N-30D 1 c23289_n-30d.txt ANNUAL REPORT UNIVERSAL ANNUITY ANNUAL REPORTS December 31, 2001 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 [logo] The Travelers Insurance Company The Travelers Life and Annuity Company One Tower Square Hartford, CT 06183 [logo] Travelers Asset Management International Company, LLC ("TAMIC") provides fixed income management and advisory services for the following Travelers Variable Products Separate Accounts contained in this report: The Travelers Growth and Income Stock Account for Variable Annuities, The Travelers Quality Bond Account for Variable Annuities and The Travelers Money Market Account for Variable Annuities. [logo] The Travelers Investment Management Company ("TIMCO") provides equity management and subadvisory services for The Travelers Growth and Income Stock Account for Variable Annuities. Table of Contents Page INVESTMENT ADVISORY COMMENTARY............................... 1 THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES....................................... 3 THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES....17 THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES....................................................28 BOARD OF MANAGERS AND OFFICERS.....................................................37 [logo] The Travelers Variable Product Separate Accounts Investment Advisory Commentary as of December 31, 2001 Market and Economic Overview The performance of the U.S. equity market in 2001 reflected a tug- of-war between the pessimism of an unfolding recession on one hand and the optimism for a quick recovery based on substantial monetary and fiscal stimulus. Aggressive easing by the Federal Reserve Board sparked a rally in the stock market both in January and April but then downward earnings revisions sent stock prices sharply lower in February, March and May. The U.S. stock market got off to a good start in January as the Fed lowered its target for the federal funds rate by 50 basis points each on two separate occasions. A barrage of earnings disappointments and profit warnings, especially from the Technology sector, hit the stock market hard later in the first quarter. Despite more interest rate cuts, U.S. stocks continued their steep slide in the first half of 2001. A compression of P/E ratios further compounded stock market woes as investors grew increasingly skeptical of sustainable profit growth in the future. The second half of the year got off to a slow start on the heels of a generally negative earnings season and further lack of short- term earning visibility. The remainder of the year proved to be quite eventful as the market experienced significant volatility from exogenous forces related to terrorism and endogenous influences triggered by policy decisions. Consumer confidence measures took a sharp dip in August and began to cast doubts on the viability of continued robust consumer spending. The devastating terrorist attacks on September 11 then triggered an even steeper decline in the consumer sentiment index, tipped the U.S. economy firmly into a recession and sent the stock market sharply lower. U.S. stock prices rebounded to above pre- September 11 levels during the fourth quarter on growing hope that the monetary and fiscal stimulus would gain traction in the near future. A combination of rising equity prices, still declining profits and falling bond prices have restored greater balance between stock and bond valuations. The remedy to the stock market ailments seemed to appear in the form of more interest rate cuts and an aggressive stimulative policy response in the form of increased government spending. 475 basis points of easing over 11 interest rate cuts in 2001 quickly and aggressively moved monetary policy from a restrictive stance to a strongly accommodative stance. The U.S. economy has shown little growth since March and is currently in a mild recession. The combination of the ongoing cyclical correction/restructuring/downsizing in the technology and telecommunications sectors and the lingering effects of the September 11 terrorist attacks are the major negative influences on the economy. On the other hand, consumers have responded positively to strong incentives from auto companies and have boosted spending significantly since October. The pace of deterioration in business activity has slowed and there are even some signs of sales stabilization. Consumer incomes, however, are barely growing and labor market prospects point toward continued flat income growth. Most broad inflation measures have fallen over the past year. Energy prices have led the way to lower inflation and core inflation, which excludes food and energy, has stabilized as well. A recession in the US and slow growth in the rest of the world lay the foundation for low inflation over the next several quarters as globally traded goods prices remain under downward pressure. Upward pressure on some service sector prices such as medical care and housing is expected to be offset by falling prices in travel-related services. -1- The recent recovery in stock prices has been inspired by bursts of optimism based on stimulative policy but has also been characterized by big swings on bouts of pessimism based on prospects of weaker earnings and economic growth in the short term. We have observed several stock market rallies in 2001 in anticipation of a quick economic recovery which have subsequently stalled for lack of real evidence of improvement. It remains to be seen if the current expectation of a short recession followed by a recovery turns into reality. David A. Tyson, CFA, Chairman, Travelers Asset Management International Company, LLC Sandip A. Bhagat, CFA, President and Chief Investment Officer, The Travelers Investment Management Company -2- THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES The Travelers Growth and Income Stock Account for Variable Annuities ("Account GIS") is managed by the Travelers Asset Management International Company, LLC ("TAMIC") with the Travelers Investment Management Company ("TIMCO") serving as subadvisor. Account GIS is managed to provide diversified exposure to the large-company segment of the U.S. equity market. Stock selection is based on a quantitative screening process favoring companies that are able to grow earnings above consensus expectations and offer attractive relative value. In order to achieve consistent relative performance, we manage the portfolio to mirror the overall risk, sector weightings and growth/value style characteristics of the Standard & Poors 500 Stock Index ("S&P 500"). The S&P 500 is a value-weighted equity index comprised primarily of large-company stocks. For the twelve months ending December 31, 2001, Account GIS declined 14.2%, before fees and expenses, underperforming the Standard & Poors 500 Stock Index ("S&P 500") which declined 11.9%. Net of fees and expenses, Account GIS's loss of 15.9% for 2001 also lagged the 14.0% loss for variable annuity stock accounts in the Lipper Growth & Income category. A discussion of portfolio performance in 2001 is presented next with a closer look at the second half of the year. The performance of the U.S. equity market in 2001 reflected the tug-of-war between the pessimism of an unfolding recession on one hand and the optimism for a quick recovery based on substantial monetary and fiscal stimulus. Early in 2001, aggressive easing by the Fed sparked a rally in the stock market both in January and April but then downward earnings revisions sent stock prices sharply lower in February, March and May. The second half of the year proved to be quite eventful as the market experienced significant volatility from exogenous forces related to terrorism and endogenous influences triggered by policy decisions. The Technology sector performed poorly in 2001 while defensive and interest-rate sensitive sectors fared well as interest rates fell for most of the year. Value stocks performed significantly better than growth stocks. Our stock selection was favorable in the Health Care sector but adverse in the Technology, Financial Services and Utilities sectors. Our stock selection models have produced neutral to negative results relative to the benchmark over this period. The earnings, valuation and momentum components of our model have not generated consistent positive excess returns in a rapidly changing environment. In the recent recovery, market cap and beta were important factors as stocks in the lowest size quintile and the highest beta quintile significantly outperformed the large cap universe. Our conservative style of management does not lend itself to overweighting these types of speculative stocks. In the Health Care sector, our positions in relatively stable growth companies such as Trigon Healthcare and Tenet Healthcare were rewarded with higher valuations. Johnson and Johnson acquired Alza, a research-based pharmaceuticals company that we had emphasized, in a stock swap towards the end of June. Our small overweight position in the Health Care sector during the third quarter was also a positive as investors moved into traditional defensive stocks in the aftermath of the terrorist attacks. The Technology sector performed poorly early in the year as the parade of earnings disappointments continued. Our overweight positions in Sun Microsystems, Inc., Sanmina Corp. and Transwitch suffered in the first quarter as the steep slowdown in demand and pricing continued to lead earnings estimates lower. In the Financial Services sector, we continue to be negatively impacted by our underweight position in Citigroup, a stock we are restricted from owning. Providian Financial Corp. was down sharply on continued concerns about the company's liquidity, regulatory exposure and capitalization. Shares in Washington Mutual traded lower on concerns of the potential impact of a weaker economy on growth and credit quality. -3- In the Utilities sector, our positions in higher growth wireless companies such as Sprint Corp.-PCS Group and Nextel Communications underperformed as investors revised their valuations downwards in the face of a weaker economy. We had a small position in Enron, which we sold prior to its bankruptcy after a SEC investigation scrutinized the CFO's role in private partnerships involved in transactions with Enron. AES Corp warned of disappointing earnings related mostly to a poorly performing utility in northern England. The recent sharp recovery in stock prices has at times been tempered with some elements of caution based on prospects of weaker earnings in the short term. It remains to be seen if these influences do get the economy going or if the recent rally proves to be yet another false start similar to others experienced earlier in 2001. Despite a brief recent period of underperformance, we are confident that our dual focus on improving earnings fundamentals and discounted stock valuations will pay off over time and we continue to screen our research universe of over 1,000 large cap securities for companies with these two main attributes. David A. Tyson, CFA, Chairman, Travelers Asset Management International Company, LLC Portfolio Manager: Sandip A. Bhagat, CFA, President and Chief Investment Officer, The Travelers Investment Management Company [logo] [logo] -4- THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF ASSETS AND LIABILITIES December 31, 2001 Assets: Investment securities, at market value (cost $656,305,991) ................... $ 664,571,796 Cash ......................................................................... 1,943,239 Receivables: Dividends ................................................................. 717,850 Investment securities sold ................................................ 11,297,107 Purchase payments and transfers from other Travelers accounts ............. 270,810 Other assets ................................................................. 31,200 ---------------- Total Assets ............................................................ 678,832,002 ---------------- Liabilities: Payables: Investment securities purchased ........................................... 16,403,918 Contract surrenders and transfers to other Travelers accounts ............. 280,239 Investment management and advisory fees ................................... 34,367 Variation on futures margin ............................................... 91,260 Insurance charges ......................................................... 64,916 Accrued liabilities .......................................................... 107,121 ---------------- Total Liabilities ...................................................... 16,981,821 ---------------- Net Assets: $ 661,850,181 ================ See Notes to Financial Statements
-5- THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF OPERATIONS For the year ended December 31, 2001 Investment Income: Dividends ..............................................................$ 9,460,386 Interest ............................................................... 713,319 -------------- Total income ........................................................ $ 10,173,705 Expenses: Investment management and advisory fees ................................ 4,526,871 Insurance charges ...................................................... 8,634,414 -------------- Total expenses ...................................................... 13,161,285 -------------- Net investment loss ....................................................... (2,987,580) -------------- Realized Gain (Loss) and Change in Unrealized Gain (Loss) on Investment Securities: Realized gain (loss) from investment security transactions: Proceeds from investment securities sold ............................ 341,396,961 Cost of investment securities sold .................................. 363,954,566 -------------- Net realized gain (loss) ......................................... (22,557,605) Change in unrealized gain (loss) on investment securities: Unrealized gain (loss) at December 31, 2000 ............................ 115,949,841 Unrealized gain (loss) at December 31, 2001 ............................ 8,265,805 -------------- Net change in unrealized gain (loss) for the year ................... (107,684,036) -------------- Net realized gain (loss) and change in unrealized gain (loss)..... (130,241,641) -------------- Net decrease in net assets resulting from operations ...................... $(133,229,221) ============== See Notes to Financial Statements
-6- THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF CHANGES IN NET ASSETS For the years ended December 31, 2001 and 2000
2001 2000 Operations: Net investment loss ..................................................................$ (2,987,580) $ (7,422,457) Net realized gain (loss) from investment security transactions ....................... (22,557,605) 95,598,581 Net change in unrealized gain (loss) on investment securities ........................ (107,684,036) (213,546,094) --------------- ---------------- Net decrease in net assets resulting from operations .............................. (133,229,221) (125,369,970) --------------- ---------------- Unit Transactions: Participant purchase payments (applicable to 1,952,537 and 2,293,907 units, respectively) ...................... 35,651,317 51,808,532 Participant transfers from other Travelers accounts (applicable to 979,445 and 2,584,078 units, respectively) ........................ 17,842,644 58,719,406 Administrative charges (applicable to 32,349 and 28,955 units, respectively) ............................ (585,466) (624,356) Contract surrenders (applicable to 3,126,520 and 4,123,931 units, respectively) ...................... (57,723,353) (93,828,914) Participant transfers to other Travelers accounts (applicable to 2,986,184 and 4,594,066 units, respectively) ...................... (53,433,740) (104,885,805) Other payments to participants (applicable to 190,128 and 133,611 units, respectively) .......................... (3,564,069) (2,984,672) --------------- ---------------- Net decrease in net assets resulting from unit transactions ....................... (61,812,667) (91,795,809) --------------- ---------------- Net decrease in net assets ..................................................... (195,041,888) (217,165,779) Net Assets: Beginning of year .................................................................... 856,892,069 1,074,057,848 --------------- ---------------- End of year ..........................................................................$ 661,850,181 $ 856,892,069 =============== ================ See Notes to Financial Statements
-7- NOTES TO FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES The Travelers Growth and Income Stock Account for Variable Annuities ("Account GIS") is a separate account of The Travelers Insurance Company ("The Travelers"), an indirect wholly owned subsidiary of Citigroup Inc., and is available for funding certain variable annuity contracts issued by The Travelers. Account GIS is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company. The following is a summary of significant accounting policies consistently followed by Account GIS in the preparation of its financial statements. Security Valuation. Investments in securities traded on a national securities exchange are valued at the 4:00 p.m. Eastern Standard Time price of such exchanges; 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 are reported at fair value based on quoted market prices. Short-term investments, for which there is no reliable quoted market price, are recorded at amortized cost which approximates fair value. Security Transactions. Security transactions are accounted for on the trade date. Dividend income is recorded on the ex- dividend date. Interest income is recorded on the accrual basis. Premiums and discounts are amortized to interest income utilizing the constant yield method. Futures Contracts. Account GIS may use stock index futures contracts as a substitute for the purchase or sale of individual securities. When Account GIS enters into a futures contract, it agrees to buy or sell a specified index of stocks at a future time for a fixed price, unless the contract is closed prior to expiration. Account GIS is obligated to deposit with a broker an "initial margin" equivalent to a percentage of the face, or notional value of the contract. It is Account GIS's practice to hold cash and cash equivalents in an amount at least equal to the notional value of outstanding purchased futures contracts, less the initial margin. Cash and cash equivalents include cash on hand, securities segregated under federal and brokerage regulations, and short-term highly liquid investments with maturities generally three months or less when purchased. Generally, futures contracts are closed prior to expiration. Futures contracts purchased by Account GIS are priced and settled daily; accordingly, changes in daily prices are recorded as realized gains or losses and no asset is recorded in the Statement of Investments. However, when Account GIS holds open futures contracts, it assumes a market risk generally equivalent to the underlying market risk of change in the value of the specified indexes associated with the futures contract. Options. Account GIS may purchase index or individual equity put or call options, thereby obtaining the right to sell or buy a fixed number of shares of the underlying asset at the stated price on or before the stated expiration date. Account GIS may sell the options before expiration. Options held by Account GIS are listed on either national securities exchanges or on over-the- counter markets and are short-term contracts with a duration of less than nine months. The market value of the options will be based on the 4:00 p.m. Eastern Standard Time price of the respective exchange, or in the absence of such price, the latest bid quotation. Repurchase Agreements. When Account GIS enters into a repurchase agreement (a purchase of securities whereby the seller agrees to repurchase the securities at a mutually agreed upon date and price), the repurchase price of the securities will generally equal the amount paid by Account GIS plus a negotiated interest amount. The seller under the repurchase agreement will be required to provide to Account GIS securities (collateral) whose market value, including accrued interest, will be at least equal to 102% of the repurchase price. Account GIS monitors the value of collateral on a daily basis. Repurchase agreements will be limited to transactions with national banks and reporting broker dealers believed to present minimal credit risks. Account GIS's custodian will take actual or constructive receipt of all securities underlying repurchase agreements until such agreements expire. -8- NOTES TO FINANCIAL STATEMENTS - continued Federal Income Taxes. The operations of Account GIS form a part of the total operations of The Travelers and are not taxed separately. The Travelers is taxed as a life insurance company under the Internal Revenue Code of 1986, as amended (the "Code"). Under existing federal income tax law, no taxes are payable on the investment income and capital gains of Account GIS. Account GIS is not taxed as a "regulated investment company" under Subchapter M of the Code. Other. The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting year. Actual results could differ from those estimates. 2. INVESTMENTS The aggregate costs of purchases and proceeds from sales of investments (other than short-term securities), were $232,581,157 and $299,940,101, respectively; the costs of purchases and proceeds from sales of direct and indirect U.S. government securities were $4,454,566 and $4,689,915, respectively, for the year ended December 31, 2001. Realized gains and losses from investment security transactions are reported on an identified cost basis. Account GIS placed a portion of its security transactions with brokerage firms which are affiliates of The Travelers. The commissions paid to these affiliated firms was $109,359 for the year ended December 31, 2000. There were no commissions paid to these affiliated firms for the year ended December 31, 2001. At December 31, 2001, Account GIS held 25 open S&P 500 Stock Index futures contracts expiring in March, 2002. The underlying face value, or notional value, of these contracts at December 31, 2001 amounted to $7,182,500. In connection with these contracts, short-term investments with a par value of $1,060,000 had been pledged as margin deposits. Net realized losses resulting from futures contracts were $5,571,408 and $2,620,825 for the years ended December 31, 2001 and 2000, respectively. These losses are included in the net realized gain (loss) from investment security transactions on both the Statement of Operations and the Statement of Changes in Net Assets. The cash settlement for December 31, 2001 is shown on the Statement of Assets and Liabilities as a payable for variation on futures margin. 3. CONTRACT CHARGES Investment management and advisory fees are calculated daily at annual rates which start at 0.65% and decrease, as net assets increase, to 0.40% of Account GIS's average net assets. These fees are paid to Travelers Asset Management International Company, LLC ("TAMIC"), an indirect wholly owned subsidiary of Citigroup Inc. Pursuant to a subadvisory agreement between TAMIC and The Travelers Investment Management Company ("TIMCO"), an indirect wholly owned subsidiary of Citigroup Inc., TAMIC pays TIMCO a subadvisory fee calculated daily at annual rates which start at 0.45% and decrease, as net assets increase, to 0.20% of Account GIS's average net assets. Insurance charges are paid for the mortality and expense risks assumed by The Travelers. Each business day, The Travelers deducts a mortality and expense risk charge which is reflected in the calculation of accumulation and annuity unit values. This charge equals, on an annual basis, 1.0017% for contracts issued prior to May 16, 1983 and 1.25% on an annual basis for contracts issued on or after May 16, 1983. Additionally, for certain contracts in the accumulation phase, a semi-annual charge of $15 (prorated for partial years) is deducted from participant account balances and paid to The Travelers to cover administrative charges. On contracts issued prior to May 16, 1983, The Travelers retained from Account GIS sales charges of $14,254 and $21,993 for the years ended December 31, 2001 and 2000, respectively. The Travelers generally assesses a 5% contingent deferred sales charge if a participant's purchase payment is surrendered within five years of its payment date. Contract surrender payments are net of contingent deferred sales charges of $349,711 and $539,334 for the years ended December 31, 2001 and 2000, respectively. -9- NOTES TO FINANCIAL STATEMENTS - continued 4. NET ASSETS HELD ON BEHALF OF AN AFFILIATE Approximately $15,668,000 and $18,869,000 of the net assets of Account GIS were held on behalf of an affiliate of The Travelers as of December 31, 2001 and 2000, respectively. Transactions with this affiliate during the years ended December 31, 2001 and 2000, were comprised of participant purchase payments of approximately $123,000 and $230,000 and contract surrenders of approximately $374,000 and $1,554,000, respectively. 5. NET CONTRACT OWNERS' EQUITY
December 31, 2001 Unit Net Units Value Assets Accumulation phase of contracts issued prior to May 16, 1983 ................... 10,072,503 $18.064 $ 181,950,039 Annuity phase of contracts issued prior to May 16, 1983 ........................ 256,744 18.064 4,637,827 Accumulation phase of contracts issued on or after May 16, 1983 ................ 27,482,188 17.245 473,934,286 Annuity phase of contracts issued on or after May 16, 1983 ..................... 77,009 17.245 1,328,029 -------------- Net Contract Owners' Equity ............................................................................. $ 661,850,181 ==============
-10- NOTES TO FINANCIAL STATEMENTS - continued 6. SUPPLEMENTARY INFORMATION (Selected data for a unit outstanding throughout each year.)
Contracts issued prior to May 16, 1983 For the years ended December 31, 2001 2000 1999 1998 1997 SELECTED PER UNIT DATA: Total investment income ........................................... $ .266 $ .242 $ .267 $ .243 $ .233 Operating expenses ................................................ .311 .376 .347 .272 .201 -------- -------- ---------- -------- -------- Net investment income (loss) ...................................... (.045) (.134) (.080) (.029) .032 Unit value at beginning of year ................................... 21.418 24.427 20.017 15.510 11.763 Net realized and change in unrealized gains (losses) .............. (3.309) (2.875) 4.490 4.536 3.715 -------- -------- ---------- -------- -------- Unit value at end of year ......................................... $18.064 $21.418 $ 24.427 $20.017 $15.510 ======== ======== ========== ======== ======== SIGNIFICANT RATIOS AND ADDITIONAL DATA: Net increase (decrease) in unit value ............................. $ (3.35) $ (3.01) $ 4.41 $ 4.51 $ 3.75 Ratio of operating expenses to average net assets ................. 1.63% 1.60% 1.60% 1.56% 1.45% Ratio of net investment income (loss) to average net assets ....... (.24)% (.57)% (.37)% (.16)% .24% Number of units outstanding at end of year (thousands) ............ 10,329 11,413 12,646 13,894 15,194 Portfolio turnover rate ........................................... 32% 52% 47% 50% 64% Contracts issued on or after May 16, 1983 For the years ended December 31, 2001 2000 1999 1998 1997 SELECTED PER UNIT DATA: Total investment income ........................................... $ .254 $ .232 $ .256 $ .234 $ .228 Operating expenses ................................................ .343 .416 .385 .303 .228 -------- -------- ---------- -------- -------- Net investment loss ............................................... (.089) (.184) (.129) (.069) - Unit value at beginning of year ................................... 20.498 23.436 19.253 14.955 11.371 Net realized and change in unrealized gains (losses) .............. (3.164) (2.754) 4.312 4.367 3.584 -------- -------- ---------- -------- -------- Unit value at end of year ......................................... $17.245 $20.498 $ 23.436 $19.253 $14.955 ======== ======== ========== ======== ======== SIGNIFICANT RATIOS AND ADDITIONAL DATA: Net increase (decrease) in unit value ............................. $ (3.25) $ (2.94) $ 4.18 $ 4.30 $ 3.58 Ratio of operating expenses to average net assets ................. 1.88% 1.85% 1.85% 1.81% 1.70% Ratio of net investment loss to average net assets ................ (.49)% (.82)% (.62)% (.41)% - Number of units outstanding at end of year (thousands) ............ 27,559 29,879 32,648 32,051 29,545 Portfolio turnover rate ........................................... 32% 52% 47% 50% 64%
-11- THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF INVESTMENTS December 31, 2001 No. of Market Shares Value COMMON STOCK (97.7%) Aerospace (0.7%) Boeing Co. 78,190 $3,032,208 General Dynamics 18,900 1,505,196 ----------- 4,537,404 ----------- Airlines (0.2%) Southwest Airlines 77,800 1,437,744 ----------- Automotive (0.5%) Ford Motor Co. 91,827 1,443,520 General Motors Corp. 34,390 1,671,354 ----------- 3,114,874 ----------- Banking (7.8%) Bank of America Corp. 97,614 6,144,801 Bank of New York 46,960 1,915,968 Bank One Corp. 110,574 4,317,915 BB&T Corp. 42,700 1,541,897 Capital One Financial Corp. 29,510 1,592,064 Fifth Third BanCorp 63,330 3,884,346 FleetBoston Financial Corp. 118,542 4,326,783 J.P. Morgan & Company, Inc. 137,486 4,997,616 MBNA Corp. 109,350 3,849,120 National City Corp. 100,540 2,939,790 SouthTrust Corp. 72,800 1,792,336 State Street Corp. 35,860 1,873,685 SunTrust Banks, Inc. 18,100 1,134,870 U. S. Bancorp 82,130 1,718,981 Wachovia Corp. 77,500 2,430,400 Washington Mutual, Inc. 95,800 3,132,660 Wells Fargo & Co. 103,520 4,497,944 ----------- 52,091,176 ----------- Beverage (2.8%) Anheuser-Busch Cos. 78,360 3,542,656 Coca-Cola Co. 157,410 7,421,882 Coca-Cola Enterprises, Inc. 76,000 1,439,440 Pepsi Bottling Group 73,300 1,722,550 PepsiCo, Inc. 91,360 4,448,318 ----------- 18,574,846 ----------- Brokerage (2.5%) Bear Stearns Cos., Inc. 27,360 1,604,390 Charles Schwab Corp. 70,200 1,085,994 Lehman Brothers Holding, Inc. 44,110 2,946,548 Merrill Lynch & Co. 90,740 4,729,369 Morgan Stanley Dean Witter & Co. 107,620 6,020,263 ----------- 16,386,564 ----------- Building Materials (0.5%) Centex Corp. 33,800 1,929,642 Masco Corp. 46,510 1,139,495 ----------- 3,069,137 ----------- No. of Market Shares Value Capital Goods (0.6%) Applied Materials, Inc. (A) 57,160 $2,292,402 Cooper Industries 42,200 1,473,624 Tellabs, Inc. (A) 25,210 377,016 ----------- 4,143,042 ----------- Chemicals (1.2%) Air Products & Chemical, Inc. 29,900 1,402,609 Dow Chemical Co. 53,694 1,813,783 E.I. Dupont de Nemours & Co. 60,436 2,569,134 Eastman Chemical Co. 13,970 545,109 Engelhard Corp. 18,600 514,848 Praxair, Inc. 9,870 545,317 Rohm & Haas Co. 12,960 448,805 ----------- 7,839,605 ----------- Conglomerates (6.6%) Crane Co. 66,000 1,692,240 General Electric Co. 630,620 25,275,250 Honeywell International, Inc. 71,240 2,409,337 Minnesota Mining & 18,670 2,206,981 Manufacturing Co. Parker-Hannifin 36,050 1,655,055 Tyco International Ltd. 143,260 8,438,014 United Technologies Corp. 30,780 1,989,311 ----------- 43,666,188 ----------- Construction Machinery (0.4%) Caterpillar, Inc. 45,200 2,361,700 ----------- Consumer (2.6%) Alberto-Culver 37,610 1,682,671 Ball Corp. 13,700 968,590 Clorox Co. 57,500 2,274,125 Colgate-Palmolive Co. 54,230 3,131,783 Gillette Co. 25,400 848,360 Procter & Gamble Co. 77,650 6,144,444 Stanley Works 12,700 591,439 Unilever N.V. 35,200 2,027,872 ----------- 17,669,284 ----------- Defense (0.7%) Lockheed Martin Corp. 51,370 2,397,438 Northrop Grumman Corp. 11,200 1,129,072 Raytheon Co. 40,400 1,311,788 ----------- 4,838,298 ----------- Entertainment (1.0%) Viacom, Inc. (A) 59,096 2,609,088 Walt Disney Co. 200,675 4,157,986 ----------- 6,767,074 ----------- Finance (2.0%) American Express Co. 141,370 5,045,495 Countrywide Credit Industries, Inc. 55,100 2,257,447 Household Finance Corp. 49,380 2,861,077 MetLife Capital Trust 65,400 2,071,872 Moodys Corp. 20,500 817,130 ----------- 13,053,021 ----------- -12- STATEMENT OF INVESTMENTS - continued No. of Market Shares Value Food (1.7%) Darden Restaurants 24,200 $ 856,680 General Mills, Inc. 43,670 2,271,277 International Flavors/Fragrances 47,100 1,399,341 Sara Lee Corp. 121,200 2,694,276 Tricon Global Restaurants (A) 47,090 2,316,828 Wendy's International 66,100 1,928,137 ----------- 11,466,539 ----------- Gaming (0.2%) International Game Technology (A) 23,400 1,598,220 ----------- Healthcare (3.1%) Abbott Laboratories 58,920 3,284,790 Appelera Corp-Applied 28,730 1,128,227 Biosystems Group Cardinal Health, Inc. 43,840 2,834,694 Guidant Corp. (A) 35,100 1,747,980 HCA-The Healthcare Company 61,460 2,368,668 Immunex Corp. (A) 61,500 1,704,472 Tenet Healthcare Corp. (A) 48,760 2,863,187 UnitedHealth Group, Inc. 40,350 2,855,570 Wellpoint Health Networks (A) 15,900 1,857,915 ----------- 20,645,503 ----------- Independent Energy (0.5%) Apache Corp. 11,264 561,848 Burlington Resources 27,650 1,037,981 Entergy Corp. 44,160 1,727,098 ----------- 3,326,927 ----------- Insurance (3.9%) AFLAC Inc. 59,000 1,449,040 Allstate Corp. 46,150 1,555,255 American International Group 182,555 14,494,867 Chubb Corp. 31,170 2,150,730 CIGNA Corp. 9,310 862,572 Lincoln National Corp. 46,310 2,249,277 Marsh & McLennan Co. 11,800 1,267,910 MBIA Inc. 38,150 2,045,985 ----------- 26,075,636 ----------- Integrated Energy (5.4%) Anadarko Petroleum 19,050 1,082,992 Chevron Texaco Corp. 65,298 5,851,354 Conoco, Inc. 36,544 1,034,195 Exxon Mobil Corp. 423,176 16,630,817 Kerr-Mcgee Corp. 6,940 380,312 Occidental Petroleum 24,820 658,475 Phillips Petroleum Co. 23,718 1,429,247 Royal Dutch Petroleum Co. 125,850 6,169,167 Unocal Corp. 26,580 958,741 USX-Marathon Group 18,760 562,800 Williams Cos. 44,850 1,144,572 ----------- 35,902,672 ----------- Media (1.6%) Andrew Corp. (A) 64,900 1,420,985 Comcast Corp. (A) 71,410 2,571,117 CSC Holdings, Inc. (A) 21,800 1,034,410 Gannett Company, Inc. 26,870 1,806,470 Knight-Ridder, Inc. 27,160 1,763,499 Omnicom Group 20,200 1,804,870 ----------- 10,401,351 ----------- No. of Market Shares Value Metals (0.5%) Alcan Aluminum Ltd. 12,720 $ 457,030 Alcoa, Inc. 54,954 1,953,615 Barrick Gold Corp. 45,240 721,578 ----------- 3,132,223 ----------- Natural Gas Pipeline (0.2%) Dynegy, Inc. 56,330 1,436,415 ----------- Oil Field (0.6%) Baker Hughes, Inc. 46,830 1,707,890 Schlumberger Ltd. 33,320 1,830,934 Transocean Sedco Forex, Inc. 17,762 600,711 ----------- 4,139,535 ----------- Paper (0.8%) Avery Dennison Corp. 16,900 955,357 Georgia-Pacific Group 23,400 646,074 International Paper Co. 49,730 2,006,606 Temple-Inland 21,400 1,214,022 Weyerhaeuser Co. 13,190 713,315 ----------- 5,535,374 ----------- Pharmaceuticals (10.7%) American Home Products Corp. 72,890 4,472,530 Amgen, Inc. (A) 71,910 4,058,241 Baxter International, Inc. 36,830 1,975,193 Biomet, Inc. 59,840 1,849,954 Bristol-Myers Squibb Co. 126,930 6,473,430 Eli Lilly & Co. 57,040 4,479,922 Forest Laboratories, Inc. (A) 33,510 2,746,144 Johnson & Johnson 213,808 12,636,053 King Pharmaceuticals (A) 42,100 1,773,673 MedImmune, Inc. (A) 12,110 561,056 Merck & Co., Inc. 148,130 8,710,044 Pfizer, Inc. 398,765 15,890,785 Pharmacia Corp. 75,768 3,231,505 Schering-Plough Corp. 59,510 2,131,053 ----------- 70,989,583 ----------- Railroads (0.6%) Burlington Northern Santa Fe 40,740 1,162,312 CSX Corp. 40,200 1,409,010 Union Pacific 22,770 1,297,890 ----------- 3,869,212 ----------- Refining (0.1%) Ashland Inc. 8,600 396,288 ----------- Retailers (7.1%) AutoZone, Inc. (A) 17,200 1,234,960 Bed Bath & Beyond, Inc. (A) 84,050 2,848,875 Best Buy Company, Inc. (A) 22,160 1,650,477 CDW Computer Centers (A) 23,940 1,285,698 Home Depot, Inc. 165,607 8,447,613 Kohl's Corp. (A) 54,300 3,824,892 Lowe's Cos. 61,700 2,863,497 Nordstrom, Inc. 110,800 2,241,484 Office Depot (A) 119,500 2,215,530 Penney J.C. Co., Inc. 59,000 1,587,100 Sears Roebuck 56,770 2,704,523 Staples Inc. (A) 103,500 1,935,967 Wal-Mart Stores, Inc. 253,940 14,614,247 ----------- 47,454,863 ----------- -13- STATEMENT OF INVESTMENTS - continued No. of Market Shares Value Services (5.4%) Biogen, Inc. (A) 10,260 $ 588,462 Concord EFS (A) 43,100 1,413,034 Medtronic, Inc. 52,660 2,696,719 Microsoft (A) 341,070 22,597,593 Oracle Corp. (A) 394,778 5,453,858 Paychex, Inc. 59,510 2,073,626 West Corp. (A) 53,800 1,346,076 ----------- 36,169,368 ----------- Supermarkets (0.4%) Albertsons, Inc. 74,400 2,342,856 ----------- Technology (14.5%) Agilent Technologies, Inc. (A) 29,700 846,747 Altera Corp. (A) 45,730 969,705 Analog Devices, Inc. (A) 37,300 1,655,747 AOL Time Warner, Inc. (A) 244,250 7,840,425 Applied Micro Circuits Corp. (A) 59,510 673,356 Automatic Data Process 27,160 1,599,724 Cisco Systems, Inc. (A) 523,810 9,488,818 Computer Associates International 80,460 2,775,065 Computer Sciences Corp. (A) 30,300 1,484,094 Dell Computer Corp. (A) 186,590 5,068,717 Electronic Data System 37,450 2,567,197 EMC Corp. (A) 116,270 1,562,669 First Data Corp. 48,660 3,817,377 Fiserv Inc. (A) 33,600 1,422,288 Hewlett Packard Co. 78,070 1,603,558 Intel Corp. 441,070 13,869,446 International Business 123,400 14,926,464 Machines Corp. ITT Industries 48,040 2,426,020 JDS Uniphase Corp. (A) 81,390 706,058 Linear Technologies 30,000 1,169,400 Lucent Technologies 150,858 948,897 Mattel, Inc. 68,000 1,169,600 Micron Technologies, Inc. (A) 77,770 2,410,870 Motorola, Inc. 90,480 1,359,010 Pitney Bowes 42,500 1,598,425 QUALCOMM, Inc. (A) 48,560 2,451,066 Sanmina Corp. (A) 69,180 1,376,336 Sun Microsystems, Inc. (A) 270,260 3,325,549 Texas Instruments, Inc. 133,370 3,734,360 VERITAS Software Corp. (A) 24,430 1,095,319 Xilinx, Inc. (A) 17,880 698,035 ----------- 96,640,342 ----------- No. of Market Shares Value Telecommunications (5.0%) ALLTEL Corp. 24,720 $ 1,525,966 AT&T Corp. 210,700 3,822,098 AT&T Wireless Group (A) 67,844 974,918 BellSouth Corp. 91,060 3,473,939 Broadcom Corp. (A) 14,270 583,286 SBC Communications, Inc. 217,128 8,504,904 Sprint Corp. - PCS Group 124,776 3,045,782 Verizon Global Funding Corp. 179,648 8,526,094 WorldCom, Inc. (A) 191,626 2,699,052 ----------- 33,156,039 ----------- Textile (0.1%) NIKE, Inc. 16,300 916,712 ----------- Tobacco (1.1%) Philip Morris Cos. 162,530 7,452,001 ----------- U.S. Agency (1.9%) Federal Home Loan Mortgage Corp. 62,770 4,105,158 Federal Association National 77,750 6,181,125 Mortgage USA Education 25,300 2,125,706 ----------- 12,411,989 ----------- Utilities (2.2%) AES Corp. (A) 57,400 938,490 Allegheny Energy 43,700 1,582,814 Dominion Resources, Inc. 40,940 2,460,494 Duke Energy 60,200 2,363,452 Exelon Corp. 19,780 947,066 FirstEnergy Corp. 76,210 2,665,826 Mirant Corp. (A) 62,408 999,776 TXU Corp. 57,740 2,722,441 ----------- 14,680,359 ----------- TOTAL COMMON STOCKS (Cost $641,424,823) 649,689,964 ----------- -14- STATEMENT OF INVESTMENTS - continued Principal Market Amount Value SHORT-TERM INVESTMENTS (2.3%) Commercial Paper (2.1%) Asset Securitization Corp., 1.98% due January 7, 2002 $ 5,000,000 $ 4,998,245 Blueridge Asset Funding Corp., 2.03% due January 3, 2002 3,600,000 3,599,460 Household Finance Corp., 1.83% due January 2, 2002 1,230,000 1,229,877 Windmill Funding Corp., 1.98% due January 11, 2002 4,000,000 3,997,784 ------------- 13,825,366 ------------- U.S. Treasury (0.2%) United States of America Treasury, 2.20% due March 14, 2002 (B) 1,060,000 1,056,466 ------------- TOTAL SHORT-TERM INVESTMENTS (Cost $14,881,168) 14,881,832 ------------- Notional Value FUTURES CONTRACTS (0.0%) S&P 500 Stock Index, Exp. March, 2002 (C) $ 7,182,500 - ------------- TOTAL INVESTMENTS (100%) (Cost $656,305,991) (D) $ 664,571,796 ============== NOTES (A) Non-income Producing Security. (B) Par value of $1,060,000 pledged to cover margin deposits on futures contracts. (C) As more fully discussed in Note 1 to the financial statements, it is Account GIS's practice to hold cash and cash equivalents (including short-term investments) at least equal to the underlying face value, or notional value, of outstanding purchased futures contracts, less the initial margin. Account GIS uses futures contracts as a substitute for holding individual securities. (D) At December 31, 2001, net unrealized appreciation for all securities was $8,265,805. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of market value over cost of $83,672,984 and aggregate gross unrealized depreciation for all securities in which there was an excess of cost over market value of $75,407,179. See Notes to Financial Statements -15- INDEPENDENT AUDITORS' REPORT The Board of Managers and the Owners of Variable Annuity Contracts of The Travelers Growth and Income Stock Account for Variable Annuities: We have audited the accompanying statement of assets and liabilities of The Travelers Growth and Income Stock Account for Variable Annuities, including the statement of investments, as of December 31, 2001, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended and the selected per unit data and ratios for each of the years in the three-year period then ended. These financial statements and selected per unit data and ratios are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and selected per unit data and ratios based on our audits. The accompanying selected per unit data and ratios for each of the years in the two year period ended December 31, 1998 were audited by other auditors whose report thereon dated February 15, 1999, expressed an unqualified opinion on those selected per unit data and ratios. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 and selected per unit data and ratios. Our procedures included confirmation of securities owned as of December 31, 2001, by correspondence with custodians and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and selected per unit data and ratios referred to above present fairly, in all material respects, the financial position of The Travelers Growth and Income Stock Account for Variable Annuities as of December 31, 2001, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended and the selected per unit data and ratios for each of the years in the three-year period then ended, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Hartford, Connecticut February 4, 2002 -16- THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES Through most of the first three quarters of 2001, the Travelers Quality Bond Account for Variable Annuities ("Account QB") posted positive returns, benefiting from a falling interest-rate environment and many investors seeking lower volatility in bond investments versus equities. During this period, the fund's effective duration stayed relatively steady, at around 3.5. Duration is a measure of a bond fund's sensitivity to interest rates, with the figure representing the percentage change the portfolio will experience should interest rates rise or fall by 1%. For example, a bond fund with a duration of 5 would have a price increase of 5% if interest rates were to fall 1%. Credit quality held steady at A3 over this period, and U.S. bonds, both Corporates and Treasuries made up around 90% of the portfolio. For the fourth quarter of 2001, Account QB declined 2.84% before expenses versus a .08% decline for the Lehman Intermediate Government/Corporate Bond Index ("the Lehman"). (The Lehman Intermediate Government/Corporate Bond Index is a combination of publicly issued intermediate and long-term U.S. government bonds and corporate bonds.) Account QB underperformed its benchmark by 276 basis points. This underperfomance was mainly driven by the volatility caused by the World Trade Center attacks and by our exposure to Enron, which filed for bankruptcy in mid-December. The year, to say the least, was volatile with many high-grade names falling to distressed levels overnight. Energy issues affected by Enron were 14 basis points wider and related electric utility issuers were 40 basis points wider. Our best performing position was in the corporate telecom sector. Telephone company spreads had become very wide in response to expensive 3G expansion plans in Europe. The most leveraged companies managed this challenge successfully, sold assets and issued equity to deliver reduced leverage and risk by the end of 2001. Year-to- date, before expenses, Account QB returned 5.69% versus its benchmark, the Lehman, that returned 8.96%. Net of expenses Account QB returned 4.06%. We are expecting the unprecedented fiscal and monetary stimulus and lower oil prices to lead to a recovery in the second half of 2002. Starting 2002, we are holding a larger position in corporate bond relative to our benchmark and remain diligent in choosing under-valued bonds and seeking issues with strong total return potential. Portfolio Manager: Dave Tyson, CFA [logo] -17- THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF ASSETS AND LIABILITIES December 31, 2001 Assets: Investment securities, at market value (cost $136,811,841) ............................. $131,624,790 Receivables: Interest ............................................................................ 2,035,863 Investment securities sold .......................................................... 4,405,549 Purchase payments and transfers from other Travelers accounts ....................... 64,567 Other assets ........................................................................... 1,589 ------------- Total Assets ..................................................................... 138,132,358 ------------- Liabilities: Cash overdraft ......................................................................... 4,400,519 Payables: Investment securities purchased ..................................................... 3,992,580 Contract surrenders and transfers to other Travelers accounts ....................... 28,537 Investment management and advisory fees ............................................. 3,442 Insurance charges ................................................................... 12,309 Accrued liabilities .................................................................... 7,817 ------------- Total Liabilities ................................................................... 8,445,204 ------------- Net Assets: $129,687,154 ============= See Notes to Financial Statements
-18- THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF OPERATIONS For the year ended December 31, 2001 Investment Income: Interest ................................................................................... $ 8,057,149 Expenses: Investment management and advisory fees .................................................... $ 415,273 Insurance charges .......................................................................... 1,516,526 ------------- Total expenses .......................................................................... 1,931,799 ------------- Net investment income ................................................................ 6,125,350 ------------- Realized Gain (Loss) and Change in Unrealized Gain (Loss) on Investment Securities: Realized gain (loss) from investment security transactions: Proceeds from investment securities sold ................................................... 194,847,830 Cost of investment securities sold ......................................................... 192,648,872 ------------- Realized gain (loss) .................................................................... 2,198,958 Change in unrealized gain (loss) on investment securities: Unrealized gain (loss) at December 31, 2000 ................................................ (1,544,807) Unrealized gain (loss) at December 31, 2001 ................................................ (5,187,051) ------------- Net change in unrealized gain (loss) for the year ....................................... (3,642,244) ------------- Net realized gain (loss) and change in unrealized gain (loss) ....................... (1,443,286) ------------- Net increase in net assets resulting from operations .......................................... $ 4,682,064 ============ See Notes to Financial Statements
-19- THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF CHANGES IN NET ASSETS For the years ended December 31, 2001 and 2000
2001 2000 Operations: Net investment income ................................................................... $ 6,125,350 $ 7,280,698 Net realized gain (loss) from investment security transactions .......................... 2,198,958 (3,538,841) Net change in unrealized gain (loss) on investment securities ........................... (3,642,244) 1,649,407 -------------- ------------- Net increase in net assets resulting from operations ................................. 4,682,064 5,391,264 -------------- ------------- Unit Transactions: Participant purchase payments (applicable to 824,666 and 870,546 units, respectively) ............................. 5,257,007 5,124,858 Participant transfers from other Travelers accounts (applicable to 4,622,095 and 1,512,101 units, respectively) ......................... 29,722,165 8,893,845 Administrative charges (applicable to 13,608 and 13,123 units, respectively) ............................... (86,730) (78,856) Contract surrenders (applicable to 1,960,150 and 2,821,093 units, respectively) ......................... (12,599,764) (16,759,298) Participant transfers to other Travelers accounts (applicable to 2,598,052 and 3,490,801 units, respectively) ......................... (16,607,051) (20,514,038) Other payments to participants (applicable to 101,586 and 157,807 units, respectively) ............................. (655,559) (949,077) -------------- ------------- Net increase (decrease) in net assets resulting from unit transactions ............... 5,030,068 (24,282,566) -------------- ------------- Net increase (decrease) in net assets ............................................. 9,712,132 (18,891,302) Net Assets: Beginning of year ....................................................................... 119,975,022 138,866,324 -------------- ------------- End of year ............................................................................. $ 129,687,154 $119,975,022 ============== ============= See Notes to Financial Statements
-20- NOTES TO FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES The Travelers Quality Bond Account for Variable Annuities ("Account QB") is a separate account of The Travelers Insurance Company ("The Travelers"), an indirect wholly owned subsidiary of Citigroup Inc., and is available for funding certain variable annuity contracts issued by The Travelers. Account QB is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company. The following is a summary of significant accounting policies consistently followed by Account QB in the preparation of its financial statements. Security Valuation. Investments in securities traded on a national securities exchange are valued at the 4:00 p.m. Eastern Standard Time price of such exchanges; securities traded on the over-the-counter market and listed securities with no reported sales are valued at the mean between the last-reported bid and asked prices or on the basis of quotations received from a reputable broker or other recognized source. When market quotations are not considered to be readily available for long-term corporate bonds and notes, such investments are generally stated at fair value on the basis of valuations furnished by a pricing service. These valuations are determined for normal institutional-size trading units of such securities using methods based on market transactions for comparable securities and various relationships between securities which are generally recognized by institutional traders. Securities, including restricted securities, for which pricing services are not readily available, are valued by management at prices which it deems, in good faith, to be fair value. Short-term investments are reported at fair value based on quoted market prices. Short-term investments, for which there is no reliable quoted market price, are recorded at amortized cost which approximates fair value. Security Transactions. Security transactions are accounted for on the trade date. Interest income is recorded on the accrual basis. Premiums and discounts are amortized to interest income utilizing the constant yield method. Futures Contracts. Account QB may use interest rate futures contracts as a substitute for the purchase or sale of individual securities. When Account QB enters into a futures contract, it agrees to buy or sell specified debt securities at a future time for a fixed price, unless the contract is closed prior to expiration. Account QB is obligated to deposit with a broker an "initial margin" equivalent to a percentage of the face, or notional value of the contract. It is Account QB's practice to hold cash and cash equivalents in an amount at least equal to the notional value of outstanding purchased futures contracts, less the initial margin. Cash and cash equivalents include cash on hand, securities segregated under federal and brokerage regulations, and short-term highly liquid investments with maturities generally three months or less when purchased. Generally, futures contracts are closed prior to expiration. Futures contracts purchased by Account QB are priced and settled daily; accordingly, changes in daily prices are recorded as realized gains or losses and no asset is recorded in the Statement of Investments. However, when Account QB holds open futures contracts, it assumes a market risk generally equivalent to the underlying market risk of change in the value of the debt securities associated with the futures contract. Repurchase Agreements. When Account QB enters into a repurchase agreement (a purchase of securities whereby the seller agrees to repurchase the securities at a mutually agreed upon date and price), the repurchase price of the securities will generally equal the amount paid by Account QB plus a negotiated interest amount. The seller under the repurchase agreement will be required to provide to Account QB securities (collateral) whose market value, including accrued interest, will be at least equal to 102% of the repurchase price. Account QB monitors the value of collateral on a daily basis. Repurchase agreements will be limited to transactions with national banks and reporting broker dealers believed to present minimal credit risks. Account QB's custodian will take actual or constructive receipt of all securities underlying repurchase agreements until such agreements expire. -21- NOTES TO FINANCIAL STATEMENTS - continued Federal Income Taxes. The operations of Account QB form a part of the total operations of The Travelers and are not taxed separately. The Travelers is taxed as a life insurance company under the Internal Revenue Code of 1986, as amended (the "Code"). Under existing federal income tax law, no taxes are payable on the investment income and capital gains of Account QB. Account QB is not taxed as a "regulated investment company" under Subchapter M of the Code. Other. The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting year. Actual results could differ from those estimates. 2. INVESTMENTS The aggregate costs of purchases and proceeds from sales of investments (other than short-term securities) were $86,451,253 and $102,939,134, respectively; the costs of purchases and proceeds from sales of direct and indirect U.S. government securities were $129,036,790 and $101,894,483, respectively, for the year ended December 31, 2001. Realized gains and losses from investment security transactions are reported on an identified cost basis. 3. CONTRACT CHARGES Investment management and advisory fees are calculated daily at an annual rate of 0.3233% of Account QB's average net assets. These fees are paid to Travelers Asset Management International Company, LLC, an indirect wholly owned subsidiary of Citigroup Inc. Insurance charges are paid for the mortality and expense risks assumed by The Travelers. Each business day, The Travelers deducts a mortality and expense risk charge which is reflected in the calculation of accumulation and annuity unit values. This charge equals, on an annual basis, 1.0017% for contracts issued prior to May 16, 1983 and 1.25% on an annual basis for contracts issued on or after May 16, 1983. Additionally, for certain contracts in the accumulation phase, a semi-annual charge of $15 (prorated for partial years) is deducted from participant account balances and paid to The Travelers to cover administrative charges. On contracts issued prior to May 16, 1983, The Travelers retained from Account QB sales charges of $5,870 and $5,639 for the years ended December 31, 2001 and 2000, respectively. The Travelers generally assesses a 5% contingent deferred sales charge if a participant's purchase payment is surrendered within five years of its payment date. Contract surrender payments are net of contingent deferred sales charges of $65,357 and $83,540 for the years ended December 31, 2001 and 2000, respectively. -22- NOTES TO FINANCIAL STATEMENTS - continued 4. NET ASSETS HELD ON BEHALF OF AN AFFILIATE Approximately $319,000 and $341,000 of the net assets of Account QB were held on behalf of an affiliate of The Travelers as of December 31, 2001 and 2000, respectively. Transactions with this affiliate during the years ended December 31, 2001 and 2000, were comprised of participant purchase payments of approximately $270,000 and $46,000 and contract surrenders of approximately $300,000 and $28,000, respectively. 5. NET CONTRACT OWNERS' EQUITY
December 31, 2001 Unit Net Units Value Assets Accumulation phase of contracts issued prior to May 16, 1983 .............. 5,116,245 $ 6.608 $ 33,810,245 Annuity phase of contracts issued prior to May 16, 1983 ................... 77,512 6.608 512,233 Accumulation phase of contracts issued on or after May 16, 1983 ........... 15,107,222 6.309 95,309,302 Annuity phase of contracts issued on or after May 16, 1983 ................ 8,777 6.309 55,374 ------------- Net Contract Owners' Equity ................................................................................ $129,687,154 =============
-23- NOTES TO FINANCIAL STATEMENTS - continued 6. SUPPLEMENTARY INFORMATION (Selected data for a unit outstanding throughout each year.)
Contracts issued prior to May 16, 1983 For the years ended December 31, 2001 2000 1999 1998 1997 SELECTED PER UNIT DATA: Total investment income ................................................ $ .421 $ .446 $ .393 $ .363 $ .353 Operating expenses ..................................................... .089 .081 .080 .076 .071 ------ ------- ------ ------ ------- Net investment income ................................................. .332 .365 .313 .287 .282 Unit value at beginning of year ........................................ 6.335 6.055 5.994 5.593 5.234 Net realized and change in unrealized gains (losses) ................... (.059) (.085) (.252) .114 .077 ------ ------- ------ ------ ------- Unit value at end of year .............................................. $6.608 $ 6.335 $6.055 $5.994 $ 5.593 ====== ======= ====== ====== ======= SIGNIFICANT RATIOS AND ADDITIONAL DATA: Net increase (decrease) in unit value .................................. $ .27 $ .28 $ .06 $ .40 $ .36 Ratio of operating expenses to average net assets ...................... 1.33% 1.33% 1.33% 1.33% 1.33% Ratio of net investment income (loss) to average net assets ............ 4.99% 5.93% 5.22% 4.96% 5.25% Number of units outstanding at end of year (thousands) ................. 5,194 5,491 6,224 6,880 7,683 Portfolio turnover rate ................................................ 166% 105% 340% 438% 196% Contracts issued on or after May 16, 1983 For the years ended December 31, 2001 2000 1999 1998 1997 SELECTED PER UNIT DATA: Total investment income ................................................ $ .402 $ .427 $ .378 $ .350 $ .342 Operating expenses ..................................................... .101 .092 .091 .088 .082 ------ ------- ------ ------ ------- Net investment income .................................................. .301 .335 .287 .262 .260 Unit value at beginning of year ........................................ 6.063 5.810 5.765 5.393 5.060 Net realized and change in unrealized gains (losses) ................... (.055) (.082) (.242) .110 .073 ------ ------- ------ ------ ------- Unit value at end of year .............................................. $6.309 $ 6.063 $5.810 $5.765 $ 5.393 ====== ======= ====== ====== ======= SIGNIFICANT RATIOS AND ADDITIONAL DATA: Net increase (decrease) in unit value .................................. $ .25 $ .25 $ .04 $ .37 $ .33 Ratio of operating expenses to average net assets ...................... 1.57% 1.57% 1.57% 1.57% 1.57% Ratio of net investment income to average net assets ................... 4.74% 5.69% 4.97% 4.71% 5.00% Number of units outstanding at end of year (thousands) ................. 15,116 14,045 17,412 21,251 21,521 Portfolio turnover rate ................................................ 166% 105% 340% 438% 196%
-24- THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF INVESTMENTS December 31, 2001 Principal Market Amount Value BONDS (67.5%) Airlines (1.0%) Delta Airlines, Inc. 9.25% Debentures, 2007 $ 1,264,121 $ 1,264,627 ------------- Finance (5.1%) Comdisco, Inc. 7.25% Debentures, 2049 (A) 6,800,000 5,392,400 Osprey 8.31% Debentures, 2003 (A) 6,300,000 1,291,500 ------------- 6,683,900 ------------- Food (6.0%) Nabisco, Inc. 6.70% Debentures, 2002 7,800,000 7,926,227 ------------- Gaming (5.4%) Park Place Entertainment 7.95% Debentures, 2003 7,000,000 7,139,475 ------------- Healthcare (3.9%) HCA-The Healthcare Corp. 6.87% Debentures, 2003 5,000,000 5,198,525 ------------- Media Non-Cable (3.0%) Cox Enterprises, Inc. 7.88% Debentures, 2010 3,800,000 3,933,988 ------------- Natural Gas Pipeline (7.5%) El Paso Corp. 6.95% Debentures, 2007 4,000,000 4,038,688 Gemstone Investment Ltd. 7.71% Debentures, 2004 6,000,000 5,835,846 ------------- 9,874,534 ------------- Real Estate (3.4%) Nationwide Health Properties, Inc. 6.90% Debentures, 2037 4,500,000 4,426,857 ------------- Telecommunications (19.5%) Qwest Capital Funding 7.00% Debentures, 2009 6,000,000 5,836,200 Sprint Capital Corp. 7.63% Debentures, 2002 6,000,000 6,129,426 Telecom New Zealand Finance Corp. 6.25% Debentures, 2003 7,500,000 7,594,988 Worldcom, Inc. 6.50% Debentures, 2004 3,000,000 3,084,162 Worldcom, Inc. 7.50% Debentures, 2011 3,000,000 3,091,197 ------------- 25,735,973 ------------- Principal Market Amount Value Utilities (12.7%) CMS Energy Corp. 7.63% Debentures, 2004 $ 1,750,000 $ 1,743,256 CMS Energy Corp. 6.75% Debentures, 2004 3,000,000 2,950,263 DPL, Inc. 6.88% Debentures, 2011 5,700,000 5,585,521 UtiliCorp United, Inc. 6.88% Debentures, 2004 6,300,000 6,478,813 ------------- 16,757,853 ------------- TOTAL BONDS (Cost $94,608,858) 88,941,959 ------------- UNITED STATES GOVERNMENT AGENCY SECURITIES (11.5%) Federal National Mortgage Association 5.00% due January, 2007 15,000,000 15,079,320 ------------- TOTAL U.S. GOVERNMENT AGENCY SECURITIES (Cost $14,978,475) 15,079,320 ------------- UNITED STATES GOVERNMENT SECURITIES (15.0%) United States of America Treasury, 6.63% due March, 2007 4,500,000 4,947,543 United States of America Treasury, 5.00% due February, 2011 14,800,000 14,759,537 ------------- TOTAL U.S. GOVERNMENT SECURITIES (Cost $19,327,695) 19,707,080 ------------- -25- STATEMENT OF INVESTMENT - continued Principal Market Amount Value SHORT-TERM INVESTMENTS (6.0%) Commercial Paper (6.0%) Asset Securitization Corp., 1.98% due January, 2002 $ 600,000 $ 599,789 Household Finance Corp., 1.83% due January, 2002 4,300,000 4,299,570 DE Funding Corp., 1.88% due January, 2002 2,000,000 1,998,482 Preferred Resources Funding Corp., 1.81% due January, 2002 1,000,000 998,590 ------------- TOTAL SHORT-TERM INVESTMENTS (Cost $7,896,813) 7,896,431 ------------- TOTAL INVESTMENT (100%) (Cost $136,811,841) (B) $131,624,790 ============= NOTES (A) Restricted Security. (B) At December 31, 2001 net unrealized depreciation for all securities was $5,187,051. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of market value over cost of $1,731,355 and aggregate gross unrealized depreciation for all securities in which there was an excess of cost over market value of $6,918,406. See Notes to Financial Statements -26- INDEPENDENT AUDITORS' REPORT The Board of Managers and the Owners of Variable Annuity Contracts of The Travelers Quality Bond Account for Variable Annuities: We have audited the accompanying statement of assets and liabilities of The Travelers Quality Bond Account for Variable Annuities, including the statement of investments, as of December 31, 2001, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended and the selected per unit data and ratios for each of the years in the three-year period then ended. These financial statements and selected per unit data and ratios are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and selected per unit data and ratios based on our audits. The accompanying selected per unit data and ratios for each of the years in the two year period ended December 31, 1998 were audited by other auditors whose report thereon dated February 15, 1999, expressed an unqualified opinion on those selected per unit data and ratios. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 and selected per unit data and ratios. Our procedures included confirmation of securities owned as of December 31, 2001, by correspondence with custodians and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and selected per unit data and ratios referred to above present fairly, in all material respects, the financial position of The Travelers Quality Bond Account for Variable Annuities as of December 31, 2001, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended and the selected per unit data and ratios for each of the years in the three-year period then ended, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Hartford, Connecticut February 4, 2002 -27- THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES During the fourth quarter, economic weakness intensified. We expect the fourth quarter Gross Domestic Product ("GDP") to contract. As a result, GDP for 2001 is expected to be up 1.1% to 1.5% versus the 4.1% gain in 2000. Corporations continued to slash payrolls. The unemployment rate rose to 5.8%, up from 4.0% at the start of the year. Consumers have remained resilient to economic weakness with a positive response to motor vehicle financing incentives, massive mortgage refinancings, and a surge in home sales. As a result, the Consumer Confidence Index gained strength in December rising to 94.6 from 84.9 in November. For this quarter, the Federal Reserve Board ("Fed") funds rate was lowered by an additional 125 basis points, from 3.00% to 1.75% The Fed has responded aggressively by providing considerable stimulus throughout the year by lowering the Fed funds rate 475 basis points, from 6.50% to 1.75%. Strong consumer resilience, tame inflation and lower energy costs, coupled with monetary and financial stimulus have begun to signal a mild recovery. As a result, we expect an economic recovery in the second half of 2002. Fed officials will be very slow to tighten monetary policy over the next year. Historically, the Federal Reserve has not begun to reverse a strategy of monetary accommodation until after the unemployment rate has started to turn down from its peak. As a result, we believe that interest rates across the curve will remain lower for longer than usual. The strategy in management for the Travelers Money Market Account for Variable Annuities will be to maintain maturities at the current average life between 30 and 40 days. Credit markets have implied Fed tightening in the third quarter of 2002. Hence, given our expectation of lower rates, we see considerable value in money market assets. Throughout the quarter we have seen significant credit deterioration. As always, we have maintained the highest level of integrity in analyzing credit quality and have successfully avoided credit pitfalls. At December 31, 2001, the asset size of the portfolio was $173 million, with an average yield of 2.09% Portfolio Manager: Emil J. Molinaro Jr. [logo] -28- THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF ASSETS AND LIABILITIES December 31, 2001 Assets: Investment securities, at market value (cost $173,725,395) ................ $173,758,796 Cash ...................................................................... 4,241 Receivables: Interest ............................................................... 337,525 Purchase payments and transfers from other Travelers accounts........... 736,786 Other assets .............................................................. 292 ------------- Total Assets ........................................................ 174,837,640 ------------- Liabilities: Payables: Contract surrenders and transfers to other Travelers accounts........... 898,413 Investment management and advisory fees ................................ 4,625 Insurance charges ...................................................... 17,879 Accrued liabilities ....................................................... 2,517 ------------- Total Liabilities ................................................... 923,434 ------------- Net Assets: $173,914,206 ============= See Notes to Financial Statements
-29- THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF OPERATIONS For the year ended December 31, 2001 Investment Income: Interest ......................................................... $ 7,139,119 Expenses: Investment management and advisory fees .......................... $ 554,922 Insurance charges ................................................ 2,145,079 ---------- Total expenses ................................................ 2,700,001 ------------ Net investment income ...................................... 4,439,118 ------------ Net increase in net assets resulting from operations ................ $ 4,439,118 ============ See Notes to Financial Statements
-30- THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF CHANGES IN NET ASSETS For the years ended December 31, 2001 and 2000
2001 2000 Operations: Net investment income .................................................................. $ 4,439,118 $ 7,383,526 -------------- ------------- Net increase in net assets resulting from operations ................................ 4,439,118 7,383,526 -------------- ------------- Unit Transactions: Participant purchase payments (applicable to 5,387,726 and 6,517,217 units, respectively) ........................ 14,622,539 16,959,975 Participant transfers from other Travelers accounts (applicable to 139,952,024 and 140,316,362 units, respectively) .................... 379,507,676 364,361,900 Administrative charges (applicable to 55,025 and 44,838 units, respectively) .............................. (150,109) (117,933) Contract surrenders (applicable to 13,518,648 and 16,614,816 units, respectively) ...................... (36,707,803) (43,155,068) Participant transfers to other Travelers accounts (applicable to 123,528,651 and 144,513,406 units, respectively) .................... (335,165,982) (374,859,447) Other payments to participants (applicable to 293,974 and 739,703 units, respectively) ............................ (800,830) (1,933,877) -------------- ------------- Net increase (decrease) in net assets resulting from unit transactions .............. 21,305,491 (38,744,450) -------------- ------------- Net increase (dcrease) in net assets ............................................. 25,744,609 (31,360,924) Net Assets: Beginning of year ...................................................................... 148,169,597 179,530,521 -------------- ------------- End of year ............................................................................ $ 173,914,206 $148,169,597 ============== ============= See Notes to Financial Statements
-31- NOTES TO FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES The Travelers Money Market Account for Variable Annuities ("Account MM") is a separate account of The Travelers Insurance Company ("The Travelers"), an indirect wholly owned subsidiary of Citigroup Inc., and is available for funding certain variable annuity contracts issued by The Travelers. Account MM is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company. The following is a summary of significant accounting policies consistently followed by Account MM in the preparation of its financial statements. Security Valuation. Investments in securities traded on a national securities exchange are valued at the 4:00 p.m. Eastern Standard Time price of such exchanges; 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 are reported at fair value based on quoted market prices. Short-term investments, for which there is no reliable quoted market price, are recorded at amortized cost which approximates fair value. Security Transactions. Security transactions are accounted for on the trade date. Interest income is recorded on the accrual basis. Premiums and discounts are amortized to interest income utilizing the constant yield method. Repurchase Agreements. When Account MM enters into a repurchase agreement (a purchase of securities whereby the seller agrees to repurchase the securities at a mutually agreed upon date and price), the repurchase price of the securities will generally equal the amount paid by Account MM plus a negotiated interest amount. The seller under the repurchase agreement will be required to provide to Account MM securities (collateral) whose market value, including accrued interest, will be at least equal to 102% of the repurchase price. Account MM monitors the value of collateral on a daily basis. Repurchase agreements will be limited to transactions with national banks and reporting broker dealers believed to present minimal credit risks. Account MM's custodian will take actual or constructive receipt of all securities underlying repurchase agreements until such agreements expire. Federal Income Taxes. The operations of Account MM form a part of the total operations of The Travelers and are not taxed separately. The Travelers is taxed as a life insurance company under the Internal Revenue Code of 1986, as amended (the "Code"). Under existing federal income tax law, no taxes are payable on the investment income and capital gains of Account MM. Account MM is not taxed as a "regulated investment company" under Subchapter M of the Code. Other. The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting year. Actual results could differ from those estimates. 2. CONTRACT CHARGES Investment management and advisory fees are calculated daily at an annual rate of 0.3233% of Account MM's average net assets. These fees are paid to Travelers Asset Management International Company, LLC, an indirect wholly owned subsidiary of Citigroup Inc. Insurance charges are paid for the mortality and expense risks assumed by The Travelers. Each business day, The Travelers deducts a mortality and expense risk charge which is reflected in the calculation of accumulation and annuity unit values. This charge equals, on an annual basis, 1.0017% for contracts issued prior to May 16, 1983 and 1.25% on an annual basis for contracts issued on or after May 16, 1983. Additionally, for certain contracts in the accumulation phase, a semi-annual charge of $15 (prorated for partial years) is deducted from participant account balances and paid to The Travelers to cover administrative charges. The Travelers assesses a 5% contingent deferred sales charge if a participant's purchase payment is surrendered within five years of its payment date. Contract surrender payments are net of contingent sales charges of $190,130 and $257,414 for the years ended December 31, 2001 and 2000, respectively. -32- NOTES TO FINANCIAL STATEMENTS - continued 3. NET ASSETS HELD ON BEHALF OF AN AFFILIATE Approximately $2,456,000 and $3,923,000 of the net assets of Account MM were held on behalf of an affiliate of The Travelers as of December 31, 2001 and 2000, respectively. Transactions with this affiliate during the years ended December 31, 2001 and 2000, were comprised of participant purchase payments of approximately $1,049,000 and $1,258,000 and contract surrenders of approximately $2,619,000 and $937,000, respectively. 4. NET CONTRACT OWNERS' EQUITY December 31, 2001 Unit Net Units Value Assets Accumulation phase of contracts issued prior to May 16, 1983 ............... 24,792 $2.869 $ 71,131 Annuity phase of contracts issued prior to May 16, 1983 .................... 35,010 2.869 100,446 Accumulation phase of contracts issued on or after May 16, 1983 ............ 63,335,590 2.739 173,483,708 Annuity phase of contracts issued on or after May 16, 1983 ................. 94,527 2.739 258,921 ------------- Net Contract Owners' Equity .................................................................................. $173,914,206 =============
-33- NOTES TO FINANCIAL STATEMENTS - continued 5. SUPPLEMENTARY INFORMATION (Selected data for a unit outstanding throughout each year.)
Contracts issued prior to May 16, 1983 For the years ended December 31, 2001 2000 1999 1998 1997 SELECTED PER UNIT DATA: Total investment income ............................................ $ .120 $ .174 $ .135 $ .138 $ .134 Operating expenses ................................................. .037 .037 .034 .033 .032 ------- ------- ------ ------ ------ Net investment income ............................................. .083 .137 .101 .105 .102 Unit value at beginning of year .................................... 2.786 2.649 2.548 2.443 2.341 ------- ------- ------ ------ ------ Unit value at end of year .......................................... $ 2.869 $ 2.786 $2.649 $2.548 $2.443 ======= ======= ====== ====== ====== SIGNIFICANT RATIOS AND ADDITIONAL DATA: Net increase in unit value ......................................... $ .08 $ .14 $ .10 $ .11 $ .10 Ratio of operating expenses to average net assets .................. 1.33% 1.33% 1.33% 1.33% 1.33% Ratio of net investment income to average net assets ............... 2.89% 5.09% 3.87% 4.20% 4.27% Number of units outstanding at end of year (thousands) ............. 60 70 80 91 105 Contracts issued on or after May 16, 1983 For the years ended December 31, 2001 2000 1999 1998 1997 SELECTED PER UNIT DATA: Total investment income ............................................ $ .114 $ .167 $ .130 $ .133 $ .128 Operating expenses ................................................. .042 .041 .039 .038 .036 ------- ------- ------ ------ ------ Net investment income .............................................. .072 .126 .091 .095 .092 Unit value at beginning of year .................................... 2.667 2.541 2.450 2.355 2.263 ------- ------- ------ ------ ------ Unit value at end of year .......................................... $ 2.739 $ 2.667 $2.541 $2.450 $2.355 ======= ======= ====== ====== ====== SIGNIFICANT RATIOS AND ADDITIONAL DATA: Net increase in unit value ......................................... $ .07 $ .13 $ .09 $ .10 $ .09 Ratio of operating expenses to average net assets .................. 1.57% 1.57% 1.57% 1.57% 1.57% Ratio of net investment income to average net assets ............... 2.64% 4.84% 3.62% 3.95% 4.02% Number of units outstanding at end of year (thousands) ............. 63,430 55,477 70,545 41,570 36,134
-34- THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF INVESTMENTS December 31, 2001 Principal Market Amount Value SHORT-TERM INVESTMENTS (100%) Commercial Paper (100%) American Express Credit Corp., 1.83% due January 11, 2002 $ 4,200,000 $ 4,197,673 Asset Securitization Corp., 1.98% due January 7, 2002 4,400,000 4,398,456 Asset Securitization Corp., 1.91% due January 22, 2002 4,000,000 3,995,560 Becton Dickinson & Co., 1.80% due January 31, 2002 4,000,000 3,993,764 Becton Dickinson & Co., 1.93% due February 7, 2002 5,000,000 4,990,460 Blueridge Asset Funding Corp., 2.03% due January 3, 2002 1,846,000 1,845,723 Blueridge Asset Funding Corp., 1.93% due January 14, 2002 3,000,000 2,997,879 Blueridge Asset Funding Corp., 1.93% due January 17, 2002 3,000,000 2,997,423 Coca-Cola Co., 1.78% due January 14, 2002 3,015,000 3,012,868 DE Funding Corp., 1.88% due January 15, 2002 8,000,000 7,993,928 Dorada Finance, Inc., 1.98% due January 9, 2002 8,000,000 7,996,384 Gannett Co. Inc., 1.95% due January 14, 2002 4,100,000 4,097,101 Gannett Co. Inc., 1.78% due January 24, 2002 4,000,000 3,995,160 GE Capital Corp., 2.00% due February 5, 2002 1,500,000 1,497,287 GE Capital Corp., 1.84% due February 7, 2002 5,000,000 4,990,460 General Dynamics Corp., 2.08% due January 23, 2002 8,000,000 7,990,720 Goldman Sachs Group, Inc., 1.88% due January 7, 2002 8,000,000 7,997,192 Harvard University, 1.76% due January 11, 2002 7,200,000 7,196,011 Household Finance Corp., 1.83% due January 2, 2002 3,870,000 3,869,613 J.P. Morgan Chase & Co., 1.78% due February 14, 2002 5,000,000 4,988,715 Principal Market Amount Value Commercial Paper (continued) May Dept Stores Co., 1.90% due January 3, 2002 $ 3,600,000 $ 3,599,460 May Dept Stores Co., 1.81% due January 18, 2002 1,942,000 1,940,233 McDonalds Corp., 4.81% due March 7, 2002 5,000,000 5,024,115 Merck & Co. Inc., 5.10% due February 22, 2002 3,000,000 3,012,852 Morgan Stanley Dean Witter & Co., 2.06% due January 18, 2002 8,000,000 7,992,720 National Rural Utilities Coop. Finance Corp., 1.88% due February 7, 2002 7,700,000 7,685,308 New Castle 2000-A, 2.01% due January 14, 2002 8,000,000 7,994,344 Old Slip Funding Corp., 2.09% due February 20, 2002 7,000,000 6,982,115 Preferred Resources Funding Corp., 2.13% due January 7, 2002 5,000,000 4,998,245 Preferred Resources Funding Corp., 2.06% due January 9, 2002 3,800,000 3,798,282 Southern Co., 1.88% due January 10, 2002 4,000,000 3,997,988 Texaco, Inc., 1.91% due January 2, 2002 8,000,000 7,999,200 Verizon Global Funding Corp., 1.90% due October 15, 2002 5,000,000 4,997,305 Windmill Funding Corp., 2.06% due January 3, 2002 6,100,000 6,099,085 Windmill Funding Corp., 1.92% due February 6, 2002 2,600,000 2,595,167 ------------- TOTAL INVESTMENTS (100%) (Cost $173,725,395) $ 173,758,796 ============= See Notes to Financial Statements -35- INDEPENDENT AUDITORS' REPORT The Board of Managers and the Owners of Variable Annuity Contracts of The Travelers Money Market Account for Variable Annuities: We have audited the accompanying statement of assets and liabilities of The Travelers Money Market Account for Variable Annuities, including the statement of investments, as of December 31, 2001, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended and the selected per unit data and ratios for each of the years in the three-year period then ended. These financial statements and selected per unit data and ratios are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and selected per unit data and ratios based on our audits. The accompanying selected per unit data and ratios for each of the years in the two year period ended December 31, 1998 were audited by other auditors whose report thereon dated February 15, 1999, expressed an unqualified opinion on those selected per unit data and ratios. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 and selected per unit data and ratios. Our procedures included confirmation of securities owned as of December 31, 2001, by correspondence with custodians and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and selected per unit data and ratios referred to above present fairly, in all material respects, the financial position of The Travelers Money Market Account for Variable Annuities as of December 31, 2001, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended and the selected per unit data and ratios for each of the years in the three-year period then ended, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Hartford, Connecticut February 4, 2002 -36- Board of Managers and Officers Name and Position With the Fund Principal Occupation During Last Five Years * Heath B. McLendon Managing Director (1993-present), Salomon Chairman and Trustee Smith Barney, Inc. ("Salomon Smith 125 Broad Street Barney"); President and Director (1994- New York, NY present), Smith Barney Fund Management Age 68 LLC (f/k/a/ SSB Citi Fund Management LLC.; Director and President (1996- present), Travelers Investment Adviser, Inc.; Chairman and Director of fifty-nine investment companies associated with Salomon Smith Barney; Trustee (1999) of seven Trusts of Citifunds' family of Trusts; Trustee, Drew University; Advisory Director, M&T Bank; Chairman, Board of Managers (1995-present), six Variable Annuity Separate Accounts of The Travelers Insurance Company+; Chairman, Board of Trustees, five Mutual Funds sponsored by The Travelers Insurance Company++; prior to July 1993, Senior Executive Vice President of Shearson Lehman Brothers Inc. Knight Edwards Of Counsel (1988-present), Partner (1956- Trustee 1988), Edwards & Angell, Attorneys; 154 Arlington Avenue Member, Advisory Board (1973-1994), Providence, RI thirty-one mutual funds sponsored by Age 78 Keystone Group, Inc.; Member, Board of Managers (1969-present), six Variable Annuity Separate Accounts of The Travelers Insurance Company+; Trustee (1990-present), five Mutual Funds sponsored by The Travelers Insurance Company.++ Robert E. McGill, III Retired manufacturing executive. Trustee Director (1983-1995), Executive Vice 295 Hancock Street President (1989-1994) and Senior Vice Williamstown, MA President, Finance and Administration Age 70 (1983-1989), The Dexter Corporation (manufacturer of specialty chemicals and materials); Vice Chairman (1990-1992), Director (1983-1995), Life Technologies, Inc. (life science/biotechnology products); Director, (1994-1999), The Connecticut Surety Corporation (insurance); Director (1995-2000), Chemfab Corporation (specialty materials manufacturer); Director (1999-2001), Ravenwood Winery, Inc.; Director (1999- present), Lydall Inc. (manufacturer of fiber materials); Member, Board of Managers (1974-present), six Variable Annuity Separate Accounts of The Travelers Insurance Company+; Trustee (1990-present), five Mutual Funds sponsored by The Travelers Insurance Company.++ Lewis Mandell Professor of Finance and Managerial Trustee Economics, University at Buffalo since 160 Jacobs Hall 1998. Dean, School of Management (1998- Buffalo, NY 2001), University at Buffalo; Dean, Age 59 College of Business Administration (1995- 1998), Marquette University; Professor of Finance (1980-1995) and Associate Dean (1993-1995), School of Business Administration, and Director, Center for Research and Development in Financial Services (1980-1995), University of Connecticut; Director (2000-present), Delaware North Corp. (hospitality business); Member, Board of Managers (1990-present), six Variable Annuity Separate Accounts of The Travelers Insurance Company+; Trustee (1990- present), five Mutual Funds sponsored by The Travelers Insurance Company.++ Frances M. Hawk, Private Investor, (1997-present); CFA, CFP Portfolio Manager (1992-1997, HLM Trustee Management Company, Inc. (investment 108 Oxford Hill Lane management); Assistant Treasurer, Downingtown, PA Pensions and Benefits. Management (1989- Age 54 1992), United Technologies Corporation (broad-based designer and manufacturer of high technology products); Member, Board of Managers (1991-present), six Variable Annuity Separate Accounts of The Travelers Insurance Company+; Trustee (1991-present), five Mutual Funds sponsored by The Travelers Insurance Company.++ -37- Ernest J. Wright Vice President and Secretary (1996- Secretary to the Board present), Assistant Secretary (1994- One Tower Square 1996), Counsel (1987-present), The Hartford, Connecticut Travelers Insurance Company; Secretary Age 61 (1994-present), six Variable Annuity Separate Accounts of The Travelers Insurance Company+; Secretary (1994- present), five Mutual Funds sponsored by The Travelers Insurance Company.++ Kathleen A. McGah Deputy General Counsel (1999 - Assistant Secretary to present); Assistant Secretary (1995- The Board present), The Travelers Insurance One Tower Square Company; Assistant Secretary (1995- Hartford, Connecticut present), six Variable Annuity Separate Age 51 Accounts of The Travelers Insurance Company+; Assistant Secretary, (1995- present), five Mutual Funds sponsored by The Travelers Insurance Company.++ Prior to January 1995, Counsel, ITT Hartford Life Insurance Company. David A. Golino Vice President and Controller (1999- Principal Accounting present), Second Vice President (1996- Officer to The Board 1999), The Travelers Insurance Company; One Tower Square Principal Accounting Officer (1998- Hartford, Connecticut present), six Variable Annuity Separate Age 40 Accounts of The Travelers Insurance Company.+ Prior to May 1996, Senior Manager, Deloitte & Touche LLP (1985- 1996.) + The six Variable Annuity Separate Accounts are: The Travelers Growth and Income Stock Account for Variable Annuities, The Travelers Quality Bond Account for Variable Annuities, The Travelers Money Market Account for Variable Annuities, The Travelers Timed Growth and Income Stock Account for Variable Annuities, The Travelers Timed Short-Term Bond Account for Variable Annuities and The Travelers Timed Aggressive Stock Account for Variable Annuities. ++ The five Mutual Funds are: Capital Appreciation Fund, Money Market Portfolio, High Yield Bond Trust, Managed Assets Trust and The Travelers Series Trust. * Mr. McLendon is an "interested person" within the meaning of the 1940 Act by virtue of his position as Managing Director of Salomon Smith Barney, Inc., an indirect wholly owned subsidiary of Citigroup Inc., and his ownership of shares, and options to purchase shares, of Citigroup Inc., the indirect parent of The Travelers Insurance Company. -38- Investment Adviser --------------------- Travelers Asset Management International Company, LLC Hartford, Connecticut The Travelers Growth and Income Stock Account for Variable Annuities The Travelers Quality Bond Account for Variable Annuities The Travelers Money Market Account for Variable Annuities Investment Sub-Adviser ----------------------- The Travelers Investment Management Company Stamford, Connecticut The Travelers Growth and Income Stock Account for Variable Annuities Independent Accountants ----------------------- KPMG LLP Hartford, Connecticut Custodian --------- The Chase Manhattan Bank, N.A. New York, New York This report is prepared for the general information of contract owners and is not an offer of units of The Travelers Growth and Income Stock Account for Variable Annuities, The Travelers Quality Bond Account for Variable Annuities or The Travelers Money Market Account for Variable Annuities. It should not be used in connection with any offer except in conjunction with the Universal Annuity Prospectus which contains all pertinent information, including the applicable sales commissions. VG-137 (Annual) (12-01) Printed in U.S.A.