-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EZuPoR0lntxdMETqPMXNWIzdCTAZ3IsSEQy+eYKfi8FAcrK78o59AFRmMlhKZ1Qj XVVgyR9cSN1MgBCxP1R/JA== 0000930413-02-002517.txt : 20020813 0000930413-02-002517.hdr.sgml : 20020813 20020813172647 ACCESSION NUMBER: 0000930413-02-002517 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES CENTRAL INDEX KEY: 0000099440 IRS NUMBER: 060566090 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-02571 FILM NUMBER: 02730861 BUSINESS ADDRESS: STREET 1: ONE TOWER SQ STREET 2: C/O TRAVELERS INSURANCE CO CITY: HARTFORD STATE: CT ZIP: 06183-2020 BUSINESS PHONE: 8602770111 MAIL ADDRESS: STREET 1: ONE TOWER SQUARE STREET 2: ATTN FINANCIAL SERVICES LEGAL DIVISION CITY: HARTFORD STATE: CT ZIP: 06183-2020 FORMER COMPANY: FORMER CONFORMED NAME: TRAVELERS FUND A-1 FOR VARIABLE ANNUITIES DATE OF NAME CHANGE: 19851103 N-30D 1 c25267_n30d.txt UNIVERSAL ANNUITY SEMI-ANNUAL REPORTS JUNE 30, 2002 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 [TRAVELERS Logo] The Travelers Insurance Company The Travelers Life and Annuity Company One Tower Square Hartford, CT 06183 [TAMIC 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. [TIMCO 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.....................16 THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES................... 26 BOARD OF MANAGERS AND OFFICERS................................................34 [TRAVELERS Logo] THE TRAVELERS VARIABLE PRODUCT SEPARATE ACCOUNTS INVESTMENT ADVISORY COMMENTARY AS OF JUNE 30, 2002 MARKET AND ECONOMIC OVERVIEW Cyclical economic conditions in the US are clearly improving following what has turned out to be a relatively mild recession in 2001. The excesses and miscalculations that led to many of the economy's problems over the past two years appear, to a large extent, to have been corrected. Business inventories have been pared back sharply and now appear to be rebounding. The inventory rebound appears to have added strongly to first quarter growth. But lingering effects of the global downturn of 2000-2001 - including continued sporadic credit problems - act as headwinds against an economic recovery that is expected to grow stronger as 2002 progresses. Business investment, both in inventories and fixed investment, has been the economy's weakest sector over the past two years. Both categories of investment appear set to rebound in 2002. A slowing of the inventory correction followed by outright inventory restocking is expected to give the economy a strong boost over the next several quarters, in effect buying time for the economy to continue to correct the remaining excesses in the information technology and communications sectors. Strengthening business fixed investment, particularly in non-communications technology industries, is expected to boost the economy in the second half of the year. The consumer sector income/spending imbalance, which manifests itself in a low savings rate, looks to keep consumer spending from leading the economy quickly out of recession despite strong incentive driven auto sales in the last part of 2001. Although consumer income should pick up as the economy begins to recover, spending growth may well lag income growth as consumers rebuild their savings. The inflation outlook remains positive. Longer-term corporate trends toward reducing costs, increasing efficiencies, and enhancing productivity remain firmly in place. Productivity has continued to rise sharply, despite the recession, because of these restructuring efforts. In an expanding economy, these cost-reducing efforts should allow firms to increase profitability even as pricing power is absent. Large cap stocks did not perform as well as their small cap counterparts while growth stocks underperformed value stocks during the first quarter of 2002. The Standard & Poors 500 Stock Index ("S&P 500"), a value weighted equity index comprised primarily of large company stocks, advanced 0.3% in the first quarter while the Russell 2000 index of small company stocks, had a return of 4.0%. The Russell 1000 Growth index declined 2.6% and trailed the increase in the Russell 1000 Value index return of 4.1%. The economic rebound continued in the second quarter and growth prospects, for the remainder of 2002, appear solid. Although the second quarter of 2002 growth pace appears to have been less than half the robust 6.1% pace seen in first quarter of 2002, the economy remains firmly entrenched in economic recovery. The 2001 recession was mild by historic measures, but six quarters of sub-par growth - - from the middle of 2000 through the end of 2001 - still left the economy operating well below its potential output level. Softer auto sales, following the end of a sustained period of attractive financing incentives, and a rise in consumer savings were major factors leading to slowing consumer spending growth in the second quarter. But consumer fundamentals look to be improving going forward. After-tax income growth appears to be holding in the 5-6% range and job growth has stabilized and looks to head higher in the second half of 2002. Consumer loan delinquency rates have been falling in recent months and ratios of mortgage debt to home values have held relatively steady. We feel that the inventory adjustment process should continue to add to growth over the remainder of the year. Although the pace of inventory decline has slowed markedly, inventories are nevertheless still declining. Improving final sales make it difficult for actual inventory restocking to begin quickly, but continued increases in industrial production and stronger imports should allow inventories to begin growing in the second half of the year. The expected inventory build-up buys time for the economy to continue to correct the remaining excesses in the information technology and communications sectors. -1- We believe that the inflation outlook remains positive despite a run-up in energy prices that caused the CPI to spike upward in the second quarter. Last year's global recession resulted in low levels of capacity utilization that will likely take a long period of above-trend economic growth to absorb. Competitive pressures are also likely to keep sharp downward pressure on prices. There is a risk that added monetary and fiscal stimulus, put in place following the 9/11 attack and the resulting shock to the economy, will have inflationary consequences as the economy recovers. We discount that risk, particularly the risk that the Fed will leave highly stimulative monetary policy in place long enough to ignite inflation pressures in 2002 and beyond. After underperforming in May, small cap stocks again resumed their leadership ahead of their large cap counterparts in June while growth stocks underperformed value stocks. During the second quarter, the S&P 500 index declined 13.4% while the Russell 2000 index fell 8.4%. The Russell 1000 Growth index declined 18.7% and trailed the Russell 1000 Value index loss of 8.5%. 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 THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON THE COVER. THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED ON MARKET OR OTHER CONDITIONS. -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 Investment Management Company (TIMCO). TIMCO manages Account GIS 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 six months ending June 30, 2002, Account GIS declined 11.2%, before fees and expenses, which outperformed the S&P 500 index decline of 13.2%. Net of fees and expenses, Account GIS's loss of 12.0% for the first half of 2002 was ahead of the median return for variable annuity stock accounts in the Lipper Large Cap Core category. On a trailing twelve-month basis as of June 30, 2002, Account GIS's decline of 18.9%, net of fees and expenses, outperformed the Lipper Large Cap Core median loss of 21.2%. A discussion of portfolio performance in each of the first two quarters of 2002 is presented next. Our stock selection factors produced good results in the first half of 2002. During the second quarter, the earnings and price momentum components generated significant excess returns. As the first quarter earnings season got underway, our emphasis on recent estimate revisions paid off handsomely. Stocks, whose earnings estimates had been revised down, did indeed disappoint in their quarterly earnings report. The market focus was squarely on the quality of earnings and our bias towards strong earnings fundamentals helped relative performance. Later, in an overall bearish environment created by geopolitical risks and financial accounting concerns, the lower price to earnings multiple of our portfolio relative to the benchmark helped us mitigate negative market returns. Our performance attribution analysis for the first quarter indicates that stock selection was favorable in the Health Care and Utilities sectors, mixed in the Consumer Discretionary sector and adverse in the Technology, Producer Durables and Financial Services. In the Health Care sector, we gained from our underweight position in Bristol Myers Squibb which reported disappointing trial results for its cardiovascular drug Vanlev. The trial results actually registered more negative side effects with no compelling efficacy and a potential $2 billion revenue stream over the next few years is now at risk. Our overweight positions in Tenet Healthcare and Bausch and Lomb helped performance as earnings estimates for those stocks continued to rise. In the Utilities sector, we benefited from avoiding stocks such as Qwest, Nextel, Sprint PCS and Calpine which all declined substantially early in the first quarter. Qwest has steadily lost market share in the intensely competitive long distance business, Nextel has struggled with its heavy debt burden in an increasingly difficult wireless industry and Calpine is faced with growing liquidity concerns in the aftermath of the Enron debacle. Late in the fourth quarter, we lost some ground in the sector as recent losers such as AES and Williams Company rose by over 50% from low, oversold price levels. In the Consumer Discretionary sector, our position in Industrial and Consumer Cyclical stocks performed well as hopes of an economic recovery grew. Stocks such as Maytag, Office Depot, Alberto Culver and International Flavors and Fragrances helped boost portfolio performance. Late in the first quarter, retail stocks rose sharply on renewed hopes of a market rally after a lull in February. Unfortunately, the lift in stock prices was more pronounced for companies with poor recent earnings performance. Our underweight positions in stocks with negative earnings surprises such as Gap Inc and CVS Corp hurt performance as they advanced by over 25%. -3- In the Technology sector, our small positions in Sanmina and Sun Microsystems underperformed on profit taking after a strong fourth quarter. In the Producer Durables sector, we held a small overweight position in Tyco International whose accounting practices have recently come under attack. Tyco fell by nearly 50% in January as the company defended its balance sheet strength and liquidity position. In the Financial Services sector, Citigroup again outperformed the sector and our inability to own the stock hurt performance. During the second quarter of 2002, stock selection was favorable in the Health Care, Consumer Discretionary, Financial Services and Utilities sectors. In the Health Care sector, we gained from our underweight position in several drug stocks such as Bristol Myers Squibb, Schering Plough and Eli Lilly. Concerns over an aging product line and lack of depth in the product pipeline took a double-digit toll on these stocks. Our earnings emphasis had identified overweight positions in HMO stocks such as Wellpoint, United Health, Humana and Trigon Healthcare which all produced strong gains. In the Consumer Discretionary sector, retailers such as Lowes, Williams-Sonoma, Limited Brands and Newell Rubbermaid continued their strong performance on higher earnings estimates driven by robust consumer spending. Our overweight position in Pactiv, a global supplier of specialty packaging and consumer products, helped performance as investors rewarded the company's low P/E multiple, defensive product mix and attractive earnings growth rate. We benefited in the Financial Services sector from not owning Citigroup which fell on general industry concerns over Argentina and Wall Street research practices. We were overweight in a handful of insurance companies such as Metlife, Washington Mutual and Cigna and a select group of financial services providers such as H R Block, PMI Group, Countrywide Credit and National City which produced the lone relief in an otherwise gloomy sector with periods of positive returns. We successfully avoided St. Paul Companies which reported a major earnings disappointment. In the Utilities sector, companies with energy trading operations such as El Paso, Reliant Energy and Dynegy continued to struggle in the wake of the credibility crisis triggered by the Enron collapse. We benefited from avoiding these companies along with companies with revenue shortfalls such as Worldcomm and Qwest Communications. At the nine-month mark following what appeared to be a market trough in September 2001, the stock market is re-testing those levels on renewed concerns of accounting fraud and terrorist threats. The anticipated economic recovery, while muted in nature, nonetheless appears to be underway. However, the economic news at least for now appears to be overwhelmed by investor skepticism about the integrity of corporate America. 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 THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON THE COVER. THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED ON MARKET OR OTHER CONDITIONS. [TAMIC Logo] [TIMCO Logo] -4- THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF ASSETS AND LIABILITIES (Unaudited) JUNE 30, 2002 ASSETS: Investment securities, at market value (cost $622,278,424) ..................................... $559,928,232 Receivables: Dividends ............................................... 639,065 Purchase payments and transfers from other Travelers accounts .................................... 156,559 Other assets .............................................. 30,613 ----------- Total Assets .......................................... 560,754,469 ----------- LIABILITIES: Cash overdraft ............................................ 3,658,511 Payables: Contract surrenders and transfers to other Travelers accounts .................................... 1,240,770 Investment management and advisory fees ................. 87,775 Variation on futures margin ............................. 23,275 Insurance charges ....................................... 161,835 Accrued liabilities ....................................... 1,259 ----------- Total Liabilities ..................................... 5,173,425 ----------- NET ASSETS: $555,581,044 ============ See Notes to Financial Statements -5- THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF OPERATIONS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, 2002
INVESTMENT INCOME: Dividends ................................................................. $ 4,092,443 Interest .................................................................. 166,030 ------------ Total income (loss)..................................................... $ 4,258,473 EXPENSES: Investment management and advisory fees 1,960,108 Insurance charges ......................................................... 3,673,485 ------------ Total expenses .......................................................... 5,633,593 ------------ Net investment income (loss) .......................................... (1,375,120) ------------ REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED GAIN (LOSS) ON INVESTMENT SECURITIES: Realized gain (loss) from investment security transactions: Proceeds from investment securities sold ................................ 274,076,303 Cost of investment securities sold ...................................... 279,101,709 ------------ Net realized gain (loss) .............................................. (5,025,406) Change in unrealized gain (loss) on investment securities: Unrealized gain (loss) at June 30, 2002 ................................. (62,350,192) Unrealized gain (loss) at December 31, 2001 ............................. 8,265,805 ------------ Net change in unrealized gain (loss) for the period ................... (70,615,997) ------------ Net realized gain (loss) and change in unrealized gain (loss) ......... (75,641,403) ------------ Net increase (decrease) in net assets resulting from operations ........... $(77,016,523) ============
See Notes to Financial Statements -6- THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, 2002 2001 ---- ---- (Unaudited) OPERATIONS: Net investment income (loss) .......................................................... $ (1,375,120) $ (2,987,580) Net realized gain (loss) from investment security transactions ........................ (5,025,406) (22,557,605) Net change in unrealized gain (loss) on investment securities ......................... (70,615,997) (107,684,036) ----------- ------------ Net increase (decrease) in net assets resulting from operations ..................... (77,016,523) (133,229,221) ----------- ------------ UNIT TRANSACTIONS: Participant purchase payments (applicable to 916,611 and 1,952,537 units, respectively) ........................... 15,288,613 35,651,317 Participant transfers from other Travelers accounts (applicable to 272,782 and 979,445 units, respectively) ............................. 4,580,006 17,842,644 Administrative charges (applicable to 17,703 and 32,349 units, respectively) ............................... (269,212) (585,466) Contract surrenders (applicable to 1,734,153 and 3,126,520 units, respectively) ......................... (29,059,331) (57,723,353) Participant transfers to other Travelers accounts (applicable to 1,118,442 and 2,986,184 units, respectively) ......................... (18,490,552) (53,433,740) Other payments to participants (applicable to 76,283 and 190,128 units, respectively) .............................. (1,302,138) (3,564,069) ---------- ---------- Net increase (decrease) in net assets resulting from unit transactions .............. (29,252,614) (61,812,667) ----------- ----------- Net increase (decrease) in net assets ............................................. (106,269,137) (195,041,888) NET ASSETS: Beginning of period ................................................................... 661,850,181 856,892,069 ----------- ----------- End of period ......................................................................... $ 555,581,044 $ 661,850,181 ============= =============
See Notes to Financial Statements -7- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 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 (UNAUDITED) - 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 period. Actual results could differ from those estimates. 2. INVESTMENTS The aggregate costs of purchases and proceeds from sales of investments (other than short-term securities), were $217,161,725 and $251,864,195, respectively; the costs of purchases and proceeds from sales of direct and indirect U.S. government securities were $3,377,632 and $3,053,699, respectively, for the six months ended June 30, 2002. Realized gains and losses from investment security transactions are reported on an identified cost basis. At June 30, 2002, Account GIS held 49 open S&P 500 Stock Index futures contracts expiring in September, 2002. The underlying face value, or notional value, of these contracts at June 30, 2002 amounted to $12,128,725. In connection with these contracts, short-term investments with a par value of $1,400,000 had been pledged as margin deposits. Net realized losses resulting from futures contracts were $1,342,467 and $5,571,408 for the six months ended June 30, 2002 and the year ended December 31, 2001, 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 June 30, 2002 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 $7,555 and $14,254 for the six months ended June 30, 2002 and the year ended December 31, 2001, 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 $209,021 and $349,711 for the six months ended June 30, 2002 and the year ended December 31, 2001, respectively. -9- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED 4. NET ASSETS HELD ON BEHALF OF AN AFFILIATE Approximately $13,551,000 and $15,668,000 of the net assets of Account GIS were held on behalf of an affiliate of The Travelers as of June 30, 2002 and December 31, 2001, respectively. Transactions with this affiliate during the six months ended June 30, 2002 and the year ended December 31, 2001, were comprised of participant purchase payments of approximately $28,000 and $123,000 and contract surrenders of approximately $306,000 and $374,000, respectively. 5. NET CONTRACT OWNERS' EQUITY JUNE 30, 2002 ----------------------------------- UNIT NET UNITS VALUE ASSETS --------- -------- ------------ Accumulation phase of contracts issued prior to May 16, 1983 .......... 9,647,338 $ 15.916 $153,529,173 Annuity phase of contracts issued prior to May 16, 1983 .......... 243,173 15.916 3,869,893 Accumulation phase of contracts issued on or after May 16, 1983 ....... 26,167,150 15.176 397,065,240 Annuity phase of contracts issued on or after May 16, 1983 ....... 73,595 15.176 1,116,738 ------------ Net Contract Owners' Equity ..................................... $555,581,044 ============ -10- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED 6. SUPPLEMENTARY INFORMATION (Selected data for a unit outstanding throughout each period.)
Contracts issued prior to May 16, 1983 SIX MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31, JUNE 30, (DERIVED FROM AUDITED FINANCIAL INFORMATION) -------- ---------------------------------------------------- 2002 2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- -------- SELECTED PER UNIT DATA: Total investment income ....................................... $ .119 $ .266 $ .242 $ .267 $ .243 $ .233 Operating expenses ............................................ .140 .311 .376 .347 .272 .201 -------- -------- -------- -------- -------- -------- Net investment income (loss) .................................. (.021) (.045) (.134) (.080) (.029) .032 Unit value at beginning of period ............................. 18.064 21.418 24.427 20.017 15.510 11.763 Net realized and change in unrealized gains (losses) .......... (2.127) (3.309) (2.875) 4.490 4.536 3.715 -------- -------- -------- -------- -------- -------- Unit value at end of period ................................... $ 15.916 $ 18.064 $ 21.418 $ 24.427 $ 20.017 $ 15.510 ======== ======== ======== ======== ======== ======== SIGNIFICANT RATIOS AND ADDITIONAL DATA: Net increase (decrease) in unit value ......................... $ (2.15) $ (3.35) $ (3.01) $ 4.41 $ 4.51 $ 3.75 Ratio of operating expenses to average net assets ............. 1.61%* 1.63% 1.60% 1.60% 1.56% 1.45% Ratio of net investment income (loss) to average net assets ... (.24)%* (.24)% (.57)% (.37)% (.16)% .24% Number of units outstanding at end of period (thousands) ...... 9,890 10,329 11,413 12,646 13,894 15,194 Portfolio turnover rate ....................................... 36% 32% 52% 47% 50% 64% Contracts issued on or after May 16, 1983 SIX MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31, JUNE 30, (DERIVED FROM AUDITED FINANCIAL INFORMATION) -------- ---------------------------------------------------- 2002 2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- -------- SELECTED PER UNIT DATA: Total investment income ....................................... $ .113 $ .254 $ .232 $ .256 $ .234 $ .228 Operating expenses ............................................ .153 .343 .416 .385 .303 .228 -------- -------- -------- -------- -------- -------- Net investment income (loss) .................................. (.040) (.089) (.184) (.129) (.069) -- Unit value at beginning of period ............................. 17.245 20.498 23.436 19.253 14.955 11.371 Net realized and change in unrealized gains (losses) .......... (2.029) (3.164) (2.754) 4.312 4.367 3.584 -------- -------- -------- -------- -------- -------- Unit value at end of period ................................... $ 15.176 $ 17.245 $ 20.498 $ 23.436 $ 19.253 $ 14.955 ======== ======== ======== ======== ======== ======== SIGNIFICANT RATIOS AND ADDITIONAL DATA: Net increase (decrease) in unit value ......................... $ (2.07) $ (3.25) $ (2.94) $ 4.18 $ 4.30 $ 3.58 Ratio of operating expenses to average net assets ............. 1.86%* 1.88% 1.85% 1.85% 1.81% 1.70% Ratio of net investment income to average net assets .......... (.48)%* (.49)% (.82)% (.62)% (.41)% -- Number of units outstanding at end of period (thousands) ...... 26,241 27,559 29,879 32,648 32,051 29,545 Portfolio turnover rate ....................................... 36% 32% 52% 47% 50% 64%
* Annualized -11- THE TRAVELERS GROWTH AND INCOME STOCK ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF INVESTMENTS (UNAUDITED) JUNE 30, 2002 NO. OF MARKET SHARES VALUE ------------ ------------ COMMON STOCK (96.6%) AEROSPACE (0.9%) Boeing Co. 71,037 $ 3,196,665 General Dynamics 17,171 1,826,136 ------------ 5,022,801 ------------ AIRLINES (0.2%) Southwest Airlines 70,683 1,142,237 ------------ AUTOMOTIVE (1.4%) Eaton Corp. 26,315 1,914,416 Ford Motor Co. 62,089 993,424 General Motors Corp. 64,049 3,423,419 Johnson Controls, Inc. 18,490 1,508,969 ------------ 7,840,228 ------------ BANKING (8.5%) Bank of America Corp. 114,829 8,079,368 Bank of New York 43,075 1,453,781 Bank One Corp. 100,459 3,865,662 Fifth Third BanCorp 18,433 1,228,467 FleetBoston Financial Corp. 75,448 2,440,743 Golden West Financial Corp. 20,142 1,385,367 J.P. Morgan Chase & Co. 100,416 3,406,111 MBNA Corp. 99,346 3,285,372 National City Corp. 97,874 3,254,311 Regions Financial Corp. 14,765 518,990 State Street Corp. 32,579 1,456,281 SunTrust Banks 17,730 1,200,676 U.S. Bancorp 74,617 1,742,307 Union Planters 73,894 2,391,949 Wachovia Corp. 60,863 2,323,749 Washington Mutual, Inc. 87,036 3,229,906 Wells Fargo & Co. 126,602 6,337,696 ------------ 47,600,736 ------------ BEVERAGE (3.6%) Adolph Coors Co. 22,779 1,419,132 Anheuser-Busch Cos 89,268 4,463,400 Coca-Cola Co. 148,016 8,288,896 Pepsi Bottling Group 66,595 2,051,126 PepsiCo, Inc. 83,003 4,000,745 ------------ 20,223,299 ------------ BROKERAGE (1.6%) Charles Schwab Corp. 63,778 714,314 Goldman Sachs Group, Inc. 21,884 1,605,191 Lehman Brothers Holding, Inc. 32,058 2,004,266 Merrill Lynch & Co. 47,818 1,936,629 Morgan Stanley Dean Witter & Co. 64,864 2,794,341 ------------ 9,054,741 ------------ BUILDING MATERIALS (0.5%) Centex Corp. 30,708 1,774,615 Masco Corp. 42,256 1,145,560 ------------ 2,920,175 ------------ NO. OF MARKET SHARES VALUE ------------ ------------ CAPITAL GOODS (0.6%) Applied Materials, Inc. (A) 103,862 $ 1,982,726 Deere & Co. 21,438 1,026,880 Nucor Corp. 7,618 495,475 ------------ 3,505,081 ------------ CHEMICALS (1.4%) Air Products & Chemical, Inc. 27,164 1,370,967 Dow Chemical Co. 48,782 1,677,125 E.I. Dupont de Nemours & Co. 54,907 2,437,871 Eastman Chemical Co. 12,692 595,255 Engelhard Corp. 16,898 478,551 Praxair, Inc. 8,967 510,850 Rohm & Haas Co. 11,774 476,729 ------------ 7,547,348 ------------ CONGLOMERATES (4.6%) General Electric Co. 589,755 17,132,383 Honeywell International, Inc. 64,723 2,280,191 3M Co. 23,073 2,837,979 Tyco International Ltd. 126,498 1,708,988 United Technologies Corp. 27,964 1,898,756 ------------ 25,858,297 ------------ CONSTRUCTION MACHINERY (0.4%) Ingersoll-Rand Co. 50,454 2,303,730 ------------ CONSUMER (3.6%) Alberto-Culver 34,169 1,633,278 Avery Dennison Corp. 15,354 963,464 Ball Corp. 12,946 537,000 Gillette Co. 23,076 781,584 Kimberly Clark Corp. 22,339 1,385,018 Leggett & Platt, Inc. 72,394 1,694,020 Maytag Corp. 39,514 1,685,272 Newell Rubbermaid Inc. 47,138 1,652,658 Procter & Gamble Co. 88,516 7,904,479 Stanley Works 11,538 473,173 Unilever N.V 25,501 1,652,465 ------------ 20,362,411 ------------ DEFENSE (1.1%) Lockheed Martin Corp. 46,671 3,243,635 Northrop Grumman Corp. 10,175 1,271,875 Raytheon Co. 36,704 1,495,688 ------------ 6,011,198 ------------ ENTERTAINMENT (1.5%) Harrahs Entertainment, Inc. (A) 7,002 310,539 Viacom, Inc. (A) 104,301 4,627,835 Walt Disney Co. 182,317 3,445,791 ------------ 8,384,165 ------------ FINANCE (2.5%) American Express Co. 110,929 4,028,941 Countrywide Credit Industries, Inc. 50,059 2,415,347 Household Finance Corp. 62,228 3,092,732 Investors Financial Services 13,732 460,640 MetLife Capital Trust 47,573 1,370,102 Moody's Corp. 50,446 2,509,689 ------------ 13,877,451 ------------ -12- STATEMENT OF INVESTMENTS (UNAUDITED) - CONTINUED NO. OF MARKET SHARES VALUE ------------ ------------ FOOD (0.9%) Hershey Foods Corp. 24,050 $ 1,511,783 International Flavors/Fragrances 5,190 168,623 Kellogg Co. 42,278 1,516,089 McDonald's Corp. 8,614 245,068 Smucker (J. M.) Co. 1,976 67,441 Tyson Foods, Inc. 78,222 1,213,223 ------------ 4,722,227 ------------ GAMING (0.1%) MGM Mirage, Inc. (A) 19,776 667,440 ------------ HEALTHCARE (3.8%) Abbott Laboratories 94,366 3,552,880 Bausch & Lomb, Inc. 34,116 1,154,827 Cardinal Health, Inc. 39,829 2,445,899 Caremark Rx, Inc. (A) 57,145 942,893 Guidant Corp. (A) 15,967 482,682 HCA - The Healthcare Company 55,837 2,652,258 Immunex Corp. (A) 55,874 1,247,946 Tenet Healthcare Corp. (A) 34,813 2,490,870 UnitedHealth Group, Inc. 36,659 3,356,131 Varian Medical Systems (A) 26,917 1,091,484 Wellpoint Health Networks (A) 21,515 1,674,082 ------------ 21,091,952 ------------ INDEPENDENT ENERGY (0.6%) Apache Corp. 10,234 588,250 Burlington Resources 25,121 954,598 Entergy Corp. 40,120 1,702,693 ------------ 3,245,541 ------------ INSURANCE (3.8%) Allstate Corp. 69,205 2,559,201 American International Group 125,388 8,555,223 CIGNA Corp. 29,943 2,917,047 Lincoln National Corp. 20,374 855,708 MBIA Inc. 15,048 850,663 MGIC Investment Corp. 19,732 1,337,830 PMI Group Inc. 42,236 1,613,415 Progressive Corp. 16,418 949,781 Torchmark Corp. 47,716 1,822,751 ------------ 21,461,619 ------------ INTEGRATED ENERGY (6.1%) Anadarko Petroleum 17,307 853,235 Chevron Texaco Corp. 61,794 5,468,769 Conoco, Inc. 33,200 922,960 Exxon Mobil Corp. 402,067 16,452,582 Kerr-Mcgee Corp. 6,306 337,686 Marathon Oil Corp. 17,044 462,233 Occidental Petroleum 22,550 676,275 Phillips Petroleum Co. 21,548 1,268,746 Royal Dutch Petroleum Co. 125,639 6,944,068 Unocal Corp. 24,148 892,027 ------------ 34,278,581 ------------ LODGING (0.1%) Hilton Hotels Corp 26,649 370,421 Starwood Hotels & Resorts 13,132 431,911 ------------ 802,332 ------------ STATEMENT OF INVESTMENTS (UNAUDITED) - CONTINUED NO. OF MARKET SHARES VALUE ------------ ------------ MEDIA (1.3%) AOL Time Warner Inc. (A) 253,645 $ 3,731,118 Comcast Corp. (A) 64,877 1,546,343 Gannett Company, Inc. 11,518 874,216 Omnicom Group 18,352 840,522 ------------ 6,992,199 ------------ METALS (1.1%) Alcan Aluminum Ltd. 11,556 433,581 Alcoa, Inc. 49,927 1,655,080 Barrick Gold Corp. 41,102 780,527 Illinois Tool Works 17,902 1,233,806 Pactiv Corp. (A) 76,467 1,812,268 ------------ 5,915,262 ------------ NATURAL GAS DISTRIBUTORS (0.3%) Questar Corp. 63,976 1,590,443 ------------ NATURAL GAS PIPELINE (0.4%) Kinder Morgan, Inc. 40,622 1,544,448 Sempra Energy 19,364 428,525 ------------ 1,972,973 ------------ OIL FIELD (0.7%) Baker Hughes, Inc. 42,546 1,416,356 BJ Services Co. (A) 12,967 439,322 Schlumberger Ltd. 30,272 1,407,648 Transocean, Inc. 25,696 800,430 ------------ 4,063,756 ------------ PAPER (0.8%) Georgia-Pacific Group 21,260 522,571 International Paper Co. 45,181 1,968,988 Temple-Inland 19,442 1,124,914 Weyerhaeuser Co. 11,983 765,115 ------------ 4,381,588 ------------ PHARMACEUTICALS (9.3%) Amgen, Inc. (A) 65,332 2,736,431 Baxter International, Inc. 33,460 1,486,962 Biomet, Inc. 54,366 1,474,134 Bristol-Myers Squibb Co. 88,741 2,280,644 Eli Lilly & Co. 51,822 2,922,761 Forest Laboratories, Inc. (A) 37,091 2,626,043 Johnson & Johnson 194,248 10,151,400 King Pharmaceuticals (A) 38,249 851,040 MedImmune, Inc. (A) 11,002 290,398 Merck & Co., Inc. 134,269 6,799,382 Pfizer, Inc. 370,536 12,968,760 Pharmacia Corp. 68,837 2,577,946 Schering-Plough Corp. 54,066 1,330,024 Wyeth 66,222 3,390,566 ------------ 51,886,491 ------------ RAILROADS (0.2%) Union Pacific 20,687 1,309,073 ------------ -13- STATEMENT OF INVESTMENTS (UNAUDITED) - CONTINUED NO. OF MARKET SHARES VALUE ------------ ------------ REAL ESTATE (0.3%) Equity Office Properties Trust 28,201 $ 848,850 Equity Residential 20,357 585,264 ------------ 1,434,114 ------------ REFINING (0.2%) Ashland Inc. 7,813 316,427 Newmont Management Corp. 26,231 690,662 ------------ 1,007,089 ------------ RETAILERS (8.0%) AutoZone, Inc. (A) 23,030 1,780,219 Bed Bath & Beyond, Inc. (A) 47,386 1,788,585 Home Depot, Inc. 133,489 4,903,051 Kohl's Corp. (A) 35,444 2,483,916 Lowe's Cos 93,858 4,261,153 Limited Brands, Inc. 88,803 1,891,504 Sears Roebuck 51,576 2,800,577 Staples Inc. (A) 128,273 2,526,978 Target Corp. 25,355 941,685 Walgreen Co. 67,088 2,591,609 Wal-Mart Stores, Inc. 294,038 16,175,030 Williams Sonoma, Inc. (A) 37,138 1,138,651 Yum! Brands, Inc. (A) 50,817 1,486,397 ------------ 44,769,355 ------------ SERVICES (5.4%) Apollo Group, Inc. (A) 51,289 2,022,069 Biogen, Inc. (A) 9,322 386,164 Concord EFS (A) 39,157 1,179,996 Equifax, Inc. 29,813 804,951 H & R Block 48,330 2,230,430 KLA-Tencor Corp. (A) 11,599 509,950 Medtronic, Inc. 71,795 3,076,416 Microsoft (A) 321,258 17,550,325 Oracle Corp. (A) 271,546 2,572,898 ------------ 30,333,199 ------------ SUPERMARKETS (0.3%) Supervalue, Inc. 77,877 1,910,323 ------------ TECHNOLOGY (10.2%) Adobe Systems, Inc. 49,843 1,420,276 Agilent Technologies, Inc. (A) 26,983 644,354 Apple Computers, Inc. (A) 53,260 943,501 Automatic Data Process 24,676 1,074,640 Cisco Systems, Inc. (A) 492,153 6,863,074 Computer Sciences Corp. (A) 27,528 1,315,838 Conexant Systems, Inc. (A) 132,767 215,746 Dell Computer Corp. (A) 169,521 4,435,517 Electronic Data System 34,024 1,263,992 EMC Corp. (A) 157,302 1,187,630 First Data Corp. 73,402 2,764,319 Fiserv Inc. (A) 38,982 1,430,834 Hewlett Packard Co. 115,882 1,770,677 Intel Corp. 397,312 7,260,877 International Business Machines Corp. 86,828 6,251,616 JDS Uniphase Corp. (A) 73,945 197,063 NO. OF MARKET SHARES VALUE ------------ ------------ TECHNOLOGY (CONTINUED) Lexmark International Group, Inc. (A) 27,320 $ 1,486,208 Lucent Technologies (A) 137,057 227,515 Mattel, Inc. 61,779 1,297,977 Micron Technologies, Inc. (A) 70,655 1,428,644 Motorola, Inc. 208,598 3,007,983 National Semiconductor (A) 51,176 1,492,804 Network Appliance Corp. (A) 19,527 242,818 Novellus Systems, Inc. (A) 12,688 431,329 Nvidia Corp. (A) 9,910 170,303 Scientific-Atlanta, Inc. 46,518 765,221 Siebel Systems, Inc. (A) 52,913 752,158 Skyworks Solutions, Inc. (A) 46,601 258,870 Sun Microsystems, Inc. (A) 245,536 1,228,908 Teradyne Inc. (A) 10,061 236,433 Texas Instruments, Inc. 147,735 3,501,319 Unisys Corp. (A) 94,325 848,925 Xilinx, Inc. (A) 35,392 794,020 ------------ 57,211,389 ------------ TELECOMMUNICATIONS (3.4%) ALLTEL Corp. 38,181 1,794,507 AT&T Corp. 125,767 1,345,707 AT&T Wireless Group (A) 194,739 1,139,223 BellSouth Corp. 120,859 3,807,059 Broadcom Corp. (A) 12,964 227,324 SBC Communications, Inc. 197,264 6,016,552 Sprint Corp. - PCS Group (A) 73,448 328,313 Verizon Global Funding Corp. 112,680 4,524,102 ------------ 19,182,787 ------------ TEXTILE (0.2%) VF Corp. 30,664 1,202,335 ------------ TOBACCO (1.4%) Fortune Brands, Inc. 45,719 2,557,521 Philip Morris Cos 124,809 5,451,657 ------------ 8,009,178 ------------ TRANSPORTATION SERVICES (0.5%) FedEx Corp. 51,132 2,730,449 ------------ U.S. AGENCY (2.2%) Federal Home Loan Mortgage Corp. 71,160 4,354,992 Federal Association National Mortgage 80,230 5,916,963 USA Education 19,423 1,882,089 ------------ 12,154,044 ------------ UTILITIES (2.6%) Dominion Resources, Inc. 41,556 2,741,865 Duke Energy 54,693 1,700,952 Exelon Corp. 47,840 2,502,032 Mirant Corp. (A) 168,058 1,226,823 PG&E Corp. (A) 52,203 933,912 Southern Co. 94,075 2,577,655 TECO Energy, Inc. 13,524 331,338 TXU Corp. 52,458 2,696,341 ------------ 14,710,918 ------------ TOTAL COMMON STOCKS (COST $603,038,603) 540,690,555 ------------ -14- STATEMENT OF INVESTMENTS (UNAUDITED) - CONTINUED PRINCIPAL MARKET AMOUNT VALUE ------------ ------------ SHORT-TERM INVESTMENTS (3.4%) COMMERCIAL PAPER (3.2%) GE Capital Corp., 1.81 % due July 11, 2002 $ 8,250,000 $ 8,244,662 Household Financial Corp., 2.03% due July 1, 2002 940,000 940,000 Sheffield Resources Corp., 1.83% due July 1, 2002 7,000,000 6,998,922 Windmill Funding Corp., 1.83% due July 31, 2002 1,661,000 1,658,304 ------------ 17,841,888 ------------ U.S. TREASURY (0.2%) United States of America Treasury, 1.83% due September 5, 2002 (B) 1,400,000 1,395,789 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $19,239,821) 19,237,677 ------------ NOTIONAL VALUE ------------ FUTURES CONTRACTS (0.0%) S&P 500 Stock Index, Exp. September, 2002 (C) $ 12,128,725 -- ------------ TOTAL INVESTMENTS (100%) (COST $622,278,424) (D) $559,928,232 ============ NOTES (A) Non-income Producing Security. (B) Par value of $1,400,000 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 June 30, 2002, net unrealized depreciation for all securities was $62,350,192. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of market value over cost of $48,336,327 and aggregate gross unrealized depreciation for all securities in which there was an excess of cost over market value of $110,686,519. See Notes to Financial Statements -15- THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES In the first half of 2002, The Travelers Quality Bond Account for Variable Annuities ("Account QB") declined 3.86%. The fund is measured against the Lehman Intermediate Government/Corporate Index, which returned 3.33%. Account QB underperformed the benchmark 718 basis points. This underperformance was mainly due to our telecom exposure. Year-to-date, telecommunications was the worst performing sector, reflecting the weakened financial performance across the industry as well as liquidity/ excess leverage concerns, and accounting/SEC investigations at several of the leading companies in the industry. The telecom sector weakened notably following the fraud revelations at WorldCom and the subsequent dramatic declines in the value of its stock and bonds. The prospects for WorldCom are uncertain, and depend significantly on banks' willingness to waive a technical default and the timing of a possible restructure. In the absence of significant fraud we believe it likely that Qwest and investment grade telecoms have the fundamental and financial strengths to survive the current crisis and ultimately will return to levels similar to comparably rated corporate bonds. The market is extremely volatile, and has performed as poorly as at any time in the last twenty years. That could carry with it the seeds of a double-dip recession, or the opportunity to acquire selectively issues that will generate substantial excess returns during the next 12-18 months. Currently, we have increased our exposure to treasuries in the portfolio. As the economy makes its way out of recession and the market jitters dissipate, we will remain diligent in seeking issues with total return potential. PORTFOLIO MANAGER: DAVE TYSON, CFA THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON THE COVER. THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED ON MARKET OR OTHER CONDITIONS [TAMIC logo] -16- THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) JUNE 30, 2002 ASSETS: Investment securities, at market value (cost $131,021,762) .... $119,891,968 Receivables: Interest .................................................... 2,140,206 Purchase payments and transfers from other Travelers accounts ........................................ 37,894 Other assets .................................................. 2,040 ------------ Total Assets .............................................. 122,072,108 ------------ LIABILITIES: Cash overdraft ................................................ 4,890,880 Payables: Contract surrenders and transfers to other Travelers accounts ........................................ 296,077 Investment management and advisory fees ..................... 9,537 Insurance charges ........................................... 34,609 Accued liabilities ............................................ 7,393 ------------ Total Liabilities ......................................... 5,238,496 ------------ NET ASSETS: $116,833,612 ============ See Notes to Financial Statements -17- THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF OPERATIONS (UNAUDITED) FOR THE SIX MONTHS ENDING JUNE 30, 2002 INVESTMENT INCOME: Interest .......................................... $ 3,448,583 EXPENSES: Investment management and advisory fees ........... $ 201,575 Insurance charges ................................. 738,335 ------------ Total expenses .................................. 939,910 ------------ Net investment income (loss) .................. 2,508,673 ------------ REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED GAIN (LOSS) ON INVESTMENT SECURITIES: Realized gain (loss) from investment security transactions: Proceeds from investment securities sold ........ 63,050,349 Cost of investment securities sold .............. 65,281,542 ------------ Net realized gain (loss) ........................ (2,231,193) Change in unrealized gain (loss) on investment securities: Unrealized gain (loss) at June 30, 2002 ......... (11,129,794) Unrealized gain (loss) at December 31, 2001 ..... (5,187,051) ------------ Net change in unrealized gain (loss) on investments ................................. (5,942,743) ------------ Net realized gain (loss) and change in unrealized gain (loss) .................... (8,173,936) ------------ Net increase (decrease) in net assets resulting from operations ................................. $ (5,665,263) ============ See Notes to Financial Statements -18- THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF CHANGE IN NET ASSETS (UNAUDITED)
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, 2002 2001 ------------ ------------ (UNAUDITED) OPERATIONS: Net investment income (loss) ............................................... $ 2,508,673 $ 6,125,350 Net realized gain (loss) from investment security transactions ............. (2,231,193) 2,198,958 Net change in unrealized gain (loss) on investment securities .............. (5,942,743) (3,642,244) ------------ ------------ Net increase (decrease) in net assets resulting from operations .......... (5,665,263) 4,682,064 ------------ ------------ UNIT TRANSACTIONS: Participant purchase payments (applicable to 565,011 and 824,666 units, respectively) .................. 3,538,364 5,257,007 Participant transfers from other Travelers accounts (applicable to 734,866 and 4,622,095 units, respectively) ................ 4,612,739 29,722,165 Administrative charges (applicable to 7,655 and 13,608 units, respectively) ..................... (46,360) (86,730) Contract surrenders (applicable to 1,148,412 and 1,960,150 units, respectively) .............. (7,222,571) (12,599,764) Participant transfers to other Travelers accounts (applicable to 1,222,617 and 2,598,052 units, respectively) .............. (7,648,422) (16,607,051) Other payments to participants (applicable to 65,670 and 101,586 units, respectively) ................... (422,029) (655,559) ------------ ------------ Net increase (decrease) in net assets resulting from unit transactions ... (7,188,279) 5,030,068 ------------ ------------ Net increase (decrease) in net assets .................................. (12,853,542) 9,712,132 NET ASSETS: Beginning of period ........................................................ 129,687,154 119,975,022 ------------ ------------ End of period .............................................................. $116,833,612 $129,687,154 ============ ============
See Notes to Financial Statements -19- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 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. -20- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - 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 period. Actual results could differ from those estimates. 2. INVESTMENTS The aggregate costs of purchases and proceeds from sales of investments (other than short-term securities) were $32,862,835 and $48,484,094, respectively; the costs of purchases and proceeds from sales of direct and indirect U.S. government securities were $28,208,754 and $18,364,964, respectively, for the six months ended June 30, 2002. 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 $2,706 and $5,870 for the six months ended June 30, 2002 and the year ended December 31, 2001, 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 $37,636 and $65,357 for the six months ended June 30, 2002 and the year ended December 31, 2001, respectively. -21- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED 4. NET ASSETS HELD ON BEHALF OF AN AFFILIATE Approximately $230,000 and $319,000 of the net assets of Account QB were held on behalf of an affiliate of The Travelers as of June 30, 2002 and December 31, 2001, respectively. Transactions with this affiliate during the six months ended June 30, 2002 and the year ended December 31, 2001, were comprised of participant purchase payments of approximately $70,000 and $270,000 and contract surrenders of approximately $147,000 and $300,000, respectively. 5. NET CONTRACT OWNERS' EQUITY JUNE 30, 2002 ------------------------------------ UNIT NET UNITS VALUE ASSETS --------- ------- ------------ Accumulation phase of contracts issued prior to May 16, 1983 .......... 4,900,127 $ 6.311 $ 30,937,063 Annuity phase of contracts issued prior to May 16, 1983 .......... 69,479 6.311 438,657 Accumulation phase of contracts issued on or after May 16, 1983 ....... 14,187,302 6.017 85,407,500 Annuity phase of contracts issued on or after May 16, 1983 ....... 8,371 6.017 50,392 ------------ Net Contract Owners' Equity ...................................... $116,833,612 ============ -22- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED 6. SUPPLEMENTARY INFORMATION (Selected data for a unit outstanding throughout each period.) SUPPLEMENTARY INFORMATION (Selected data for a unit outstanding throughout each period.)
Contracts issued prior to May 16, 1983 SIX MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31, JUNE 30, (DERIVED FROM AUDITED FINANCIAL INFORMATION) -------- ---------------------------------------------------- 2002 2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- -------- SELECTED PER UNIT DATA: Total investment income ........................................ $ .177 $ .421 $ .446 $ .393 $ .363 $ .353 Operating expenses ............................................. .042 .089 .081 .080 .076 .071 -------- -------- -------- -------- -------- -------- Net investment income (loss) ................................... .135 .332 .365 .313 .287 .282 Unit value at beginning of period .............................. 6.608 6.335 6.055 5.994 5.593 5.234 Net realized and change in unrealized gains (losses) ........... (.432) (.059) (.085) (.252) .114 .077 -------- -------- -------- -------- -------- -------- Unit value at end of period .................................... $ 6.311 $ 6.608 $ 6.335 $ 6.055 $ 5.994 $ 5.593 ======== ======== ======== ======== ======== ======== SIGNIFICANT RATIOS AND ADDITIONAL DATA: Net increase (decrease) in unit value .......................... $ (.30) $ .27 $ .28 $ .06 $ .40 $ .36 Ratio of operating expenses to average net assets .............. 1.33%* 1.33% 1.33% 1.33% 1.33% 1.33% Ratio of net investment income (loss) to average net assets .... 4.15%* 4.99% 5.93% 5.22% 4.96% 5.25% Number of units outstanding at end of period (thousands) ....... 4,969 5,194 5,491 6,224 6,880 7,683 Portfolio turnover rate ........................................ 103% 166% 105% 340% 438% 196% Contracts issued on or after May 16, 1983 SIX MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31, JUNE 30, (DERIVED FROM AUDITED FINANCIAL INFORMATION) -------- ---------------------------------------------------- 2002 2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- -------- SELECTED PER UNIT DATA: Total investment income ........................................ $ .169 $ .402 $ .427 $ .378 $ .350 $ .342 Operating expenses ............................................. .048 .101 .092 .091 .088 .082 -------- -------- -------- -------- -------- -------- Net investment income (loss) ................................... .121 .301 .335 .287 .262 .260 Unit value at beginning of period .............................. 6.309 6.063 5.810 5.765 5.393 5.060 Net realized and change in unrealized gains (losses) ........... (.413) (.055) (.082) (.242) .110 .073 -------- -------- -------- -------- -------- -------- Unit value at end of period .................................... $ 6.017 $ 6.309 $ 6.063 $ 5.810 $ 5.765 $ 5.393 ======== ======== ======== ======== ======== ======== SIGNIFICANT RATIOS AND ADDITIONAL DATA: Net increase (decrease) in unit value .......................... $ (.29) $ .25 $ .25 $ .04 $ .37 $ .33 Ratio of operating expenses to average net assets .............. 1.57%* 1.57% 1.57% 1.57% 1.57% 1.57% Ratio of net investment income to average net assets ........... 3.90%* 4.74% 5.69% 4.97% 4.71% 5.00% Number of units outstanding at end of period (thousands) ....... 14,196 15,116 14,045 17,412 21,251 21,251 Portfolio turnover rate ........................................ 103% 166% 105% 340% 438% 196%
* Annualized -23- THE TRAVELERS QUALITY BOND ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF INVESTMENTS (UNAUDITED) JUNE 30, 2002 PRINCIPAL MARKET AMOUNT VALUE ------------ ------------ BONDS (53.7%) AIRLINES (0.9%) Delta Airlines Inc., 9.25% Debentures, 2007 ...... $ 1,085,671 $ 1,086,539 ------------ CONGLOMERATES (3.9%) General Electric Co., 6.00% Debentures, 2012 ..... 4,700,000 4,686,379 ------------ HEALTHCARE (4.3%) Columbia HCA Healthcare Corp., 6.73% Debentures, 2045 ......................... 5,000,000 5,098,680 ------------ MEDIA NON-CABLE (3.0%) Cox Enterprises Inc., 7.88% Debentures, 2010 ..... 3,800,000 3,606,447 ------------ NATURAL GAS PIPELINE (7.6%) El Paso Corp., 6.95% Debentures, 2007 ............ 2,500,000 2,473,658 Gemstone Investment Ltd., 7.10% Debentures, 2004 . 6,000,000 5,850,918 Osprey, 8.31% Debentures, 2003 (A) ............... 3,700,000 767,750 ------------ 9,092,326 ------------ REAL ESTATE (3.8%) Nationwide Health Properties, Inc., 6.10% Debentures, 2037 ......................... 4,500,000 4,573,337 ------------ TELECOMMUNICATIONS (9.9%) Qwest Capital Funding, 7.00% Debentures, 2009 .... 6,000,000 3,360,000 Telecom New Zealand Finance Corp., 6.25% Debentures, 2003 ......................... 7,500,000 7,513,275 Worldcom, Inc., 6.50% Debentures, 2004 (A) ....... 3,000,000 495,000 Worldcom, Inc., 7.5% Debentures, 2011 (A) ........ 3,000,000 465,000 ------------ 11,833,275 ------------ UTILITIES (20.3%) CMS Energy Corp., 7.63% Debentures, 2004 ......... 1,750,000 1,313,277 CMS Energy Corp., 6.75% Debentures, 2004 ......... 3,000,000 2,250,873 DPL Inc., 6.88% Debentures, 2011 ................. 5,700,000 5,627,114 Progress Energy Inc., 6.05% Debentures, 2007 ..... 5,100,000 5,252,760 Progress Energy Inc., 6.85% Debentures, 2012 ..... 3,900,000 4,070,301 UtiliCorp United, Inc., 6.88% Debentures, 2004 ... 6,300,000 5,884,320 ------------ 24,398,645 ------------ TOTAL BONDS (COST $76,499,311) 64,375,628 ------------ UNITED STATES GOVERNMENT SECURITIES (37.8%) United States of America Treasury, 6.63% due May, 2007 ............................ 4,500,000 5,005,391 United States of America Treasury, 6.13% due August, 2007 ......................... 12,800,000 13,955,277 United States of America Treasury, 6.00% due August, 2009 ......................... 2,400,000 2,607,845 United States of America Treasury, 5.00% due February, 2011 ....................... 12,680,000 12,898,590 United States of America Treasury, 4.88% due February, 2012 ....................... 5,820,000 5,843,647 United States of America Treasury, 2.88% due June, 2004 (A) ....................... 5,000,000 4,997,600 ------------ TOTAL U.S. GOVERNMENT SECURITIES (COST $44,312,135) .................................... 45,308,350 ------------ -24- STATEMENT OF INVESTMENTS (UNAUDITED) - CONTINUED PRINCIPAL MARKET AMOUNT VALUE ------------ ------------ SHORT-TERM INVESTMENTS (8.5%) COMMERCIAL PAPER (7.1%) Sheffield Resources Corp., 1.83% due July, 2002 .. $ 1,000,000 $ 999,846 Sheffield Resources Corp., 1.81% due July, 2002 .. 4,000,000 3,997,992 Compaq Computer Corp., 7.45% due August, 2002 .... 3,500,000 3,511,543 8,509,381 ------------ UNITED STATES GOVERNMENT AGENCY SECURITIES (1.4%) Federal Home Loan Mortgage Corp., 1.78% due July, 2002 .......................... 1,700,000 1,698,609 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $10,210,316) .................. 10,207,990 ------------ TOTAL INVESTMENTS (100%) (COST $131,021,762) ............................ $119,891,968 ============ NOTES (A) Restricted Security. (B) At June 30, 2002 net unrealized depreciation for all securities was $11,129,794. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of market value over cost of $1,453,062 and aggregate gross unrealized depreciation for all securities in which there was an excess of cost over market value of $12,582,856. See Notes to Financial Statements -25- THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES During the first quarter of 2002, signs of imminent recovery were proliferating. However, this strength in economic activity appeared to dissipate throughout the second quarter. Real Gross Domestic Product ("GDP") for the first quarter of 2002 indicated that the economy grew by 6.1%, up from the 1.7% pace for the fourth quarter of 2001. Although real GDP surged, a modest slowdown is anticipated for the second half of the year. Economists expect real GDP to grow at a 2.50 - 3.50% annual rate for the remainder of 2002. After a long contraction, purchasing managers continued to see signs of improvement in the manufacturing sector. The purchasing managers index of the Institute for Supply Management (ISM) increased to 57.20 in June, from 49.60 in January. The recent gains in the new orders component of the survey point to stronger growth in both factory orders and industrial production in the coming months. Consumers continued to feed the momentum of the economic recovery. Surveys of consumer attitudes showed improvement. The Consumer Confidence Index increased to 106.40 in June, from 97.80 in January. In contrast, businesses have been slow to respond. The shifted focus to the quality of corporate earnings and the degree of corporate leverage has resulted in a tightening of lending standards. However, the labor market continues to show signs of weakness. In June, the economy added only 36 thousand jobs, well below the expected 75 thousand gain. Consequently, the unemployment rate rose from 5.6% in January to 5.9% in June and remains near its peak of 6.00% reported in April 2002. The Federal Open Market Committee (FOMC) kept the federal funds rate unchanged at 1.75% and maintained a weakness bias at it's January 2002 FOMC meeting. At the March FOMC meeting, rates remained unchanged, however, the Federal Reserve Board ("Fed") shifted its bias to neutral, which it has maintained at both the May and June FOMC meetings. Equity market weakness, slower final demand and benign inflation suggest that the Fed will be very patient with an accommodative interest rate policy. The strategy in management for The Travelers Money Market Account for Variable Annuities short-term assets will be to maintain a 30 - 40 day average life. We maintain the view that the Fed tightening will commence no earlier than the fourth quarter of 2002, with the risk skewed to no tightening this year. At the end of the second quarter, the portfolio had total assets of $142 million with an average life and yield of 23 days and 1.80%, respectively. PORTFOLIO MANAGER: EMIL J. MOLINARO JR. THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON THE COVER. THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED ON MARKET OR OTHER CONDITIONS. [TAMIC logo] See Notes to Financial Statements -26- THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) JUNE 30, 2002 ASSETS: Investment securities, at market value (cost $141,342,417) ..... $141,327,953 Cash ........................................................... 3,757 Receivables: Interest ..................................................... 3,727 Purchase payments and transfers from other Travelers accounts ......................................... 972,793 Other assets ................................................... 395 ------------ Total Assets ............................................... 142,308,625 ------------ LIABILITIES: Payables: Contract surrenders and transfers to other Travelers accounts ......................................... 315,411 Investment management and advisory fees ...................... 11,324 Insurance charges ............................................ 43,774 Accrued liabilities ............................................ 2,486 ------------ Total Liabilities .......................................... 372,995 ------------ NET ASSETS: $141,935,630 ============ See Notes to Financial Statements -27- THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIABLE ANNUITIES STATEMENT OF OPERATIONS (UNAUDITED) FOR THE SIX MONTHS ENDING JUNE 30, 2002 INVESTMENT INCOME: Interest .......................................... $ 1,480,033 EXPENSES: Investment management and advisory fees ........... $ 263,071 Insurance charges ................................. 1,016,930 ------------ Total expenses .................................. 1,280,001 ------------ Net investment income (loss) .................. 200,032 ------------ Net increase (decrease) in net assets resulting from operations ................................. $ 200,032 ============ See Notes to Financial Statements -28- THE TRAVELERS MONEY MARKET FOR VARIABLE ANNUITIES STATEMENT OF CHANGE IN NET ASSETS (UNAUDITED)
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, 2002 2001 ------------ ------------ (UNAUDITED) OPERATIONS: Net investment income (loss) ............................................... $ 200,032 $ 4,439,118 ------------ ------------ Net increase (decrease ) in net assets resulting from operations ......... 200,032 4,439,118 ------------ ------------ UNIT TRANSACTIONS: Participant purchase payments (applicable to 3,849,824 and 5,387,726 units, respectively) .............. 10,550,584 14,622,539 Participant transfers from other Travelers accounts (applicable to 31,095,733 and 139,952,024 units, respectively) ........... 85,219,377 379,507,676 Administrative charges (applicable to 26,558 and 55,025 units, respectively) .................... (72,837) (150,109) Contract surrenders (applicable to 6,564,991 and 13,518,648 units, respectively) ............. (17,992,971) (36,707,803) Participant transfers to other Travelers accounts (applicable to 39,446,697 and 123,528,651 units, respectively) ........... (108,114,273) (335,165,982) Other payments to participants (applicable to 645,018 and 293,974 units, respectively) .................. (1,768,488) (800,830) ------------ ------------ Net increase (decrease) in net assets resulting from unit transactions ... (32,178,608) 21,305,491 ------------ ------------ Net increase (decrease) in net assets .................................. (31,978,576) 25,744,609 NET ASSETS: Beginning of period ........................................................ 173,914,206 148,169,597 ------------ ------------ End of period .............................................................. $141,935,630 $173,914,206 ============ ============
See Notes to Financial Statements -29- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 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 period. 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 $178,243 and $190,130 for the six months ended June 30, 2002 and the year ended December 31, 2001, respectively. -30- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED 3. NET ASSETS HELD ON BEHALF OF AN AFFILIATE Approximately $2,472,000 and $2,456,000 of the net assets of Account MM were held on behalf of an affiliate of The Travelers as of June 30, 2002 and December 31, 2001, respectively. Transactions with this affiliate during the six months ended June 30, 2002 and the year ended December 31, 2001, were comprised of participant purchase payments of approximately $534,000 and $1,049,000 and contract surrenders of approximately $521,000 and $2,619,000, respectively. 4. NET CONTRACT OWNERS' EQUITY JUNE 30, 2002 ------------------------------------- UNIT NET UNITS VALUE ASSETS ---------- ------- ----------- Accumulation phase of contracts issued prior to May 16, 1983 ........ 24,876 $ 2.876 $ 71,545 Annuity phase of contracts issued prior to May 16, 1983 ........ 29,982 2.876 86,229 Accumulation phase of contracts issued on or after May 16, 1983 ..... 51,606,698 2.743 141,529,237 Annuity phase of contracts issued on or after May 16, 1983 ..... 90,656 2.743 248,619 ------------ Net Contract Owners' Equity .................................... $141,935,630 ============ -31- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED 5. SUPPLEMENTARY INFORMATION (Selected data for a unit outstanding throughout each period.)
Contracts issued prior to May 16, 1983 SIX MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31, JUNE 30, (DERIVED FROM AUDITED FINANCIAL INFORMATION) -------- ---------------------------------------------------- 2002 2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- -------- SELECTED PER UNIT DATA: Total investment income ........................................ $ .026 $ .120 $ .174 $ .135 $ .138 $ .134 Operating expenses ............................................. .019 .037 .037 .034 .033 .032 -------- -------- -------- -------- -------- -------- Net investment income (loss) ................................... .007 .083 .137 .101 .105 .102 Unit value at beginning of period .............................. 2.869 2.786 2.649 2.548 2.443 2.341 -------- -------- -------- -------- -------- -------- Unit value at end of period .................................... $ 2.876 $ 2.869 $ 2.786 $ 2.649 $ 2.548 $ 2.443 ======== ======== ======== ======== ======== ======== SIGNIFICANT RATIOS AND ADDITIONAL DATA: Net increase (decrease) in unit value .......................... $ .01 $ .08 $ .14 $ .10 $ .11 $ .10 Ratio of operating expenses to average net assets .............. 1.33%* 1.33% 1.33% 1.33% 1.33% 1.33% Ratio of net investment income (loss) to average net assets .... 0.55%* 2.89% 5.09% 3.87% 4.20% 4.27% Number of units outstanding at end of period (thousands) ....... 55 60 70 80 91 105 Contracts issued on or after May 16, 1983 SIX MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31, JUNE 30, (DERIVED FROM AUDITED FINANCIAL INFORMATION) -------- ---------------------------------------------------- 2002 2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- -------- SELECTED PER UNIT DATA: Total investment income ........................................ $ .025 $ .114 $ .167 $ .130 $ .133 $ .128 Operating expenses ............................................. .021 .042 .041 .039 .038 .036 -------- -------- -------- -------- -------- -------- Net investment income (loss) ................................... .004 .072 .126 .091 .095 .092 Unit value at beginning of period .............................. 2.739 2.667 2.541 2.450 2.355 2.263 -------- -------- -------- -------- -------- -------- Unit value at end of period .................................... $ 2.743 $ 2.739 $ 2.667 $ 2.541 $ 2.450 $ 2.355 ======== ======== ======== ======== ======== ======== SIGNIFICANT RATIOS AND ADDITIONAL DATA: Net increase (decrease) in unit value .......................... $ .01 $ .07 $ .13 $ .09 $ .10 $ .09 Ratio of operating expenses to average net assets .............. 1.57%* 1.57% 1.57% 1.57% 1.57% 1.57% Ratio of net investment income to average net assets ........... 0.30%* 2.64% 4.84% 3.62% 3.95% 4.02% Number of units outstanding at end of period (thousands) ....... 51,697 63,430 55,477 70,545 41,570 36,134
* Annualized -32- THE TRAVELERS MONEY MARKET ACCOUNT FOR VARIALE ANNUITIES STATEMENT OF INVESTMENTS (UNAUDITED) JUNE 30, 2002
PRINCIPAL MARKET AMOUNT VALUE ------------ ------------ SHORT-TERM INVESTMENTS (100%) COMMERCIAL PAPER (83.4%) AIG Funding, Inc., 1.77% due July 22, 2002 .............................. $ 4,800,000 $ 4,794,322 American Express Credit Corp., 1.78% due July 29, 2002 .................. 7,000,000 6,989,325 Blueridge Asset Funding Corp., 1.81% due July 11, 2002 .................. 2,400,000 2,398,447 CVS Corp., 2.07% due July 25, 2002 ...................................... 6,600,000 6,591,222 DE Funding Corp., 1.85% due July 23, 2002 ............................... 1,700,000 1,697,906 Gannett Co. Inc., 1.78% due July 17, 2002 ............................... 2,550,000 2,547,606 Gannett Co. Inc., 1.78% due July 26, 2002 ............................... 4,400,000 4,393,937 GE Capital Corp., 1.80% due July 9, 2002 ................................ 5,000,000 4,997,250 GE Capital Corp., 1.81% due July 11, 2002 ............................... 2,130,000 2,128,622 Goldman Sachs Group Inc., 1.83% due July 18, 2002 ....................... 2,200,000 2,197,826 Household Finance Corp., 2.03% due July 1, 2002 ......................... 3,000,000 3,000,000 Morgan Stanley Dean Witter & Co., 1.78% due July 24, 2002 ............... 6,960,000 6,951,084 National Rural Utilities Coop. Finance Corp., 1.83% due July 15, 2002 ... 6,400,000 6,394,624 Nordea North America Inc., 1.83% due August 7, 2002 ..................... 7,000,000 6,986,231 Paradigm Funding LLC, 1.82% due August 1, 2002 .......................... 7,000,000 6,988,296 Preferred Resources Funding Corp., 1.81% due July 12, 2002 .............. 6,000,000 5,995,830 Quincy Capital Corp., 1.83% due July 9, 2002 ............................ 2,500,000 2,498,625 Quincy Capital Corp., 1.82% due July 17, 2002 ........................... 2,000,000 1,998,122 Santander Central Hispano Find, 1.88% due July 12, 2002 ................. 1,725,000 1,723,801 Santander Central Hispano Find, 1.83% due July 25, 2002 ................. 5,500,000 5,492,685 Sheffield Resources Corp., 1.83% due July 1, 2002 ....................... 1,500,000 1,499,769 Sheffield Resources Corp., 1.81% due July 17, 2002 ...................... 5,500,000 5,494,835 Southern Co., 1.82% due July 8, 2002 .................................... 3,300,000 3,298,343 Tribune Co., 1.80% due July 2, 2002 ..................................... 7,500,000 7,498,470 UBS Financial, Inc., 1.78% due July 18, 2002 ............................ 5,000,000 4,995,060 UBS Financial, Inc., 1.87% due August 21, 2002 .......................... 1,700,000 1,695,485 Verizon Global Funding Corp., 1.92% due October 15, 2002 ................ 5,000,000 4,999,710 Windmill Funding Corp., 1.81% due August 12, 2002 ....................... 1,590,000 1,586,481 ------------ 117,833,914 ------------ U.S. GOVERNMENT AGENCY SECURITIES (16.6%) Federal Home Loan Mortgage Corp., 1.78% due July 18, 2002 ............... 9,125,000 9,117,535 Federal Home Loan Mortgage Corp., 1.79% due August 8, 2002 .............. 10,500,000 10,480,817 Federal National Mortgage Association, 1.78% due July 24, 2002 .......... 3,900,000 3,895,687 ------------ 23,494,039 ------------ TOTAL INVESTMENTS (100%) (COST $141,342,417) .................................................................. $141,327,953 ============
See Notes to Financial Statements -33- 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 Smith Chairman and Trustee Barney, Inc. ("Salomon Smith Barney"); President and 125 Broad Street Director (1994-present), Smith Barney Fund Management New York, NY LLC (f/k/a/ SSB Citi Fund Management LLC.; Director Age 68 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 (1956-1988), Trustee Edwards & Angell, Attorneys; Member, Advisory Board 154 Arlington Avenue (1973-1994), thirty-one mutual funds sponsored by Providence, RI Keystone Group, Inc.; Member, Board of Managers Age 78 (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. Director Trustee (1983-1995), Executive Vice President (1989-1994) and 295 Hancock Street Senior Vice President, Finance and Administration Williamstown, MA (1983-1989), The Dexter Corporation (manufacturer of Age 71 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 Economics, Trustee University at Buffalo since 1998. Dean, School of 160 Jacobs Hall Management (1998-2001), University at Buffalo; Dean, Buffalo, NY College of Business Administration (1995-1998), Age 59 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); Portfolio Manager CFA, CFP (1992-1997, HLM Management Company, Inc. (investment Trustee management); Assistant Treasurer, Pensions and 108 Oxford Hill Lane Benefits. Management (1989-1992), United Technologies Downingtown, PA Corporation (broad-based designer and manufacturer of Age 54 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.++ * R. Jay Gerken Managing Director of Salomon Smith Barney, Inc. Trustee Director/Trustee of forty-one investment companies 125 Broad Street associated with Salomon Smith Barney. Member, Board New York, NY of Managers (2002-present), six Variable Annuity Age 51 Separate Accounts of The Travelers Insurance Company+; Trustee, Board of Trustees, five Mutual Funds sponsored by The Travelers Insurance Company++ -34- Ernest J. Wright Vice President and Secretary (1996-present), Secretary to the Board Assistant Secretary (1994-1996), Counsel One Tower Square (1987-present), The Travelers Insurance Company; Hartford, Connecticut Secretary (1994-present), six Variable Annuity Age 62 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 - present); Assistant Assistant Secretary to Secretary (1995-present), The Travelers Insurance The Board Company; Assistant Secretary (1995-present), six One Tower Square Variable Annuity Separate Accounts of The Travelers Hartford, Connecticut Insurance Company+; Assistant Secretary, Age 51 (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-present), Second Principal Accounting Vice President (1996-1999), The Travelers Insurance Officer Company; Principal Accounting Officer (1998-present), to The Board six Variable Annuity Separate Accounts of The One Tower Square Travelers Insurance Company.+ Prior to May 1996, Hartford, Connecticut Senior Manager, Deloitte & Touche LLP (1985-1996.) Age 40 + 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. -35- 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 The financial information included herein has been taken from the records of 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. This financial information has not been audited by the Accounts' independent accountants, who therefore express no opinion concerning its accuracy. However, it is management's opinion that all proper adjustments have been made. 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 (Semi-Annual) (06-02) Printed in U.S.A. -----END PRIVACY-ENHANCED MESSAGE-----