.15% - ------------------------------------------------------------------------------------------------------ BALANCED ACCOUNTS: - ------------------------------------------------------------------------------------------------------ MFS Total Return Portfolio 6/20/94 10.37% 10.37% 14.36% 14.11% - ------------------------------------------------------------------------------------------------------ Salomon Brothers Total Return Fund 2/17/98 - - - 4.58% - ------------------------------------------------------------------------------------------------------ Smith Barney Concert Select Balanced Portfolio 3/10/97 8.24% 8.24% - 9.73% - ------------------------------------------------------------------------------------------------------ Smith Barney Concert Select Growth Portfolio 3/11/97 12.62% 12.62% - 12.53% - ------------------------------------------------------------------------------------------------------ MONEY MARKET ACCOUNTS: - ------------------------------------------------------------------------------------------------------ Smith Barney Money Market Portfolio 6/20/94 3.83% 3.83% 3.81% 3.79% - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------
Enhanced Death Benefit Option* - ------------------------------------------------------------------------------------------- Since YTD 1 Year 3 Year Inception - ------------------------------------------------------------------------------------------- STOCK ACCOUNTS: - ------------------------------------------------------------------------------------------- AIM Capital Appreciation Portfolio 15.53% 15.53% 13.08% 10.61% - ------------------------------------------------------------------------------------------- Alliance Growth Portfolio 27.19% 27.19% 27.26% 26.15% - ------------------------------------------------------------------------------------------- Dreyfus Small Cap Portfolio -4.86% -4.86% 7.95% 24.65% - ------------------------------------------------------------------------------------------- MFS Emerging Growth Portfolio 32.38% 32.38% - 24.50% - ------------------------------------------------------------------------------------------- MFS Research Portfolio - - - 4.74% - ------------------------------------------------------------------------------------------- Salomon Brothers Investors Fund - - - 9.19% - ------------------------------------------------------------------------------------------- Smith Barney International Equity Portfolio 4.96% 4.96% 7.21% 5.76% - ------------------------------------------------------------------------------------------- Smith Barney Large Cap Growth Portfolio - - - 23.44% - ------------------------------------------------------------------------------------------- Smith Barney Large Cap Value Portfolio 8.24% 8.24% 16.82% 17.15% - ------------------------------------------------------------------------------------------- Smith Barney Pacific Basin Portfolio 5.77% 5.77% -6.84% -6.63% - ------------------------------------------------------------------------------------------- Smith Barney Total Return Portfolio 3.45% 3.45% 13.76% 14.38% - ------------------------------------------------------------------------------------------- Strategic Stock Portfolio - - - -6.61% - ------------------------------------------------------------------------------------------- Travelers Disciplined Mid Cap Stock Portfolio 15.24% 15.24% - 27.60% - ------------------------------------------------------------------------------------------- Travelers Disciplined Small Cap Stock Portfolio - - - -11.88% - ------------------------------------------------------------------------------------------- Van Kampen Enterprise Portfolio 23.32% 23.32% 23.70% 23.14% - ------------------------------------------------------------------------------------------- BOND ACCOUNTS: - ------------------------------------------------------------------------------------------- G.T. Global Strategic Income Portfolio -2.96% -2.96% 6.34% 6.71% - ------------------------------------------------------------------------------------------- Putnam Diversified Income Portfolio -0.78% -0.78% 3.95% 6.12% - ------------------------------------------------------------------------------------------- Smith Barney High Income Portfolio -1.00% -1.00% 7.39% 8.28% - ------------------------------------------------------------------------------------------- Travelers Convertible Bond Portfolio - - - -0.06% - ------------------------------------------------------------------------------------------- Travelers Managed Income Portfolio 3.56% 3.56% 4.37% 5.86% - ------------------------------------------------------------------------------------------- BALANCED ACCOUNTS: - ------------------------------------------------------------------------------------------- MFS Total Return Portfolio 10.06% 10.06% 14.04% 13.79% - ------------------------------------------------------------------------------------------- Salomon Brothers Total Return Fund - - - 4.32% - ------------------------------------------------------------------------------------------- Smith Barney Concert Select Balanced Portfolio 7.94% 7.94% - 9.43% - ------------------------------------------------------------------------------------------- Smith Barney Concert Select Growth Portfolio 12.31% 12.31% - 12.21% - ------------------------------------------------------------------------------------------- MONEY MARKET ACCOUNTS: - ------------------------------------------------------------------------------------------- Smith Barney Money Market Portfolio 3.54% 3.54% 3.51% 3.50% - ------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------- Returns for periods less than one year are cumulative; all others are annualized. Inception date reflects the date the underlying fund began operating - -------------------------------------------------------------------------------------------
7 47 FEDERAL TAX CONSIDERATIONS The following description of the federal income tax consequences under this Contract is not exhaustive and is not intended to cover all situations. Because of the complexity of the law and the fact that the tax results will vary according to the factual status of the individual involved, tax advice may be needed by a person contemplating purchase of an annuity contract and by a contract owner or beneficiary who may make elections under a contract. For further information, please consult a qualified tax adviser. MANDATORY DISTRIBUTIONS FOR QUALIFIED PLANS Federal tax law generally requires that minimum annual distributions begin by April 1st of the calendar year following the calendar year in which a participant under a qualified plan, a Section 403(b) annuity, or an IRA attains age 701/2. Distributions must also begin or be continued according to required patterns following the death of the contract owner or the annuitant. NONQUALIFIED ANNUITY CONTRACTS Individuals may purchase tax-deferred annuities without tax law funding limits. The purchase payments receive no tax benefit, deduction or deferral, but increases in the value of the contract are generally deferred from tax until distribution. If a nonqualified annuity is owned by other than an individual, however, (e.g., by a corporation), the increases in value attributable to purchase payments made after February 28, 1986 are includable in income annually. Furthermore, for contracts issued after April 22, 1987, all deferred increases in value will be includable in the income of a contract owner when the contract owner transfers the contract without adequate consideration. If two or more annuity contracts are purchased from the same insurer within the same calendar year, distributions from any of them will be taxed based upon the amount of income in all of the same calendar year series of annuities. This will generally have the effect of causing taxes to be paid sooner on the deferred gain in the contracts. Those receiving partial distributions made before the maturity date will generally be taxed on an income-first basis to the extent of income in the contract. If you are exchanging another annuity contract for this annuity, certain pre-August 14, 1982 deposits into an annuity contract that have been placed in the contract by means of a tax-deferred exchange under Section 1035 of the Code may be withdrawn first without income tax liability. This information on deposits must be provided to the Company by the other insurance company at the time of the exchange. There is income in the contract generally to the extent the cash value exceeds the investment in the contract. The investment in the contract is equal to the amount of premiums paid less any amount received previously which was excludable from gross income. Any direct or indirect borrowing against the value of the contract or pledging of the contract as security for a loan will be treated as a cash distribution under the tax law. The federal tax law requires that nonqualified annuity contracts meet minimum mandatory distribution requirements upon the death of the contract owner, including the first of joint owners. Failure to meet these requirements will cause the surviving joint owner, or the beneficiary to lose the tax benefits associated with annuity contracts, i.e., primarily the tax deferral prior to distribution. The distribution required depends, among other things, upon whether an annuity option is elected or whether the new contract owner is the surviving spouse. Contracts will be administered by the 8 48 Company in accordance with these rules and the Company will make a notification when payments should be commenced. INDIVIDUAL RETIREMENT ANNUITIES To the extent of earned income for the year and not exceeding $2,000 per individual, an individual may make deductible contributions to an individual retirement annuity (IRA). There are certain limits on the deductible amount based on the adjusted gross income of the individual and spouse and based on their participation in a retirement plan. If an individual is married and the spouse does not have earned income, the individual may establish IRAs for the individual and spouse. Purchase payments may then be made annually into IRAs for both spouses in the maximum amount of 100% of earned income up to a combined limit of $4,000. The Code provides for the purchase of a Simplified Employee Pension (SEP) plan. A SEP is funded through an IRA with an annual employer contribution limit of 15% of compensation up to $30,000 for each participant. SIMPLE Plan IRA Form Effective January 1, 1997, employers may establish a savings incentive match plan for employees ("SIMPLE plan") under which employees can make elective salary reduction contributions to an IRA based on a percentage of compensation of up to $6,000. (Alternatively, the employer can establish a SIMPLE cash or deferred arrangement under IRS Section 401(k)). Under a SIMPLE plan IRA, the employer must either make a matching contribution of 100% on the first 3% or 7% contribution for all eligible employees. Early withdrawals are subject to the 10% early withdrawal penalty generally applicable to IRAs, except that an early withdrawal by an employee under a SIMPLE plan IRA, within the first two years of participation, shall be subject to a 25% early withdrawal tax. ROTH IRAS Effective January 1, 1998, Section 408A of the Code permits certain individuals to contribute to a Roth IRA. Eligibility to make contributions is based upon income, and the applicable limits vary based on marital status and/or whether the contribution is a rollover contribution from another IRA or an annual contribution. Contributions to a Roth IRA, which are subject to certain limitations ($2,000 per year for annual contributions), are not deductible and must be made in cash or as a rollover or transfer from another Roth IRA or other IRA. A conversion of a "traditional" IRA to a Roth IRA may be subject to tax and other special rules apply. You should consult a tax adviser before combining any converted amounts with other Roth IRA contributions, including any other conversion amounts from other tax years. Qualified distributions from a Roth IRA are tax-free. A qualified distribution requires that the Roth IRA has been held for at least 5 years, and the distribution is made after age 59 1/2, on death or disability of the owner, or for a limited amount ($10,000) for a qualified first time home purchase for the owner or certain relatives. Income tax and a 10% penalty tax may apply to distributions made (1) before age 59 1/2 (subject to certain exceptions) or (2) during five taxable years starting with the year in which the first contribution is made to the Roth IRA. 9 49 QUALIFIED PENSION AND PROFIT-SHARING PLANS Under a qualified pension or profit-sharing plan, purchase payments made by an employer are not currently taxable to the participant and increases in the value of a contract are not subject to taxation until received by a participant or beneficiary. Distributions are taxable to the participant or beneficiary as ordinary income in the year of receipt. Any distribution that is considered the participant's "investment in the contract" is treated as a return of capital and is not taxable. Certain lump-sum distributions may be eligible for special forward averaging tax treatment for certain classes of individuals. FEDERAL INCOME TAX WITHHOLDING The portion of a distribution which is taxable income to the recipient will be subject to federal income tax withholding as follows: 1. ELIGIBLE ROLLOVER DISTRIBUTION FROM SECTION 403(b) PLANS OR ARRANGEMENTS OR FROM QUALIFIED PENSION AND PROFIT-SHARING PLANS There is a mandatory 20% tax withholding for plan distributions that are eligible for rollover to an IRA or to another retirement plan but that are not directly rolled over. A distribution made directly to a participant or beneficiary may avoid this result if: (a) a periodic settlement distribution is elected based upon a life or life expectancy calculation, or (b) a term-for-years settlement distribution is elected for a period of ten years or more, payable at least annually, or (c) a minimum required distribution as defined under the tax law is taken after the attainment of the age of 70 1/2 or as otherwise required by law. A distribution including a rollover that is not a direct rollover will be subject to the 20% withholding, and a 10% additional tax penalty may apply to any amount not added back in the rollover. The 20% withholding may be recovered when the participant or beneficiary files a personal income tax return for the year if a rollover was completed within 60 days of receipt of the funds, except to the extent that the participant or spousal beneficiary is otherwise underwithheld or short on estimated taxes for that year. 2. OTHER NON-PERIODIC DISTRIBUTIONS (FULL OR PARTIAL REDEMPTIONS) To the extent not described as requiring 20% withholding in 1 above, the portion of a non-periodic distribution which constitutes taxable income will be subject to federal income tax withholding, if the aggregate distributions exceed $200 for the year, unless the recipient elects not to have taxes withheld. If no such election is made, 10% of the taxable distribution will be withheld as federal income tax. Election forms will be provided at the time distributions are requested. This form of withholding applies to all annuity programs. 10 50 3. PERIODIC DISTRIBUTIONS (DISTRIBUTIONS PAYABLE OVER A PERIOD GREATER THAN ONE YEAR) The portion of a periodic distribution which constitutes taxable income will be subject to federal income tax withholding under the wage withholding tables as if the recipient were married claiming three exemptions. A recipient may elect not to have income taxes withheld or have income taxes withheld at a different rate by providing a completed election form. Election forms will be provided at the time distributions are requested. This form of withholding applies to all annuity programs. As of January 1, 1999, a recipient receiving periodic payments (e.g., monthly or annual payments under an annuity option) which total $14,700 or less per year, will generally be exempt from periodic withholding. Recipients who elect not to have withholding made are liable for payment of federal income tax on the taxable portion of the distribution. All recipients may also be subject to penalties under the estimated tax payment rules if withholding and estimated tax payments are not sufficient to cover tax liabilities. Recipients who do not provide a social security number or other taxpayer identification number will not be permitted to elect out of withholding. Additionally, U.S citizens residing outside of the country, or U.S. legal residents temporarily residing outside the country, are not permitted to elect out of withholding. INDEPENDENT ACCOUNTANTS The financial statements of The Travelers Life and Annuity Company as of December 31, 1998 and 1997, and for each of the years in the three-year period ended December 31, 1998, included herein, and the financial statements of Fund BD II as of December 31, 1998 and for the year ended December 31, 1998, incorporated herein by reference, have been included or incorporated in reliance upon the reports of KPMG LLP, independent certified public accountants, appearing elsewhere herein or incorporated herein by reference, and upon the authority of said firm as experts in accounting and auditing. 11 51 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholder The Travelers Life and Annuity Company: We have audited the accompanying balance sheets of The Travelers Life and Annuity Company as of December 31, 1998 and 1997, and the related statements of income, changes in retained earnings and accumulated other changes in equity from non-owner sources and cash flows for each of the years in the three-year period ended December 31, 1998. 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 audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Travelers Life and Annuity Company as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ KPMG LLP Hartford, Connecticut January 25, 1999 F-1 52 THE TRAVELERS LIFE AND ANNUITY COMPANY STATEMENTS OF INCOME ($ in thousands)
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996 ---- ---- ---- REVENUES Premiums $ 23,677 $ 35,190 $ 17,462 Net investment income 171,003 168,653 151,326 Realized investment gains (losses) 18,493 44,871 (9,613) Fee income 14,687 5,004 1,336 Other 14,199 3,159 940 - -------------------------------------------------------------------------- ------------- -------------- Total Revenues 242,059 256,877 161,451 - -------------------------------------------------------------------------- ------------- -------------- BENEFITS AND EXPENSES Current and future insurance benefits 81,371 95,639 77,285 Interest credited to contractholders 51,535 35,165 35,607 Amortization of deferred acquisition costs and value in insurance in force 17,031 6,036 3,286 Operating expenses 3,937 10,462 5,691 - -------------------------------------------------------------------------- ------------- -------------- Total Benefits and Expenses 153,874 147,302 121,869 - -------------------------------------------------------------------------- ------------- -------------- Income before federal income taxes 88,185 109,575 39,582 - -------------------------------------------------------------------------- ------------- -------------- Federal income taxes: Current 18,917 33,859 29,456 Deferred expense (benefit) 11,783 4,344 (15,665) - -------------------------------------------------------------------------- ------------- -------------- Total Federal Income Taxes 30,700 38,203 13,791 - -------------------------------------------------------------------------- ------------- -------------- Net income $ 57,485 $ 71,372 $ 25,791 ========================================================================== ============= ==============
See Notes to Financial Statements. F-2 53 THE TRAVELERS LIFE AND ANNUITY COMPANY BALANCE SHEETS ($ in thousands)
DECEMBER 31, 1998 1997 - ------------------------------------------------------------------------------------------ ---------------- ----------------- ASSETS Fixed maturities, available for sale at fair value (cost, $1,707,347; $1,571,121) $1,838,681 $1,678,120 Equity securities, at fair value (cost, $25,826; $15,092) 26,685 16,289 Mortgage loans 174,565 160,247 Short-term securities 126,176 169,229 Other invested assets 136,122 121,242 - ------------------------------------------------------------------------------------------ ---------------- ----------------- Total Investments 2,302,229 2,145,127 - ------------------------------------------------------------------------------------------ ---------------- ----------------- Separate accounts 2,178,474 812,059 Deferred acquisition costs and value of insurance in force 194,213 90,966 Premium balances receivable 16,074 9,288 Deferred federal income taxes 12,395 33,661 Other assets 41,119 61,904 - ------------------------------------------------------------------------------------------ ---------------- ----------------- Total Assets $4,744,504 $3,153,005 - ------------------------------------------------------------------------------------------ ---------------- ----------------- LIABILITIES Future policy benefits $963,171 $971,602 Contractholder funds 947,411 818,971 Separate accounts 2,178,474 812,059 Other liabilities 114,690 84,712 - ------------------------------------------------------------------------------------------ ---------------- ----------------- Total Liabilities 4,203,746 2,687,344 - ------------------------------------------------------------------------------------------ ---------------- ----------------- SHAREHOLDER'S EQUITY Common stock, par value $100; 100,000 shares authorized, 30,000 issued and outstanding 3,000 3,000 Additional paid-in capital 167,314 167,314 Retained earnings 282,555 225,070 Accumulated other changes in equity from non-owner sources 87,889 70,277 - ------------------------------------------------------------------------------------------ ---------------- ----------------- Total Shareholder's Equity 540,758 465,661 - ------------------------------------------------------------------------------------------ ---------------- ----------------- Total Liabilities and Shareholder's Equity $4,744,504 $3,153,005 ========================================================================================== ================ =================
See Notes to Financial Statements. F-3 54 THE TRAVELERS LIFE AND ANNUITY COMPANY STATEMENTS OF CHANGES IN RETAINED EARNINGS AND ACCUMULATED OTHER CHANGES IN EQUITY FROM NON-OWNER SOURCES ($ IN THOUSANDS)
- ------------------------------------------------------ ---------------- ----------------- ------------------- STATEMENTS OF CHANGES IN RETAINED EARNINGS 1998 1997 1996 - ------------------------------------------------------ ---------------- ----------------- ------------------- Balance, beginning of year $225,070 $167,698 $157,907 Net income 57,485 71,372 25,791 Dividends to parent - 14,000 16,000 - ------------------------------------------------------ ---------------- ----------------- ------------------- Balance, end of year $282,555 $225,070 $167,698 ====================================================== ================ ================= =================== - ------------------------------------------------------ ---------------- ----------------- ------------------- STATEMENTS OF ACCUMULATED OTHER CHANGES IN EQUITY FROM NON-OWNER SOURCES - ------------------------------------------------------ ---------------- ----------------- ------------------- Balance, beginning of year $70,277 $33,856 $35,330 Unrealized gains (losses), net of tax 17,612 36,421 (1,474) - ------------------------------------------------------ ---------------- ----------------- ------------------- Balance, end of year $87,889 $70,277 $33,856 ====================================================== ================ ================= =================== - ------------------------------------------------------ ---------------- ----------------- ------------------- SUMMARY OF CHANGES IN EQUITY FROM NON-OWNER SOURCES - ------------------------------------------------------ ---------------- ----------------- ------------------- Net Income $57,485 $71,372 $25,791 Other changes in equity from non-owner sources 17,612 36,421 (1,474) - ------------------------------------------------------ ---------------- ----------------- ------------------- Total changes in equity from non-owner sources $75,097 $107,793 $24,317 ====================================================== ================ ================= ===================
See Notes to Financial Statements. F-4 55 THE TRAVELERS LIFE AND ANNUITY COMPANY STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH ($ in thousands)
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996 - ----------------------------------------------------------------------------------- --------------- --------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Premiums collected $ 22,300 $ 34,553 $ 6,472 Net investment income received 146,158 170,460 71,083 Benefits and claims paid (90,872) (90,820) (70,331) Interest credited to contractholders (51,535) (35,165) (813) Operating expenses paid (75,632) (40,868) (5,482) Income taxes paid (25,214) (22,440) (23,931) Other (596) (7,702) (6,857) - ----------------------------------------------------------------------------------- --------------- --------------- ------------- Net Cash Provided by (Used in) Operating Activities (75,391) 8,018 (29,859) - ----------------------------------------------------------------------------------- --------------- --------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities of investments Fixed maturities 113,456 81,899 20,301 Mortgage loans 25,462 8,972 37,789 Proceeds from sales of investments Fixed maturities 1,095,976 856,846 978,970 Equity securities 6,020 12,404 12,818 Mortgage loans - 5,483 22,437 Real estate held for sale - 4,493 - Purchases of investments Fixed maturities (1,320,704) (1,020,803) (994,443) Equity securities (13,653) (6,382) (5,412) Mortgage loans (39,158) (41,967) (21,450) Policy loans (2,010) (1,144) (1,750) Short-term securities, (purchases) sales, net 43,054 (88,067) (19,688) Other investments, (purchases) sales, net 1,110 (51,502) (6,160) Securities transactions in course of settlement 36,459 10,526 (51,703) - ----------------------------------------------------------------------------------- --------------- --------------- ------------- Net Cash Used in Investing Activities (53,988) (229,242) (28,291) - ----------------------------------------------------------------------------------- --------------- --------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Contractholder fund deposits 211,476 325,932 96,490 Contractholder fund withdrawals (83,036) (89,145) (22,340) Dividends to parent company - (14,000) (16,000) - ----------------------------------------------------------------------------------- --------------- --------------- ------------- Net Cash Provided by Financing Activities 128,440 222,787 58,150 - ----------------------------------------------------------------------------------- --------------- --------------- ------------- Net increase (decrease) in cash (939) 1,563 - - ----------------------------------------------------------------------------------- --------------- --------------- ------------- Cash at December 31, $624 $1,563 $ - =================================================================================== =============== =============== =============
See Notes to Financial Statements. F-5 56 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Significant accounting policies used in the preparation of the accompanying financial statements follow. Basis of Presentation The Travelers Life and Annuity Company (the Company) is a wholly owned subsidiary of The Travelers Insurance Company (TIC), an indirect wholly owned subsidiary of Citigroup Inc. (Citigroup), formerly Travelers Group Inc. The financial statements and accompanying footnotes of the Company are prepared in conformity with generally accepted accounting principles. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and benefits and expenses during the reporting period. Actual results could differ from those estimates. The Company offers a variety of variable annuity products where the investment risk is borne by the contractholder, not the Company, and the benefits are not guaranteed. The premiums and deposits related to these products are reported in separate accounts. The Company considers it necessary to differentiate, for financial statement purposes, the results of the risks it has assumed from those it has not. See also Note 6. Certain reclassifications have been made to the prior year's financial statements to conform to the current year's presentation. ACCOUNTING CHANGES Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities Effective January 1, 1997, the Company adopted Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (FAS 125). This statement establishes accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. These standards are based on an approach that focuses on control. Under this approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered and derecognizes liabilities when extinguished. FAS 125 provides standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. Effective January 1, 1998, the Company adopted the collateral provisions of FAS 125 which were not effective until 1998 in accordance with Statement of Financial Accounting Standards No. 127, "Deferral of the Effective Date of Certain Provisions of SFAS 125". The adoption of the collateral provisions of FAS 125 created additional assets and liabilities on the Company's statement of financial position related to the recognition of securities provided and received as collateral. There was no impact on the results of operations from the adoption of the collateral provisions of FAS 125. F-6 57 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) Reporting Comprehensive Income Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS 130). FAS 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. All items that are required to be recognized under accounting standards as components of comprehensive income are required to be reported in an annual financial statement that is displayed with the same prominence as other financial statements. This statement stipulates that comprehensive income reflect the change in equity of an enterprise during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income thus represents the sum of net income and other changes in equity from non-owner sources. The accumulated balance of other changes in equity from non-owner sources is required to be displayed separately from retained earnings and additional paid-in capital in the balance sheet. The adoption of FAS 130 resulted in the Company reporting unrealized gains and losses on investments in debt and equity securities in changes in equity from non-owner sources. See Note 3. Disclosures About Segments of an Enterprise and Related Information During 1998, Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" (FAS 131) became effective. FAS 131 establishes standards for the way that public enterprises report information about operating segments in annual financial statements and requires that selected information about those operating segments be reported in interim financial statements. This statement supersedes Statement of Financial Accounting Standards No. 14, "Financial Reporting for Segments of a Business Enterprise". FAS 131 requires that all public enterprises report financial and descriptive information about its reportable operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decisionmaker in deciding how to allocate resources and in assessing performance. The Company only has one reportable operating segment and therefore, no additional disclosures are required under FAS 131. Accounting for the Costs of Computer Software Developed or Obtained for Internal Use During the third quarter of 1998, the Company adopted (effective January 1, 1998) the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants' Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 provides guidance on accounting for the costs of computer software developed or obtained for internal use and for determining when specific costs should be capitalized or expensed. The adoption of SOP 98-1 had no impact on the Company's financial condition, statement of operations or liquidity. F-7 58 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) ACCOUNTING POLICIES Investments Fixed maturities include bonds, notes and redeemable preferred stocks. Fair values of investments in fixed maturities are based on quoted market prices or dealer quotes or, if these are not available, discounted expected cash flows using market rates commensurate with the credit quality and maturity of the investment. The effective yield used to determine amortization is calculated based upon actual historical and projected future cash flows, which are obtained from a widely-accepted securities data provider. Fixed maturities are classified as "available for sale" and are reported at fair value, with unrealized investment gains and losses, net of income taxes, charged or credited directly to shareholder's equity. Equity securities, which include common and non-redeemable preferred stocks, are classified as "available for sale" and are carried at fair value based primarily on quoted market prices. Changes in fair values of equity securities are charged or credited directly to shareholder's equity, net of income taxes. Mortgage loans are carried at amortized cost. A mortgage loan is considered impaired when it is probable that the Company will be unable to collect principal and interest amounts due. For mortgage loans that are determined to be impaired, a reserve is established for the difference between the amortized cost and fair market value of the underlying collateral. In estimating fair value, the Company uses interest rates reflecting the current real estate financing market. Impaired loans were insignificant at December 31, 1998 and 1997. Short-term securities, consisting primarily of money market instruments and other debt issues purchased with a maturity of less than one year, are carried at amortized cost which approximates market. Other invested assets include real estate joint ventures and partnership investments accounted for on the equity method of accounting. All changes in equity of these investments are recorded in net investment income. Accrual of income, included in other assets, is suspended on fixed maturities or mortgage loans that are in default, or on which it is likely that future payments will not be made as scheduled. Interest income on investments in default is recognized only as payment is received. Included in investments are invested assets associated with Structured Settlement Guaranteed Separate Accounts where the investment risk is borne by the Company. See Note 6. F-8 59 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) DERIVATIVE FINANCIAL INSTRUMENTS The Company uses derivative financial instruments, including financial futures contracts, options, forward contracts and interest rate swaps and caps, as a means of hedging exposure to interest rate and foreign currency risk. Hedge accounting is used to account for derivatives. To qualify for hedge accounting the changes in value of the derivative must be expected to substantially offset the changes in value of the hedged item. Hedges are monitored to ensure that there is a high correlation between the derivative instruments and the hedged investment. Gains and losses arising from financial futures contracts are used to adjust the basis of hedged investments and are recognized in net investment income over the life of the investment. Forward contracts, and options, and interest rate caps were not significant at December 31, 1998 and 1997. Information concerning derivative financial instruments is included in Note 4. INVESTMENT GAINS AND LOSSES Realized investment gains and losses are included as a component of pre-tax revenues based upon specific identification of the investments sold on the trade date. Also included are gains and losses arising from the remeasurement of the local currency value of foreign investments to U.S. dollars, the functional currency of the Company. POLICY LOANS Policy loans are carried at the amount of the unpaid balances that are not in excess of the net cash surrender values of the related insurance policies. The carrying value of policy loans, which have no defined maturities, is considered to be fair value. SEPARATE ACCOUNTS The Company has separate account assets and liabilities representing funds for which investment income and investment gains and losses accrue directly to, and investment risk is borne by, the contractholders. Each of these accounts have specific investment objectives. The assets and liabilities of these accounts are carried at fair value, and amounts assessed to the contractholders for management services are included in fee income. Deposits, net investment income and realized investment gains and losses for these accounts are excluded from revenues, and related liability increases are excluded from benefits and expenses. The Company also has a separate account for structured settlement annuity obligations where the investment risk is borne by the Company. The assets and liabilities of this separate account are included in investments, future policy benefits and contractholder funds for financial reporting purposes. See Note 6. F-9 60 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) DEFERRED ACQUISITION COSTS AND VALUE OF INSURANCE IN FORCE Costs of acquiring individual life insurance and annuity business, principally commissions and certain expenses related to policy issuance, underwriting and marketing, all of which vary with and are primarily related to the production of new business, are deferred. Acquisition costs relating to traditional life insurance are amortized in relation to anticipated premiums; universal life in relation to estimated gross profits; and annuity contracts employing a level yield method. A 15 to 20 year amortization period is used for life insurance, and a 7 to 20 year period is employed for annuities. Deferred acquisition costs are reviewed periodically for recoverability to determine if any adjustment is required. Adjustments, if any, are charged to income. The value of insurance in force is an asset recorded at the time of acquisition of an insurance company. It represents the actuarially determined present value of anticipated profits to be realized from annuity contracts at the date of acquisition using the same assumptions that were used for computing related liabilities, where appropriate. The value of insurance in force was the actuarially determined present value of the projected future profits discounted at an interest rate of 16% for the annuity business acquired. The annuity contracts are amortized employing a level yield method. The value of insurance in force is reviewed periodically for recoverability to determine if any adjustment is required. Adjustments, if any, are charged to income. FUTURE POLICY BENEFITS Benefit reserves represent liabilities for future insurance policy benefits. Benefit reserves for life insurance and annuity policies have been computed based upon mortality, morbidity, persistency and interest assumptions applicable to these coverages, which range from 3.0% to 7.5%, including a provision for adverse deviation. These assumptions consider Company experience and industry standards. The assumptions vary by plan, age at issue, year of issue and duration. CONTRACTHOLDER FUNDS Contractholder funds represent receipts from the issuance of universal life, certain individual annuity contracts, and structured settlement contracts. Contractholder fund balances are increased by such receipts and credited interest and reduced by withdrawals, mortality charges and administrative expenses charged to the contractholders. Interest rates credited to contractholder funds range from 3.3% to 7.2%. PERMITTED STATUTORY ACCOUNTING PRACTICES The Company, domiciled in the State of Connecticut, prepares statutory financial statements in accordance with the accounting practices prescribed or permitted by the State of Connecticut Insurance Department. Prescribed statutory accounting practices include certain publications of the National Association of Insurance Commissioners (NAIC) as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. The impact of any permitted accounting practices on the statutory surplus of the Company is not material. F-10 61 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) The NAIC recently completed a process intended to codify statutory accounting practices for certain insurance enterprises. As a result of this process, the NAIC will issue a revised statutory Accounting Practices and Procedures Manual - version effective January 1, 2001 (the revised Manual) that will be effective January 1, 2001 for the calendar year 2001 statutory financial statements. It is expected that the State of Connecticut will require that, effective January 1, 2001, insurance companies domiciled in Connecticut prepare their statutory basis financial statements in accordance with the revised Manual subject to any deviations prescribed or permitted by the Connecticut insurance commissioner. The Company has not yet determined the impact that this change will have on its statutory capital and surplus. PREMIUMS Premiums are recognized as revenues when due. Reserves are established for the portion of premiums that will be earned in future periods. OTHER REVENUES Other revenues include surrender, mortality and administrative charges, and fees earned on investment and other insurance contracts. FEDERAL INCOME TAXES The provision for federal income taxes comprises two components, current income taxes and deferred income taxes. Deferred federal income taxes arise from changes during the year in cumulative temporary differences between the tax basis and book basis of assets and liabilities. The deferred federal income tax asset is recognized to the extent that future realization of the tax benefit is more likely than not, with a valuation allowance for the portion that is not likely to be recognized. FUTURE APPLICATION OF ACCOUNTING STANDARDS In December 1997, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments" (SOP 97-3). SOP 97-3 provides guidance for determining when an entity should recognize a liability for guaranty-fund and other insurance-related assessments, how to measure that liability, and when an asset may be recognized for the recovery of such assessments through premium tax offsets or policy surcharges. This SOP is effective for financial statements for fiscal years beginning after December 15, 1998, and the effect of initial adoption is to be reported as a cumulative catch-up adjustment. Restatement of previously issued financial statements is not allowed. The Company plans to implement SOP 97-3 in the first quarter of 1999 and expects there to be no material impact on the Company's financial condition, results of operations or liquidity. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133). This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments imbedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. F-11 62 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation. FAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Upon initial application of FAS 133, hedging relationships must be designated anew and documented pursuant to the provisions of this statement. The Company has not yet determined the impact that FAS 133 will have on its financial statements. 2. REINSURANCE The Company participates in reinsurance in order to limit losses, minimize exposure to large risks, provide capacity for future growth and to effect business-sharing arrangements. The Company remains primarily liable as the direct insurer on all risks reinsured. Life insurance in force ceded to TIC at December 31, 1998 and 1997 was $69.6 million and $76.4 million, respectively. Life insurance premiums ceded were $4.2 million, $2.4 million and $1.3 million in 1998, 1997 and 1996, respectively. Life insurance premiums ceded to non-affiliates were insignificant. Life insurance in force ceded to non-affiliates at December 31, 1998 and 1997, was $8.8 billion and $4.5 billion, respectively. 3. SHAREHOLDER'S EQUITY Unrealized Investment Gains (Losses) See Note 11 for an analysis of the change in unrealized gains and losses on investments. Shareholder's Equity and Dividend Availability The Company's statutory net income (loss) was $(3.2) million, $80.3 million and $17.9 million for the years ended December 31, 1998, 1997 and 1996, respectively. Statutory capital and surplus was $328.2 million at both December 31, 1998 and 1997. The Company is currently subject to various regulatory restrictions that limit the maximum amount of dividends available to be paid to its parent without prior approval of insurance regulatory authorities. Statutory surplus of $32.8 million is available in 1999 for dividend payments by the Company without prior approval of the Connecticut Insurance Department. F-12 63 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) TAX EFFECTS ALLOCATED TO EACH COMPONENT OF OTHER CHANGES IN EQUITY FROM NON-OWNER SOURCES
For the years ended December 31, PRE-TAX AMOUNT TAX EXPENSE/ AFTER-TAX ($ in thousands) (BENEFIT) AMOUNT ---------------------------------------------------------------- --------------- ---------------- -------------- 1998 Unrealized gain on investment securities: Unrealized holding gains arising during year $45,589 $15,957 $29,632 Less: reclassification adjustment for gains realized in net income 18,493 6,473 12,020 ---------------------------------------------------------------- --------------- ---------------- -------------- Other changes in equity from non-owner sources $27,096 $9,484 $17,612 ================================================================ =============== ================ ============== 1997 Unrealized gain on investment securities: Unrealized holding gains arising during year $100,903 $35,316 $65,587 Less: reclassification adjustment for gains realized in net income 44,871 15,705 29,166 ---------------------------------------------------------------- --------------- ---------------- -------------- Other changes in equity from non-owner sources $56,032 $19,611 $36,421 ================================================================ =============== ================ ============== 1996 Unrealized gain (loss) on investment securities: Unrealized holding gains (losses) arising during year $(11,881) $4,158 $(7,723) Less: reclassification adjustment for losses realized in net income (9,613) (3,364) (6,249) ---------------------------------------------------------------- --------------- ---------------- -------------- Other changes in equity from non-owner sources $(2,268) $794 $(1,474) ================================================================ =============== ================ ==============
4. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS Derivative Financial Instruments The Company uses derivative financial instruments, including financial futures, forward contracts and interest rate swaps as a means of hedging exposure to foreign currency, equity price changes and/or interest rate risk on anticipated transactions or existing assets and liabilities. The Company does not hold or issue derivative instruments for trading purposes. These derivative financial instruments have off-balance sheet risk. Financial instruments with off-balance sheet risk involve, to varying degrees, elements of credit and market risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of these instruments reflect the extent of involvement the Company has in a particular class of financial instrument. However, the maximum loss of cash flow associated with these instruments can be less than these amounts. For forward contracts and interest rate swaps, credit risk is limited to the amounts that it would cost the Company to replace such contracts. Financial futures contracts and purchased listed option contracts have little credit risk since organized exchanges are the counterparties. F-13 64 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) The Company monitors creditworthiness of counterparties to these financial instruments by using criteria of acceptable risk that are consistent with on-balance sheet financial instruments. The controls include credit approvals, limits and other monitoring procedures. The Company uses exchange traded financial futures contracts to manage its exposure to changes in interest rates and equity prices which arise from the sale of certain insurance and investment products, or the need to reinvest proceeds from the sale or maturity of investments. To hedge against adverse changes in interest rates and equity prices, the Company enters long or short positions in financial futures contracts which offset changes in the fair value of investments and liabilities resulting from changes in market interest rates or equity prices until an investment is purchased, a product is sold or a liability is settled. Margin payments are required to enter a futures contract and contract gains or losses are settled daily in cash. The contract amount of futures contracts represents the extent of the Company's involvement, but not future cash requirements, as open positions are typically closed out prior to the delivery date of the contract. At December 31, 1998 and 1997, the Company held financial futures contracts with notional amounts of $41.5 million and $156.3 million, respectively. At December 31, 1998 and 1997, the Company's futures contracts had no fair value because these contracts are marked to market and settled in cash daily. The Company enters into interest rate swaps in connection with other financial instruments to provide greater risk diversification and better match an asset with a corresponding liability. Under interest rate swaps, the Company agrees with other parties to exchange, at specific intervals, the difference between fixed-rate and floating-rate interest amounts calculated by reference to a notional principal amount. Generally, no cash is exchanged at the outset of the contract and no principal payments are made by either party. A single net payment is usually made by one counterparty at each due date. Swaps are not exchange traded and are subject to the risk of default by the counterparty. As of December 31, 1998 and 1997, the Company held interest rate swap contracts with notional amounts of $165.3 million and $17.3 million, respectively. The fair value of these financial instruments was $3.4 million (gain position) and $.7 million (loss position) at December 31, 1998 and was $.7 million (loss position) at December 31, 1997. The fair values were determined using the discounted cash flow method. The off-balance sheet risks of forward contracts were not significant at December 31, 1998 and 1997. Financial Instruments with Off-Balance Sheet Risk In the normal course of business, the Company issues fixed and variable rate loan commitments and has unfunded commitments to partnerships. The off-balance sheet risk of these financial instruments was not significant at December 31, 1998 and 1997. F-14 65 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) Fair Value of Certain Financial Instruments The Company uses various financial instruments in the normal course of its business. Fair values of financial instruments that are considered insurance contracts are not required to be disclosed and are not included in the amounts discussed. At December 31, 1998, investments in fixed maturities had a carrying value and a fair value of $1.8 billion, compared with a carrying value and a fair value of $1.7 billion at December 31, 1997. See Notes 1 and 11. At December 31, 1998, mortgage loans had a carrying value of $174.6 million and a fair value of $185.7 million and in 1997 had a carrying value of $160.2 million and a fair value of $172.6 million. In estimating fair value, the Company used interest rates reflecting the current real estate financing market. The carrying values of $36.5 million and $54.4 million of financial instruments classified as other assets approximated their fair values at December 31, 1998 and 1997, respectively. The carrying values of $98.4 million and $70.5 million of financial instruments classified as other liabilities also approximated their fair values at December 31, 1998 and 1997, respectively. Fair value is determined using various methods, including discounted cash flows, as appropriate for the various financial instruments. At December 31, 1998, contractholder funds with defined maturities had a carrying value of $725.6 million and a fair value of $698.1 million, compared with a carrying value of $694.9 million and a fair value of $695.9 million at December 31, 1997. The fair value of these contracts is determined by discounting expected cash flows at an interest rate commensurate with the Company's credit risk and the expected timing of cash flows. Contractholder funds without defined maturities had a carrying value of $483.0 million and a fair value of $442.5 million at December 31, 1998, compared with a carrying value of $98.5 million and a fair value of $93.9 million at December 31, 1997. These contracts generally are valued at surrender value. The carrying values of short-term securities and policy loans approximated their fair values. 5. COMMITMENTS AND CONTINGENCIES Financial Instruments with Off-Balance Sheet Risk See Note 4. Litigation The Company is a defendant in various litigation matters in the normal course of business. Although there can be no assurances, as of December 31, 1998, the Company believes, based on information currently available, that the ultimate resolution of these legal proceedings would not be likely to have a material adverse effect on its results of operations, financial condition or liquidity. F-15 66 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. STRUCTURED SETTLEMENT CONTRACTS The Company has structured settlement contracts that provide guarantees for the contractholders independent of the investment performance of the assets held in the related separate account. The assets held in the separate account are owned by the Company and contractholders do not share in their investment performance. The Company maintains assets sufficient to fund the guaranteed benefits attributable to the liabilities. Assets held in the separate account cannot be used to satisfy any other obligations of the Company. The Company reports the related assets and liabilities in investments, future policy benefit reserves and contractholder funds. These contracts were purchased by the insurance subsidiaries of Travelers Property Casualty Corp. (TAP), an affiliate of the Company, in connection with the settlement of certain of their policyholder obligations. Effective April 1, 1998, all new contracts have been written by TIC. 7. BENEFIT PLANS Pension and Other Postretirement Benefits The Company participates in a qualified, noncontributory defined benefit pension plan sponsored by Citigroup. In addition, the Company provides certain other postretirement benefits to retired employees through a plan sponsored by The Travelers Insurance Group Inc. (TIGI), TIC's direct parent. The Company's share of net expense for the qualified pension and other postretirement benefit plans was not significant for 1998, 1997 and 1996. 401(k) Savings Plan Substantially all of the Company's employees are eligible to participate in a 401(k) savings plan sponsored by Citigroup. During 1996, the Company made matching contributions in an amount equal to the lesser of 100% of the pre-tax contributions made by the employee or $1,000. Effective January 1, 1997, the Company discontinued matching contributions for the majority of its employees. The Company's expenses in connection with the 401(k) savings plan were not significant in 1998, 1997 and 1996. F-16 67 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. RELATED PARTY TRANSACTIONS The principal banking functions, including payment of salaries and expenses, for certain subsidiaries and affiliates of TIGI, including the Company, are handled by two companies. TIC handles banking functions for the life and annuity operations of Travelers Life & Annuity and some of its non-insurance affiliates. The Travelers Indemnity Company handles banking functions for the property-casualty operations, including most of its property-casualty insurance and non-insurance affiliates. Settlements between companies are made at least monthly. TIC provides various employee benefit coverages to certain subsidiaries of TIGI. The premiums for these coverages were charged in accordance with cost allocation procedures based upon salaries or census. In addition, investment advisory and management services, data processing services and claims processing services are provided by affiliated companies. Charges for these services are shared by the companies on cost allocation methods based generally on estimated usage by department. TIC maintains a short-term investment pool in which the Company participates. The position of each company participating in the pool is calculated and adjusted daily. At December 31, 1998 and 1997, the pool totaled approximately $2.3 billion and $2.6 billion, respectively. The Company's share of the pool amounted to $93.1 million and $145.5 million at December 31, 1998 and 1997, respectively, and is included in short-term securities in the balance sheet. The Company's TTM Modified Guaranteed Annuity Contracts are subject to a limited guarantee agreement by TIC in a principal amount of up to $450 million. TIC's obligation is to pay in full to any owner or beneficiary of the TTM Modified Guaranteed Annuity Contracts principal and interest as and when due under the annuity contract to the extent that the Company fails to make such payment. In addition, TIC guarantees that the Company will maintain a minimum statutory capital and surplus level. The Company sold structured settlement annuities to the insurance affiliates of Travelers Property Casualty (TAP). Premiums and deposits were $8.9 million, $70.6 million and $36.9 million for 1998, 1997 and 1996, respectively. The reduction in premiums and deposits from 1997 to 1998 was a result of a decision to use TIC as the primary issuer of structured settlement annuities and the Company as the assignment company. Policy reserves and contractholder fund liabilities associated with these structured settlements were $808.7 and $842.3 million at December 31, 1998 and 1997, respectively. The Company began marketing variable annuity products through its affiliate, Salomon Smith Barney Inc. (SSB) in 1995. Premiums and deposits related to these products were $932.1 million, $615.6 million and $300.0 million in 1998, 1997 and 1996, respectively. In 1996, the Company began marketing various life products through SSB as well. Premiums related to such products were $42.1 million, $25.1 million and $20.5 million in 1998, 1997 and 1996, respectively. During 1998, the Company began marketing deferred annuity products through its affiliate Primerica Financial Services (Primerica). Deposits received were $216 million. The Company participates in a stock option plan sponsored by Citigroup that provides for the granting of stock options in Citigroup common stock to officers and key employees. To further encourage employee stock ownership, during 1997 the Company's ultimate parent introduced the WealthBuilder stock option program. Under this program, all employees meeting certain requirements are granted Citigroup stock options. F-17 68 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) Most leasing functions for TIGI and its subsidiaries are handled by TAP. Rent expense related to these leases are shared by the companies on a cost allocation method based generally on estimated usage by department. The Company's rent expense was insignificant in 1998, 1997 and 1996. At December 31, 1998 and 1997, the Company had investments in Tribeca Investments, L.L.C., an affiliate of the Company in the amounts of $18.3 million and $16.5 million, included in other invested assets. 9. FEDERAL INCOME TAXES ($ in thousands) EFFECTIVE TAX RATE
--------------------------------------------------------- ----------------- ---------------- ----------------- FOR THE YEAR ENDED DECEMBER 31, 1998 1997 1996 --------------------------------------------------------- ----------------- ---------------- ----------------- Income Before Federal Income Taxes $88,185 $109,575 $39,582 Statutory Tax Rate 35% 35% 35% --------------------------------------------------------- ----------------- ---------------- ----------------- Expected Federal Income Taxes 30,865 38,351 13,854 Tax Effect of: Non-taxable investment income (20) (24) (15) Other, net (145) (124) (48) --------------------------------------------------------- ----------------- ---------------- ----------------- Federal Income Taxes $30,700 $38,203 $13,791 ========================================================= ================= ================ ================= Effective Tax Rate 35% 35% 35% --------------------------------------------------------- ----------------- ---------------- ----------------- COMPOSITION OF FEDERAL INCOME TAXES 1998 1998 1996 ---- ---- ---- Current: United States $18,794 $33,805 $29,435 Foreign 123 54 21 --------------------------------------------------------- ----------------- ---------------- ----------------- Total 18,917 33,859 29,456 --------------------------------------------------------- ----------------- ---------------- ----------------- Deferred: United States 11,783 4,344 (15,665) --------------------------------------------------------- ----------------- ---------------- ----------------- Federal Income Taxes $30,700 $38,203 $13,791 ========================================================= ================= ================ =================
F-18 69 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) The net deferred tax assets at December 31, 1998 and 1997 were comprised of the tax effects of temporary differences related to the following assets and liabilities:
($ in thousands) 1998 1997 ---- ---- --------------------------------------------------------------------- ---------------- -------------- Deferred Tax Assets: Benefit, reinsurance and other reserves $121,150 $100,969 Other 2,810 2,571 --------------------------------------------------------------------- ---------------- -------------- Total 123,960 103,540 --------------------------------------------------------------------- ---------------- -------------- Deferred Tax Liabilities: Investments, net 56,103 42,933 Deferred acquisition costs and value of insurance in force 51,993 23,650 Other 1,399 1,226 --------------------------------------------------------------------- ---------------- -------------- Total 109,495 67,809 --------------------------------------------------------------------- ---------------- -------------- Net Deferred Tax Asset Before Valuation Allowance 14,465 35,731 Valuation Allowance for Deferred Tax Assets (2,070) (2,070) --------------------------------------------------------------------- ---------------- -------------- Net Deferred Tax Asset After Valuation Allowance $12,395 $33,661 --------------------------------------------------------------------- ---------------- --------------
TIC and its life insurance subsidiaries, including the Company, has filed, and will file, a consolidated federal income tax return. Federal income taxes are allocated to each member on a separate return basis adjusted for credits and other amounts required by the consolidation process. Any resulting liability has been, and will be, paid currently to TIC. Any credits for losses have been, and will be, paid by TIC to the extent that such credits are for tax benefits that have been utilized in the consolidated federal income tax return. The $2.1 million valuation allowance is sufficient to cover any capital losses on investments that may exceed the capital gains able to be generated in the life insurance group's consolidated federal income tax return based upon management's best estimate of the character of the reversing temporary differences. Reversal of the valuation allowance is contingent upon the recognition of future capital gains or a change in circumstances that causes the recognition of the benefits to become more likely than not. There was no change in the valuation allowance during 1998. The initial recognition of any benefit provided by the reversal of the valuation allowance will be recognized by reducing goodwill. F-19 70 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) In management's judgment, the $12.4 million "net deferred tax asset after valuation allowance" as of December 31, 1998, is fully recoverable against expected future years' taxable ordinary income and capital gains. At December 31, 1998, the Company has no ordinary or capital loss carryforwards. The policyholders surplus account, which arose under prior tax law, is generally that portion of the gain from operations that has not been subjected to tax, plus certain deductions. The balance of this account is approximately $2 million. Income taxes are not provided for on this amount because under current U.S. tax rules such taxes will become payable only to the extent such amounts are distributed as a dividend to exceed limits prescribed by federal law. Distributions are not contemplated from this account. At current rates the maximum amount of such tax would be approximately $700 thousand. 10. NET INVESTMENT INCOME
-------------------------------------------------------------- --------------- --------------- -------------- FOR THE YEAR ENDED DECEMBER 31, ($ in thousands) 1998 1997 1996 -------------------------------------------------------------- --------------- --------------- -------------- GROSS INVESTMENT INCOME Fixed maturities $130,825 $120,900 $113,296 Joint venture and partnership income 22,107 32,336 19,775 Mortgage loans 15,969 14,905 18,278 Other 3,322 2,284 4,113 -------------------------------------------------------------- --------------- --------------- -------------- 172,223 170,425 155,462 -------------------------------------------------------------- --------------- --------------- -------------- Investment expenses 1,220 1,772 4,136 -------------------------------------------------------------- --------------- --------------- -------------- Net investment income $171,003 $168,653 $151,326 -------------------------------------------------------------- --------------- --------------- --------------
11. INVESTMENTS AND INVESTMENT GAINS (LOSSES) Realized investment gains (losses) for the periods were as follows:
---------------------------------------------------------------- --------------- --------------- --------------- FOR THE YEAR ENDED DECEMBER 31, ($ in thousands) 1998 1997 1996 ---------------------------------------------------------------- --------------- --------------- --------------- REALIZED INVESTMENT GAINS (LOSSES) Fixed maturities $15,620 $29,236 $(11,491) Equity securities 1,819 8,385 4,613 Mortgage loans 623 (8) 1,979 Real estate held for sale - 2,164 (73) Other 431 5,094 (4,641) ---------------------------------------------------------------- --------------- --------------- --------------- Total Realized Investment Gains (Losses) $18,493 $44,871 $(9,613) ---------------------------------------------------------------- --------------- --------------- ---------------
F-20 71 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) Changes in net unrealized investment gains (losses) that are included as accumulated other changes in equity from non-owner sources in shareholder's equity were as follows:
---------------------------------------------------------------- --------------- --------------- --------------- FOR THE YEAR ENDED DECEMBER 31, ($ in thousands) 1998 1997 1996 ---------------------------------------------------------------- --------------- --------------- --------------- UNREALIZED INVESTMENT GAINS (LOSSES) Fixed maturities $24,336 $34,451 $(23,953) Equity securities (338) (2,394) (746) Other 3,098 23,975 22,431 ---------------------------------------------------------------- --------------- --------------- --------------- Total Unrealized Investment Gains (Losses) 27,096 56,032 (2,268) Related taxes 9,484 19,611 (794) ---------------------------------------------------------------- --------------- --------------- --------------- Change in unrealized investment gains (losses) 17,612 36,421 (1,474) Balance beginning of year 70,277 33,856 35,330 ---------------------------------------------------------------- --------------- --------------- --------------- Balance End of Year $87,889 $70,277 $33,856 ---------------------------------------------------------------- --------------- --------------- ---------------
Fixed Maturities Proceeds from sales of fixed maturities classified as available for sale were $1.1 billion, $.9 billion and $1.0 billion in 1998, 1997 and 1996, respectively. Gross gains of $32.6 million, $38.1 million and $8.4 million and gross losses of $17.0 million, $8.9 million and $19.9 million in 1998, 1997 and 1996, respectively were realized on those sales. Fair values of investments in fixed maturities are based on quoted market prices or dealer quotes or, if these are not available, discounted expected cash flows using market rates commensurate with the credit quality and maturity of the investment. The fair value of investments for which a quoted market price or dealer quote are not available amounted to $427.0 million and $485.3 million at December 31, 1998 and 1997, respectively. F-21 72 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) The amortized cost and fair values of investments in fixed maturities were as follows:
------------------------------------------------- ---------------- --------------- ---------------- --------------- DECEMBER 31, 1998 GROSS GROSS ($ in thousands) AMORTIZED COST UNREALIZED UNREALIZED FAIR GAINS LOSSES VALUE ------------------------------------------------- ---------------- --------------- ---------------- --------------- AVAILABLE FOR SALE: Mortgage-backed securities - CMOs and pass-through securities $220,105 $ 11,571 $(193) $231,483 U.S. Treasury securities and obligations of U.S. Government and government agencies and authorities 289,376 53,782 (274) 342,884 Obligations of states and political subdivisions 28,749 994 (17) 29,726 Debt securities issued by foreign governments 40,786 2,966 (375) 43,377 All other corporate bonds 1,124,298 75,870 (13,000) 1,187,168 Redeemable preferred stock 4,033 119 (109) 4,043 ------------------------------------------------- ---------------- --------------- ---------------- --------------- Total Available For Sale $1,707,347 $145,302 $(13,968) $1,838,681 ------------------------------------------------- ---------------- --------------- ---------------- ---------------
DECEMBER 31, 1997 GROSS GROSS ($ in thousands) AMORTIZED COST UNREALIZED UNREALIZED FAIR GAINS LOSSES VALUE ------------------------------------------------- ---------------- --------------- ---------------- --------------- AVAILABLE FOR SALE: Mortgage-backed securities - CMOs and pass-through securities $144,921 $ 8,254 $(223) $152,952 U.S. Treasury securities and obligations of U.S. Government and government agencies and authorities 248,081 34,111 (123) 282,069 Obligations of states and political subdivisions 14,560 392 (2) 14,950 Debt securities issued by foreign governments 85,367 6,194 (228) 91,333 All other corporate bonds 1,077,211 59,972 (1,387) 1,135,796 Redeemable preferred stock 981 48 (9) 1,020 ------------------------------------------------- ---------------- --------------- ---------------- --------------- Total Available For Sale $1,571,121 $108,971 $(1,972) $1,678,120 ------------------------------------------------- ---------------- --------------- ---------------- ---------------
The amortized cost and fair value of fixed maturities available for sale at December 31, 1998, by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. F-22 73 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------- ------------------ ------------------ ($ in thousands) AMORTIZED FAIR COST VALUE ----------------------------------------------------- ------------------ ------------------ MATURITY: Due in one year or less $ 21,149 $ 21,655 Due after 1 year through 5 years 249,251 256,032 Due after 5 years through 10 years 356,358 379,061 Due after 10 years 860,484 950,450 ----------------------------------------------------- ------------------ ------------------ 1,487,242 1,607,198 ----------------------------------------------------- ------------------ ------------------ Mortgage-backed securities 220,105 231,483 ----------------------------------------------------- ------------------ ------------------ Total Maturity $1,707,347 $1,838,681 ----------------------------------------------------- ------------------ ------------------
The Company makes significant investments in collateralized mortgage obligations (CMOs). CMOs typically have high credit quality, offer good liquidity, and provide a significant advantage in yield and total return compared to U.S. Treasury securities. The Company's investment strategy is to purchase CMO tranches which are protected against prepayment risk, including planned amortization class (PAC) tranches. Prepayment protected tranches are preferred because they provide stable cash flows in a variety of interest rate scenarios. The Company does invest in other types of CMO tranches if a careful assessment indicates a favorable risk/return tradeoff. The Company does not purchase residual interests in CMOs. At December 31, 1998 and 1997, the Company held CMOs with a market value of $181.6 million and $122.8 million, respectively. The Company's CMO holdings were 62.9% and 97.5% collateralized by GNMA, FNMA or FHLMC securities at December 31, 1998 and 1997, respectively. Equity Securities The cost and market values of investments in equity securities were as follows:
--------------------------------------------- ----------- ---------------------- ---------------------- ----------- EQUITY SECURITIES: GROSS UNREALIZED GROSS UNREALIZED FAIR VALUE ($ in thousands) COST GAINS LOSSES --------------------------------------------- ----------- ---------------------- ---------------------- ----------- DECEMBER 31, 1998 Common stocks $ 5,185 $889 $(292) $5,782 Non-redeemable preferred stocks 20,641 707 (445) 20,903 --------------------------------------------- ----------- ---------------------- ---------------------- ----------- Total Equity Securities $25,826 $1,596 $(737) $26,685 --------------------------------------------- ----------- ---------------------- ---------------------- ----------- DECEMBER 31, 1997 Common stocks $3,318 $ 583 $(70) $3,831 Non-redeemable preferred stocks 11,774 931 (247) 12,458 --------------------------------------------- ----------- ---------------------- ---------------------- ----------- Total Equity Securities $15,092 $1,514 $(317) $16,289 --------------------------------------------- ----------- ---------------------- ---------------------- -----------
F-23 74 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) Proceeds from sales of equity securities were $6.0 million, $12.4 million and $12.8 million in 1998, 1997 and 1996, respectively. Gross gains of $2.6 million, $8.6 million and $4.7 million and gross losses of $815 thousand, $172 thousand and $155 thousand in 1998, 1997 and 1996, respectively were realized on those sales. Mortgage Loans Underperforming assets include delinquent mortgage loans, loans in the process of foreclosure and loans modified at interest rates below market. At December 31, 1998 and 1997, the Company's mortgage loan portfolios consisted of the following:
- ----------------------------------------------------- ------------- -------------- ($ in thousands) 1998 1997 - ----------------------------------------------------- ------------- -------------- Current Mortgage Loans $170,635 $160,247 Underperforming Mortgage Loans 3,930 - - ----------------------------------------------------- ------------- -------------- Total 174,565 160,247 - ----------------------------------------------------- ------------- --------------
Aggregate annual maturities on mortgage loans at December 31, 1998 are as follows:
- ----------------------------------------------------- ------- ($ in thousands) Past Maturity $ 129 1999 11,649 2000 11,309 2001 8,697 2002 16,272 2003 4,998 Thereafter 121,511 - ----------------------------------------------------- ------- Total 174,565 ===================================================== =======
Joint Venture In October 1997, TIC and Tishman Speyer Properties (Tishman), a worldwide real estate owner, developer and manager, formed a joint real estate venture with an initial equity commitment of $792 million. TIC and certain of its affiliates committed $420 million in real estate equity and $100 million in cash while Tishman committed $272 million in properties and cash. Both companies are serving as asset managers for the venture and Tishman is primarily responsible for the venture's real estate acquisition and development efforts. The Company's investment in the joint venture, which is included in other invested assets, totaled $62.4 million and $54.8 million at December 31, 1998 and 1997, respectively. F-24 75 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) Concentrations The Company's significant individual investment concentrations included $53.3 million and $32.7 million in Bellsouth Corp. at December 31, 1998 and 1997, respectively. In addition, there was an investment of $50.8 million in the State of Israel in 1997. The Company participates in a short-term investment pool maintained by an affiliate. See Note 8. Included in fixed maturities are below investment grade assets totaling $102.4 million and $76.7 million at December 31, 1998 and 1997, respectively. The Company defines its below investment grade assets as those securities rated "Ba1" or below by external rating agencies, or the equivalent by internal analysts when a public rating does not exist. Such assets include publicly traded below investment grade bonds and certain other privately issued bonds that are classified as below investment grade bonds. The Company's three largest industry concentrations of investments, primarily fixed maturities, were as follows:
-------------------------------------------- ----------- ----------- ($ in thousands) 1998 1997 -------------------------------------------- ----------- ----------- Banking $160,713 $130,966 Transportation 155,116 138,903 Electric utilities 109,027 106,724 -------------------------------------------- ----------- -----------
Below investment grade assets included in the preceding table were not significant. Concentrations of mortgage loans by property type at December 31, 1998 and 1997 were as follows:
-------------------------------------------- ----------- ----------- ($ in thousands) 1998 1997 -------------------------------------------- ----------- ----------- Agricultural $78,579 $62,463 Office 51,813 47,453 -------------------------------------------- ----------- -----------
The Company monitors creditworthiness of counterparties to all financial instruments by using controls that include credit approvals, limits and other monitoring procedures. Collateral for fixed maturities often includes pledges of assets, including stock and other assets, guarantees and letters of credit. The Company's underwriting standards with respect to new mortgage loans generally require loan to value ratios of 75% or less at the time of mortgage origination. Non-Income Producing Investments There were no investments included in the balance sheets that were non-income producing for the preceding 12 months. F-25 76 THE TRAVELERS LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) Restructured Investments Mortgage loan and debt securities which were restructured at below market terms at December 31, 1998 and 1997 were insignificant. The new terms of restructured investments typically defer a portion of contract interest payments to varying future periods. The accrual of interest is suspended on all restructured assets, and interest income is reported only as payment is received. Gross interest income on restructured assets that would have been recorded in accordance with the original terms of such assets was insignificant. Interest on these assets, included in net investment income, was insignificant. 12. LIFE AND ANNUITY DEPOSIT FUNDS AND RESERVES At December 31, 1998, the Company had $1.9 billion of life and annuity deposit funds and reserves. Of that total, $1.5 billion were not subject to discretionary withdrawal based on contract terms. The remaining $.4 billion were life and annuity products that were subject to discretionary withdrawal by the contractholders. Included in the amount that is subject to discretionary withdrawal were $.2 billion of liabilities that are surrenderable with market value adjustments. An additional $.2 billion of life insurance and individual annuity liabilities are subject to discretionary withdrawals with an average surrender charge of 4.6%. The life insurance risks would have to be underwritten again if transferred to another carrier, which is considered a significant deterrent for long-term policyholders. Insurance liabilities that are surrendered or withdrawn from the Company are reduced by outstanding policy loans and related accrued interest prior to payout. 13. RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES The following table reconciles net income to net cash provided by (used in) operating activities:
------------------------------------------------------------------ ------------- ------------- ------------- FOR THE YEAR ENDED DECEMBER 31, 1998 1997 1996 ---- ---- ---- ($ in thousands) ------------------------------------------------------------------ ------------- ------------- ------------- Net Income From Continuing Operations $57,485 $71,372 $ 25,791 Adjustments to reconcile net income to cash provided by operating activities: Realized (gains) losses (18,493) (44,871) 9,613 Deferred federal income taxes 11,783 4,344 (15,665) Amortization of deferred policy acquisition costs and value of insurance in force 17,031 6,036 3,286 Additions to deferred policy acquisition costs (120,278) (56,975) (20,753) Investment income accrued (3,821) 908 1,308 Premium balances receivable (6,786) (3,450) (3,561) Insurance reserves and accrued expenses (8,431) 3,981 (16,459) Other (3,881) 26,673 (13,419) ------------------------------------------------------------------ ------------- ------------- ------------- Net cash provided by (used in) operations $(75,391) $8,018 $(29,859) ------------------------------------------------------------------ ------------- ------------- -------------
14. NON-CASH INVESTING AND FINANCING ACTIVITIES There were no significant non-cash investing and financing activities for 1998, 1997 and 1996. F-26 77 VINTAGE STATEMENT OF ADDITIONAL INFORMATION FUND BD II FOR VARIABLE ANNUITIES Individual Variable Annuity Contract issued by The Travelers Life and Annuity Company One Tower Square Hartford, Connecticut 06183 L-12540S May, 1999 78 PART C Other Information Item 24. Financial Statements and Exhibits (a) The financial statements of the Registrant and the Report of Independent Accountants are contained in the Registrant's Annual Report and are incorporated in the Statement of Additional Information by reference. The financial statements of the Registrant are: Statement of Assets and Liabilities as of December 31, 1998 Statement of Operations for the year ended December 31, 1998 Statement of Changes in Net Assets for the year ended December 31, 1998 and 1997 Statement of Investments as of December 31, 1998 Notes to Financial Statements The financial statements of The Travelers Life and Annuity Company and the report of Independent Accountants are contained in the Statement of Additional Information. These financial statements include: Statements of Income for the years ended December 31, 1998, 1997 and 1996 Balance Sheets as of December 31, 1998 and 1997 Statements of Changes in Retained Earnings and Accumulated Other Changes in Equity from Non-Owner Sources for the years ended December 31, 1998, 1997 and 1996 Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 Notes to Financial Statements (b) Exhibits 1. Resolution of The Travelers Life and Annuity Company Board of Directors authorizing the establishment of the Registrant. (Incorporated herein by reference to Registration Statement on Form N-4, File No. 33-58131, filed via Edgar on March 17, 1995.) 2. Not Applicable. 3(a). Distribution and Principal Underwriting Agreement among the Registrant, The Travelers Life and Annuity Company and CFBDS, Inc. (Incorporated herein by reference to Exhibit 3(a) to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-4, File No. 333-60215 filed November 9, 1998) 3(b). Selling Agreement. (Incorporated herein by reference to Exhibit 3(b) to the Registration Statement on Form N-4, filed May 23, 1997.) (Incorporated herein by reference to Exhibit 3(b) to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-4, File No. 333-60215 filed November 9, 1998) 4. Variable Annuity Contracts. (Incorporated herein by reference to Registration Statement on Form N-4, File No. 33-58131, filed via Edgar on March 17, 1995.) 5. Form of Applications. (Incorporated herein by reference to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-4, filed September 8, 1995.) 6(a). Charter of The Travelers Life and Annuity Company, as amended on April 10, 1990. (Incorporated herein by reference to Registration Statement on Form N-4, File No. 33-58131, filed via Edgar on March 17, 1995.) 79 6(b). By-Laws of The Travelers Life and Annuity Company, as amended on October 20, 1994. (Incorporated herein by reference to Registration Statement on Form N-4, File No. 33-58131, filed via Edgar on March 17, 1995.) 7. None. 8. None. 9. Opinion of Counsel as to the legality of securities being registered. (Incorporated herein by reference to Exhibit 9 to Post-Effective Amendment No. 3 to the Registration Statement on Form N-4 filed April 29, 1997.) 10. Consent of KPMG LLP, Independent Certified Public Accountants. 11. None. 12. None. 13. Schedule for computation of each performance quotation - Standardized and Non-Standardized. (Incorporated herein by reference to Exhibit No. 13 to Post-Effective Amendment No. 2 to the Registration Statement on Form N-4, filed April 29, 1997.) 15(a). Powers of Attorney authorizing Ernest J. Wright or Kathleen A. McGah as signatory for Michael A. Carpenter, Jay S. Benet, George C. Kokulis, Ian R. Stuart and Katherine M. Sullivan. (Incorporated herein by reference to Exhibit No. 15(a) to Post-Effective Amendment No. 2 to the Registration Statement on Form N-4, filed April 29, 1997.) 15(b). Powers of Attorney authorizing Jay S. Fishman or Ernest J. Wright as a signatory for Michael A. Carpenter, Robert I. Lipp, Charles O. Prince III, Marc P. Weill, and Irwin R. Ettinger. (Incorporated herein by reference to Registration Statement on Form N-4, File No. 33-58131, filed via Edgar on March 17, 1995.) 15(a). Powers of Attorney authorizing Ernest J. Wright or Kathleen A. McGah as signatory for J. Eric Daniels and Jay S. Benet. Item 25. Directors and Officers of the Depositor Name and Principal Positions and Offices Business Address with Insurance Company - -------------------- ---------------------- Michael A. Carpenter** Director, Chairman of the Board J. Eric Daniels* President and Chief Executive Officer Jay S. Benet* Director, Senior Vice President Chief Financial Officer, Chief Accounting Officer and Controller George C. Kokulis* Director and Senior Vice President Robert I. Lipp* Director Katherine M. Sullivan* Director and Senior Vice President and General Counsel Marc P. Weill** Director and Senior Vice President Stuart Baritz*** Senior Vice President Elizabeth C. Georgakopoulos* Senior Vice President 80 Barry Jacobson* Senior Vice President Russell H. Johnson* Senior Vice President Warren H. May* Senior Vice President Christine M. Modie* Senior Vice President David A. Tyson* Senior Vice President F. Denney Voss* Senior Vice President Ambrose J. Murphy* Deputy General Counsel Virginia M. Meany* Vice President Selig Ehrlich* Vice President and Actuary Donald R. Munson, Jr.* Second Vice President Anthony Cocolla Second Vice President Scott R. Hansen Second Vice President Ernest J. Wright* Vice President and Secretary Kathleen A. McGah* Assistant Secretary and Counsel Principal Business Address: * The Travelers Insurance Company ** Citigroup Inc. One Tower Square 388 Greenwich Street Hartford, CT 06183 New York, N.Y. 10013 *** Travelers Portfolio Group 1345 Avenue of the Americas New York, NY 10105 Item 26. Persons Controlled by or Under Common Control with the Depositor or Registrant Incorporated herein by reference to Exhibit 16 to Post-Effective Amendment No. 2 to the Registration Statement on Form N-4, File No. 333-27689, filed April 16, 1999. Item 27. Number of Contract Owners As of March 31, 1999, 16,661 contract owners held qualified and non-qualified contracts offered through the Registrant. Item 28. Indemnification Sections 33-770 to 33-778, inclusive of the Connecticut General Statutes ("C.G.S.") regarding indemnification of directors and officers of Connecticut corporations provides in general that Connecticut corporations shall indemnify their officers, directors and certain other defined individuals against judgments, fines, penalties, amounts paid in settlement and reasonable expenses actually incurred in connection with proceedings against the corporation. The corporation's obligation to provide such indemnification generally does not apply unless (1) the individual is wholly successful on the merits in the defense of any such proceeding; or (2) a determination is made (by persons specified in the statute) that the individual acted in good faith and in the best interests of the corporation and in all other cases, his conduct was at least not 81 opposed to the best interests of the corporation, and in a criminal case he had no reasonable cause to believe his conduct was unlawful; or (3) the court, upon application by the individual, determines in view of all of the circumstances that such person is fairly and reasonably entitled to be indemnified, and then for such amount as the court shall determine. With respect to proceedings brought by or in the right of the corporation, the statute provides that the corporation shall indemnify its officers, directors and certain other defined individuals, against reasonable expenses actually incurred by them in connection with such proceedings, subject to certain limitations. Citigroup Inc. also provides liability insurance for its directors and officers and the directors and officers of its subsidiaries, including the Registrant. This insurance provides for coverage against loss from claims made against directors and officers in their capacity as such, including, subject to certain exceptions, liabilities under the federal securities laws. Rule 484 Undertaking Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. Item 29. Principal Underwriter (a) CFBDS, Inc. 21 Milk Street Boston, MA 02109 CFBDS, Inc. also serves as principal underwriter for the following : (a) CFBDS, the Registrant's Distributor, is also the distributor for CitiFundsSM International Growth & Income Portfolio, CitiFundsSM International Growth Portfolio, CitiFundsSM U.S. Treasury Reserves, CitiFundsSM Cash Reserves, CitiFundsSM Premium U.S. Treasury Reserves, CitiFundsSM Premium Liquid Reserves, CitiFundsSM Institutional U.S. Treasury Reserves, CitiFundsSM Institutional Liquid Reserves, CitiFundsSM Institutional Cash Reserves, CitiFundsSM Tax Free Reserves, CitiFundsSM Institutional Tax Free Reserves, CitiFundsSM California Tax Free Reserves, CitiFundsSM Connecticut Tax Free Reserves, CitiFundsSM New York Tax Free Reserves, CitiFundsSM New York Tax Free Income Portfolio, CitiFundsSM National Tax Free Income Portfolio, CitiFundsSM California Tax Free Income Portfolio, CitiFundsSM Intermediate Income Portfolio, CitiFundsSM Balanced Portfolio, CitiFundsSM Small Cap Value Portfolio, CitiFundsSM Growth & Income Portfolio, CitiFundsSM Large Cap Growth Portfolio, CitiFundsSM Small Cap Growth Portfolio, CitiSelect VIP Folio 200, CitiSelect VIP Folio 300, CitiSelect VIP Folio 400, CitiSelect VIP Folio 500, CitiFundsSM Small Cap Growth VIP Portfolio, CitiSelect Folio 200, CitiSelect Folio 300, CitiSelect Folio 400, and CitiSelect Folio 500. CFBDS is also the placement agent for Large Cap Value Portfolio, 82 Small Cap Value Portfolio, International Portfolio, Foreign Bond Portfolio, Intermediate Income Portfolio, Short-Term Portfolio, Growth & Income Portfolio, U.S. Fixed Income Portfolio, Large Cap Growth Portfolio, Small Cap Growth Portfolio, International Equity Portfolio, Balanced Portfolio, Government Income Portfolio, Tax Free Reserves Portfolio, Cash Reserves Portfolio and U.S. Treasury Reserves Portfolio. CFBDS also serves as the distributor for the following funds: The Travelers Fund U for Variable Annuities, The Travelers Fund VA for Variable Annuities, The Travelers Fund BD for Variable Annuities, The Travelers Fund BD II for Variable Annuities, The Travelers Fund BD III for Variable Annuities, The Travelers Fund BD IV for Variable Annuities, The Travelers Fund ABD for Variable Annuities, The Travelers Fund ABD II for Variable Annuities, The Travelers Separate Account PF for Variable Annuities, The Travelers Separate Account PF II for Variable Annuities, The Travelers Separate Account QP for Variable Annuities, The Travelers Separate Account TM for Variable Annuities, The Travelers Separate Account TM II for Variable Annuities, The Travelers Separate Account Five for Variable Annuities, The Travelers Separate Account Six for Variable Annuities, The Travelers Separate Account Seven for Variable Annuities, The Travelers Separate Account Eight for Variable Annuities, The Travelers Fund UL for Variable Life Insurance, The Travelers Fund UL II for Variable Life Insurance, The Travelers Fund UL III for Variable Life Insurance, The Travelers Variable Life Insurance Separate Account One, The Travelers Variable Life Insurance Separate Account Two, The Travelers Variable Life Insurance Separate Account Three, The Travelers Variable Life Insurance Separate Account Four, The Travelers Separate Account MGA, The Travelers Separate Account MGA II, The Travelers Growth and Income Stock Account for Variable Annuities, The Travelers Quality Bond Account for Variable Annuities, The Travelers Money Market Account for Variable Annuities, The Travelers Timed Growth and Income Stock Account for Variable Annuities, The Travelers Timed Short-Term Bond Account for Variable Annuities, The Travelers Timed Aggressive Stock Account for Variable Annuities, The Travelers Timed Bond Account for Variable Annuities, Emerging Growth Fund, Government Fund, Growth and Income Fund, International Equity Fund, Municipal Fund, Balanced Investments, Emerging Markets Equity Investments, Government Money Investments, High Yield Investments, Intermediate Fixed Income Investments, International Equity Investments, International Fixed Income Investments, Large Capitalization Growth Investments, Large Capitalization Value Equity Investments, Long-Term Bond Investments, Mortgage Backed Investments, Municipal Bond Investments, Small Capitalization Growth Investments, Small Capitalization Value Equity Investments, Appreciation Portfolio, Diversified Strategic Income Portfolio, Emerging Growth Portfolio, Equity Income Portfolio, Equity Index Portfolio, Growth & Income Portfolio, Intermediate High Grade Portfolio, International Equity Portfolio, Money Market Portfolio, Total Return Portfolio, Smith Barney Adjustable Rate Government Income Fund, Smith Barney Aggressive Growth Fund Inc., Smith Barney Appreciation Fund, Smith Barney Arizona Municipals Fund Inc., Smith Barney California Municipals Fund Inc., Balanced Portfolio, Conservative Portfolio, Growth Portfolio, High Growth Portfolio, Income Portfolio, Global Portfolio, Select Balanced Portfolio, Select Conservative Portfolio, Select Growth Portfolio, Select High Growth Portfolio, Select Income Portfolio, Concert Social Awareness Fund, Smith Barney Large Cap Blend Fund, Smith Barney Fundamental Value Fund Inc., Large Cap Value Fund, Short-Term High Grade Bond Fund, U.S. Government Securities Fund, Smith Barney Balanced Fund, Smith Barney Convertible Fund, Smith Barney Diversified Strategic Income Fund, Smith Barney Exchange Reserve Fund, Smith Barney High Income Fund, Smith Barney Municipal High Income Fund, Smith Barney Premium Total Return Fund, Smith Barney Total Return Bond Fund, Cash Portfolio, Government Portfolio, Municipal Portfolio, Concert Peachtree Growth Fund, Smith Barney Contrarian Fund, Smith Barney Government Securities Fund, Smith Barney Hansberger Global Small Cap Value Fund, Smith Barney Hansberger Global Value Fund, Smith Barney Investment Grade Bond Fund, Smith Barney Special Equities Fund, Smith Barney Intermediate Maturity California Municipals Fund, Smith Barney Intermediate Maturity New York Municipals Fund, Smith Barney Large Capitalization Growth Fund, Smith Barney S&P 500 Index Fund, Smith Barney Mid Cap Blend Fund, Smith Barney Managed Governments Fund Inc., Smith Barney Managed Municipals Fund Inc., Smith Barney Massachusetts Municipals Fund, Cash Portfolio, Government Portfolio, Retirement Portfolio, 83 California Money Market Portfolio, Florida Portfolio, Georgia Portfolio, Limited Term Portfolio, New York Money Market Portfolio, New York Portfolio, Pennsylvania Portfolio, Smith Barney Municipal Money Market Fund, Inc., Smith Barney Natural Resources Fund Inc., Smith Barney New Jersey Municipals Fund Inc., Smith Barney Oregon Municipals Fund, Zeros Plus Emerging Growth Series 2000, Smith Barney Security and Growth Fund, Smith Barney Small Cap Blend Fund, Inc., Smith Barney Telecommunications Income Fund, Income and Growth Portfolio, Reserve Account Portfolio, U.S. Government/High Quality Securities Portfolio, Emerging Markets Portfolio, European Portfolio, Global Government Bond Portfolio, International Balanced Portfolio, International Equity Portfolio, Pacific Portfolio, AIM Capital Appreciation Portfolio, Alliance Growth Portfolio, GT Global Strategic Income Portfolio, MFS Total Return Portfolio, Putnam Diversified Income Portfolio, Smith Barney High Income Portfolio, Smith Barney Large Cap Value Portfolio, Smith Barney International Equity Portfolio, Smith Barney Large Capitalization Growth Portfolio, Smith Barney Money Market Portfolio, Smith Barney Pacific Basin Portfolio, TBC Managed Income Portfolio, Van Kampen American Capital Enterprise Portfolio, Centurion Tax-Managed U.S. Equity Fund, Centurion Tax-Managed International Equity Fund, Centurion U.S. Protection Fund, Centurion International Protection Fund, Global High-Yield Bond Fund, International Equity Fund, Emerging Opportunities Fund, Core Equity Fund, Long-Term Bond Fund, Global Dimensions Fund L.P., Citicorp Private Equity L.P., AIM V.I. Capital Appreciation Fund, AIM V.I. Government Series Fund, AIM V.I. Growth Fund, AIM V.I. International Equity Fund, AIM V.I. Value Fund, Fidelity VIP Growth Portfolio, Fidelity VIP High Income Portfolio, Fidelity VIP Equity Income Portfolio, Fidelity VIP Overseas Portfolio, Fidelity VIP II Contrafund Portfolio, Fidelity VIP II Index 500 Portfolio, MFS World Government Series, MFS Money Market Series, MFS Bond Series, MFS Total Return Series, MFS Research Series, MFS Emerging Growth Series, Salomon Brothers Institutional Money Market Fund, Salomon Brothers Cash Management Fund, Salomon Brothers New York Municipal Money Market Fund, Salomon Brothers National Intermediate Municipal Fund, Salomon Brothers U.S. Government Income Fund, Salomon Brothers High Yield Bond Fund, Salomon Brothers Strategic Bond Fund, Salomon Brothers Total Return Fund, Salomon Brothers Asia Growth Fund, Salomon Brothers Capital Fund Inc, Salomon Brothers Investors Fund Inc, Salomon Brothers Opportunity Fund Inc, Salomon Brothers Institutional High Yield Bond Fund, Salomon Brothers Institutional Emerging Markets Debt Fund, Salomon Brothers Variable Investors Fund, Salomon Brothers Variable Capital Fund, Salomon Brothers Variable Total Return Fund, Salomon Brothers Variable High Yield Bond Fund, Salomon Brothers Variable Strategic Bond Fund, Salomon Brothers Variable U.S. Government Income Fund, and Salomon Brothers Variable Asia Growth Fund. (b) The information required by this Item 29 with respect to each director and officer of CFBDS, Inc. is incorporated by reference to Schedule A of Form BD filed by CFBDS pursuant to the Securities and Exchange Act of 1934 (File No. 8-32417). (c) Not Applicable. Item 30. Location of Accounts and Records (1) The Travelers Life and Annuity Company One Tower Square Hartford, Connecticut 06183 Item 31. Management Services Not applicable. 84 Item 32. Undertakings The undersigned Registrant hereby undertakes: (a) To file a post-effective amendment to this registration statement as frequently as is necessary to ensure that the audited financial statements in the registration statement are never more than sixteen months old for so long as payments under the variable annuity contracts may be accepted; (b) To include either (1) as part of any application to purchase a contract offered by the prospectus, a space that an applicant can check to request a Statement of Additional Information, or (2) a post card or similar written communication affixed to or included in the prospectus that the applicant can remove to send for a Statement of Additional Information; and (c) To deliver any Statement of Additional Information and any financial statements required to be made available under this Form N-4 promptly upon written or oral request. The Company hereby represents: (a) That the aggregate charges under the Contracts of the Registrant described herein are reasonable in relation to the services rendered, the expenses expected to be incurred, and the risks assumed by the Company. 85 SIGNATURES As required by the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets the requirements of Securities Act Rule 485(b) for effectiveness of this post-effective amendment to this registration statement and has duly caused this post-effective amendment to this registration statement to be signed on its behalf, in the City of Hartford, State of Connecticut, on this 23rd day of April 1999. THE TRAVELERS FUND BD II FOR VARIABLE ANNUITIES (Registrant) THE TRAVELERS LIFE AND ANNUITY COMPANY (Depositor) By: *JAY S. BENET ----------------------------------------------- Jay S. Benet Senior Vice President, Chief Financial Officer Chief Accounting Officer and Controller As required by the Securities Act of 1933, this post-effective amendment to this registration statement has been signed by the following persons in the capacities indicated on the 23rd day of April 1999. *MICHAEL A. CARPENTER Director and Chairman of the Board - --------------------------- (Michael A. Carpenter) *J. ERIC DANIELS Director, President and Chief Executive - --------------------------- Officer (J. Eric Daniels) *JAY S. BENET Director, Senior Vice President, Chief - --------------------------- Financial Officer, Chief Accounting (Jay S. Benet) Officer and Controller *GEORGE C. KOKULIS Director - --------------------------- (George C. Kokulis *ROBERT I. LIPP Director - --------------------------- (Robert I. Lipp) *KATHERINE M. SULLIVAN Director, Senior Vice President and - --------------------------- General Counsel (Katherine M. Sullivan) *MARC P. WEILL Director - --------------------------- (Marc P. Weill) *By: /s/Ernest J. Wright, Attorney-in-Fact 86 EXHIBIT INDEX
Exhibit No. Description Method of Filing - ------- ----------- ---------------- 10. Consent of KPMG LLP, Independent Certified Electronically Public Accountants. 15(c). Powers of Attorney authorizing Ernest J. Wright and Electronically Kathleen A. McGah as signatory for J. Eric Daniels and Jay S. Benet.
EX-99.10 2 CONSENT OF KPMG LLP 1 Consent of Independent Certified Public Accountants The Board of Directors The Travelers Life and Annuity Company We consent to the use of our reports included herein or incorporated herein by reference and to the reference to our firm as experts under the heading "Independent Accountants." KPMG LLP Hartford, Connecticut April 26, 1999 EX-99.15.C 3 POWERS OF ATTORNEY 1 THE TRAVELERS FUND BD II FOR VARIABLE ANNUITIES POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That I, J. ERIC DANIELS of Farmington, Connecticut, Director, President and Chief Executive Officer of The Travelers Life and Annuity Company (hereafter the "Company"), do hereby make, constitute and appoint ERNEST J. WRIGHT, Secretary of said Company, and KATHLEEN A. McGAH, Assistant Secretary of said Company, or either one of them acting alone, my true and lawful attorney-in-fact, for me, and in my name, place and stead, to sign registration statements on behalf of said Company on Form N-4 or other appropriate form under the Securities Act of 1933 and the Investment Company Act of 1940 for The Travelers Fund BD II for Variable Annuities, a separate account of the Company dedicated specifically to the funding of variable annuity contracts to be offered by said Company, and further, to sign any and all amendments thereto, including post-effective amendments, that may be filed by the Company on behalf of said registrant. IN WITNESS WHEREOF, I have hereunto set my hand this 15th day of January 1999. /s/ J. Eric Daniels Director, President and Chief Executive Officer The Travelers Life and Annuity Company 2 THE TRAVELERS FUND BD II FOR VARIABLE ANNUITIES POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That I, JAY S. BENET of West Hartford, Connecticut, Director, Senior Vice President and Chief Financial Officer, Chief Accounting Officer and Controller of The Travelers Life and Annuity Company (hereafter the "Company"), do hereby make, constitute and appoint ERNEST J. WRIGHT, Secretary of said Company, and KATHLEEN A. McGAH, Assistant Secretary of said Company, or either one of them acting alone, my true and lawful attorney-in-fact, for me, and in my name, place and stead, to sign registration statements on behalf of said Company on Form N-4 or other appropriate form under the Securities Act of 1933 and the Investment Company Act of 1940 for The Travelers Fund BD II for Variable Annuities, a separate account of the Company dedicated specifically to the funding of variable annuity contracts to be offered by said Company, and further, to sign any and all amendments thereto, including post-effective amendments, that may be filed by the Company on behalf of said registrant. IN WITNESS WHEREOF, I have hereunto set my hand this 15th day of January 1999. /s/ Jay S. Benet Director, Senior Vice President Chief Financial Officer, Chief Accounting Officer and Controller The Travelers Life and Annuity Company -----END PRIVACY-ENHANCED MESSAGE-----